-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UTZ+y1t+0558BWA3SOnWAijn2tX6jREm4wV6WBqCFK5OBMjiAkuMW0u3w1w/ee1x rkK1/CUmcxWEJHTVMJt7Vg== 0001144204-06-013578.txt : 20060403 0001144204-06-013578.hdr.sgml : 20060403 20060403163830 ACCESSION NUMBER: 0001144204-06-013578 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20060328 ITEM INFORMATION: Entry into a Material Definitive Agreement ITEM INFORMATION: Unregistered Sales of Equity Securities ITEM INFORMATION: Regulation FD Disclosure ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20060403 DATE AS OF CHANGE: 20060403 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Onstream Media CORP CENTRAL INDEX KEY: 0000919130 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 650420146 STATE OF INCORPORATION: FL FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-22849 FILM NUMBER: 06733991 BUSINESS ADDRESS: STREET 1: 1291 SW 29 AVE STREET 2: STE 3A CITY: POMPANO BEACH STATE: FL ZIP: 33069 BUSINESS PHONE: 9549176655 MAIL ADDRESS: STREET 1: 1600 S DIXIE HIGHWAY STREET 2: SUITE 3A CITY: BOCA RATON STATE: FL ZIP: 33432 FORMER COMPANY: FORMER CONFORMED NAME: VISUAL DATA CORP DATE OF NAME CHANGE: 19961025 8-K/A 1 v039622_8k.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 8-K/A AMENDMENT TO CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) March 28, 2006 ONSTREAM MEDIA CORPORATION (Exact name of registrant as specified in its charter) Florida 000-22849 6500420146 (State or Other Jurisdiction (Commission (I.R.S. Employer of Incorporation) File Number) Identification No.) 1291 SW 29 Avenue, Pompano Beach, FL 33069 (Address of Principal Executive Office) (Zip Code) (954) 917-6655 (Registrant's telephone number, including area code) N/A (Former Name or Former Address, If Changed Since Last Report.) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: [ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) [ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) [ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) - -------------------------------------------------------------------------------- Item 1.01 Entry into a Material Definitive Agreement and Item 3.02 Unregistered Sale of Equity Securities On March 28, 2006 we completed the execution of agreements with seventeen (17) investors for a new $2.5 million financing, consisting of Subordinated Convertible Debentures and Warrants. The Subordinated Convertible Debentures, which have a 48-month term, bear interest at a rate of 8% annually, payable quarterly in cash or registered stock at our option based on certain requirements, and have a fixed conversion rate of $1.00. The five-year warrant grants the right to purchase 35,000 shares of our common stock per $100,000 of Debentures, with an exercise price equal to $1.50 per share exercisable starting six months after closing. We also agreed to issue to placement agents, in addition to placement fees of 7% of the gross proceeds paid in cash, additional warrants with identical terms to purchase an aggregate of up to 250,000 common shares. We have the right at any time, if there is an effective registration statement while any Debentures are still outstanding to redeem all or part of the then outstanding Debentures at 115% of the principal amount of the Debentures. The Debenture holders will have the right within 5 days to convert the amount of Debentures to be redeemed or allow us to redeem them. If at any time while the Debentures are outstanding and for a minimum of 20 days during any 30 day period, the closing price of our common stock exceeds $1.50 per share, then an amount of Debentures equal to the total volume for the 30 day period multiplied by the average daily closing price multiplied by 20% will automatically convert into shares of common stock at the Conversion Price. Each Debenture will be converted on a pro-rata basis based on initial principal. At the end of the 21st month any Debentures still outstanding shall be paid in nine (9) equal quarterly installments ("Quarterly Installment") with the first payment to be due in the 24th month from final closing with 8% interest and all conversion and redemption terms remaining in effect. We will have the option to pay the Quarterly Installment in cash or in stock. The option to pay in stock will only be available if the average closing price of the stock for the prior 20 days from the due date is greater than $1.00 per share. The Quarterly Installment will be satisfied first through the issuance of shares at the Conversion Price utilizing the following formula: 20% of the total volume for that quarter multiplied times the average closing price for that quarter up to the Quarterly Installment amount. To the extent that this results in an insufficient amount to satisfy the Quarterly Installment at the option of the investor, the balance would be satisfied with cash or the issuance of shares at their conversion price. In addition, in any quarter where the above formula results in an excess of the Quarterly Installment, at the option of a majority of the holders, an additional amount up to the 20% limit may be converted and applied to the last Quarterly Payment (or to prior Quarterly Installments once the last has been paid in full). Any other conversions, automatic or requested, that occur after the 21st month will apply to the last Quarterly Installment or prior Quarterly Installments once the last is paid in full. Any stock issuances will be limited to 19.9% of the outstanding shares, unless shareholder approval has been obtained. The form of the Subordinated Secured Convertible Note is attached as Exhibit 4.1, the form of the $1.50 Warrant is attached as Exhibit 4.2, the form of the Subscription Agreement is attached as Exhibit 10.1, the form of the Subordination Agreement is attached as Exhibit 10.2, and the form of the Security Agreement is attached as Exhibit 10.3. All of the financing transaction securities were offered and sold without such offers and sales being registered under the Securities Act of 1933, as amended (together with the rules and regulations of the Securities and Exchange Commission (the "SEC") promulgated thereunder, the "Securities Act"), in reliance on exemptions therefrom as provided by Section 4(2) and Regulation D of the Securities Act of 1933, for securities issued in private transactions to accredited investors. Among other terms of the financing transaction, we have agreed not to issue an equity or equity-linked issuance below the $1.00 conversion price for a period of one year. We also agreed to file for the registration of the underlying common shares within 30 days of the final closing and may incur a penalty of up to 15% of the transaction amount if the registration is not completed in accordance with various deadlines specified in the documents. Item 7.01 Regulation FD Disclosure On March 29, 2006, we issued a press release announcing the above described financing. A copy of the press release, which is incorporated herein by reference, was attached as Exhibit 99.1 to Form 8-K filed by us on March 29, 2006. Item 9.01 Financial Statements and Exhibits (c) Exhibits. The following exhibits are filed with this report, except Exhibit 99.1, which was included in the Form 8-K filed on March 29, 2006: 4.1 Form of Subordinated Secured Convertible Note 4.2 Form of $1.50 Warrant 10.1 Form of Subscription Agreement for Subordinated Secured Convertible Notes 10.2 Form of Subordination Agreement 10.3 Form of Security Agreement 99.1 Press Release issued March 29, 2006 The foregoing descriptions are qualified in their entirety by reference to the full text of such exhibits. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this amended report to be signed on its behalf by the undersigned, hereunto duly authorized. ONSTREAM MEDIA CORPORATION Date: April 3, 2006 /s/ Robert E. Tomlinson ----------------------- Robert E. Tomlinson Chief Financial Officer EX-4.1 2 v039622_ex4-1.txt Exhibit 4.1 NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS OR BLUE SKY LAWS. NOTWITHSTANDING THE FOREGOING, THESE SECURITIES AND THE SECURITIES ISSUABLE UPON CONVERSION OF THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY SUCH SECURITIES. No. [ ] $[ ] Date: [ ] ONSTREAM MEDIA CORPORATION 8.0% SUBORDINATED SECURED CONVERTIBLE NOTE DUE ____ THIS NOTE is one of a series of duly authorized and issued Notes of Onstream Media Corporation, a Florida corporation (the "Company"), designated as its 8.0% Subordinated Secured Convertible Notes due 2008, in the aggregate principal amount of up to 2.5 Million with $1,000,000 over-allotment (the "Notes"), subject to increase pursuant to the terms of a certain Additional Investment Right of even date herewith. FOR VALUE RECEIVED, the Company promises to pay to the order of [Holder] or its registered assigns (the "Holder"), the principal sum of [__________] $(________), on [_____________] (the "Maturity Date"), or such earlier date as the Notes are required or permitted to be repaid as provided hereunder, and to pay interest to the Holder on the unconverted and then outstanding principal amount of this Note in accordance with the provisions hereof. Notwithstanding the foregoing, the Company hereby unconditionally promises to pay to the order of the Holder interest on any principal or interest payable hereunder that shall not be paid in full when due, whether at the time of any stated interest payment date or maturity or by prepayment, acceleration or declaration or otherwise, for the period from and including the due date of such payment to but excluding the date the same is paid in full, at a rate of 18% per annum (but in no event in excess of the maximum rate permitted under applicable law). Interest payable under this Note shall be computed on the basis of a year of 360 days and actual days elapsed (including the first day but excluding the last day) occurring in the period for which interest is payable. Payments of principal and interest shall be made in lawful money of the United States of America to the Holder at its address as provided in Section 14 or by wire transfer to such account specified from time to time by the Holder hereof for such purpose as provided in Section 14. The holder of this Note is entitled to the benefits of the Security Agreement. 1. Definitions. In addition to the terms defined elsewhere in this Note, the following terms have the meanings indicated: "Company Prepayment Price" for any Notes which shall be subject to prepayment pursuant to Section 8(a), shall equal the sum of: (i) 115% of the principal amount of Notes to be prepaid, plus all accrued and unpaid interest thereon, and (ii) all other amounts, costs, expenses and liquidated damages due in respect of such Notes. "Conversion Date" means the date a Conversion Notice is delivered to the Company together with the Conversion Schedule pursuant to Section 6(a). "Conversion Notice" means a written notice in the form attached hereto as Schedule 1. "Conversion Price" means $1.00, subject to adjustment from time to time pursuant to Section 12. "Equity Conditions" means, with respect to a specified issuance of Common Stock, that each of the following conditions is satisfied: (i) the number of authorized but unissued and otherwise unreserved shares of Common Stock is sufficient for such issuance; (ii) such shares of Common Stock are registered for resale by the Holder and may be sold by the Holders pursuant to an effective Registration Statement covering the Underlying Shares or all such shares may be sold without volume restrictions pursuant to Rule 144(k) under the Securities Act; (iii) the Common Stock generally is listed or quoted (and is not suspended from trading) on an Eligible Market and such shares of Common Stock are approved for listing upon issuance; (iv) such issuance would be permitted in full without violating Section 6(c) hereof or the rules or regulations of any Trading Market; (v) no Bankruptcy Event has occurred; (vi) the Company is not in default with respect to any material obligation hereunder or under any other Transaction Document; and (vii) no public announcement of a pending or proposed Change of Control transaction has occurred that has not been consummated. "Event Equity Value" means 115% of the average of the Closing Prices for the five Trading Days preceding the date of delivery of the notice requiring payment of the Event Equity Value, provided that if the Company does not make such required payment (together with any other payments, expenses and liquidated damages then due and payable under the Transaction Documents) when due or, in the event the Company disputes in good faith the occurrence of the Triggering Event pursuant to which such notice relates, does not instead deposit such required payment (together with such other payments, expenses and liquidated damages then due) in escrow with an independent third-party escrow agent within five Trading Days of the date such required payment is due, then the Event Equity Value shall be 115% of the greater of (a) the average of the Closing Prices for the five Trading Days preceding the date of delivery of the notice requiring payment of the Event Equity Value and (b) the average of the Closing Prices for the five Trading Days preceding the date on which such required payment (together with such other payments, expenses and liquidated damages) is paid in full. 2 "Original Issue Date" means the date of the first issuance of any Notes, regardless of the number of transfers of any particular Note. "Principal Payment Date" means any date on which payment of a principal amount of this Note shall be due and payable by the Company in accordance with Section 9. "Triggering Event" means any of the following events: (a) the Common Stock is not listed or quoted, or is suspended from trading, in each case, on an Eligible Market for a period of 20 or more Trading Days (which need not be consecutive Trading Days); (b) the Company fails for any reason to deliver a certificate evidencing any Securities to a Purchaser within five Trading Days after delivery of such certificate is required pursuant to any Transaction Document or the exercise or conversion rights of the Holders pursuant to any Transaction Document are otherwise suspended for any reason; (c) the Company fails to have available a sufficient number of authorized but unissued and otherwise unreserved shares of Common Stock available to issue Underlying Shares upon any exercise of the Note; (d) the Company effects or publicly announces its intention to effect any exchange, recapitalization or other transaction that effectively requires or rewards physical delivery of certificates evidencing the Common Stock; (e) the effectiveness of the Registration Statement lapses for any reason or the Holder shall not be permitted to resell any Underlying Shares under the Registration Statement, in either case, for 30 or more consecutive days in any 12 month period or for more than twice any 12 month period; (f) the Company fails to make any cash payment required under the Transaction Documents and such failure is not cured within five days after notice of such default is first given to the Company by a Purchaser; or (g) the Company defaults in the timely performance of any other obligation under the Transaction Documents and such default continues uncured for a period of 20 days after the date on which notice of such default is first given to the Company by a Purchaser (it being understood that no prior notice need be given in the case of a default that cannot reasonably be cured within 20 days). 3 2. Principal and Interest. (a) The Company shall pay interest to the Holder on the aggregate unconverted and then outstanding principal amount of this Note at the rate of 8.0% per annum, payable quarterly in arrears, except if such date is not a Trading Day, in which case such interest shall be payable on the next succeeding Trading Day (each, an "Interest Payment Date"). The first Interest Payment Date shall be one hundred eighty (180) days after the final closing of the offering and quarterly thereafter. (b) Subject to the conditions and limitations set forth below, the Company may pay interest or principal on this Note in (i) cash or (ii) shares of Common Stock, subject to any limitations upon share issuances, imposed by the Nasdaq Stock Market. The Company must deliver written notice to the Holder indicating the manner in which it intends to pay interest and principal at least 15 Trading Days prior to each Interest Payment Date or the Principal Payment Date, respectively, but the Company may indicate in any such notice that the election contained therein shall continue for subsequent Interest Payment Dates or Principal Payment Dates until revised. Failure to timely provide such written notice shall be deemed an election by the Company to pay the amount of any interest or principal in cash. (c) Notwithstanding the foregoing, the Company may not pay interest or principal by issuing shares of Common Stock unless all of the Equity Conditions have been satisfied; provided, however, that prior to the Effective Date, the Company shall be permitted to pay the first interest payment in shares of unregistered Common Stock to the extent such shares will be included in the Registration Statement. If the Company is required to pay interest in cash on any Interest Payment Date but fails to do so, the Holder may (but shall not be required to) treat such interest as if it had been added to the principal amount of this Note as of such Interest Payment Date or accept any number of shares of Common Stock in lieu of such interest payment. (d) In the event that the Company elects to pay interest on any Interest Payment Date or Principal Payment Date in shares of Common Stock, the number of shares of Common Stock to be issued to each Holder as such interest or principal shall be (i) with respect to interest, determined by dividing the aggregate amount of interest then payable to such Holder by the Market Price (as defined below) as of the applicable Interest Payment Date, and rounding up to the nearest whole share, (ii) with respect to principal, determined as set forth in Section 9(c) hereof, and (iii) paid to such Holder in accordance with Section 2(e) below. The term "Market Price" shall mean 85% of the arithmetic average of the VWAP for the 20 Trading Days prior to the applicable Interest Payment Date or Principal Payment Date, as the case may be (not including such date). (e) In the event that any interest or principal are paid in Common Stock, the Company shall on such Interest Payment Date or Principal Payment Date (i) issue and deliver to such Holder a certificate, registered in the name of the Holder or its designee, for the number of shares of Common Stock to which the Holder shall be entitled or (ii) at all times after the Holder has notified the Company that this clause (ii) shall apply, credit the number of shares of Common Stock to which the Holder shall be entitled to the Holder's or its designee's balance account with The Depository Trust Company through its Deposit Withdrawal Agent Commission System. 4 3. Ranking and Covenants. (a) Except as set forth in Schedule 3.1(a) or as otherwise permitted on Schedule 3.1(a) (the "Existing Indebtedness"), no indebtedness of the Company is senior to this Note in right of payment, whether with respect to interest, damages or upon liquidation or dissolution or otherwise. Other than the Existing Indebtedness and any renewal, refinancing or replacement thereof that does not exceed the aggregate amount of the Existing Indebtedness and the borrowing availability under the related credit or loan agreements on the date hereof, the Company will not, and will not permit any Subsidiary to, directly or indirectly, enter into, create, incur, assume or suffer to exist any indebtedness of any kind, on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom, that is senior in any respect to the Company's obligations under the Notes, other than indebtedness secured by purchase money security interests (which will be senior only as to the underlying assets covered thereby) and indebtedness under capital lease obligations (which will be senior only as to the assets covered thereby). (b) Except as set forth on Schedule 3(b), so long as any Notes are outstanding, neither the Company nor any Subsidiary shall, directly or indirectly, (i) redeem, purchase or otherwise acquire any capital stock or set aside any monies for such a redemption, purchase or other acquisition or (ii) issue variable priced equity securities or variable priced equity linked securities. (c) The Company covenants that it will at all times reserve and keep available out of its authorized but unissued and otherwise unreserved Common Stock, solely for the purpose of enabling it to issue Underlying Shares as required hereunder, the number of Underlying Shares which are then issuable and deliverable upon the conversion of (and otherwise in respect of) this entire Note (taking into account the adjustments set forth in Section 12 and disregarding any limitations set forth in Section 6(b)), free from preemptive rights or any other contingent purchase rights of Persons other than the Holder. The Company covenants that all Underlying Shares so issuable and deliverable shall, upon issuance in accordance with the terms hereof, be duly and validly authorized and issued and fully paid and nonassessable. (d) The Company covenants that it will not redeem, repurchase or otherwise acquire all or any portion of the Series A-10 Preferred Stock or any other preferred stock, common stock or other equity equivalent of the Company, on or prior to the earlier of (i) the Maturity Date hereof or (ii) the date on which all of the Notes shall have been converted into Common Stock, without the prior written consent of the holders of 51% of the aggregate principal value of the then outstanding Notes (the "Majority Holders"). 