EXHIBIT 10.36
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______________________________
SECURITIES PURCHASE AGREEMENT
______________________________
SENIOR SECURED PROMISSORY NOTES
AND
WARRANTS
OF
7TH LEVEL, INC.
Dated as of May 6, 1998
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TABLE OF CONTENTS
Section Page
1. Definitions...............................................................2
2. Issuance, Purchase and Sale of Securities.................................6
2.1 Issuance of the Securities........................................6
2.2 Sale and Purchase of the Securities...............................6
3. Closing of Sale of Securities.............................................7
4. Deliveries at the Closing.................................................7
4.1 Deliveries by the Company to the Purchasers on the Closing Date...7
(a) Securities...................................................7
(b) Opinion of Counsel...........................................7
(c) Security Agreement...........................................7
(d) Registration Rights Agreement................................7
(e) Officer's Certificate........................................7
(f) Payment of Closing Fees......................................8
4.2 Deliveries by the Purchasers to the Company on the Closing Date...8
(a) Purchase Price...............................................8
(b) Security Agreement...........................................8
(c) Registration Rights Agreement................................8
5. Representations and Warranties, Etc.......................................8
5.1 Organization and Qualification; Authority.........................8
5.2 Corporate Authorization...........................................9
5.3 No Conflict; Requisite Consents...................................9
5.4 Capitalization....................................................9
5.5 Litigation; Defaults.............................................10
5.6 No Material Adverse Change.......................................10
5.7 Employee Programs................................................11
5.8 Private Offerings................................................12
5.9 Company SEC Documents............................................12
5.10 Financial Statements; No Undisclosed Liabilities.................13
5.11 Environmental Regulation, Etc....................................13
5.12 Properties and Assets............................................13
5.13 Insurance........................................................14
5.14 Employment Practices.............................................14
5.15 Intellectual Property............................................14
5.16 Material Contracts...............................................14
5.17 Taxes............................................................15
5.18 Licenses.........................................................15
5.19 Transactions with Affiliates.....................................15
5.20 Federal Reserve Regulations......................................15
5.21 Investment Company Act...........................................15
5.22 Broker's or Finder's Commissions.................................15
5.23 Books and Records................................................16
5.24 Disclosure.......................................................16
6. Representations and Warranties of the Purchasers.........................16
7. Covenants of the Company.................................................17
7.1 Use of Proceeds..................................................17
7.2 Charter Documents................................................17
7.3 Ordinary Course..................................................17
7.4 Issuance of Securities...........................................18
7.5 Dividends; Changes in Capital Stock..............................18
7.6 Change in Condition..............................................18
7.7 No Action........................................................18
7.8 Replacement of Certificates......................................18
8. Covenants of the Purchasers..............................................18
8.1 Conversion Right.................................................18
8.2 Purchase Obligation..............................................19
8.3 Reservation of Securities........................................19
8.4 Release of Collateral............................................19
9. Restrictions on Transfer.................................................20
9.1 Restrictive Legends..............................................20
9.2 Notice of the Proposed Transfer; Opinion of Counsel..............20
10. Miscellaneous............................................................21
10.1 Indemnification; Expenses, Etc...................................21
10.2 Survival of Representations and Warranties.......................21
10.3 Amendment and Waiver.............................................22
10.4 Notices, Etc.....................................................22
10.5 Entire Agreement.................................................22
10.6 Successors and Assigns...........................................22
10.7 Agreement and Action of the Purchasers...........................22
10.8 Descriptive Headings.............................................23
10.9 Governing Law....................................................23
10.10 Counterparts.....................................................23
SCHEDULES
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SCHEDULE 5.1 -- Qualified Jurisdictions and Subsidiaries
SCHEDULE 5.2 -- Authorization
SCHEDULE 5.3 -- Consents
SCHEDULE 5.4 -- Capitalization
SCHEDULE 5.5 -- Litigation; Defaults
SCHEDULE 5.6 -- Material Developments
SCHEDULE 5.7 -- ERISA
SCHEDULE 5.10 -- Undisclosed Liabilities
SCHEDULE 5.11 -- Environmental
SCHEDULE 5.12 -- Properties and Assets
SCHEDULE 5.13 -- Insurance
SCHEDULE 5.14 -- Employment Practices
SCHEDULE 5.15 -- Intellectual Property
SCHEDULE 5.16 -- Material Contracts
SCHEDULE 5.17 -- Taxes
SCHEDULE 5.18 -- Licenses
SCHEDULE 5.19 -- Transactions with Affiliates
SCHEDULE 7.3 -- Dissolved Subsidiaries
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EXHIBITS
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EXHIBIT A -- Certificate of Designations of Series A Preferred Stock
EXHIBIT B -- Certificate of Designations of Series B Convertible
Preferred Stock
EXHIBIT C -- Form of Warrant
EXHIBIT D -- Form of Note
EXHIBIT E -- Form of Registration Rights Agreement
EXHIBIT F -- Form of Security Agreement
EXHIBIT G -- Certificate of Designations of Series C Preferred Stock
EXHIBIT H -- Form of Opinion of Shereff, Friedman, ▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇, LLP
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SECURITIES PURCHASE AGREEMENT
-----------------------------
This SECURITIES PURCHASE AGREEMENT ("Agreement"), dated as of May 6, 1998,
by and among 7th Level, Inc., a Delaware corporation (the "Company"), Alpine
Associates, a New Jersey Limited Partnership ("Alpine") and East West Capital
Associates, Inc., a California corporation ("Capital"). Alpine and Capital are
also each referred to herein as a "Purchaser," and collectively, the
"Purchasers."