5 (e) The Holder acknowledges and agrees that the Debentures shall be subordinate to the Existing Indebtedness as set forth in a subordination agreement dated the date hereof. 4. Registration of Notes. The Company shall register the Notes upon records to be maintained by the Company for that purpose (the "Note Register") in the name of each record holder thereof from time to time. The Company may deem and treat the registered Holder of this Note as the absolute owner hereof for the purpose of any conversion hereof or any payment of interest or principal hereon, and for all other purposes, absent actual notice to the contrary. 5. Registration of Transfers and Exchanges. The Company shall register the transfer of any portion of this Note in the Note Register upon surrender of this Note to the Company at its address for notice set forth herein. Upon any such registration or transfer, a new Note, in substantially the form of this Note (any such new Note, a "New Note"), evidencing the portion of this Note so transferred shall be issued to the transferee and a New Note evidencing the remaining portion of this Note not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Note by the transferee thereof shall be deemed the acceptance by such transferee of all of the rights and obligations of a holder of a Note. This Note is exchangeable for an equal aggregate principal amount of Notes of different authorized denominations, as requested by the Holder surrendering the same. No service charge or other fee will be imposed in connection with any such registration of transfer or exchange. 6. Conversion. (a) At the Option of the Holder. All or any portion of this Note shall be convertible into shares of Common Stock (subject to the limitations set forth in Section 6(c)), at the option of the Holder, at any time and from time to time from and after the Original Issue Date. The number of Underlying Shares issuable upon any conversion hereunder shall equal the outstanding principal amount of this Note to be converted, plus the amount of any accrued but unpaid interest on this Note through the Conversion Date, divided by the Conversion Price on the Conversion Date. The Holder shall effect conversions under this Section 6(a) by delivering to the Company a Conversion Notice together with a schedule in the form of Schedule 2 attached hereto (the "Conversion Schedule"). If the Holder is converting less than all of the principal amount of this Note, or if a conversion hereunder may not be effected in full due to the application of Section 6(c), the Company shall honor such conversion to the extent permissible hereunder and shall promptly deliver to the Holder a Conversion Schedule indicating the principal amount (and accrued interest) which has not been converted. (b) Automatic Conversion. At any time following the Original Issue Date, the Company shall have the right to cause an amount (the "Converted Amount") of this Note then outstanding equal to the lesser of (A) the principal amount outstanding under this Note and (B) 20% of the product of (x) the total volume of Common Stock traded on the company's Trading Market for the 30 day period preceding the Automatic Conversion Date (as defined below), (y) the arithmetic average of the VWAP for such 30 day period and (z) the quotient of (I) the outstanding principal amount of this Note on the Automatic Conversion Date and (II) the outstanding principal amount of all of the Notes issued pursuant to the Transaction Documents on the Automatic Conversion Date (such amount being the Holder's "Pro Rata Amount"), to be automatically converted into fully paid non-assessable shares of Common Stock (such conversion, an "Automatic Conversion") at the Conversion Price (subject to the limitations set forth in Sections 6(c)), by delivery of a 10 day advance written notice (the "Automatic Conversion Notice") to the Holder. 6 Notwithstanding anything to the contrary, the Company may not cause an Automatic Conversion unless each of the following conditions are satisfied: (A) as of the Automatic Conversion Date (as defined below), no Triggering Event has occurred (after giving effect to any addition to principal under the Notes); (B) each of the Equity Conditions are satisfied with respect to all of the Common Stock issuable on the Automatic Conversion Date; and (C) the Closing Price of the Common Stock on each of the 20 out of any 30 consecutive days preceding the Automatic Conversion Notice is greater than $1.50 per share (as adjusted for stock splits, stock combinations or other similar recapitalization or event). Upon an Automatic Conversion in accordance with the procedures specified in this Section 6(b), and effective as of the close of business on the Automatic Conversion Date, the Converted Amount shall be converted into fully paid and non-assessable shares of Common Stock automatically without the need for any further action by the Holder. Upon the occurrence of such Automatic Conversion of the Converted Amount, there shall be (A) issued and delivered to the Holder a certificate or certificates for the number of shares of Common Stock into which this the Converted Amount was convertible on the Automatic Conversion Date or (B) at all times after the Holder has notified the Company that this clause (ii) shall apply, credited the number of shares of Common Stock to which the Holder shall be entitled to the Holder's or its designee's balance account with The Depository Trust Company through its Deposit Withdrawal Agent Commission System. For purposes of this Section 6(b), the "Automatic Conversion Date" shall mean the 10th day following the date on which the Automatic Conversion Notice is either: (x) delivered to the Holder by personal delivery, or (y) delivered to the Holder by facsimile transmission to the facsimile telephone number of such Holder appearing on the signature page to the Purchase Agreement (with confirmation of receipt), or (z) deposited with a recognized express courier for express delivery, fees prepaid, addressed to such registered holder at the address of such holder appearing on the signature page to the Purchase Agreement. (c) Certain Conversion Restrictions. Relating to the Number of Shares. 7 (A) Subject to Section 6(c)(i)(B), the number of shares of Common Stock that may be acquired by a Holder upon any conversion of Notes (or otherwise in respect hereof) shall be limited to the extent necessary to insure that, following such conversion (or other issuance), the total number of shares of Common Stock then beneficially owned by such Holder and its Affiliates and any other Persons whose beneficial ownership of Common Stock would be aggregated with such Holder's for purposes of Section 13(d) of the Exchange Act, does not exceed 4.999% (the "Maximum Percentage") of the total number of issued and outstanding shares of Common Stock (including for such purpose the shares of Common Stock issuable upon such conversion). For such purposes, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. Each delivery of a Conversion Notice hereunder will constitute a representation by the applicable Holder that it has evaluated the limitations set forth in this Section 6(c)(i)(A) and has determined that issuance of the full number of Underlying Shares issuable in respect of such Conversion Notice does not violate the restrictions contained in this Section 6(c)(i)(A). If at any time the limits in this Section 6(c) make this Note inconvertible in whole or in part, the Company shall not by reason thereof be relieved of its obligation to issue shares of Common Stock at any time or from time to time thereafter but prior to the Maturity Date upon conversion of this Note as and when shares of Common Stock may be issued in compliance with such restrictions. (B) Trading Market Limitations. Notwithstanding anything herein to the contrary, if the Company has not obtained shareholder approval and if required by the applicable rules and regulations of the Nasdaq Stock Market (or any successor entity), then until such time as shareholder approval is obtained or is not otherwise required, this Debenture shall not be convertible into Conversion Shares beyond any such limitation. 7. Mechanics of Conversion. (a) Upon conversion of this Note, the Company shall promptly (but in no event later than three Trading Days after the Conversion Date) issue or cause to be issued and cause to be delivered to or upon the written order of the Holder and in such name or names as the Holder may designate a certificate for the Underlying Shares issuable upon such conversion, free of restrictive legends unless a registration statement covering the resale of the Underlying Shares and naming the Holder as a selling stockholder thereunder is not then effective and such Underlying Shares are not then freely transferable without volume restrictions pursuant to Rule 144 under the Securities Act. The Holder, or any Person so designated by the Holder to receive Underlying Shares, shall be deemed to have become holder of record of such Underlying Shares as of the Conversion Date. The Company shall, upon request of the Holder, use its best efforts to deliver Underlying Shares hereunder electronically through the Depository Trust Corporation or another established clearing corporation performing similar functions. 8 (b) The Holder shall not be required to deliver the original Note in order to effect a conversion hereunder. Execution and delivery of the Conversion Notice shall have the same effect as cancellation of the original Note and issuance of a New Note representing the remaining outstanding principal amount. Upon surrender of this Note following one or more partial conversions, the Company shall promptly deliver to the Holder a New Note representing the remaining outstanding principal amount. (c) The Company's obligations to issue and deliver Underlying Shares upon conversion of this Note in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any set-off, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to the Company or any violation or alleged violation of law by the Holder or any other Person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with the issuance of such Underlying Shares. (d) If by the third Trading Day after a Conversion Date the Company fails to deliver to the Holder such Underlying Shares in such amounts and in the manner required pursuant to Section 7(a), then the Holder will have the right to rescind such conversion. (e) If by the third Trading Day after a Conversion Date the Company fails to deliver to the Holder such Underlying Shares in such amounts and in the manner required pursuant to Section 7(a), and if after such third Trading Day the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by such Holder of the Underlying Shares which the Holder anticipated receiving upon such conversion (a "Buy-In"), then the Company shall either (i) pay cash to such Purchaser in an amount equal to such Purchaser's total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased (the "Buy-In Price"), at which point the Company's obligation to deliver such certificate (and to issue such Common Stock) shall terminate, or (ii) promptly honor its obligation to deliver to such Purchaser a certificate or certificates representing such Common Stock and pay cash to such Purchaser in an amount equal to the excess (if any) of the Buy-In Price over the product of (A) such number of shares of Common Stock, times (B) the Closing Price on the date of the event giving rise to the Company's obligation to deliver such certificate. In the event the Holder elects to effectuate a Buy-In and the Company complies with the provisions of this Section 7(e), the failure of the Company to deliver to the Holder the Underlying Shares required to be issued on the Conversion Date pursuant to Section 7(a) shall not result in a Triggering Event. 8. Prepayment. At the Option of the Company. 9 (i) At any time following the Original Issue Date, upon delivery of a written notice to the Holder (a "Company Prepayment Notice" and the date such notice is delivered by the Company, the "Company Notice Date"), the Company shall be entitled to prepay all or any portion of the outstanding principal amount of this Note plus any accrued and unpaid interest thereon for an amount in cash equal to the Company Prepayment Price. Notwithstanding anything to the contrary, the Company shall only be entitled to deliver a Company Prepayment Notice pursuant to the terms hereof if the Equity Conditions are satisfied with respect to all shares of Common Stock issuable pursuant to the Transaction Documents on the Company Notice Date. If any of the Equity Conditions shall cease to be in effect during the period between the Company Notice Date and the date the Company Prepayment Price is paid in full, then the Holder subject to such prepayment may elect, by written notice to the Company given at any time after any of the Equity Conditions shall cease to be in effect, to invalidate ab initio such optional prepayment, notwithstanding anything herein contained to the contrary. The Holder may, within 5 Trading Days of its receipt of the Company Prepayment Notice, convert any portion of the outstanding principal amount of this Note and any accrued and unpaid interest thereon subject to a Company Prepayment Notice. Once delivered, the Company shall not be entitled to rescind a Company Prepayment Notice. (ii) The Company Prepayment Price shall be due on the 5th Trading Day immediately following the Company Notice Date. Any such prepayment shall be free of any claim of subordination. If any portion of the Company Prepayment Price shall not be timely paid by the Company, interest shall accrue thereon at the rate of 18% per annum (or the maximum rate permitted by applicable law, whichever is less) until the Company Prepayment Price plus all such interest is paid in full, which payment shall constitute liquidated damages and not a penalty. In addition, if any portion of the Company Prepayment Price remains unpaid after such date, the Holder subject to such prepayment may elect by written notice to the Company to invalidate ab initio such Company Prepayment Notice with respect to the unpaid amount, notwithstanding anything herein contained to the contrary and no interest shall be owed to the Holder in respect thereof. If the Holder makes such an election, the principal amount of this Note, together with the accrued and unpaid interest thereon shall be reinstated with respect to such unpaid amount and the Company shall no longer have any prepayment rights under this Section 8. (iii) Notwithstanding anything to the contrary herein, the Company may not elect a prepayment pursuant to Section 8(a)(i) unless the Company makes such prepayment election to all of the Holders on a pro rata basis, based on such Holders then outstanding principal amount of Notes. (iv) At any time the Company shall prepay any amount due under this Note, the Company shall issue to the Holder warrants substantially in the same form as the Warrants, except the number of shares of Common Stock issuable upon the exercise of such warrants shall equal 50% of the quotient of (1) the portion of the outstanding principal amount of this Note prepaid by the Company in accordance with this Section 8(a) and (2) the Conversion Price on the date the prepayment shall take place. 10 9. Principal Repayment. (a) On and after the 21st month following the Original Issue Date, the principal face amount of any Notes then outstanding shall be paid in 9 equal quarterly installments on the last day of such quarter (each a "Principal Payment"), except if such date is not a Trading Day, in which case such Principal Payment shall be payable on the next succeeding Trading Day, each a "Principal Payment Date", with the first Principal Payment Date to occur on ______________. (b) The Company shall have the option to make any Principal Payments in cash or in Common Stock; provided, however, that the Company may only make such payments in Common Stock if (i) the arithmetic average of the VWAP for the quarter ending on the applicable Principal Payment Date is greater than $1.18 per share (as adjusted for stock splits, stock combinations or other similar recapitalization or event), (ii) the Equity Conditions are satisfied with respect to all shares of Common Stock issuable by the Company on the Principal Payment Date, and (iii) to the extent such payment may be made in accordance with subsection (c) below. (c) In the event the Company elects to pay all or part of any Principal Payment in Common Stock, such Principal Payment shall be satisfied first through the issuance of Common Stock in an amount equal to the quotient of (i) the lesser of (A) the product of (1) 20% of the total volume of Common Stock traded on the Company's Trading Market in such quarter and (2) the arithmetic average of the VWAP for such quarter (such amount, the "Maximum Principal Payment") and (B) the Principal Payment amount and (ii) the Conversion Price on such date. To the extent that such calculation results in an insufficient amount to satisfy the then due Principal Payment, at the option of the Holder, the balance may be paid in cash or otherwise in Common Stock issued at the Conversion Price on such Principal Payment Date. Further, in the event such amount shall exceed the Principal Payment then due, at the option of a Holder of a Note, an additional amount of Common Stock up to an amount equal to the quotient of (x) the Maximum Principal Payment on such date minus the Principal Payment then due and (y) the Conversion Price may be converted and applied to the 9th and final Principal Payment (or other Principal Payments in an order starting with last Principal Payment that has not yet been satisfied in accordance with this Section 9(c) (i.e. the Principal Payment due on the 8th Principal Payment Date) once the last Principal Payment shall have been paid in full). Any other conversions that occur after the 21st month following the Original Issue Date shall apply to the 9th and final Principal Payment or prior Principal Payments as set forth in the preceding sentence. 11 10. Events of Default. (a) "Event of Default" means any one of the following events (whatever the reason and whether it shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body): (i) any default in the payment (free of any claim of subordination) of principal, interest or liquidated damages in respect of any Notes, as and when the same becomes due and payable (whether on a date specified for the payment of interest or the date on which the obligations under the Note mature or by acceleration, redemption, prepayment or otherwise); (ii) the Company or any Subsidiary defaults in any of its obligations under any other note or any mortgage, credit agreement or other facility, indenture agreement, factoring agreement or other instrument under which there may be issued, or by which there may be secured or evidenced, any indebtedness for borrowed money or money due under any long term leasing or factoring arrangement of the Company or any Subsidiary in an amount exceeding $1,000,000, whether such indebtedness now exists or is hereafter created, and such default results in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise become due and payable; (iii) the occurrence of a Triggering Event; (iv) the occurrence of a Bankruptcy Event; or (v) any breach of provisions of Sections 12(d)(i) and 12(d)(ii). (b) At any time or times following the occurrence of an Event of Default, the Holder shall have the option to elect, by notice to the Company (an "Event Notice"), to require the Company to repurchase all or any portion of (i) the outstanding principal amount of this Note, at a repurchase price equal to the greater of (A) 115% of such outstanding principal amount, plus all accrued but unpaid interest thereon through the date of payment, or (B) the Event Equity Value of the Underlying Shares issuable upon conversion of such principal amount and all such accrued but unpaid interest thereon, provided this remedy shall not be available upon an Event of Default set forth in Section 10(a)(ii) hereof, and (ii) any Underlying Shares issued to such Holder upon conversion of Notes and then owned by the Holder, at a price per share equal to the Event Equity Value of such issuable and issued Underlying Shares. The aggregate amount payable pursuant to the preceding sentence is referred to as the "Event Price." The Company shall pay the Event Price to the Holder no later than the third Trading Day following the date of delivery of the Event Notice, and upon receipt thereof the Holder shall deliver this Note and certificates evidencing any Underlying Shares so repurchased to the Company (to the extent such certificates have been delivered to the Holder). 12 (c) Upon the occurrence of any Bankruptcy Event, all amounts pursuant to Section 10(b) shall immediately become due and payable in full in cash, without any further action by the Holder. (d) In connection with any Event of Default, the Holder need not provide and the Company hereby waives any presentment, demand, protest or other notice of any kind, and the Holder may immediately enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. Any such declaration may be rescinded and annulled by the Holder at any time prior to payment hereunder. No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereto. 