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company is in the process of raising capital through the sale
by the Company of debt or equity securities resulting in gross proceeds
(including the surrender of the Notes (as defined below) valued at face) of at
least $7 million (the "Permanent Financing");
WHEREAS, certain investors have committed an aggregate amount of $5,500,000
to the Company to subscribe for units consisting of Series A Preferred Stock,
par value $.01 per share ("Series A Preferred Stock"), with the powers,
designations, preferences, rights, qualifications, limitations and restrictions
contained in the Certificate of Designations of the Series A Preferred Stock,
substantially in the form of Exhibit A hereto (the "Series A Preferred Stock
Certificate of Designations") and Warrants exercisable for shares of Common
Stock (as defined) which Series A Preferred Stock will convert into Series B
Convertible Preferred Stock, par value $.01 per share ("Series B Convertible
Preferred Stock"), with the powers, designations, preferences, rights,
qualifications, limitations and restrictions contained in the Certificate of
Designations of the Series B Convertible Preferred Stock, substantially in the
form of Exhibit B hereto;
WHEREAS, the Company desires to raise additional funds before the
consummation of the Permanent Financing;
WHEREAS, Alpine has committed to loan the Company an amount of $3,000,000
and in connection therewith the Company has previously issued to Alpine a
warrant exercisable for 50,000 shares of Common Stock at $.01 per share;
WHEREAS, Capital has committed to loan the Company an amount of $1,500,000
and in connection therewith the Company has previously agreed to issue to
Capital a warrant exercisable for 25,000 shares of Common Stock at $.01 per
share; and
WHEREAS, the Company desires to issue and sell to the Purchasers, and the
Purchasers desire to purchase from the Company, (i) the Notes (as defined below)
in the aggregate amount of $4,500,000 together with (ii) warrants ("Warrants")
exercisable for 150,000 shares of Common Stock for each $1,000,000 loaned by
the Purchasers to the Company (reduced by the warrants exercisable for 75,000
shares of Common Stock previously issued to the Purchasers), substantially in
the form of Exhibit C hereto, on the terms, and subject to the conditions, set
forth herein.
NOW, THEREFORE, in consideration of these premises, the mutual covenants
and agreements set forth herein and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. Definitions. For purposes hereof unless the context otherwise
requires, the following terms shall have the meanings indicated. All accounting
terms not otherwise defined herein, shall have the respective meanings accorded
to them under GAAP (as defined below). Unless the context otherwise requires,
(i) references to a "Schedule" or an "Exhibit" are to a Schedule or an Exhibit
attached to this Agreement, (ii) references to a "section" are to a section of
this Agreement and (iii) any of the following terms may be used in the singular
or the plural, depending on the reference.
"Affiliate" means any Person (i) which directly or indirectly through
one or more intermediaries controls, or is controlled by, or is under common
control with, the Company, or (ii) which beneficially owns or holds 10% or more
of any class of the outstanding Voting Stock of the Company. The term "control"
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of a Person, whether through
ownership of Voting Stock, by Contract or otherwise.
"Agent" means Alpine, as collateral agent for itself and Capital, in
connection with the Security Agreement.
"Agreement" means this Agreement, as amended, modified or supplemented
from time to time, in accordance with the terms hereof, together with any
exhibits, schedules or other attachments thereto.
"Alpine" means Alpine Associates, a New Jersey Limited Partnership.
"Benefit Plans" has the meaning ascribed thereto in Section 5.7
hereof.
"Business Day" means any day that is not a Saturday, a Sunday or a day
on which banking institutions in New York, New York are authorized or obligated
by Law, executive order or government decree to be closed.
"Capital" means East West Capital Associates, Inc., a California
corporation.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, rights in or other equivalents (however designated
and whether voting or non-voting) of such Person's capital stock, whether
outstanding on the Closing Date or issued after the Closing Date and any and all
rights, warrants or options exercisable or exchangeable for or convertible into
such capital stock.
"Charter Documents" has the meaning ascribed thereto in Section 5.1
hereof.
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"Closing" has the meaning ascribed thereto in Section 3 hereof.
"Closing Date" has the meaning ascribed thereto in Section 3 hereof.
"Code" means the Internal Revenue Code of 1986, and the rules and
regulations promulgated thereunder, as amended from time to time.
"Commission" means the United States Securities and Exchange
Commission or any other federal agency at the time administering the Securities
Act.
"Common Stock" means the common stock, par value $.01 per share, of
the Company.
"Company" has the meaning ascribed thereto in the introduction hereof.
"Company Financial Statements" has the meaning ascribed thereto in
Section 5.10 hereof.
"Company SEC Documents" has the meaning ascribed thereto in Section
5.9 hereof.
"Contracts" has the meaning ascribed thereto in Section 5.16 hereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, and
the rules and regulations promulgated thereunder, as amended.
"ERISA Affiliate" means any trade or business (whether incorporated or
unincorporated) which is a member of a group described in Section 414(b), (c),
(m) or (o) of the Code, of which the Company also is a member.
"ERISA Affiliate Title IV Plan" has the meaning ascribed thereto in
Section 5.7 hereof.
"Exchange Act" means the Securities Exchange Act of 1934, and the
rules and regulations of the Commission promulgated thereunder, as amended.
"Form 10-K" means the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, which has been previously delivered by ▇▇▇▇▇▇▇▇▇,
▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇ Securities Corporation to the Purchasers.
"GAAP" means generally accepted accounting principles and practices
set forth in the opinions and pronouncements of the Accounting Principles Board
and the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting
3
Standards Board or in such other statements by such other entity as may be
approved by a significant segment of the accounting profession that are
applicable to the circumstances as of the date of determination.
"Governmental Authority" means any governmental or quasi-governmental
authority including, without limitation, any federal, state, territorial,
county, municipal or other governmental or quasi-governmental agency, board,
branch, bureau, commission, court, arbitration panel, department, authority,
body or other instrumentality or political unit or subdivision or official
thereof, whether domestic or foreign.