11. Charges, Taxes and Expenses. Issuance of certificates for Underlying Shares upon conversion of (or otherwise in respect of) this Note shall be made without charge to the Holder for any issue or transfer tax, withholding tax, transfer agent fee or other incidental tax or expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Underlying Shares or Notes in a name other than that of the Holder. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Note or receiving Underlying Shares in respect hereof. 12. Certain Adjustments. The Conversion Price is subject to adjustment from time to time as set forth in this Section 12. (a) Stock Dividends and Splits. If the Company, at any time while this Note is outstanding, (i) pays a stock dividend on its Common Stock or otherwise makes a distribution on any class of capital stock that is payable in shares of Common Stock, (ii) subdivides outstanding shares of Common Stock into a larger number of shares, or (iii) combines outstanding shares of Common Stock into a smaller number of shares, then in each such case the Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to clause (i) of this Section 12(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution, and any adjustment pursuant to clause (ii) or (iii) of this Section 12(a) shall become effective immediately after the effective date of such subdivision or combination. (b) Pro Rata Distributions. If the Company, at any time while this Note is outstanding, distributes to all holders of Common Stock (i) evidences of its indebtedness, (ii) any security (other than a distribution of Common Stock described in Section 12(c)), (iii) rights or warrants to subscribe for or purchase any security, or (iv) cash or any other asset (in each case, "Distributed Property"), then, at the request of the Holder delivered before the 90th day after the record date fixed for determination of stockholders entitled to receive such distribution, the Company will deliver to the Holder, within five Trading Days after such request (or, if later, on the effective date of such distribution), the Distributed Property that the Holder would have been entitled to receive in respect of the Underlying Shares for which this Note could have been converted immediately prior to such record date. If such Distributed Property is not delivered to the Holder pursuant to the preceding sentence, upon any conversion of this Note that occurs after such record date, the Holder shall be entitled to receive, in addition to the Underlying Shares otherwise issuable upon such conversion, the Distributed Property that the Holder would have been entitled to receive in respect of such number of Underlying Shares had the Holder been the record holder of such Underlying Shares immediately prior to such record date. 13 (c) Fundamental Changes. If, at any time while this Note is outstanding, (i) the Company effects any merger or consolidation of the Company with or into another Person in which it is not the surviving entity, (ii) the Company effects any sale of all or substantially all of its assets in one or more transactions, (iii) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, or (iv) the Company effects any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (other than as a result of a subdivision or combination of shares of Common Stock described in Section 12(a)) (in any such case, a "Fundamental Change"), then upon any subsequent conversion of this Note, the Holder shall have the right to receive, for each Underlying Share that would have been issuable upon such conversion absent such Fundamental Change, the same kind and amount of securities, cash or property as it would have been entitled to receive upon the occurrence of such Fundamental Change if it had been, immediately prior to such Fundamental Change, the holder of one share of Common Stock (the "Alternate Consideration"). If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Change, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any conversion of this Note following such Fundamental Change. In the event of a Fundamental Change, the Company or the successor or purchasing Person, as the case may be, shall execute with the Holder a written agreement providing that: (x) this Note shall thereafter entitle the Holder to purchase the Alternate Consideration, (y) in the case of any such successor or purchasing Person, upon such consolidation, merger, statutory exchange, combination, sale or conveyance such successor or purchasing Person shall be jointly and severally liable with the Company for the performance of all of the Company's obligations under this Warrant and the Purchase Agreement, and 14 (z) if registration or qualification is required under the Exchange Act or applicable state law for the public resale by the Holder of shares of stock and other securities so issuable upon exercise of this Warrant, such registration or qualification shall be completed prior to such reclassification, change, consolidation, merger, statutory exchange, combination or sale. If, in the case of any Fundamental Change, the Alternate Consideration includes shares of stock, other securities, other property or assets of a Person other than the Company or any such successor or purchasing Person, as the case may be, in such Fundamental Change, then such written agreement shall also be executed by such other Person and shall contain such additional provisions to protect the interests of the Holder as the Board of Directors of the Company shall reasonably consider necessary by reason of the foregoing. At the Holder's request, any successor to the Company or surviving Person in such Fundamental Change shall issue to the Holder a new Note consistent with the foregoing provisions and evidencing the Holder's right to convert such Note into Alternate Consideration. The terms of any agreement pursuant to which a Fundamental Change is effected shall include terms requiring any such successor or surviving Person to comply with the provisions of this Section 12(c) and insuring that this Note (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Change. If any Fundamental Change constitutes or results in a Change of Control, then at the request of the Holder delivered before the 90th day after such Fundamental Change, the Company (or any such successor or surviving entity) will purchase this Note from the Holder for a purchase price, payable in cash within five Trading Days after such request (or, if later, on the effective date of the Fundamental Transaction), equal to the Black Scholes value of the remaining unexercised portion of this Note on the date of such request. (d) Subsequent Equity Sales. (i) The Company covenants and agrees that for a period of one year from the issuance of this Note, it will not issue additional shares of Common Stock or rights, warrants, options or other securities or debt convertible, exercisable or exchangeable for shares of Common Stock or otherwise entitling any Person to acquire shares of Common Stock (collectively, "Common Stock Equivalents") at a price (exclusive of commissions payable by the Company in connection therewith) per share of Common Stock (the "Effective Price") less than the Conversion Price (as adjusted hereunder to such date), then the Conversion Price shall be reduced to equal the Effective Price. For purposes of this paragraph, in connection with any issuance of any Common Stock Equivalents, (A) the maximum number of shares of Common Stock potentially issuable at any time upon conversion, exercise or exchange of such Common Stock Equivalents (the "Deemed Number") shall be deemed to be outstanding upon issuance of such Common Stock Equivalents, (B) the Effective Price applicable to such Common Stock shall equal the minimum dollar value of consideration payable to the Company to purchase such Common Stock Equivalents and to convert, exercise or exchange them into Common Stock (net of any discounts, fees, commissions and other expenses), divided by the Deemed Number, and (C) no further adjustment shall be made to the Conversion Price upon the actual issuance of Common Stock upon conversion, exercise or exchange of such Common Stock Equivalents. 15 (ii) At any time while this Note is outstanding, the Company or Subsidiary shall not issue Common Stock Equivalents with an Effective Price or a number of underlying shares that floats or resets or otherwise varies or is subject to adjustment based (directly or indirectly) on market prices of the Common Stock (a "Floating Price Security"). (iii) Notwithstanding the foregoing, no adjustment will be made under this paragraph (d) in respect of (A) the issuance of Common Stock upon exercise or conversion of any Common Stock Equivalents described in Schedule 3.1(g) to the Purchase Agreement (provided that such exercise or conversion occurs in ---------------- accordance with the terms thereof, without amendment or modification, and that the applicable exercise or conversion price or ratio is described in such schedule); (B) to officers, directors or employees of, or advisers, consultants or independent contractors acting in a similar capacity to, the Company pursuant to restricted stock issuances, stock grants, stock options or similar employee stock incentives, in each case approved by the Board of Directors of the Company; (C) the issuance of securities in connection with a bona fide joint venture or development agreement or strategic partnership or similar agreement approved by the Company's board of directors, the primary purpose of which is not to raise equity capital; or (D) in connection with a transaction involving a merger or acquisition of an entity, business or assets (not principally for the purpose of obtaining cash). (e) Calculations. All calculations under this Section 12 shall be made to the nearest cent or the nearest 1/100th of a share, as applicable. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock. (f) Notice of Adjustments. Upon the occurrence of each adjustment pursuant to this Section 12, the Company at its expense will promptly compute such adjustment in accordance with the terms hereof and prepare and deliver to the Holder a certificate describing in reasonable detail such adjustment and the transactions giving rise thereto, including all facts upon which such adjustment is based. (g) Notice of Corporate Events. If the Company (i) declares a dividend or any other distribution of cash, securities or other property in respect of its Common Stock, including without limitation any granting of rights or warrants to subscribe for or purchase any capital stock of the Company or any Subsidiary, (ii) authorizes or approves, enters into any agreement contemplating or solicits stockholder approval for any Fundamental Change or (iii) authorizes the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall deliver to the Holder a notice describing the material terms and conditions of such transaction, at least 20 Trading Days prior to the applicable record or effective date on which a Person would need to hold Common Stock in order to participate in or vote with respect to such transaction, and the Company will take all steps reasonably necessary in order to insure that the Holder is given the practical opportunity to convert this Note prior to such time so as to participate in or vote with respect to such transaction; provided, however, that the failure to deliver such notice or any defect therein shall not affect the validity of the corporate action required to be described in such notice. 16 13. No Fractional Shares. The Company shall not issue or cause to be issued fractional Underlying Shares on conversion of this Note. If any fraction of an Underlying Share would, except for the provisions of this Section 13, be issuable upon conversion of this Note, the number of Underlying Shares to be issued will be rounded up to the nearest whole share. 14. Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile (facsimile confirmed) at the facsimile number specified in this Section prior to 5:30 p.m. (New York City time) on a Trading Day, (ii) the Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Agreement later than 5:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City time) on such date, (iii) the Trading Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as follows: If to the Company: Onstream Media Corporation 1291 SW 29 Avenue Pompano Beach, Florida 33069 Attn: Randy S. Selman Fax No.: 954-917-0575 With a copy to: With a copy to: Arnstein & Lehr LLP 2424 North Federal Highway, Suite 462 Boca Raton, FL 33431 Attn: Joel D. Mayersohn Fax No.: (561) 322-6940 If to the Purchasers: To the address set forth under such Purchaser's name on the signature pages attached hereto. 17 15. Miscellaneous. (a) This Note shall be binding on and inure to the benefit of the parties hereto and their respective successors and permitted assigns. The Company shall not be permitted to assign this Note. (b) Subject to Section 15(a), nothing in this Note shall be construed to give to any person or corporation other than the Company and the Holder any legal or equitable right, remedy or cause under this Note. (C) GOVERNING LAW; VENUE; WAIVER OF JURY TRIAL. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW THEREOF. EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS SITTING IN THE CITY OF NEW YORK, BOROUGH OF MANHATTAN, FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR WITH ANY TRANSACTION CONTEMPLATED HEREBY OR DISCUSSED HEREIN (INCLUDING WITH RESPECT TO THE ENFORCEMENT OF ANY OF THE TRANSACTION DOCUMENTS), AND HEREBY IRREVOCABLY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY SUCH COURT, THAT SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER. EACH PARTY HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF VIA REGISTERED OR CERTIFIED MAIL OR OVERNIGHT DELIVERY (WITH EVIDENCE OF DELIVERY) TO SUCH PARTY AT THE ADDRESS IN EFFECT FOR NOTICES TO IT UNDER THIS AGREEMENT AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING CONTAINED HEREIN SHALL BE DEEMED TO LIMIT IN ANY WAY ANY RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW. THE COMPANY HEREBY WAIVES ALL RIGHTS TO A TRIAL BY JURY. (d) The headings herein are for convenience only, do not constitute a part of this Note and shall not be deemed to limit or affect any of the provisions hereof. (e) In case any one or more of the provisions of this Note shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Note shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefore, and upon so agreeing, shall incorporate such substitute provision in this Note. (f) In the event of any stock split, subdivision, dividend or distribution payable in shares of Common Stock (or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly shares of Common Stock), combination or other similar recapitalization or event occurring after the date hereof, each reference in this Note to a price shall be amended to appropriately account for such event. 18 (g) No provision of this Note may be waived or amended except in a written instrument signed, in the case of an amendment, by the Company and Majority Holders, or, in the case of a waiver, by the Holder; provided that no amendment shall, without the consent of the Holder (i) extend the scheduled final maturity of this Note, or reduce the rate or extend the time of payment of principal or of interest (other than as a result of waiving the applicability of any post-default increase in interest rates) hereon or reduce the principal amount hereof or reduce or change the form or relative amounts of the components of the Company Prepayment Price, the Holder Prepayment Price or the Event Price, (ii) increase the Conversion Price, (iii) amend, modify or waive any provision of this Section 15(g), including, without limitation, the definition of Majority Holders or (v) change the method of calculating the Market Price in a manner adverse to the Holder. No waiver of any default with respect to any provision, condition or requirement of this Note shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right. IN WITNESS WHEREOF, the Company has caused this Note to be duly executed by a duly authorized officer as of the date first above indicated. ONSTREAM MEDIA CORPORATION By -------------------------- Randy S. Selman Chief Executive Officer 19 Schedule 1 FORM OF CONVERSION NOTICE (To be executed by the registered Holder in order to convert Note) The undersigned hereby elects to convert the specified principal amount of 8.0% Subordinated Secured Convertible Notes (the "Notes") into shares of common stock, no par value (the "Common Stock"), of Onstream Media Corporation, a Florida corporation, according to the conditions hereof, as of the date written below. -------------------------------------------------------- Date to Effect Conversion -------------------------------------------------------- Principal amount of Notes owned prior to conversion -------------------------------------------------------- Principal amount of Notes to be converted (including accrued but unpaid interest thereon) -------------------------------------------------------- Number of shares of Common Stock to be Issued -------------------------------------------------------- Applicable Conversion Price -------------------------------------------------------- Principal amount of Notes owned subsequent to Conversion -------------------------------------------------------- Name of Holder By ----------------------------------------------------- Name: Title: Schedule 2 CONVERSION SCHEDULE This Conversion Schedule reflects conversions of the 8.0% Subordinated Secured Convertible Notes issued by Onstream Media Corporation. Aggregate Principal Amount Remaining Date of Conversion Amount of Conversion Subsequent to Conversion - --------------------- ----------------------------- ---------------------------- - --------------------- ----------------------------- ---------------------------- - --------------------- ----------------------------- ---------------------------- - --------------------- ----------------------------- ---------------------------- - --------------------- ----------------------------- ---------------------------- - --------------------- ----------------------------- ---------------------------- - --------------------- ----------------------------- ---------------------------- - --------------------- ----------------------------- ---------------------------- - --------------------- ----------------------------- ---------------------------- - --------------------- ----------------------------- ---------------------------- - --------------------- ----------------------------- ---------------------------- - --------------------- ----------------------------- ---------------------------- 21 EX-4.2 3 v039622_ex4-2.txt Exhibit 4.2 No. ______ WARRANT TO PURCHASE COMMON STOCK Date of Issuance: _________, 2006 Warrant to Purchase an Aggregate of _______ shares of Common Stock FOR VALUE RECEIVED, Onstream Media Corporation, a Florida corporation (the "Company"), promises to issue in the name of, and sell and deliver to _____________________ _______________ with offices at ____________________________________________ (the "Holder") a certificate or certificates for an aggregate of ___________________________ (_______) shares ("Number of Shares") of the Company's common stock, par value $_____ per share (the "Common Stock"), upon payment by the Holder of One Dollar and Fifty Cents ($1.50) (the "Exercise Price"), with the Number of Shares and Exercise Price being subject to adjustment in the circumstances set forth below. Section 1. Exercise of Warrant 1.1 Exercise Period. The Holder may exercise this Warrant, in whole or in part (but not as to fractional shares), at any time and from time to time from ____________________ (six months from the date hereof) and ending at 5:00 p.m., Eastern Time, on the ____ day of ___________, 2011 [five years] (the "Exercise Period"). 1.2 Exercise Procedure. a. This Warrant will be deemed to have been exercised at such time as the Company has received all of the following items (the "Exercise Date"): i. a completed Exercise Agreement, in the form attached hereto as Exhibit 1 hereto, executed by the Holder (the "Purchaser"); and ii. a cashier's or official bank check, wire transfer or other immediately available funds payable to the Company in an amount equal to the sum of the product of the Exercise Price multiplied by the number of shares of Common Stock being purchased upon such exercise. b. Certificates for the shares of Common Stock purchased upon exercise of this Warrant will be delivered by the Company to the Purchaser within five (5) business days after the Exercise Date. Unless this Warrant has expired or all of the purchase rights represented hereby have been exercised, the Company may prepare a new Warrant representing the rights formerly represented by this Warrant that have not expired or been exercised. The Company will, if it elects to do so, within such ten (10) day period, deliver such new Warrant to the Holder at the address set forth in this Warrant. c. The shares of Common Stock issuable upon the exercise of this Warrant will be deemed to have been transferred to the Purchaser on the Exercise Date, and the Purchaser will be deemed for all purposes to have become the record holder of such Common Stock on the Exercise Date. d. The issuance of certificates for shares of Common Stock upon the exercise of this Warrant will be made without charge to the Purchaser for any issuance tax in respect thereof or any other cost incurred by the Company in connection with such exercise and related transfer of the shares; provided, however, that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any certificate or instrument in a name other than that of the Holder of this Warrant or any state or federal income or similar tax, and that the Company shall not be required to issue or deliver any such certificate or instrument unless and until the person or persons requiring the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. e. Unless the Company shall have registered the shares of Common Stock underlying this Warrant pursuant to the provisions of Section 6 hereof, the shares of Common Stock issuable upon the exercise of this Warrant have not been registered under the Securities Act of 1933, as amended (the "Act") and, accordingly, will be "restricted securities" as that term is defined in the Act. The Company may insert the following or similar legend on the face of the certificates evidencing shares of Common Stock if required in compliance with state securities laws: "These securities have not been registered under any state securities laws and may not be sold or otherwise transferred or disposed of except pursuant to an effective registration statement under any applicable state securities laws, or an opinion of counsel satisfactory to counsel to the Company that an exemption from registration under any applicable state securities laws is available." f. If at any time after one year from the date of issuance of this Warrant there is no effective Registration Statement registering, or no current prospectus available for, the resale of the Warrant Shares by the Holder, then this Warrant may also be exercised at such time by means of a "cashless exercise" in which the Holder shall be entitled to receive a certificate for the number of Warrant Shares equal to the quotient obtained by dividing [(A-B)(X)] by (A), where: (A) = the average of the 5 VWAPs on the Trading Days immediately preceding the date of such election; (B) = the Exercise Price of this Warrant, as adjusted; and (C) = the number of Warrant Shares issuable upon exercise of this Warrant in accordance with the terms of this Warrant by means of a cash exercise rather than a cashless exercise. 2 g. The number of shares of Common Stock that may be acquired by a Holder upon exercise of this Warrant (or otherwise in respect hereof) shall be limited to the extent necessary to insure that, following such exercise (or other issuance), the total number of shares of Common Stock then beneficially owned by such Holder and its affiliates and any other Persons whose beneficial ownership of Common Stock would be aggregated with such Holder's for purposes of Section 13(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), does not exceed 4.999% (the "Maximum Percentage") of the total number of issued and outstanding shares of Common Stock (including for such purpose the shares of Common Stock issuable upon such exercise). For such purposes, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. Each delivery of an Exercise Agreement hereunder will constitute a representation by the applicable Holder that it has evaluated the limitations set forth in this Section and has determined that issuance of the full number of underlying shares issuable in respect of such Exercise Agreement does not violate the restrictions contained in this Section. If at any time the limits in this Section 6(g) make this Warrant inconvertible in whole or in part, the Company shall not by reason thereof be relieved of its obligation to issue shares of Common Stock at any time or from time to time thereafter but prior to the end of Exercise Period Date upon exercise of this Warrant and when shares of Common Stock may be issued in compliance with such restrictions. 1.3 Fractional Shares. The Company shall not be required to issue fractions of shares of Common Stock on the exercise of this Warrant. The Company shall not be obligated to issue any fractional share interests or fractional warrant interests upon the exercise of this Warrant, nor shall it be obligated to issue scrip or pay cash in lieu of fractional interests, provided, however, that if a holder exercises all the Warrants held of record by such holder, the Company shall at its option (i) eliminate the fractional interests by rounding any fraction up to the nearest whole number of shares or (ii) within 30 days after the Exercise Date, deliver to the Purchaser a check payable to the Purchaser, in lieu of such fractional share, in an amount equal to the value of such fractional share as determined by the closing price of the Company's Common Stock as reported on the principal exchange on which the Company's Common Stock is then traded, as of the close of business on the Exercise Date. Section 2. Effect of Reorganization, Reclassification, Consolidation, Merger or Sale 2.1 Adjustment for Stock Splits and Combinations. In case the Company shall at any time prior to the exercise or termination of this Warrant effect a recapitalization or reclassification of such character that its Common Stock shall be changed into or become exchangeable for a larger or smaller number of shares, then, upon the effective date thereof, the number of shares of Common Stock that the Holder of this Warrant shall be entitled to purchase upon exercise hereof shall be increased or decreased, as the case may be, in direct proportion to the increase or decrease in such number of shares of Common Stock by reason of such recapitalization or reclassification, and the Exercise Price of such recapitalized or reclassified Common Stock shall, in the case of an increase in the number of shares, be proportionately decreased and, in the case of a decrease in the number of shares, be proportionately increased. 2.2 Reorganization, Mergers, Consolidations, or Sales of Assets. If at any time or from time to time there shall be a capital reorganization of the Common Stock (other than a subdivision, combination, reclassification, or exchange of shares provided for elsewhere in this Section) or a merger or consolidation of the Company with or into another corporation, or the sale of all or substantially all of the Company's assets to any other person, then, as a part of such reorganization, merger, consolidation, or sale, provision shall be made so that the holder of this Warrant shall thereafter be entitled to receive upon exercise of the Warrant, the number of shares of stock or other securities or property of the Company, or of the successor corporation resulting from such merger or consolidation or sale, to which a holder of the number of shares of Common Stock into which such shares underlying this Warrant might have been exercised into immediately prior to such capital reorganization, merger, consolidation, or sale would have been entitled, all subject to further adjustments as provided herein; and, in any such case, appropriate provisions shall be made with respect to the rights and interests of the Holder hereof to the effect that the provisions of this Warrant shall thereafter be applicable (as nearly as may be practicable) with respect to any shares, evidences of indebtedness, or other securities or assets thereafter deliverable upon exercise of this Warrant. 2.3 Notice of Adjustment. Whenever the number of shares of Common Stock purchasable upon exercise of this Warrant shall be adjusted as provided herein, the Company shall file with its corporate records a certificate of its Chief Financial Officer setting forth the computation and the adjusted number of shares of Common Stock purchasable hereunder resulting from such adjustments, and a copy of such certificate shall be mailed to the Holder. Any such certificate or letter shall be conclusive evidence as to the correctness of the adjustment or adjustments referred to therein and shall be available for inspection by the holders of the Warrants on any day during normal business hours. Section 3. Reservation of Common Stock The Company will at all time reserve and keep available such number of shares of Common Stock as will be sufficient to permit the exercise in full of this Warrant. Upon exercise of this Warrant pursuant to its terms, the Holder will acquire fully paid and non-assessable ownership rights of the Common Stock, free and clear of any liens, claims or encumbrances except as otherwise provided herein. Section 4. No Shareholder Rights or Obligations This Warrant will not entitle the Holder hereof to any voting rights or other rights as a shareholder of the Company. Until the shares of Common Stock issuable upon the exercise of this Warrant are recorded as issued on the books and records of the Company's transfer agent, the Holder shall not be entitled to any voting rights or other rights as a shareholder; provided, however, the Company uses its best efforts to ensure that, upon receipt of the Exercise Agreement and payment of the Exercise Price, the appropriate documentation necessary to effectuate the exercise of the Warrant and the issuance of the Common Stock is accomplished as expeditiously as possible. No provision of this Warrant, in the absence of affirmative action by the Holder to purchase Common Stock, and no enumeration in this Warrant of the rights or privileges of the Holder, will give rise to any obligation of such Holder for the Exercise Price or as a stockholder of the Company. Section 5. Transferability Subject to the terms hereof, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant with a properly executed Assignment in the form of Exhibit 2 hereto at the principal offices of the Company. This Warrant and the underlying shares of Common Stock may not be offered, sold or transferred except in compliance with the Act, and any applicable state securities laws, and then only against receipt of an agreement of the person to whom such offer or sale or transfer is made to comply with the provisions of this Warrant with respect to any resale or other disposition of such securities; provided that no such agreement shall be required from any person purchasing this Warrant or the underlying shares of Common Stock pursuant to a registration statement effective under the Act. The Holder of this Warrant agrees that, prior to the disposition of any security purchased on the exercise hereof other than pursuant to an registration statement then effective under the Act, or any similar statute then in effect, the Holder shall give written notice to the Company, expressing his intention as to such disposition. Upon receiving such notice, the Company shall present a copy thereof to its securities counsel. If, in the sole opinion of such counsel, which such opinion shall not be unreasonably withheld, the proposed disposition does not require registration of such security under the Act, or any similar statute then in effect, the Company shall, as promptly as practicable, notify the Holder of such opinion, whereupon the Holder shall be entitled to dispose of such security in accordance with the terms of the notice delivered by the Holder to the Company. Section 6. Registration Rights The Company will register the Common Stock underlying the Warrants in accordance with the terms set forth in the Subscription Agreement dated as of the ____ day of________, 2006. The Company shall bear all fees and expenses other than the fees and expenses of holder's counsel incurred in the preparation and filing of such registration statement and any fees incurred in selling the securities. Section 7. Miscellaneous 7.1 Notices. Any notices, requests or consents hereunder shall be deemed given, and any instruments delivered, two days after they have been mailed by first class mail, postage prepaid, or upon receipt if delivered personally or by facsimile transmission, as follows: If to the Company: Onstream Media Corporation 1291 SW 29 Avenue Pompano Beach, Florida 33069 except that any of the foregoing may from time to time by written notice to the other designate another address which shall thereupon become its effective address for the purposes of this paragraph. 7.2 Entire Agreement. This Warrant, including the exhibits and documents referred to herein which are a part hereof, contain the entire understanding of the parties hereto with respect to the subject matter and may be amended only by a written instrument executed by the parties hereto or their successors or assigns. Any paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Warrant. 7.3 Governing Law. This Warrant is governed by, interpreted under and construed in all respects in accordance with the substantive laws of the State of Florida, without regard to the conflicts of law provision thereof, and irrespective of the place of domicile or resident of the party. In the event of a controversy arising out of the interpretation, construction, performance or breach of this Warrant, the parties hereby agree and consent to the jurisdiction and venue of the Courts of the State of Florida, or the United States District Court for the Southern District of Florida; and further agree and consent that personal service of process in any such action or preceding outside the State of Florida shall be tantamount to service in person in Florida. IN WITNESS WHEREOF, this Warrant has been duly executed and the corporate seal affixed hereto, all as of the day and year first above written. ONSTREAM MEDIA CORPORATION By: ---------------------------- ATTEST: Randy S. Selman, President - ---------------------------- 6 EXHIBIT 1 EXERCISE AGREEMENT To: Dated: ------------------------------------ ----------------------------- The undersigned record Holder, pursuant to the provisions set forth in the within Warrant, hereby subscribed for and purchases ________ shares of Common Stock covered by such Warrant and hereby makes full cash payment of $ _______ for such shares at the Exercise Price provided by such Warrant. ------------------------------------ (Signature) ------------------------------------ (Print or type name) ------------------------------------ (Address) ------------------------------------ NOTICE: The signature of this Exercise Agreement must correspond with the name as written upon the face of the within Warrant, or upon the Assignment thereof, if applicable, in every particular, without alteration, enlargement or any change whatsoever. EXHIBIT 2 ASSIGNMENT FOR VALUE RECEIVED, , the undersigned Holder hereby sell, assigns, and transfer all of the rights of the undersigned under the within Warrant with respect to the number of shares of Common Stock issuable upon the exercise of such Warrant set forth below, unto the Assignee identified below, and does hereby irrevocable constituted and appoint to effect such transfer of rights on the books of the Company, with full power of substitution: Number of Shares Name of Assignee Address of Assignee of Common Stock - ---------------- ------------------- --------------- Dated: ---------------------- --------------------------------------- (Signature of Holder) --------------------------------------- (Print or type name) NOTICE: The signature of this Exercise Agreement must correspond with the name as written upon the face of the within Warrant, or upon the Assignment thereof, if applicable, in every particular, without alteration, enlargement or any change whatsoever. CONSENT OF ASSIGNEE I HEREBY CONSENT to abide by the terms and conditions of the within Warrant. Dated: ---------------------- ----------------------------------------- (Signature of Assignee) ----------------------------------------- (Print or type name) EX-10.1 4 v039622_ex10-1.txt Exhibit 10.1 $2,500,000 SUBORDINATED CONVERTIBLE DEBENTURES SUBSCRIPTION AGREEMENT OF ONSTREAM MEDIA CORPORATION SUBSCRIPTION AGREEMENT made as of this ____ day of ________ 2006 between Onstream Media Corporation, a corporation organized under the laws of the State of Florida with offices at 1291 S.W. 29th Avenue, Pompano Beach, Florida 33069 (the "Company"), and the undersigned (the "Subscriber"). WHEREAS, the Company desires to secure financing by conducting a private placement (the "Offering") in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"), and Regulation D promulgated thereunder, and intends to issue on a "best efforts" basis up to $2,500,000 of a its Subordinated Convertible Debentures ("Debentures") and Warrants ("Warrants") being convertible into shares of the Company's common stock, par value $.0001 per share (the "Common Stock") . For each $100,000 principal amount of Debentures, the Company will issue 35,000 Warrants up to 875,000 in the aggregate with a $1.50 conversion price. The Company may offer an additional $1,000,000 of Subordinated Convertible Debentures (the "Additional Debentures") and associated Warrants, 350,000 in the aggregate, upon Shareholder approval for a maximum offering of $3,500,000; WHEREAS, approval of the Company's stockholders is required for the issuance of the Additional Debentures in accordance with the rules of the Nasdaq Stock Market; and WHEREAS, the Subscriber desires to purchase the amount of Debentures set forth on the signature page hereof. NOW, THEREFORE, for and in consideration of the premises and the mutual covenants hereinafter set forth, the parties hereto do hereby agree as follows: I. Subscription for Debentures and Warrants and Representations by and Covenants of Subscriber 1.1 Subject to the terms and conditions hereinafter set forth, the Subscriber hereby subscribes for and agrees to purchase from the Company such amount of Debentures and Warrants as is set forth upon the signature page hereof, and the Company agrees to sell such Debentures to the Subscriber for said purchase price subject to the Company's right to sell to the Subscriber such lesser amount of Debentures as the Company may, in its sole discretion, deem necessary or desirable. The purchase price is payable by certified or bank check made payable to Onstream Media Corporation or by wire transfer of immediately available funds, contemporaneously with the execution and delivery of this Agreement, as follows: Wire Transfer Instructions Onstream Media Corporation Acct.#: ABA#: Sun Trust/South Florida , N.A. 800 South Federal Highway Boca Raton, Florida 33432 The Debentures and Warrants will be delivered by the Company within three (3) business days following the completion of this Offering as set forth in Article III hereof. 1.2 The Subscriber recognizes that the purchase of the Debentures and Warrants involves a high degree of risk in that (a) the Company has suffered recurring losses and negative cash flows from operations; (b) an investment in the Company is highly speculative and only investors who can afford the loss of their entire investment should consider investing in the Company and the Debentures and Warrants; (c) it may not be able to liquidate its investment; (d) transferability of the Debentures and Warrants is extremely limited; and (e) the Company will in all likelihood be unable to pay cash dividends on the Debentures; and (f) the Company is subject to the other risk factors more fully set forth herein and in the Memorandum. The Subscriber acknowledges that the Company has and continues to incur substantial costs and expenses in maintaining its business operations. The Subscriber recognizes that the Company will require significant additional financing in order to satisfy its longer term cash requirements. The failure to raise additional funds may prevent the Company from implementing its business strategy and continuing effectively as a going concern. 1.3 The Subscriber represents and warrants that it is an "accredited investor," as such term as defined in Rule 501 of Regulation D promulgated under the Securities Act, as indicated by its responses to the Investor Questionnaire attached hereto as Annex A (the "Investor Questionnaire"), and that it is able to bear the economic risk of an investment in the Debentures and Warrants. The Subscriber further represents and warrants that the information furnished in the Investor Questionnaire is accurate and complete in all material respects. 1.4 The Subscriber represents and warrants that the Subscriber did not learn of the Offering directly or indirectly through any general solicitation or advertising, including, but not limited to, learning of the Company or the Offering as a result of viewing any press releases or similar types of publicly available information which directly or indirectly resulted in the subscriber subscribing for Debentures and Warrants in the Offering. The Subscriber further understands that the Company is relying, in part, on this representation to ensure compliance with the federal securities laws. 1.5 The Subscriber acknowledges that it has significant prior investment experience, including investment in non-listed and non-registered securities and that it recognizes the highly speculative nature of this investment. 