"Indemnified Party" or "Indemnified Parties" has the meaning ascribed
thereto in Section 10.1(a) hereof.
"Intellectual Property" shall mean all registered patents, trademarks,
product designations, service marks, copyrights, and applications for any of the
foregoing, used, licensed, leased or owned, by a Person which is material to the
operations of such Person.
"Law" means any statute, ordinance, code, rule, regulation or order
enacted, adopted, promulgated, applied or followed by any Governmental
Authority.
"License" or "Licenses" has the meaning ascribed thereto in Section
5.18 hereof.
"Lien" means any security agreement, financing statement (whether or
not filed) mortgage, lien (statutory or otherwise), charge, pledge,
hypothecation, conditional sales agreement, adverse claim, title retention
agreement or other security interest, encumbrance, lien, charge, restrictive
agreement, mortgage, deed of trust, indenture, pledge, option, limitation,
exception to or other title defect in or on any interest or title of any vendor,
lessor, lender or other secured party to or of such Person under any conditional
sale, lease, consignment, or bailment given for security purposes, trust receipt
or other title retention agreement with respect to any Property or asset of such
Person, whether direct, indirect, accrued or contingent.
"Losses" has the meaning ascribed thereto in Section 10.1(a) hereof.
"Material Adverse Effect" has the meaning ascribed thereto in Section
5.1 hereof.
"Notes" means the Senior Secured Promissory Notes of the Company,
substantially in the form of Exhibit D hereto.
"Permanent Financing" has the meaning ascribed thereto in the
introduction hereof.
"Person" means any individual, entity or group, including, without
limitation, individual, corporation, limited liability company, limited or
general partnership, joint venture,
4
association, joint stock company, trust, unincorporated organization, or
government or any agency or political subdivision thereof.
"Property" means any interest in any kind of property or asset,
whether real, personal or mixed, or tangible or intangible.
"Purchasers" has the meaning ascribed thereto in the introduction
hereof.
"Registration Rights Agreement" means the Registration Rights
Agreement dated as of the date hereof by and among the Company and the
Purchasers, substantially in the form of Exhibit E hereto, as amended, modified
or supplemented from time to time in accordance with the terms thereof, together
with any exhibits, schedules or other attachments thereto.
"Regulation D" means Regulation D under the Securities Act.
"Restricted Security" has the meaning ascribed thereto in Section 9.2
hereof.
"Rule 144" means Rule 144 as promulgated by the Commission under the
Securities Act, and any successor rule or regulation thereto.
"Rule 144A" means Rule 144A as promulgated by the Commission under the
Securities Act, and any successor rule or regulation thereto.
"Securities" means the Notes and the Warrants.
"Securities Act" means the Securities Act of 1933, and the rules and
regulations of the Commission promulgated thereunder, as amended.
"Security Agreement" means the Security Agreement dated as of the date
hereof by and among the Company, the Purchasers and Agent, substantially in the
form of Exhibit F hereto, as amended, modified or supplemented from time to time
in accordance with the terms thereof, together with any exhibits, schedules or
other attachments thereto.
"Series A Preferred Stock" has the meaning ascribed thereto in the
introduction hereof.
"Series A Preferred Stock Certificate of Designations" has the meaning
ascribed thereto in the introduction hereof.
"Series B Convertible Preferred Stock" has the meaning ascribed
thereto in the introduction hereof.
5
"Series C Preferred Stock" means the Series C Preferred Stock, $.01
par value, of the Company, which shall rank junior to the Series A Preferred
Stock and Series B Convertible Preferred Stock, with the powers, designations,
preferences, rights, qualifications, limitations and restrictions contained in
the Certificate of Designations of the Series C Preferred Stock, substantially
in the form of Exhibit G hereto.
"Subsidiary" means with respect to any Person, any corporation,
association or other business entity of which securities representing more than
50% of the combined voting power of the total Voting Stock (or in the case of an
association or other business entity which is not a corporation, more than 50%
of the equity interest) is at the time owned or controlled, directly or
indirectly, by that Person or one or more Subsidiaries of that Person or a
combination thereof. When used herein without reference to any Person,
"Subsidiary" means a Subsidiary of the Company.
"Taxes" has the meaning ascribed thereto in Section 5.17 hereof.
"Transaction Documents" means, collectively, this Agreement, the
Warrants, the Notes, the Security Agreement, the Registration Rights Agreement
and any and all agreements, exhibits, schedules, certificates, instruments and
other documents delivered pursuant hereto and thereto.
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to vote for the election of directors, managers or trustees of any
Persons (irrespective of whether or not at the time, Capital Stock of any class
or classes will have, or might have, voting power by the reason of the happening
of any contingency).
"Warrants" has the meaning ascribed thereto in the introduction
thereof.
2. Issuance, Purchase and Sale of Securities.
2.1 Issuance of the Securities. The Company has authorized the issuance
and sale of the Notes in the aggregate principal amount of $4,500,000 and the
Warrants (as defined) to be acquired by the Purchasers in accordance with the
terms of this Agreement. The Warrants will be issued in substantially the form
of the Warrant attached hereto as Exhibit C. Each Note will be issued in
substantially the form of the Note attached hereto as Exhibit D.
2.2 Sale and Purchase of the Securities. Subject to the terms and
conditions of this Agreement, on the Closing Date, the Company will issue, sell
and deliver to each Purchaser and each Purchaser will purchase from the Company,
such Warrants and such principal amount of Notes, as is specified opposite such
Purchaser's name on the signature pages hereto. At the Closing (as defined),
the aggregate amount of Warrants and principal amount of the Notes shall be
payable by the Purchasers to the Company in cash by wire transfer of immediately
available funds.