2 1.6 The Subscriber acknowledges receipt and careful review of the Term Sheet dated __________, 2006, and all attachments, and all other documents furnished in connection with this transaction (collectively, the "Offering Documents") and hereby represents that it has been furnished by the Company during the course of this transaction with all information regarding the Company which it has requested; that it has been afforded the opportunity to ask questions of and receive answers from duly authorized officers or other representatives of the Company concerning the terms and conditions of the Offering, and any additional information which it had requested. The Subscriber represents and warrants that it is relying solely on the information contained in the Memorandum and the Company's filings made pursuant to the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and information obtained through its own due diligence. 1.7 The Subscriber acknowledges that this Offering may involve adverse tax consequences (including, but not limited to, the possible need to recognize dividend income relating to the Debentures) and that neither the Company nor the Placement Agent (as defined below) has provided it with tax advice or information. The Subscriber acknowledges that it must retain its own professional advisors to evaluate the tax and other consequences of an investment in the Debentures and Warrants. 1.8 The Subscriber acknowledges that this Offering has not been reviewed by the U.S. Securities and Exchange Commission ("SEC") nor has the SEC or any state Securities Commission passed upon the accuracy or adequacy of the Memorandum. The Subscriber represents that the Securities subscribed for hereunder, including the shares of Common Stock into which the Debentures are convertible and the Warrants are exercisable, are being purchased for its own account, for investment and not for distribution or resale to others. The Subscriber agrees that it will not sell or otherwise transfer the Securities unless they are registered under the Securities Act or unless an exemption from such registration is available. 1.9 The Subscriber understands Rule 144 (the "Rule") promulgated under the Securities Act requires, among other conditions, a one-year holding period prior to the resale (in limited amounts) of securities acquired in a non-public offering without having to satisfy the registration requirements under the Securities Act. The Subscriber understands that the Company makes no representation or warranty regarding its fulfillment in the future of any reporting requirements under the Exchange Act, or its dissemination to the public of any current financial or other information concerning the Company, as is required by the Rule as one of the conditions of its availability. The Subscriber understands and hereby acknowledges that the Company is under no obligation to register the Securities under the Securities Act, with the exception of certain registration rights relating to the shares of Common Stock issuable upon the conversion of the Debentures and exercise of the Warrants (together, the "Conversion Shares") set forth in Article IV herein. The Subscriber consents that the Company may, if it desires, permit the transfer of the Debentures, the Warrants or the Conversion Shares out of its name only when its request for transfer is accompanied by an opinion of counsel reasonably satisfactory to the Company that neither the sale nor the proposed transfer results in a violation of the Act or any applicable state "blue sky" laws (collectively, "Securities Laws"). The Subscriber agrees to hold the Company and its directors, officers and controlling persons and their respective heirs, representatives, successors and assigns harmless and to indemnify them against all liabilities, costs and expenses (including reasonable legal fees and costs of investigation) incurred by them as a result of any misrepresentation made by such Subscriber contained herein or in the Investor Questionnaire or any sale or distribution by the undersigned Subscriber in violation of any Securities Laws. 3 1.10 The Subscriber consents to the placement of a legend on any certificate or other document evidencing the Securities or the Conversion Shares stating that they have not been registered under the Securities Act and setting forth or referring to the restrictions on transferability and sale thereof. 1.11 The Subscriber acknowledges that if such Subscriber is a Registered Representative of an NASD member firm, such Subscriber must give such firm the notice required by the NASD's Rules of Fair Practice, receipt of which must be acknowledged by such firm on the signature page hereof. 1.12 If the undersigned Subscriber is a partnership, corporation, trust or other entity, such partnership, corporation, trust or other entity further represents and warrants that: (a) it was not formed for the purpose of investing in the Company; (b) it is authorized and otherwise duly qualified to purchase and hold the Securities and the Conversion Shares; and (c) that this Subscription Agreement has been duly and validly authorized, executed and delivered and constitutes the legal, binding and enforceable obligation of the undersigned. 1.13 The Subscriber hereby represents that the address of Subscriber furnished by such Subscriber at the end of this Subscription Agreement is the undersigned's principal residence if such Subscriber is an individual or its principal executive office if it is a corporation or other business entity. 1.14 The Subscriber hereby represents that, except as set forth in the Offering Documents, no representations or warranties have been made to the Subscriber by the Placement Agent, Company or any agent, employee or affiliate of the Company and in entering into this transaction, the Subscriber is not relying on any information, other than that contained in the Offering Documents and the results of independent investigation by the Subscriber. 1.15 The Subscriber acknowledges that at such time as the Conversion Shares are registered, sales of such securities will be subject to state securities laws, including those of states which may require any securities sold therein to be sold through a registered broker-dealer or in reliance upon an exemption from registration. II. Representations by the Company 2.1 The Company represents and warrants to the Subscriber that prior to the consummation of this Offering and at each closing date: (a) The Company is a corporation duly organized, existing and in good standing under the laws of the State of Florida and has the corporate power to conduct the business which it conducts and proposes to conduct. 4 (b) The execution, delivery and performance of this Subscription Agreement by the Company will have been duly approved by the Board of Directors of the Company and all other actions required to authorize and effect the offer and sale of the Securities contained therein will have been duly taken and approved including the approval of the Company's stockholders which will be required to comply with Nasdaq listing standards, and will be a condition to a release of the Additional Securities from escrow. (c) The Debentures have been duly and validly authorized and when issued and paid for in accordance with the terms hereof, will be duly and validly issued and fully paid and non-assessable. (d) The Warrants have been duly and validly authorized and, when duly exercised and the exercise price is paid in connection therewith, the Common Stock underlying such Warrants will be duly and validly issued and fully paid and non-assessable. (e) The Company will at all times have authorized and reserved a sufficient number of Reserved Shares to provide for the conversion of the Debentures and exercise of the Warrants. (f) The Company has obtained, or is in the process of obtaining, all licenses, permits and other governmental authorizations necessary to the conduct of its business; such licenses, permits and other governmental authorizations obtained are in full force and effect; and the Company is in all material respects complying therewith. (g) Except as described in the Offering Documents, the Company knows of no pending or threatened legal or governmental proceedings to which the Company is a party which could materially adversely affect the business, property, financial condition or operations of the Company. (h) Except as described in the Memorandum, the Company is not in violation of or default under, nor will the execution and delivery of this Subscription Agreement, the issuance of the Debentures and Warrants, and the incurrence of the obligations herein and therein set forth and the consummation of the transactions herein or therein contemplated, result in a violation of, or constitute a default under, the Company's certificate of incorporation or by-laws, any material obligations, agreement, covenant or condition contained in any bond, debenture, note or other evidence of indebtedness or in any material contract, indenture, mortgage, loan agreement, lease, joint venture or other agreement or instrument to which the Company is a party or by which it or any of its properties may be bound or any material order, rule, regulation, writ, injunction, or decree of any government, governmental instrumentality or court, domestic or foreign, except where such violation or default would not have a material adverse effect on the Company's business or financial condition. (i) The financial information contained in the Offering Documents presents fairly the financial condition of the Company as of the dates and for the periods indicated. 5 III. Terms of Subscription The subscription period will begin as of March 1, 2006 and will terminate at 11:59 p.m. Eastern time on ____________, unless extended by the Company for a period or periods of up to 60 days (the "Termination Date"). Such extension may be effected without notice to the Subscribers. The Company will issue on a "best efforts" basis up to $2,500,000 of a its Subordinated Convertible Debentures ("Debentures") and Warrants ("Warrants") being convertible into shares of the Company's common stock, par value $.0001 per share (the "Common Stock") . For each $100,000 principal amount of Debentures, the Company will issue 35,000 Warrants. The Company may offer an additional $1,000,000 of Subordinated Convertible Debentures ("the Additional Debentures") and associated detachable Warrants upon Shareholder approval for a maximum offering of $3,500,000; 3.1 Placement of the Securities will be made by NASD broker dealers (and finders as permitted by law), as placement agent (the "Placement Agent"), which will receive (a) a cash commission equal to 7% of the gross proceeds received by the Company from the Debentures sold in the Offering; and (b) four-year warrants to purchase 10% of the number of shares of Common Stock issuable upon the conversion of the Debentures and exercise of the Warrants, on the same terms as agreed to under the Warrants (the "Agent's Warrants"), at an exercise price equal to $1.50 per share (as such term is defined in the Certificate of Designation). The Company shall also pay all expenses in connection with the qualification of the Securities under the Securities Laws of the states which the Placement Agent shall designate, including legal fees and filing fees. 3.2 All funds paid for the Debentures hereunder shall be deposited directly into the Bank account of the Company. At the Companies discretion, not later than (i) when the total amount of Debentures are sold or (2) May 1, 2006 (or in the event the company extends the offering for up to 60 days, July 1, 2006), the Company will effect an initial closing of the offering. All Placement Agent fees and expenses if not already deducted shall be paid. 3.3 Upon the sale of all or part of the Additional Debentures and Warrants, which shall be subject to the approval of the Company's stockholders in accordance with the rules of the Nasdaq Stock Market, all Additional Debentures and Warrants subscription proceeds, less the Placement Agent fees and expenses, shall be promptly paid to the Company by the subscribers within 5 days of notice that the Additional Debentures and Warrants were approved by the Company's shareholders. 3.4 The Subscriber hereby authorizes and directs the Company to deliver Notes and Warrants representing the Securities to be issued to such Subscriber pursuant to this Subscription Agreement either (a) to the residential or business address indicated in the Investor Questionnaire or (b) directly to the Subscriber's account maintained with the Placement Agent, if any. (If the Subscriber does not desire the Securities to be delivered to such account, the Subscriber should so indicate on the signature page). 3.5 The Subscriber hereby authorizes and directs the Company to return any funds for unaccepted subscriptions to the same account from which the funds were drawn, including any customer account maintained with the Placement Agent. 6 3.6 If the Subscriber is not a United States person, such Subscriber hereby represents that it has satisfied itself as to the full observance of the laws of its jurisdiction in connection with any invitation to subscribe for the Securities or any use of this Agreement, including (a) the legal requirements within its jurisdiction for the purchase of the Securities, (b) any foreign exchange restrictions applicable to such purchase, (c) any governmental or other consents that may need to be obtained, and (d) the income tax and other tax consequences, if any, that may be relevant to the purchase, holding, redemption, sale or transfer of the Securities. Such Subscriber's subscription and payment for, and such Subscriber's continued beneficial ownership of the Securities, will not violate any applicable securities or other laws of the Subscriber's jurisdiction. IV. Registration Rights 4.1 Required Registration Under the Securities Act. (a) The Company shall, for the benefit of the holders of Registrable Securities (as defined below), at the Company's cost, file with the SEC on or prior to thirty (30) days after the final closing of the Offering in which the Securities are sold in accordance with the Memorandum (the "Closing"), a Registration Statement (the "Registration Statement") providing for the resale by the holders of all the Registrable Securities, and shall use commercially reasonable efforts to have such Registration Statement declared effective by the SEC as soon as practicable. If the Registration Statement is not filed as set forth above or declared effective within ninety (90) days following the Closing (or 150 days in the event of a review of the Registration Statement by the Securities and Exchange Commission), the Company shall be obligated to pay the holders of the Registrable Securities an amount equal to one percent (1%) of the aggregate purchase price paid by the holder of the Registrable Securities (pursuant to the Subscription Agreement) on such date and one and one-half percent (1.5%) on the monthly anniversary of each such date thereafter (if the Registration Statement shall not have been declared effective by such date) until the Registration Statement is declared effective up to a maximum of fifteen percent (15%). The Company agrees to use commercially reasonable efforts to keep the Registration Statement continuously effective until the earlier to occur of (i) the expiration of the time period referred to in Rule 144(k) under the Securities Act with respect to all beneficial holders of the underlying shares of Common Stock (other than affiliates of the Company), and (ii) such time as all the restricted underlying shares of Common Stock covered by the Registration Statement have been sold or are otherwise freely tradable without registration under the Securities Act (the "Effectiveness Period"); provided that, if at any time or from time to time after the date of effectiveness of the Registration Statement, the Company notifies the undersigned in writing of the existence of a Potential Material Event (as defined below), the undersigned shall not offer or sell any shares of Common Stock, or engage in any other transaction involving or relating to such shares, from the time of the giving of notice with respect to a Potential Material Event until the Company notifies the undersigned that such Potential Material Event either has been disclosed to the public or no longer constitutes a Potential Material Event. "Potential Material Event" means the possession by the Company of material information regarding a potential transaction beneficial to the Company or its stockholders not ripe for disclosure in a registration statement, which shall be evidenced by determinations in good faith by the Board of Directors of the Company that disclosure of such information in the registration statement would be detrimental to the business and affairs of the Company. The Company further agrees, if necessary or appropriate, to supplement or amend the Registration Statement, if required by the rules, regulations or instructions applicable to the registration form used by the Company for such Registration Statement or by the Securities Act or by any other rules and regulations thereunder for such registrations, and the Company agrees to furnish to the holders of Registrable Securities copies of any such supplement or amendment promptly after its being used or filed with the Commission. As used in this Agreement, (ii) "Registrable Securities" shall mean (A) the shares of Common Stock issuable upon the conversion of the Debentures and exercise of the Warrants, (B) any securities issued in exchange for or substitution of any thereof or as a result of a stock split or combination or as a dividend or other distribution in respect thereof, and (ii) as used in this Agreement, and (C) any shares to be paid in lieu of interest. 7 (b) Effective Registration Statement. A Registration Statement pursuant to Section 4.1(a) above will not be deemed to have become effective unless it has been declared effective by the SEC; provided that if, after it has been declared effective, the offering of Registrable Securities pursuant to a Registration Statement is interfered with by any stop order, injunction or other order or requirement of the SEC or any other governmental agency or court, such Registration Statement will be deemed not to have been effective during the period of such interference, until the offering of Registrable Securities pursuant to such Registration Statement may legally resume provided that for purposes of this Agreement the Registration Statement will still be deemed effective. If the Registration Statement is not effective for more for more than 60 calendar days (which need not be consecutive days) during any 12 month period. The obligation of the Company under this Section 4.1 shall not apply to Registrable Securities that at such time are eligible for immediate resale pursuant to Rule 144(k) under the Act. 4.2 Expenses. -------- (a) With respect to the registration required pursuant to Section 4.1 hereof, all fees, costs and expenses of and incidental to such registration, inclusion and public offering (as specified in paragraph (b) below) in connection therewith shall be borne by the Company, including the cost of one counsel to the holders of the Registrable Securities who shall be chosen by the Placement Agent; provided, however, that the holders of Registrable Securities (the "Holders") shall bear their pro rata share of the underwriting discount and commissions and transfer taxes and the cost of their own counsel. (b) The fees, costs and expenses of registration to be borne by the Company as provided in paragraph (a) above shall include, without limitation, all registration, filing, and NASD fees, printing expenses, fees and disbursements of counsel and accountants for the Company, and all legal fees and disbursements and other expenses of complying with state securities or blue sky laws of any jurisdictions in which the securities to be offered are to be registered and qualified (except as provided in 4.2(a) above). Fees and disbursements of counsel and accountants for the Holders and any other expenses incurred by the Holders not expressly included above shall be borne by the Holders. 8 4.3 Indemnification. (a) The Company will indemnify and hold harmless each Holder of Registrable Securities which are included in a registration statement pursuant to the provisions of Section 4.1 hereof, its directors and officers, and any underwriter (as defined in the Securities Act) for such Holder and each person, if any, who controls such Holder or such underwriter within the meaning of the Securities Act, from and against, and will reimburse such Holder and each such underwriter and controlling person with respect to, any and all loss, damage, liability, cost and expense to which such Holder or any such underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, damages, liabilities, costs or expenses are caused by any untrue statement or alleged untrue statement of any material fact contained in such registration statement, any prospectus contained therein or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; provided, however, that the Company will not be liable in any such case to the extent that any such loss, damage, liability, cost or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by or on behalf of such Holder, such underwriter or such controlling person in writing specifically for use in the preparation thereof. (b) Each Holder of Registrable Securities included in a registration pursuant to the provisions of Section 4.1 hereof will indemnify and hold harmless the Company, its directors and officers, any controlling person and any underwriter from and against, and will reimburse the Company, its directors and officers, any controlling person and any underwriter with respect to, any and all loss, damage, liability, cost or expense to which the Company or any controlling person and/or any underwriter may become subject under the Securities Act or otherwise, insofar as such losses, damages, liabilities, costs or expenses are caused by any untrue statement or alleged untrue statement of any material fact contained in such registration statement, any prospectus contained therein or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was so made in reliance upon and in strict conformity with written information furnished by or on behalf of such Holder specifically for use in the preparation thereof, or if the Holder sells after receiving a notice as contemplated by Section 4.2(h) or (i) hereof. 