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3. Closing of Sale of Securities. The purchase and delivery of the
Notes and the Warrants to be purchased by the Purchasers hereunder shall take
place at the offices of Shereff, Friedman, ▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇, LLP, ▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇, at a closing (the "Closing") on or before May
6, 1998 or at such other place or on such other date as the Purchasers and the
Company may agree upon (such date on which the Closing shall have actually
occurred, the "Closing Date"). At the Closing, the Company will deliver or
cause to be delivered to each Purchaser the Warrants and the Notes to be
purchased by such Purchaser pursuant hereto against payment of the purchase
price therefor. The Notes and the Warrants to be purchased by each Purchaser
hereunder shall be, with respect to such Purchaser, in the form of a single Note
and Warrant (or such greater number of Notes and Warrants as each Purchaser may
request no less than 48 hours prior to the Closing), dated the date of the
Closing and registered in the Purchaser's name or that of its nominee (provided
to the Company no less than 48 hours prior to the Closing).
4. Deliveries at the Closing.
4.1 Deliveries by the Company to the Purchasers on the Closing Date.
At the Closing, the Company will deliver or cause to be delivered to each
Purchaser, against payment of the purchase price as provided herein:
(a) Securities. The Notes and the Warrants, as provided in
Section 3 hereof.
(b) Opinion of Counsel. A favorable opinion from Shereff,
Friedman, ▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇, LLP, counsel for the Company, substantially in the
form set forth in Exhibit H, addressed to the Purchasers, dated the Closing Date
and otherwise satisfactory in substance and form to the Purchasers, and their
respective counsel.
(c) Security Agreement. The Security Agreement, duly executed
by the Company, and a UCC-1 Financing Statement.
(d) Registration Rights Agreement. The Registration Rights
Agreement, duly executed by the Company.
(e) Officer's Certificate. A certificate, dated the Closing
Date, of an officer of the Company, (i) certifying as true, complete and correct
its Charter Documents and resolutions relating to the transactions contemplated
by this Agreement and the other Transaction Documents, (ii) as to the absence of
proceedings or other action for dissolution, liquidation or reorganization of
the Company, and (iii) as to the incumbency and specimen signatures of officers
who shall have executed instruments, agreements and other documents in
connection with the transactions contemplated hereby.
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(f) Payment of Closing Fees. The fees, expenses and
disbursements of not more than one counsel for the Purchasers not to exceed
$10,000 reflected in statements of such counsel rendered prior to or on the
Closing Date.
4.2 Deliveries by the Purchasers to the Company on the Closing Date.
At the Closing, each Purchaser will deliver or cause to be delivered to the
Company the following:
(a) Purchase Price. Such Purchaser's payment of the purchase
price, as provided herein.
(b) Security Agreement. The Security Agreement, duly executed
by the Purchasers and Agent.
(c) Registration Rights Agreement. The Registration Rights
Agreement, duly executed by the Purchasers.
5. Representations and Warranties, Etc. In order to induce the
Purchasers to purchase the Securities, the Company represents and warrants to
the Purchasers that:
5.1 Organization and Qualification; Authority. The Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware. Schedule 5.1 attached hereto contains a list of
the name and jurisdiction of organization of each of the Company's Subsidiaries
and the Company's ownership interest with respect thereto. Each Subsidiary
material to the business of the Company is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation. The Company and each of its Subsidiaries has full corporate power
and authority and all necessary government approvals to own and lease its
properties and carry on its business as presently conducted, is duly qualified,
registered or licensed as a foreign corporation to do business and is in good
standing in each jurisdiction in which the ownership or leasing of its
properties or the character of its present operations makes such qualification,
registration or licensing necessary, except where the failure to so qualify or
be in good standing would not have a material adverse effect on the condition
(financial or otherwise), assets, business or results of operations of the
Company and its Subsidiaries, taken as a whole (a "Material Adverse Effect").
The Company has heretofore delivered to the Purchasers' counsel complete and
correct copies of (i) the certificate of incorporation and (ii) the by-laws of
the Company and its Subsidiaries, each as amended to date and as presently in
effect (collectively, the "Charter Documents").
5.2 Corporate Authorization. The execution, delivery and performance
by the Company of this Agreement and the other Transaction Documents are within
the Company's corporate power and authority. The execution and delivery of this
Agreement and the other Transaction Documents by the Company and the performance
by the Company of its obligations hereunder and thereunder, have been duly
authorized by all requisite corporate action and no other corporate proceedings
on the part of the Company other than those listed on Schedule 5.2 are
8
necessary to authorize this Agreement and the other Transaction Documents. This
Agreement and the other Transaction Documents have been duly executed and
delivered by duly authorized officers of the Company and, assuming the due
authorization, execution and delivery thereof by all parties thereto other than
the Company, constitutes a legal, valid and binding obligation of the Company,
enforceable against it in accordance with its terms, except as may be limited by
bankruptcy, reorganization, moratorium, fraudulent conveyance and insolvency
laws and by other laws affecting the rights of creditors generally and except as
may be limited by the availability of equitable remedies.
5.3 No Conflict; Requisite Consents. The execution, delivery and
performance by the Company of this Agreement and the other Transaction Documents
does not and will not (i) contravene or conflict with the Charter Documents and
any amendments thereto as contemplated by the Form 10-K, (ii) constitute a
default under or give rise to a right of termination, cancellation or
acceleration of any right or obligation of the Company or any of the Company's
Subsidiaries under any provision of any written agreement or other instrument
binding upon the Company or any of the Company's Subsidiaries or require the
consent of any third party under any Law applicable to the Company or any
License held by the Company or any of the Company Subsidiaries, or (iii) result
in the creation or imposition of any Lien on any asset of the Company or any of
the Company's Subsidiaries other than those Liens created by the Security
Agreement, except, with respect to each of the occurrences or results referred
to in clauses (ii) and (iii) of this sentence, (a) the third party consents set
forth in Schedule 5.3 and (b) such items which would not have a Material Adverse
Effect.