9 (c) Promptly after receipt by an indemnified party pursuant to the provisions of paragraph (a) or (b) of this Section 4.2 of notice of the commencement of any action involving the subject matter of the foregoing indemnity provisions such indemnified party will, if a claim thereof is to be made against the indemnifying party pursuant to the provisions of said paragraph (a) or (b), promptly notify the indemnifying party of the commencement thereof; but the omission to so notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than hereunder. In case such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party shall have the right to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; provided, however, if counsel for the indemnifying party concludes that a single counsel cannot under applicable legal and ethical considerations, represent both the indemnifying party and the indemnified party, the indemnified party or parties have the right to select separate counsel to participate in the defense of such action on behalf of such indemnified party or parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party pursuant to the provisions of said paragraph (a) or (b) for any legal or other expense subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, unless (i) the indemnified party shall have employed counsel in accordance with the provisions of the preceding sentence, (ii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after the notice of the commencement of the action or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. V. Miscellaneous 5.1 Any notice or other communication given hereunder shall be deemed sufficient if in writing and sent by registered or certified mail, return receipt requested, addressed to the Company, at its registered office, 1291 S.W. 29th Avenue, Pompano Beach, Florida 33069, Attention: Mr. Randy S. Selman, Chief Executive Officer, and to the Subscriber at its address indicated on the last page of this Agreement. Notices shall be deemed to have been given on the date of mailing, except notices of change of address and notices sent from outside the continental United States, which shall be deemed to have been given when received. 5.2 This Agreement shall not be changed, modified or amended except by a writing signed by the parties to be charged, and this Agreement may not be discharged except by performance in accordance with its terms or by a writing signed by the party to be charged. 5.3 This Agreement shall be binding upon and inure to the benefit of the parties hereto and to their respective heirs, legal representatives, successors and assigns. This Agreement sets forth the entire agreement and understanding between the parties as to the subject matter thereof and merges and supersedes all prior discussions, agreements and understandings of any and every nature among them. 10 5.4 Notwithstanding the place where this Agreement may be executed by any of the parties hereto, the parties expressly agree that all the terms and provisions hereof shall be construed in accordance with and governed by the laws of the State of Florida without regard to such states laws regarding conflicts of laws. The parties hereby agree that any dispute which may arise between them arising out of or in connection with this Agreement shall be adjudicated before a court located in Fort Lauderdale, Florida and they hereby submit to the exclusive jurisdiction of the courts of the State of Florida located in Fort Lauderdale, Florida and of the federal courts in the Southern District of Florida with respect to any action or legal proceeding commenced by any party, and irrevocably waive any objection they now or hereafter may have respecting the venue of any such action or proceeding brought in such a court or respecting the fact that such court is an inconvenient forum, relating to or arising out of this Agreement or any acts or omissions relating to the sale of the securities hereunder, and consent to the service of process in any such action or legal proceeding by means of registered or certified mail, return receipt requested, in care of the address set forth below or such other address as the undersigned shall furnish in writing to the other. 5.5 This Agreement may be executed in counterparts. Upon the execution and delivery of this Agreement by the Subscriber, this Agreement shall become a binding obligation of the Subscriber with respect to the purchase of the Securities as herein provided; subject, however, to the right hereby reserved to the Company to enter into the same agreements with other subscribers and to add and/or to delete other persons as subscribers. 5.6 The holding of any provision of this Agreement to be invalid or unenforceable by a court of competent jurisdiction shall not affect any other provision of this Agreement, which shall remain in full force and effect. 5.7 It is agreed that a waiver by either party of a breach of any provision of this Agreement shall not operate, or be construed, as a waiver of any subsequent breach by that same party. 5.8 The parties agree to execute and deliver all such further documents, agreements and instruments and take such other and further action as may be necessary or appropriate to carry out the purposes and intent of this Agreement. 5.9 The Company agrees not to disclose the names, addresses or any other information about the Subscribers, except as required by law, provided, that the Company may use information relating to the Subscriber in any registration statement under the Securities Act with respect to the Debentures. 11 VI. Blue Sky Legends FOR RESIDENTS OF ALL STATES: THE UNITS OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF CERTAIN STATES AND ARE BEING OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SAID ACT AND SUCH LAWS. THE INTERESTS ARE SUBJECT IN VARIOUS STATES TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER SAID ACT AND SUCH LAWS PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. THE UNITS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THIS OFFERING OR THE ACCURACY AND ADEQUACY OF THE CONFIDENTIAL PRIVATE OFFERING MEMORANDUM. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. 12 IN WITNESS WHEREOF, the parties have executed this Subscription Agreement as of the day and year first written above. - -------------------------------- ------------------------------------ Signature of Subscriber Signature of Co-Subscriber - -------------------------------- ------------------------------------ Name of Subscriber Name of Co-Subscriber [please print] [please print] - -------------------------------- ------------------------------------ Address of Subscriber Address of Co-Subscriber - -------------------------------- ------------------------------------ Social Security or Taxpayer Social Security or Taxpayer Identification Number of Subscriber Identification - ------------------------------ Number of Co-Subscriber - -------------------------------- ------------------------------------ Telephone Number of Subscriber Telephone Number of Co-Subscriber - -------------------------------- = $-------------------- Amount of Subordinated Convertible Aggregate Purchase Price Debentures Subscribed for Check here to delete Subsection (b) of Section 3.4. |_| *IF SUBSCRIBER IS A REGISTERED REPRESENTATIVE WITH AN NASD MEMBER FIRM, HAVE THE FOLLOWING ACKNOWLEDGMENT SIGNED BY THE APPROPRIATE PARTY: The undersigned NASD member firm acknowledges receipt of the notice required by Rule 3050 of the NASD Subscription Accepted: Conduct Rules. ONSTREAM MEDIA CORPORATION - -------------------------------- Name of NASD Member Firm By: --------------------------------- Randy S. Selman, Chief Executive Officer By: ----------------------------- Authorized Officer 13 INVESTOR QUESTIONNAIRE Instructions: Check all boxes below which correctly describe you. |_| You are (i) a bank, as defined in Section 3(a)(2) of the Securities Act of 1933, as amended - (the "Securities Act"), (ii) a savings and loan association or other institution, as defined in -------------- -- Section 3(a)(5)(A) of the Securities Act, whether acting in an individual or fiduciary capacity, (iii) a broker or dealer registered pursuant to Section 15 of the Securities Exchange --- Act of 1934, as amended (the "Exchange Act"), (iv) an insurance company as defined in Section ------------- -- 2(13) of the Securities Act, (v) an investment company registered under the Investment Company - Act of 1940, as amended (the "Investment Company Act"), (vi) a business development company as ----------------------- -- defined in Section 2(a)(48) of the Investment Company Act, (vii) a Small Business Investment --- Company licensed by the U.S. Small Business Administration under Section 301 (c) or (d) of the Small Business Investment Act of 1958, as amended, (viii) a plan established and maintained by ---- a state, its political subdivisions, or an agency or instrumentality of a state or its political subdivisions, for the benefit of its employees and you have total assets in excess of $5,000,000, or (ix) an employee benefit plan within the meaning of the Employee Retirement -- Income Security Act of 1974, as amended ("ERISA") and (1) the decision that you shall subscribe ----- - for and purchase Subordinated Convertible Debentures (the "Debentures") is made by a plan ---------- fiduciary, as defined in Section 3(21) of ERISA, which is either a bank, savings and loan association, insurance company, or registered investment adviser, (2) you have total assets in excess of $5,000,000 and the decision that you shall subscribe for and purchase Debentures is made solely by persons or entities that are accredited investors, as defined in Rule 501 of Regulation D promulgated under the Securities Act ("Regulation D") or (3) you are a ------------- - self-directed plan and the decision that you shall subscribe for and purchase Debentures is made solely by persons or entities that are accredited investors. |_| You are a private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940, as amended. |_| Internal Revenue Code of 1986, as amended (the "Code"), a corporation, Massachusetts or similar business trust or a partnership, in each case not formed for the specific purpose of making an investment in Debentures and with total assets in excess of $5,000,000. |_| You are a director or executive officer of Onstream Media Corporation |_| You are a natural person whose individual net worth, or joint net worth with your spouse, exceeds $1,000,000 at the time of your subscription for and purchase of Debentures. |_| You are a natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with your spouse in excess of $300,000 in each of the two most recent years, and who has a reasonable expectation of reaching the same income level in the current year. Q-1 |_| You are a trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring Debentures, whose subscribe for and purchase of Debentures is directed by a sophisticated person as described in Rule 506(b)(2)(ii) of Regulation D. |_| You are an entity in which all of the equity owners are persons or entities described in one of the preceding paragraphs. The undersigned hereby represents and warrants that all of its answers to this Investor Questionnaire are true as of the date of its execution of the Subscription Agreement pursuant to which it purchased Subordinated Convertible Debentures and Warrants of Onstream Media Corporation - -------------------------------- ------------------------------------ Name of Purchaser [please print] Name of Co-Purchaser [please print] - -------------------------------- ------------------------------------ Signature of Purchaser (Entities Signature of Co-Purchaser please provide signature of Purchaser's duly authorized signatory.) - -------------------------------- Name of Signatory (Entities only) - -------------------------------- Title of Signatory (Entities only) Q-2 EX-10.2 5 v039622_ex10-2.txt Exhibit 10.2 SUBORDINATION AGREEMENT SUBORDINATION AGREEMENT, dated as of March __, 2006, among the 8.0% SUBORDINATED SECURED CONVERTIBLE Debenture Holders (the "JUNIOR CREDITORS"), Onstream Media Corporation (the "BORROWER"), and the 8% Senior Convertible Debenture Holders as defined in Schedule 3.1 of the Note (the "SENIOR CREDITORS"). I. Pursuant the Securities Purchase Agreement, dated as of June 8, 2004 among the Borrower and the Senior Creditors (as amended, supplemented or otherwise modified from time to time, the "PURCHASE AGREEMENT"), the Senior Creditors, severally, loaned the Borrower an aggregate principal amount of $6,500,000, pursuant to the terms and conditions of the Borrower's 8% Secured Convertible Notes, due 2008(as amended, supplemented or otherwise modified from time to time, the "SENIOR NOTES"). In connection with the Senior Notes, the Senior Creditors were granted a first priority lien on all of the assets of the Borrower and its Subsidiaries (as defined in the Security Agreement). II. The Junior Creditors made loans to the Borrower in the aggregate principal amount of $2,500,000 with an over allotment of an additional $1,000,000 upon approval of the Borrower's shareholders pursuant to the terms and conditions of the Secured 8% Convertible Note, dated ___________, 2006 (as amended, supplemented or otherwise modified from time to time, the "SUBORDINATED CONVERTIBLE NOTES"). Accordingly, the parties hereto agree as follows: 1. Definitions. Unless the context otherwise requires, capitalized terms used herein and not defined herein shall have the meanings assigned to such terms in the Senior Notes. "AGENT" means the Agent appointed under the Security Agreement, dated as of _________, _____, among the Borrower and the Senior Creditors. "JUNIOR OBLIGATIONS" means all of the obligations and liabilities of the Borrower to the Junior Creditors, including with out limitation, all loans (including the Subordinated Convertible Notes), advances and other extensions of credit made by the Junior Creditors to the Borrower, whether fixed, contingent, now existing or hereafter arising, created, assumed or incurred, including all post-petition interest and make-whole premiums, whether or not allowed as a secured claim or as an unsecured claim in any proceeding, including any proceeding arising under Title 11 of the United States Code. "PAYMENT" means any payment, whether in the form of cash, property or otherwise, whether in respect of principal, interest, fees, expenses or otherwise, whether in respect of a scheduled payment, a prepayment, a repurchase, a redemption, a defeasance, an acceleration, the sale or redemption of any collateral security or otherwise and whether voluntary or involuntary; provided that payment shall in no event include the issuance by the Borrower to the Junior Creditor of any equity, including common stock, of the Borrower (by way of setoff, offset or otherwise). "PAYOFF TIME" means any time upon which all payments of principal and interest of the Senior Creditors under the Senior Notes shall have been satisfied in full or otherwise released. "SENIOR DOCUMENTS" means (i) the Senior Notes, (ii) the Security Agreement, dated as of __________, 2006, among the Borrower and the Senior Creditors, (iii) the Transaction Documents, (v) each agreement, instrument or other document executed or delivered in connection with any Senior Obligations, and (vi) each agreement, instrument or other document executed or delivered in connection with any of the foregoing, as each may be amended, supplemented or otherwise modified from time to time in accordance with their respective terms. "SENIOR OBLIGATIONS" means all of the obligations and liabilities of the Borrower under the Senior Notes, whether fixed, contingent, now existing or hereafter arising, created, assumed or incurred, and including all post-petition interest and make-whole premiums, whether or not allowed as a secured claim or as an unsecured claim in any proceeding, including any proceeding arising under Title 11 of the United States Code; provided, however, that Senior Obligations shall not exceed, in the aggregate, the principal amount and interest of the Senior Notes outstanding and in any event more than $3,400,000. 2. Subordination. (a) The Junior Creditors hereby subordinate, upon the terms and conditions herein contained, the Junior Obligations to the Senior Obligations. (b) Until the later of (i) the Payoff Time and (ii) 6 months from the occurrence of an Event of Default under the Junior Obligations ("Standstill Expiration Date"), the Junior Creditors shall not be entitled to receive and the Borrower shall not make any Payment in respect of the Junior Obligations except as to the payment of interest and scheduled principal payments as per the Subordinated Convertible Notes and the issuance of equity of the Borrower, including but not limited to the issuance of Common Stock to be issued by the Borrower upon conversion of the Junior Obligations. The principal payments for the Junior Creditors commence twenty-one (21) months from the execution date of the Note. (c) The Junior Creditors agree that they shall not declare any part of the Junior Obligations to be due and payable or exercise any of the rights or remedies that they may have (including, without limitation, bringing, or joining with any other creditor in instituting, any proceeding in contemplation of, or in connection with, any Bankruptcy Event until the Standstill Expiration Date. 2 (d) Until the Standstill Expiration Date (i) the Borrower shall not grant, and the Junior Creditors shall not receive or accept, any Lien of any kind or nature on any property (whether now existing or hereafter acquired) of the Borrower or any Subsidiary that secures the Junior Obligations, and (ii) the Junior Creditors shall not accept any guaranty of any Junior Obligation, or any "put" or other arrangement similar thereto. (e) Nothing contained in this Subordination Agreement is intended to or shall impair, as among the Borrower, its creditors (other than the Senior Creditors) and the Junior Creditors, the obligation of the Borrower to pay the Junior Creditors any amount due in respect of the Junior Obligations as and when the same shall become due and payable in accordance with the terms thereof, or affect the relative rights of the Borrower and its creditors (other than the Senior Creditors), in each case subject to the rights of each Senior Creditor under this Subordination Agreement. (f) The Junior Creditors agree that this Subordination Agreement shall not be affected by any action or failure to act by a Senior Creditor that results, or may result, in affecting, impairing or extinguishing any right of reimbursement or subrogation or other right or remedy of the Junior Creditors. (g) The Junior Creditors agree that any statement of account with respect to the Senior Obligations from the Senior Creditors to the Borrower that binds the Borrower shall also be binding upon the Junior Creditors, and that copies of any such statement of account maintained in the ordinary course of business may be used in evidence against the Junior Creditors. (h) The Junior Creditors agree that no Payment received by the Junior Creditors and paid over to any Senior Creditor pursuant to the provisions hereof shall entitle the Junior Creditors to exercise any rights of subrogation in respect thereof until the Standstill Expiration Date, and for the purpose of such subrogation no such Payment that otherwise would have been made to the Junior Creditors shall, as among the Borrower, its creditors (other than the Senior Creditors) and the Junior Creditors, be deemed to be a payment by the Borrower to or on account of the Senior Obligations, it being understood that the provisions hereof are intended solely for the purpose of defining the relative rights of the Junior Creditors, on the one hand, and the Senior Creditors, on the other hand. The Junior Creditors shall be subrogated to all rights of the Senior Creditors to receive any further payments or distributions until the Senior Obligations shall have been indefeasibly paid in full. The subordination provisions contained herein shall not be affected by any action, or failure to act, by any Senior Creditor that results, or may result, in affecting, impairing or extinguishing any right of reimbursement or subrogation or other right or remedy of the Junior Creditors. 3 (i) Any document or instrument evidencing the Junior Obligations, including, without limitation, the Subordinated Convertible Notes, shall bear the following legend: THIS INSTRUMENT AND THE RIGHTS TO PAYMENT HEREUNDER ARE SUBORDINATED PURSUANT THE SUBORDINATION AGREEMENT, DATED AS OF March __, 2006, AMONG THE JUNIOR CREDITORS AND THE SENIOR CREDITORS PARTY THERETO. 