5.4 Capitalization.
(a) As of April 28, 1998, the authorized Capital Stock of the
Company consists of 20,000,000 shares of Common Stock and 100,000 shares of
preferred stock, par value $.01 per share, of which 13,857,361 shares of Common
Stock and no shares of preferred stock are issued and outstanding. All issued
and outstanding shares of the Company's Capital Stock are validly issued, fully
paid and nonassessable. Except as set forth on Schedule 5.4, there are no (i)
outstanding subscriptions, options, warrants or rights (including registration
rights, conversion rights and preemptive rights), agreements, calls, convertible
securities, arrangements or commitments of any character to which the Company is
a party relating to the issued or unissued Capital Stock or other securities of
the Company or obligating the Company to grant, issue or sell any such options,
warrants or rights or (ii) shares of Common Stock reserved for issuance upon the
exercise of any warrants, options granted or to be granted under any stock
option plan or any options previously granted outside of any stock option plan.
(b) All the outstanding shares of Common Stock of the Company's
Subsidiaries are validly issued, fully paid and nonassessable and are owned by
the Company or by a Subsidiary of the Company free and clear of all Liens,
except as set forth on Schedule 5.4 and except for Liens which in the aggregate
are not material to the Company and its Subsidiaries. As of the date of this
Agreement, there are no outstanding options, warrants, preemptive or other
rights, Contracts, commitments, undertakings or arrangements by which any of the
Company's Subsidiaries
9
is or may become obligated to issue any additional shares of their Capital Stock
or securities convertible into any such shares except as set forth on Schedule
5.4 or as contemplated by the Form 10-K. The Company does not directly or
indirectly own any interest in any other corporation, partnership, joint venture
or other business association or entity, which interest is material to the
Company and its Subsidiaries, taken as a whole, except as set forth on Schedule
5.4, or in the Form 10-K for the fiscal year ended December 31, 1997 heretofore
made available to the Purchasers, or otherwise publicly disclosed in a
subsequent filing with the Commission pursuant to the Securities Act or the
Exchange Act. Schedule 5.4 contains a list of all options, warrants or other
securities convertible into shares of Common Stock granted or approved to be
granted by the Company's Board of Directors (or a committee thereof) prior to
the date hereof.
5.5 Litigation; Defaults. There is no action, suit, proceeding or
investigation pending or, to the knowledge of the Company, threatened against or
affecting the Company, any of its Subsidiaries, or any properties of any of the
foregoing, before or by any Governmental Authority, which would (i) have a
Material Adverse Effect, or (ii) impair the ability of the Company to perform
any material obligation which the Company has under any Transaction Document
except as set forth on Schedule 5.5 or Schedule 5.11. Neither the Company nor
any of its Subsidiaries is in violation of, or in default under (and there does
not exist any event or condition which, after notice or lapse of time or both,
would constitute such a default under), any term of its Charter Documents, or of
any term of any agreement, Contract, instrument, judgment, decree, writ,
determination, arbitration award, or Law applicable to the Company or any of its
Subsidiaries or to which the Company or any of its Subsidiaries is bound, or to
any Properties of the Company or any of its Subsidiaries, except in each case to
the extent that such violations or defaults would not (a) affect the validity or
enforceability of any Transaction Document, (b) have a Material Adverse Effect
or (c) impair the ability of the Company to perform any material obligation
which the Company has under any Transaction Document except as set forth on
Schedule 5.5 or Schedule 5.11.
5.6 No Material Adverse Change. Since December 31, 1997, there has
been (i) no material adverse change in the condition (financial or otherwise),
assets, business, projects or results of operations of the Company or any of its
Subsidiaries, (ii) no material obligation or liability (contingent or otherwise)
incurred by the Company or any of its Subsidiaries, other than obligations and
liabilities incurred in the ordinary course of business and no material Lien
placed on any of the Properties of the Company or any of its Subsidiaries that
remains in existence on the date hereof, other than liabilities and Liens
described on Schedule 5.12 hereto, and (iii) no acquisition or disposition of
any material assets by the Company or any of its Subsidiaries (or any Contract
or arrangement therefor), or any other material transaction, otherwise than for
fair value in the ordinary course of business, except as set forth on Schedule
5.6, the Company SEC Documents or by virtue of the Company exiting the games
business and the international business.
5.7 Employee Programs.
(a) Neither the Company nor its Subsidiaries provide, nor has an
obligation to provide, or make contributions to provide compensation or benefits
of any kind or
10
description whatsoever (whether current or deferred and whether paid in cash or
in kind) to, or on behalf of, one, or more than one, current or former employees
or directors of the Company, its Subsidiaries or any of its current or former
Affiliates or any of their dependents, other than any plans, programs or other
arrangements which only provide for the payment of cash compensation currently
from the general assets of the Company or its Subsidiaries on a payday by payday
basis as base salary or hourly wages for current services and other than
policies for vacation and sick days and except as disclosed on Schedule 5.7
(individually, a "Benefit Plan," and collectively, the "Benefit Plans"). Each of
the Benefit Plans is listed on Schedule 5.7.
(b) Except as disclosed on Schedule 5.7:
(i) No ERISA Affiliate (other than the Company or its
Subsidiaries) provides, or has an obligation to provide,
contributions, compensation or benefits of or under any plan, program
or arrangement which is subject to Title IV of ERISA ("ERISA Affiliate
Title IV Plan").