3. Pari Passu Acknowledgement Regarding Senior Notes. Crescent International Ltd. ("Crescent"), a Junior Creditor, have/will purchase from certain Senior Creditor(s) their respective Senior Note(s). The Senior Creditors acknowledge and agree that such Senior Note(s) held by Crescent shall maintain their status as having rights pari passu with all other Senior Note(s) as if Crescent were an original Senior Creditor and accordingly Crescent shall share pro-rata with the Senior Creditors in respect to any exercise of rights under, and distributions to, the Senior Note(s). 4. Representations and Warranties. The Junior Creditors represent and warrant to the Agent and each Senior Creditor as follows: (a) The Junior Creditors are duly organized, validly existing and in good standing under the laws of the jurisdiction of their organizations and have all requisite power and authority to carry on their business as now conducted. (b) The transactions contemplated hereby are within the corporate or other analogous powers of the Junior Creditors and have been duly authorized by all necessary corporate or other analogous and, if required, equityholder action. This Subordination Agreement has been duly executed and delivered by the Junior Creditors and constitutes a legal, valid and binding obligation thereof, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally. (c) The transactions contemplated hereby will not (i) violate the organizational documents of the Junior Creditors and (ii) violate or result in a default under any indenture, agreement or other instrument binding upon the Junior Creditors or its assets, or give rise to a right thereunder to require any payment to be made by the Junior Creditors. (d) All of the Junior Obligations are represented by the Subordinated Convertible Notes. 4 5. Subordination Absolute. (a) All rights and interests of the Agent and each other Senior Creditor hereunder, and all agreements and obligations of the Junior Creditors and the Borrower hereunder, shall remain in full force and effect irrespective of (i) the invalidity or lack of enforceability of any Senior Notes, (ii) any amendment of, supplement to or other modification of (including by any amendment, waiver or consent) the Senior Debentures or all or any of the Senior Obligations, including any renewal, extension, acceleration or replacement thereof, (iii) the existence, enforceability, perfection or validity of any collateral security or any guarantor, (iv) the liability of any other Person in respect of the Senior Obligations, (v) any failure, delay, neglect or omission by the Agent or any other Senior Creditor to obtain, realize upon or perfect any security interest in any Collateral, guaranty, indebtedness, liability or obligation, or by any direct or indirect collateral security therefore, (vi) the bankruptcy, reorganization or insolvency of, or by any other proceeding for the relief of debtors commenced by or against, the Junior Creditors, the Borrower or any other Person, (vii) the subordination of the Senior Obligations to any other liabilities or obligations or (viii) any other reason or circumstance whatsoever, whether similar or dissimilar to the foregoing, that might otherwise constitute a defense available to, or a discharge of, the Junior Creditors in respect of this Subordination Agreement or the Borrower in respect of the Senior Obligations or this Subordination Agreement. (b) The Junior Creditors hereby waive any right to require that resort be had by the Agent or any other Senior Creditor against the Borrower or any other Person, or to require that resort be had by the Agent or any other Senior Creditor to any collateral security. Neither the Agent nor any other Senior Creditor shall have any obligation to enforce any Senior Documents by any action, including making or perfecting any claim against the Borrower prior to being entitled to the benefits of this Subordination Agreement. (c) The Junior Creditors agree that the provisions of this Subordination Agreement shall be applicable notwithstanding the fact that no Senior Obligations may be outstanding from time to time or may have been paid down to zero at any time or from time to time. 5 6. Binding Effect; Several Agreement; Assignments; Continuing Agreement; Termination. Whenever in this Subordination Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party; and all covenants, promises and agreements by or on behalf of the Borrower or the Junior Creditors that are contained in this Subordination Agreement shall bind and inure to the benefit of each party hereto and its respective successors and assigns. This Subordination Agreement shall become effective when a counterpart hereof executed on behalf of each of the Borrower and the Junior Creditors shall have been delivered to the Senior Creditors and a counterpart hereof shall have been executed on behalf of the Senior Creditors, and thereafter shall be binding upon the Borrower or the Junior Creditors, as applicable, and the Secured Creditors and their respective successors and assigns, and shall inure to the benefit of the Borrower or the Junior Creditors, as applicable, the Agent and the other Senior Creditors, and their respective successors and assigns, except that neither the Borrower or the Junior Creditors shall have the right to assign its rights or obligations hereunder or any interest herein (and any such attempted assignment shall be void), except as expressly contemplated by this Subordination Agreement or the other Senior Documents. This Subordination Agreement shall be a continuing agreement and shall be irrevocable, provided, however, that this Subordination Agreement shall terminate one year and one day after the payment in full of the Junior Obligations; provided further that no Event of Default or breach under the Senior Obligations shall have occurred. 7. Waivers; Amendment. (a) No failure or delay of the Secured Creditors in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Senior Creditors hereunder and under the other Senior Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Subordination Agreement or consent to any departure by the Borrower or the Junior Creditors therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on the Borrower or the Junior Creditors in any case shall entitle the Borrower or the Junior Creditors, as applicable, to any other or further notice or demand in similar or other circumstances. (b) Neither this Subordination Agreement nor any provision hereof may be waived, amended or modified except pursuant to a written agreement entered into by, between or among the Senior Creditors and the Borrower and/or the Junior Creditors, as applicable. 8. GOVERNING LAW. THIS SUBORDINATION AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 6 9. Notices. All notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by facsimile to each party hereto at the address set forth with respect to such party on the signature pages hereof. Any party hereto may change its address or facsimile number for notices and other communications hereunder by notice to the other parties hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Subordination Agreement shall be deemed to have been given on the date of receipt. 10. Survival of Agreement; Severability. (a) All covenants, agreements, representations and warranties made by each of the Borrower and the Junior Creditors herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Subordination Agreement shall be considered to have been relied upon by the Senior Creditors and shall survive the execution and delivery of this Agreement, regardless of any investigation made by the Senior Creditors or on their behalf, and shall continue in full force and effect until this Subordination Agreement shall terminate. The agreements made herein shall continue to be effective or be reinstated, as applicable, if at any time payment, or any part thereof, of any Senior Obligation is rescinded or must otherwise be restored by any Senior Creditor or the Junior Creditors upon the bankruptcy or reorganization of the Borrower, the Junior Creditors or otherwise. (b) In the event any one or more of the provisions contained in this Subordination Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein or therein shall not in any way be affected or impaired thereby (it being understood that the invalidity of a particular provision in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction). The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. 11. Counterparts. This Subordination Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one contract. Delivery of an executed counterpart of this Subordination Agreement by facsimile transmission shall be as effective as delivery of a manually executed counterpart of this Subordination Agreement. 12. Headings. Section headings used herein are for convenience of reference only, are not part of this Subordination Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Subordination Agreement. 7 13. Jurisdiction; Consent to Service of Process. (a) Each of the Borrower and the Junior Creditors hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Subordination Agreement, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that, to the extent permitted by applicable law, all claims in respect of any such action or proceeding may be heard and determined in such New York State court or, to the extent permitted by applicable law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Subordination Agreement shall affect any right that the Senior Creditors may otherwise have to bring any action or proceeding relating to this Subordination Agreement against the Borrower or the Junior Creditors, or any of its property, in the courts of any jurisdiction. (b) Each of the Borrower and the Junior Creditors hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Subordination Agreement in any court referred to in paragraph (a) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (c) Each party to this Subordination Agreement irrevocably consents to service of process in the manner provided for notices in Section 10. Nothing in this Subordination Agreement will affect the right of any party to this Subordination Agreement to serve process in any other manner permitted by law. (d) If any party shall commence a proceeding to enforce any provisions of this Subordination Agreement, then the prevailing party in such proceeding shall be reimbursed by the other party for its reasonable attorney's fees and other actual costs and expenses incurred with the investigation, preparation and prosecution of such proceeding. 14. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS SUBORDINATION AGREEMENT. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS SUBORDINATION AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. 8 15. Miscellaneous. (a) Except as otherwise specifically provided in this Subordination Agreement, the Junior Creditors hereby waive presentment, demand for payment, notice of default, nonperformance and dishonor, protest and notice of protest under this Subordination Agreement, notice of acceptance of this Subordination Agreement and reliance hereupon by the Senior Creditors, and the incurrence or accrual of any other obligations and notice of any sale of collateral or any default of any sort. (b) Nothing herein shall limit or affect in any manner any right any Senior Creditor may have by virtue of any other instrument or agreement. (c) The Borrower, for the consideration hereinabove stated, authorizes and approves any act or thing which may be done in accordance herewith and agrees to act in accordance herewith. (d) This Agreement constitutes the entire contract among the parties relating to the subject matter hereof and supersedes any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. 9 IN WITNESS WHEREOF, the parties hereto have duly executed this Subordination Agreement as of the day and year first above written. JUNIOR CREDITORS By: ---------------------------------- Name: Title: Address for Notice: With a copy to: |---------------------| By: --------------------------------- Name: Title: Address for Notice: Attn: Chief Executive Officer 10 IN WITNESS WHEREOF, the parties hereto have duly executed this Subordination Agreement as of the day and year first above written. SENIOR CREDITOR'S AGENT By: --------------------------------- Name: Title: Address for Notice: 11 EX-10.3 6 v039622_ex10-3.txt SECURITY AGREEMENT This SECURITY AGREEMENT, dated as of March ___, 2006 (the "Agreement") is by and among Onstream Media Corporation, a corporation duly organized and validly existing under the laws of the State of Florida (the "Company"), the Purchasers identified on the signature pages hereto (each, a "Purchaser" and collectively, the "Purchasers") and_____ as agent for the Purchasers (in such capacity, together with its successors in such capacity, the "Agent"). The Company and each of the Purchasers are parties to a Subscription Agreement dated as of [__________, 2006] (as modified and supplemented and in effect from time to time, the "Subscription Agreement"), that provides, subject to the terms and conditions thereof, for the issuance and sale by the Company to each of the Purchasers, severally and not jointly, Notes, and Warrants as more fully described in the Subscription Agreement. To induce each of the Purchasers to enter into the Subscription Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company has agreed to pledge and grant a security interest in the Collateral (as hereinafter defined) as security for the Secured Obligations (as hereinafter defined). The Security Agreement and the lien of the Purchasers is subject to and the rights of the Purchasers are subordinate to certain existing indebtedness of the Company. Accordingly, the parties hereto agree as follows: Section 1. Definitions. Each capitalized term used herein and not otherwise defined shall have the meaning assigned to such term in the Subscription Agreement. In addition, as used herein: "Accounts" shall have the meaning ascribed thereto in Section 3(d) hereof. "Business" shall mean the businesses from time to time, now or hereafter, conducted by the Company and its Subsidiaries. "Collateral" shall have the meaning ascribed thereto in Section 3 hereof. "Copyright Collateral" shall mean all Copyrights, whether now owned or hereafter acquired by the Company, that are associated with the Business. "Copyrights" shall mean all copyrights, copyright registrations and applications for copyright registrations, including, without limitation, all renewals and extensions thereof, the right to recover for all past, present and future infringements thereof, and all other rights of any kind whatsoever accruing thereunder or pertaining thereto. "Documents" shall have the meaning ascribed thereto in Section 3(j) hereof. "Equipment" shall have the meaning ascribed thereto in Section 3(h) hereof. "Event of Default" shall have the meaning ascribed thereto in Section 10 of the Notes. "Excluded Collateral" shall mean the assets of the Company which secure the Permitted Indebtedness and the assets listed on Annex 2 hereto. "Instruments" shall have the meaning ascribed thereto in Section 3(e) hereof. "Intellectual Property" shall mean, collectively, all Copyright Collateral, all Patent Collateral and all Trademark Collateral, together with (a) all inventions, processes, production methods, proprietary information, know-how and trade secrets used or useful in the Business; (b) all licenses or user or other agreements granted to the Company with respect to any of the foregoing, in each case whether now or hereafter owned or used including, without limitation, the licenses or other agreements with respect to the Copyright Collateral, the Patent Collateral or the Trademark Collateral; (c) all customer lists, identification of suppliers, data, plans, blueprints, specifications, designs, drawings, recorded knowledge, surveys, manuals, materials standards, processing standards, catalogs, computer and automatic machinery software and programs, and the like pertaining to the operation by the Company of the Business; (d) all sales data and other information relating to sales now or hereafter collected and/or maintained by the Company that pertain to the Business; (e) all accounting information which pertains to the Business and all media in which or on which any of the information or knowledge or data or records which pertain to the Business may be recorded or stored and all computer programs used for the compilation or printout of such information, knowledge, records or data; (f) all licenses, consents, permits, variances, certifications and approvals of governmental agencies now or hereafter held by the Company pertaining to the operation by the Company and its Subsidiaries of the Business; and (g) all causes of action, claims and warranties now or hereafter owned or acquired by the Company in respect of any of the items listed above. "Inventory" shall have the meaning ascribed thereto in Section 3(f) hereof. "Issuers" shall mean, collectively, the respective entities identified on Annex 1 hereto, and all other entities formed by the Company or entities in which the Company owns or acquires any capital stock or similar interest. "Motor Vehicles" shall mean motor vehicles, tractors, trailers and other like property, whether or not the title thereto is governed by a certificate of title or ownership. "Patent Collateral" shall mean all Patents, whether now owned or hereafter acquired by the Company that are associated with the Business. "Patents" shall mean all patents and patent applications, including, without limitation, the inventions and improvements described and claimed therein together with the reissues, divisions, continuations, renewals, extensions and continuations-in-part thereof, all income, royalties, damages and payments now or hereafter due and/or payable under and with respect thereto, including, without limitation, damages and payments for past or future infringements thereof, the right to sue for past, present and future infringements thereof, and all rights corresponding thereto throughout the world. 2 "Permitted Indebtedness" shall mean the Company's existing indebtedness, liabilities and obligations as disclosed on Schedule 3.1 of the Notes hereto and any future capitalized leases, purchase money indebtedness and the Notes provided that "Permitted Indebtedness" shall not include indebtedness in excess of $[______], senior to the Notes. "Permitted Liens" shall mean (i) the Company's existing Liens and Pledges as disclosed in the Company's SEC Report or Annex __ hereto, (ii) the security interests created by this Agreement, (iii) Liens of local or state authorities for franchise, real estate or other like taxes, (iv) statutory Liens of landlords and liens of carriers, warehousemen, bailees, mechanics, materialmen and other like Liens imposed by law, created in the ordinary course of business and for amounts not yet due, (v) tax Liens not yet due and payable, (vi) liens by holders of Permitted Indebtedness and (vii) existing Liens which do not materially affect the value of the Company's property and do not materially interfere with the use made and proposed to be made of such property by the Company and the Subsidiaries. "Real Estate" shall have the meaning ascribed thereto in Section 3(l) hereof. "Secured Obligations" shall mean, collectively, (a) the principal of and interest on the Notes issued or issuable (as applicable) by the Company and held by the applicable Purchaser and all other amounts from time to time owing to such Purchasers by the Company under the Subscription Agreement and the Notes and (b) all obligations of the Company to such Purchasers thereunder. "Trademark Collateral" shall mean all Trademarks, whether now owned or hereafter acquired by the Company, that are associated with the Business. Notwithstanding the foregoing, the Trademark Collateral does not and shall not include any Trademark which would be rendered invalid, abandoned, void or unenforceable by reason of its being included as part of the Trademark Collateral. "Trademarks" shall mean all trade names, trademarks and service marks, logos, trademark and service mark registrations, and applications for trademark and service mark registrations, including, without limitation, all renewals of trademark and service mark registrations, all rights corresponding thereto throughout the world, the right to recover for all past, present and future infringements thereof, all other rights of any kind whatsoever accruing thereunder or pertaining thereto, together, in each case, with the product lines and goodwill of the business connected with the use of, and symbolized by, each such trade name, trademark and service mark. "Uniform Commercial Code" shall mean the Uniform Commercial Code as in effect in the State of New York from time to time. 3 Section 2. Representations and Warranties. The Company represents and warrants to each of the Purchasers that: a. the Company is the sole beneficial owner of the Collateral and no Lien exists or will exist upon any Collateral at any time (and, with respect to the Stock Collateral, no right or option to acquire the same exists in favor of any other Person), except for Permitted Liens and the security interest in favor of each of the Purchasers created or provided for herein; b. the Company owns and possesses the right to use, and to its knowledge, has done nothing to authorize or enable any other Person to use, all of its Copyrights, Patents and Trademarks, and all registrations of its