(ii) The Company has furnished or made available to the
Purchasers a true, complete and current copy of each written Benefit
Plan and any amendments thereto, a summary of each other Benefit Plan,
and all Internal Revenue Service, Department of Labor or Pension
Benefit Guaranty Corporation rulings or determinations, annual
reports, summary plan descriptions, actuarial and other financial
reports and such other documentation with respect to any Benefit Plan
as was reasonably requested by the Purchasers.
(iii) No assets have been set aside in a trust or other
separate account to pay directly or indirectly any benefits under any
Benefit Plan or to the extent assets have been set aside, all assets
are shown on the books and records of such trust or separate account
at their fair market value as of the date of any report last provided
with respect to such trust.
(iv) Each Benefit Plan and each ERISA Affiliate Title IV
Plan has been established, maintained and administered in compliance
in all material respects with all applicable Laws. The Company has no
duty or obligation to indemnify or hold any other person or entity
harmless for any liability attributable to any acts or omissions by
such person or entity with respect to any Benefit Plan or ERISA
Affiliate Title IV Plan, other than indemnification obligations to
Benefit Plan fiduciaries under the terms of the Benefit Plan documents
and corporate charters, by-laws and state corporate Law.
(v) Neither the Company nor its Subsidiaries has incurred
any material liability for any tax or penalty with respect to any
Benefit Plan, ERISA Affiliate Title IV Plan or any group health plan
(as described in Section 5000 of the
11
Code) of an ERISA Affiliate including, without limitation, any tax or
penalty under ERISA or under the Code.
(vi) Neither the Company nor its Subsidiaries has
terminated or withdrawn from, or sought a funding waiver with respect
to, any Benefit Plan which is subject to Title IV of ERISA.
(vii) To the knowledge of the Company, there is no
proposed or actual audit or investigation by any Governmental
Authority with respect to any Benefit Plan or ERISA Affiliate Title IV
Plan.
(viii) Neither the Company nor its Subsidiaries has any
obligation to make, or reimburse another employer, directly or
indirectly, for making, contributions to a multi employer plan as
described in Title IV of ERISA.
5.8 Private Offerings. Assuming the truth of the Purchasers'
representations and acknowledgments contained in Section 6 hereof, neither the
Company nor any person acting on its behalf (other than the Purchasers, as to
whom the Company makes no representations) has offered or sold the Securities by
means of any general solicitation or general advertising within the meaning of
Rule 502(c) under the Securities Act. The Company has not sold the Securities
to anyone other than the Purchasers designated in this Agreement. No securities
of the same class or series as the Securities have been issued and sold by the
Company prior to the date hereof. Each Security shall bear substantially the
same legend set forth in Section 9.1 hereof for at least so long as required by
the Securities Act. Assuming the truth of the Purchasers' representations and
acknowledgments contained in Section 6 hereof and any required filings pursuant
to the Securities Act or any state securities laws, or such other post-closing
filings as may be required, the offer and sale of the Securities are and will be
exempt from the registration and prospectus delivery requirements of the
Securities Act, and have been registered or qualified (or are exempt from
registration and qualification) under the registration, permit or qualification
requirements of all applicable state securities laws.
5.9 Company SEC Documents. The Company has filed with the
Commission, and has heretofore made available to the Purchasers, true and
complete copies of, each report, schedule, registration statement and definitive
proxy statement required to be filed by it under the Exchange Act or the
Securities Act (as such documents have been amended since the time of their
filing, collectively, the "Company SEC Documents"). As of their respective
dates, the Company SEC Documents do not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
5.10 Financial Statements; No Undisclosed Liabilities. The
financial statements of the Company included or incorporated by reference in the
Company SEC Documents (the "Company Financial Statements") have been prepared in
accordance with GAAP applied on a
12
consistent basis (except as may be indicated therein or in the notes thereto)
and fairly present in all material respects the consolidated financial position
of the Company and the consolidated Subsidiaries of the Company as at the dates
thereof and the consolidated results of their operations and cash flows for the
periods then ended (subject, in the case of any unaudited interim financial
statements, to normal year-end adjustments and any other adjustments described
therein). Since December 31, 1997, neither the Company nor any of the Company's
Subsidiaries has incurred any liabilities or obligations of any nature, whether
or not accrued, absolute, contingent or otherwise, that would have a Material
Adverse Effect, other than liabilities (i) disclosed in press releases set forth
on Schedule 5.10, Schedule 5.10 or the Company SEC Documents filed prior to the
date of this Agreement (all of which have been furnished to the Purchasers),
(ii) adequately provided for in the Company Financial Statements or disclosed in
any related notes thereto (all of which have been furnished to the Purchasers),
(iii) not required under GAAP to be reflected in the Company Financial
Statements, or disclosed in any related notes thereto, (iv) incurred in
connection with the Permanent Financing, this Agreement or the other Transaction
Documents, or (v) incurred in the ordinary course of business.
5.11 Environmental Regulation, Etc. To the knowledge of the Company,
(i) the operations of the Company and its Subsidiaries comply in all material
respects with all applicable federal, state or local environmental, health and
safety statutes and regulations; (ii) none of the operations of the Company or
its Subsidiaries is the subject of any judicial or administrative proceeding
alleging the violation of any federal, state or local environmental, health or
safety statute or regulation; (iii) none of the operations of the Company or its
Subsidiaries is the subject of a federal or state investigation evaluating
whether any remedial action is needed to respond to a release of any hazardous
or toxic waste, substance or constituent, or other substance into the
environment; (iv) neither the Company nor its Subsidiaries has filed any notice
under any federal or state Law indicating past or present treatment, storage or
disposal of a hazardous waste or reporting a spill or release of a hazardous or
toxic waste, substance or constituent, or other substance into the environment;
and (v) neither the Company nor its Subsidiaries has contingent liability in
connection with any release of any hazardous or toxic waste, substance or
constituent, or other substance into the environment except as set forth on
Schedule 5.11.
5.12 Properties and Assets. The Company and its Subsidiaries have
and assets, whether tangible or intangible, owned by them and reasonably
necessary in the conduct of business of the Company or its Subsidiaries, except
defects in title which would not have a Material Adverse Effect or disclosed on
Schedule 5.12. The Company and its Subsidiaries have complied with all
commitments and obligations on their part to be performed or observed under each
of the leases listed on Schedule 5.12, except for such noncompliance which would
not have a Material Adverse Effect. All buildings, machinery and equipment of
the Company and its Subsidiaries are in good repair and working order, except
for ordinary wear and tear, and except as would not have a Material Adverse
Effect.
13
5.13 Insurance. A list of all insurance policies covering the
assets, business, equipment and Properties under which the Company or any of its
Subsidiaries may derive any material benefit is set forth on Schedule 5.13
hereof. Except as set forth on Schedule 5.13, such policies of insurance and
bonds (or other policies and bonds providing substantially similar insurance
coverage) are and have been in full force and effect for at least the last year
and remain in full force and effect. Such policies of insurance and bonds are of
the type and in amounts customarily carried by Persons conducting business
similar to that presently conducted by the Company and its Subsidiaries. The
Company knows of no threatened termination of any such policies or bonds.
5.14 Employment Practices. Neither the Company nor its Subsidiaries
is a party to, or bound by, any collective bargaining agreement, Contract or
other agreement or understanding with a labor union organization except as set
forth on Schedule 5.14. Except as set forth on Schedule 5.14, there (i) is no
unfair labor practice or material labor arbitration proceeding pending or, to
the Company's knowledge, threatened against the Company or its Subsidiaries,
(ii) are no organizational efforts with respect to the formation of a collective
bargaining unit presently being made or, to the Company's knowledge, threatened
involving employees of the Company or its Subsidiaries, and (iii) is no material
labor controversy in existence with respect to the Company's or the
Subsidiaries' business and operations.
5.15 Intellectual Property. Schedule 5.15 annexed hereto sets forth
an accurate and complete list of all Intellectual Property owned or licensed by
the Company and its Subsidiaries. Except as set forth on Schedule 5.15, (i) the
Company and its Subsidiaries own, are licensed or otherwise have the right to
use, all Intellectual Property used in the business of the Company and its
Subsidiaries, as presently conducted or as proposed by the Company or its
Subsidiaries to be conducted, (ii) to the knowledge of the Company, the use of
the Intellectual Property by the Company or its Subsidiaries does not infringe
upon or otherwise violate the rights of any third party in or to such
Intellectual Property, and no claim has been asserted with respect thereto which
violation or assertion would have a Material Adverse Effect, and (iii) no
Employee of the Company or its Subsidiaries has a right to receive a royalty or
similar payment, or has any other monetary rights, in respect of any item of
Intellectual Property of the Company or its Subsidiaries.
5.16 Material Contracts. Schedule 5.16 sets forth a true, complete
and correct list of all contracts, agreements, commitments, obligations and
licenses to which the Company or its Subsidiaries is a party that are material
("Contracts"). All of the Contracts are valid and binding and are in full force
and effect; and, except as set forth on Schedule 5.16 hereto, there are no
existing material defaults (or events which, with notice or lapse of time or
both, would constitute a material default) by the Company or its Subsidiaries,
or, to the Company's knowledge, any other party thereunder.
5.17 Taxes. The Company and its Subsidiaries have in all material
respects filed or obtained extensions of all federal, state, local and foreign
income, excise, franchise, real estate, sales and use and other tax returns
heretofore required by Law to be filed by it. All material federal,
14
state, county, local, foreign or other income taxes which have become due or
payable by the Company or any of its Subsidiaries (collectively, "Taxes"), have
been paid in full or are adequately provided for in accordance with GAAP on the
financial statements of the applicable Person. No Liens arising from or in
connection with Taxes have been filed and are currently in effect against the
Company or any of its Subsidiaries, except for Liens for Taxes which are not yet
due or which would not have a Material Adverse Effect. Except as set forth on
Schedule 5.17, no audits or investigations are pending or, to the knowledge of
the Company, threatened with respect to any tax returns or Taxes of the Company
or any of its Subsidiaries.
5.18 Licenses. The Company and its Subsidiaries hold all material
licenses, franchises, permits, consents, registrations, certificates and other
approvals (individually, a "License" and collectively, "Licenses") required for
the conduct of their business as now being conducted, and are operating in
substantial compliance therewith, except where the failure to hold any such
License or to operate in compliance therewith would not have a Material Adverse
Effect. Except as set forth on Schedule 5.18, the Company and its Subsidiaries
are in substantial compliance with all Laws applicable to it, except in each
case where the failure so to comply would not have a Material Adverse Effect or
a material adverse effect on the ability of the Company or any of its
Subsidiaries to perform any obligation that it has under any Transaction
Document to which it is a party.
5.19 Transactions with Affiliates. There are no material
transactions, agreements or understandings, existing or presently contemplated,
between or among the Company or any of its Subsidiaries, and any of their
officers or directors or stockholders or any of their Affiliates or associates
except as set forth on Schedule 5.19 or contemplated by the Form 10-K.
5.20 Federal Reserve Regulations. None of the transactions
contemplated by this Agreement (including without limitation the use of the
proceeds from the sale of the Securities) will violate or result in a violation
of Section 7 of the Exchange Act, or any regulation promulgated thereunder,
including without limitation Regulations G, T, U and X of the Board of Governors
of the Federal Reserve System.