material Copyrights, Patents and Trademarks are valid and in full force and effect. Except as may be set forth in said Annex 3, the Company owns and possesses the right to use all material Copyrights, Patents and Trademarks, necessary for the operation of the Business; c. to the Company's knowledge, (i) except as set forth in Annex 3 hereto, there is no violation by others of any right of the Company with respect to any material Copyrights, Patents or Trademarks, respectively, and (ii) the Company is not, in connection with the Business, infringing in any respect upon any Copyrights, Patents or Trademarks of any other Person; and no proceedings have been instituted or are pending against the Company or, to the Company's knowledge, threatened, and no claim against the Company has been received by the Company, alleging any such violation, except as may be set forth in said Annex 3; d. the Company does not own any material Trademarks registered in the United States of America to which the last sentence of the definition of Trademark Collateral applies; and Section 3. Collateral. As collateral security for the prompt payment in full when due (whether at stated maturity, by acceleration or otherwise) of the Secured Obligations, the Company hereby pledges and grants to each of the Purchasers as hereinafter provided, a security interest subject to and certain in cases subordinate to, Permitted Indebtedness in all of the Company's right, title and interest in the following property, whether now owned by the Company or hereafter acquired and whether now existing or hereafter coming into existence, and wherever located, except for the Excluded Collateral, (all being collectively referred to herein as "Collateral"): a. all accounts and general intangibles (each as defined in the Uniform Commercial Code) of the Company constituting any right to the payment of money, including (but not limited to) all moneys due and to become due to the Company in respect of any loans or advances for the purchase price of Inventory or Equipment or other goods sold or leased or for services rendered, all moneys due and to become due to the Company under any guarantee (including a letter of credit) of the purchase price of Inventory or Equipment sold by the Company and all tax refunds (such accounts, general intangibles and moneys due and to become due being herein called collectively "Accounts"); 4 b. all instruments, chattel paper or letters of credit (each as defined in the Uniform Commercial Code) of the Company evidencing, representing, arising from or existing in respect of, relating to, securing or otherwise supporting the payment of, any of the Accounts, including (but not limited to) promissory notes, drafts, bills of exchange and trade acceptances (herein collectively called "Instruments"); c. all inventory (as defined in the Uniform Commercial Code) of the Company and all goods obtained by the Company in exchange for such inventory (herein collectively called "Inventory"); d. all Intellectual Property and all other accounts or general intangibles of the Company not constituting Intellectual Property or Accounts; e. all equipment (as defined in the Uniform Commercial Code) of the Company (herein collectively called "Equipment"); f. each contract and other agreement of the Company relating to the sale or other disposition of Inventory or Equipment; g. all documents of title (as defined in the Uniform Commercial Code) or other receipts of the Company covering, evidencing or representing Inventory or Equipment (herein collectively called "Documents"); h. all rights, claims and benefits of the Company against any Person arising out of, relating to or in connection with Inventory or Equipment purchased by the Company, including, without limitation, any such rights, claims or benefits against any Person storing or transporting such Inventory or Equipment; i. all estates in land together with all improvements and other structures now or hereafter situated thereon, together with all rights, privileges, tenements, hereditaments, appurtenances, easements, including, but not limited to, rights and easements for access and egress and utility connections, and other rights now or hereafter appurtenant thereto ("Real Estate"); j. all other tangible or intangible property of the Company, including, without limitation, all proceeds, products and accessions of and to any of the property of the Company described in clauses (a) through (l) above in this Section 3 (including, without limitation, any proceeds of insurance thereon), and, to the extent related to any property described in said clauses or such proceeds, products and accessions, all books, correspondence, credit files, records, invoices and other papers, including without limitation all tapes, cards, computer runs and other papers and documents in the possession or under the control of the Company or any computer bureau or service company from time to time acting for the Company. 5 Section 4. Further Assurances; Remedies. In furtherance of the grant of the pledge and security interest pursuant to Section 3 hereof, the Company hereby agrees with each of the Purchasers as follows: 4.01 Delivery and Other Perfection. The Company shall: a. keep accurate books and records relating to the Collateral, and stamp or otherwise mark such books and records in such manner as the Agent may reasonably require in order to reflect the security interests granted by this Agreement; b. furnish to the Agent from time to time (but, unless an Event of Default shall have occurred and be continuing, no more frequently than quarterly) statements and schedules further identifying and describing the Copyright Collateral, the Patent Collateral and the Trademark Collateral, respectively, and such other reports in connection with the Copyright Collateral, the Patent Collateral and the Trademark Collateral, as the Agent may reasonably request, all in reasonable detail; and c. permit representatives of the Agent, upon reasonable notice, at any time during normal business hours to inspect and make abstracts from its books and records pertaining to the Collateral, and permit representatives of the Agent to be present at the Company's place of business to receive copies of all communications and remittances relating to the Collateral, and forward copies of any notices or communications by the Company with respect to the Collateral, all in such manner as the Agent may reasonably require. 4.02 Other Financing Statements and Liens. Except with respect to Permitted Indebtedness, Permitted Liens or as otherwise permitted under Schedule 3.1(a) of the Subscription Agreement, without the prior written consent of the Agent, the Company shall not file or suffer to be on file, or authorize or permit to be filed or to be on file, in any jurisdiction, any financing statement or like instrument with respect to the Collateral. 4.03 Preservation of Rights. The Agent shall not be required to take steps necessary to preserve any rights against prior parties to any of the Collateral. a. Intellectual Property. 6 (1) For the purpose of enabling the Agent to exercise rights and remedies under Section 4.05 hereof at such time as the Agent shall be lawfully entitled to exercise such rights and remedies, and for no other purpose, the Company hereby grants to the Agent, to the extent assignable, an irrevocable, non-exclusive license (exercisable without payment of royalty or other compensation to the Company) to use, assign, license or sublicense any of the Intellectual Property (other than the Trademark Collateral or goodwill associated therewith) now owned or hereafter acquired by the Company, wherever the same may be located, including in such license reasonable access to all media in which any of the licensed items may be recorded or stored and to all computer programs used for the compilation or printout thereof. 4.04 Events of Default, etc. Subject to the subordination of even date hereof, during the period during which an Event of Default shall have occurred and be continuing: a. the Company shall, at the request of the Agent, assemble the Collateral owned by it at such place or places, reasonably convenient to both the Agent and the Company, designated in its request; b. the Agent may make any reasonable compromise or settlement deemed desirable with respect to any of the Collateral and may extend the time of payment, arrange for payment in installments, or otherwise modify the terms of, any of the Collateral; c. the Agent shall have all of the rights and remedies with respect to the Collateral of a secured party under the Uniform Commercial Code (whether or not said Code is in effect in the jurisdiction where the rights and remedies are asserted) and such additional rights and remedies to which a secured party is entitled under the laws in effect in any jurisdiction where any rights and remedies hereunder may be asserted, including, without limitation, the right, to the maximum extent permitted by law, to exercise all voting, consensual and other powers of ownership pertaining to the Collateral as if the Agent were the sole and absolute owner thereof (and the Company agrees to take all such action as may be appropriate to give effect to such right); d. the Agent in its discretion may, in its name or in the name of the Company or otherwise, demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for any of the Collateral, but shall be under no obligation to do so; and e. the Agent may, upon 10 Business Days, prior written notice to the Company of the time and place, with respect to the Collateral or any part thereof which shall then be or shall thereafter come into the possession, custody or control of the Agent, or any of its respective agents, sell, lease, assign or otherwise dispose of all or any of such Collateral, at such place or places as the Agent deems best, and for cash or on credit or for future delivery (without thereby assuming any credit risk), at public or private sale, without demand of performance or notice of intention to effect any such disposition or of time or place thereof (except such notice as is required above or by applicable statute and cannot be waived) and the Agent or anyone else may be the purchaser, lessee, assignee or recipient of any or all of the Collateral so disposed of at any 7 public sale (or, to the extent permitted by law, at any private sale), and thereafter hold the same absolutely, free from any claim or right of whatsoever kind, including any right or equity of redemption (statutory or otherwise), of the Company, any such demand, notice or right and equity being hereby expressly waived and released. In the event of any sale, assignment, or other disposition of any of the Trademark Collateral, the goodwill of the Business connected with and symbolized by the Trademark Collateral subject to such disposition shall be included, and the Company shall supply to the Agent or its designee, for inclusion in such sale, assignment or other disposition, all Intellectual Property relating to such Trademark Collateral. The Agent may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the same may be so adjourned. The proceeds of each collection, sale or other disposition under this Section 4.04, including by virtue of the exercise of the license granted to the Agent in Section 4.03(1) hereof, shall be applied in accordance with Section 4.08 hereof. The Company recognizes that, by reason of certain prohibitions contained in the Securities Act of 1933, as amended, and applicable state securities laws, the Agent may be compelled, with respect to any sale of all or any part of the Collateral, to limit purchasers to those who will agree, among other things, to acquire the Collateral for their own account, for investment and not with a view to the distribution or resale thereof. The Company acknowledges that any such private sales to an unrelated third party in an arm's length transaction may be at prices and on terms less favorable to the Agent than those obtainable through a public sale without such restrictions, and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that the Agent shall have no obligation to engage in public sales and no obligation to delay the sale of any Collateral for the period of time necessary to permit the respective Issuer thereof to register it for public sale. 4.05 Deficiency. If the proceeds of sale, collection or other realization of or upon the Collateral pursuant to Section 4.05 hereof are insufficient to cover the costs and expenses of such realization and the payment in full of the Secured Obligations, the Company shall remain liable for any deficiency. 4.06 Removals, etc. Without at least 30 days' prior written notice to the Agent, the Company shall not (i) maintain any of its books or records with respect to the Collateral at any office or maintain its chief executive office or its principal place of business at any place, or permit any Inventory or Equipment to be located anywhere other than at the address indicated for the Company in Section 7.4 of the Subscription Agreement or at one of the locations identified in Annex 4 hereto or in transit from one of such locations to another or (ii) change its corporate name, or the name under which it does business, from the name shown on the signature page hereto. 8 4.07 Private Sale. The Agent shall incur no liability as a result of the sale of the Collateral, or any part thereof, at any private sale to an unrelated third party in an arm's length transaction pursuant to Section 4.05 hereof conducted in a commercially reasonable manner. The Company hereby waives any claims against the Agent arising by reason of the fact that the price at which the Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale or was less than the aggregate amount of the Secured Obligations, even if the Agent accepts the first offer received and does not offer the Collateral to more than one offeree. 4.08 Application of Proceeds. Except as otherwise herein expressly provided, the proceeds of any collection, sale or other realization of all or any part of the Collateral pursuant hereto, and any other cash at the time held by the Agent under this Section 4, shall be applied by the Agent: First, to the payment of the costs and expenses of such collection, sale or other realization, including reasonable out-of-pocket costs and expenses of the Agent and the fees and expenses of its agents and counsel, and all expenses, and advances made or incurred by the Agent in connection therewith; Next, to the payment in full of the Secured Obligations in each case equally and ratably in accordance with the respective amounts thereof then due and owing to each of the Purchasers; and Finally, to the payment to the Company, or its successors or assigns, or as a court of competent jurisdiction may direct, of any surplus then remaining. As used in this Section 4, "proceeds" of Collateral shall mean cash, securities and other property realized in respect of, and distributions in kind of, Collateral, including any thereof received under any reorganization, liquidation or adjustment of debt of the Company or any issuer of or obligor on any of the Collateral. 4.09 Attorney-in-Fact. Without limiting any rights or powers granted by this Agreement to the Agent while no Event of Default has occurred and is continuing, upon the occurrence and during the continuance of any Event of Default, the Agent is hereby appointed the attorney-in-fact of the Company for the purpose of carrying out the provisions of this Section 4 and taking any action and executing any instruments which the Agent may deem necessary or advisable to accomplish the purposes hereof, which appointment as attorney-in-fact is irrevocable and coupled with an interest. Without limiting the generality of the foregoing, so long as the Purchasers shall be entitled under this Section 4 to make collections in respect of the Collateral, the Agent shall have the right and power to receive, endorse and collect all checks made payable to the order of the Company representing any dividend, payment, or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same. 9 4.10 Perfection. Prior to or concurrently with the execution and delivery of this Agreement, the Company shall file such financing statements and other documents in such offices as the Agent may request to perfect the security interests granted by Section 3 of this Agreement. 4.11 Termination. When all Secured Obligations shall have been paid in full under the Subscription Agreement, this Agreement shall terminate, and the Agent shall forthwith cause to be assigned, transferred and delivered, against receipt but without any recourse, warranty or representation whatsoever, any remaining Collateral and money received in respect thereof, to or on the order of the Company and to be released and cancelled all licenses and rights referred to in Section 4.03(1) hereof. The Agent shall also execute and deliver to the Company upon such termination such Uniform Commercial Code termination statements, certificates for terminating the Liens on the Motor Vehicles and such other documentation as shall be reasonably requested by the Company to effect the termination and release of the Liens on the Collateral. 4.12 Expenses. The Company agrees to pay to the Agent all out-of-pocket expenses (including reasonable expenses for legal services of every kind) of, or incident to, the enforcement of any of the provisions of this Section 4, or performance by the Agent of any obligations of the Company in respect of the Collateral which the Company has failed or refused to perform upon reasonable notice, or any actual or attempted sale, or any exchange, enforcement, collection, compromise or settlement in respect of any of the Collateral, and for the care of the Collateral and defending or asserting rights and claims of the Agent in respect thereof, by litigation or otherwise, including expenses of insurance, and all such expenses shall be Secured Obligations to the Agent secured under Section 3 hereof. 4.13 Further Assurances. The Company agrees that, from time to time upon the written request of the Agent, the Company will execute and deliver such further documents and do such other acts and things as the Agent may reasonably request in order fully to effect the purposes of this Agreement. 4.14 Indemnity. Each of the Purchasers hereby jointly and severally covenants and agrees to reimburse, indemnify and hold the Agent harmless from and against any and all claims, actions, judgments, damages, losses, liabilities, costs, transfer or other taxes, and expenses (including, without limitation, reasonable attorneys' fees and expenses) incurred or suffered without any bad faith or willful misconduct by the Agent, arising out of or incident to this Agreement or the administration of the Agent's duties hereunder, or resulting from its actions or inactions as Agent. Section 5. Miscellaneous. 10 5.01 No Waiver. No failure on the part of the Agent or any of its agents to exercise, and no course of dealing with respect to, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise by the Agent or any of its agents of any right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies herein are cumulative and are not exclusive of any remedies provided by law. 5.02 Governing Law. This Agreement shall be governed by, and construed in accordance with, the law of the State of New York. 5.03 Notices. All notices, requests, consents and demands hereunder shall be in writing and facsimile (facsimile confirmation required) or delivered to the intended recipient at its address or fax number specified pursuant to Section 14 of the Note and shall be deemed to have been given at the times specified in said Section 14. 5.04 Waivers, etc. The terms of this Agreement may be waived, altered or amended only by an instrument in writing duly executed by the Company and the Agent. Any such amendment or waiver shall be binding upon each of the Purchasers and the Company. 5.05 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the respective successors and assigns of the Company and each of the Purchasers (provided, however, that the Company shall not assign or transfer its rights hereunder without the prior written consent of the Agent). 5.06 Counterparts. This Agreement may be executed in any number of counterparts, all of which together shall constitute one and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart. 5.07 Agent. Each Purchaser agrees to appoint [who is agent] as its Agent for purposes of this Agreement. The Agent may employ agents and attorneys-in-fact in connection herewith and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it in good faith. 5.08 Severability. If any provision hereof is invalid and unenforceable in any jurisdiction, then, to the fullest extent permitted by law, (i) the other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in favor of the Purchasers in order to carry out the intentions of the parties hereto as nearly as may be possible and (ii) the invalidity or unenforceability of any provision hereof in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction. 11 IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed as of the day and year first above written. COMPANY: ONSTREAM MEDIA CORPORATION By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- AGENT: [WHO IS AGENT] By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- PURCHASERS: By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- 12 -----END PRIVACY-ENHANCED MESSAGE-----