5.21 Investment Company Act. Neither the Company nor any of its
Subsidiaries is an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
5.22 Broker's or Finder's Commissions. With the exception of the
retention of ▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇ Securities Corporation, the Company
has not employed any agent, broker, investment banker, finder or financial
advisor or incurred any liability for any broker's or finder's fee or any other
commission or similar fee in connection with any of the transactions
contemplated by this Agreement and the other Transaction Documents.
5.23 Books and Records. The books of account, minute books, stock
record books and other records of the Company and the Company's Subsidiaries,
all of which have been made available to the Purchasers, are complete and
correct in all material respects.
15
5.24 Disclosure. The Form 10-K, this Agreement and the other
Transaction Documents do not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
60 Representations and Warranties of the Purchasers .
(a) Each Purchaser represents for itself to the Company that (i) it
is an accredited investor as defined in Regulation D under the Securities Act,
and (ii) by reason of its business and financial experience, and the business
and financial experience of those persons, if any, retained by it to advise it
with respect to its investment in the Securities, such Purchaser together with
such advisers have such knowledge, sophistication and experience in business and
financial matters as to be capable of evaluating the merits and risk of the
prospective investment, and that it is purchasing the Securities for its own
account or for one or more separate accounts maintained by it or for the account
of one or more institutional investors on whose behalf such Purchaser has
authority to make this representation for investment and not with a view to the
distribution thereof or with any present intention of distributing or selling
any of the Securities except in compliance with the Securities Act and except to
one or more such institutional investors, provided that the disposition of such
Purchaser's or such investor's property shall at all times be within its
control. Each Purchaser understands and agrees that the Company's offer and sale
of the Securities have not been registered under the Securities Act and the
Securities may be resold only if registered pursuant to the provisions
thereunder or if an exemption from registration is available.
(b) Each Purchaser which is an insurance company represents, to the
knowledge of such Purchaser, that no part of the funds to be used by it to
purchase the Securities to be purchased by such Purchaser constitutes assets
allocated to any separate account maintained by such Purchaser that contains the
assets of any Benefit Plan listed on Schedule 5.7 (or its related trust). Each
Purchaser which is not an insurance company or an "investment company" (as
defined in the Investment Company Act of 1940, as amended) also represents, to
the knowledge of such Purchaser, that no part of the funds to be used to
purchase the Securities to be purchased by such Purchaser constitutes assets
allocated to any trust or other entity which contains the assets of any Benefit
Plan listed on Schedule 5.7. The representations made in the preceding
sentences are made solely in reliance upon, and subject to, the accuracy of the
Company's representations contained in Section 5.7 of this Agreement and the
list of Benefit Plans shown on Schedule 5.7. As used in this section, the term
"separate account" shall have the meaning assigned to it in Section 3(17) of
ERISA.
(c) Each Purchaser represents for itself to the Company that it has
full power and authority and has taken all action necessary to authorize it to
enter into and perform its obligations under this Agreement and the other
Transaction Documents. This Agreement is the legal, valid and binding
obligation of each Purchaser, and is enforceable against each Purchaser in
accordance with its terms, except as may be limited by bankruptcy,
reorganization, moratorium, fraudulent
16
conveyance and insolvency laws and by other laws affecting the rights of
creditors generally and except as may be limited by the availability of
equitable remedies.
(d) Each Purchaser acknowledges for itself that it has read the Form
10-K and has received all the information it has requested from the Company and
has had the opportunity to ask questions of the Company and, relying on the
completeness and accuracy of such information, such Purchaser believes such
information is sufficient to make an informed decision with respect to its
purchase of the Securities.
(e) Each Purchaser acknowledges for itself that the address set forth
on such Purchaser's signature page hereto is such Purchaser's principal place
of business.
70 Covenants of the Company. The Company covenants and agrees that from
the date hereof until the earlier of the consummation of the sale of the Series
B Convertible Preferred Stock to the holders of the Notes as contemplated below
or the repayment of the Notes in full, unless the Purchasers shall otherwise
consent in writing, it will do or cause the following:
7.1 Use of Proceeds. Use the net proceeds from the sale of the
Securities to provide for working capital requirements and general corporate
purposes.
7.2 Charter Documents. The Charter Documents shall not have been
modified or amended since the date delivered by the Company, except for the
Company's Certificate of Incorporation which may be amended to increase the
number of authorized shares of Capital Stock, to change the terms of the
Company's blank check preferred stock in order to provide for the establishment
of voting rights and to perform such other acts as are necessary to establish
the terms of the Series A Preferred Stock, the Series B Convertible Preferred
Stock and the Series C Preferred Stock.
7.3 Ordinary Course. Other than with respect to the Company's
games business and international business, the Company's business and the
businesses of its Subsidiaries shall be conducted only in the ordinary course of
business and in a manner consistent with past practice. The Company shall use
commercially reasonable efforts to preserve substantially intact the business
organization of itself and its Subsidiaries, to keep available the services of
its present officers and employees and to preserve its present relationships
with customers, suppliers and other persons with which it has a significant
business relationship, except as otherwise contemplated by the Company SEC
Documents provided, however, that the Company shall be permitted to close
international business offices and dissolve its Subsidiaries listed on Schedule
7.3.
7.4 Issuance of Securities. The Company shall not, nor shall it
permit any of its Subsidiaries to, issue, deliver, sell, redeem, acquire,
authorize or propose to issue, deliver, sell, redeem, acquire or authorize, any
shares of its Capital Stock of any class or any securities convertible into, or
any rights, warrants or options to acquire, any such shares or convertible
securities or other ownership interest, provided that the Company shall be
permitted to (i) issue the securities as set
17
forth on Schedule 5.4, (ii) issue Common Stock, Warrants, Series A Preferred
Stock, Series B Convertible Preferred Stock resulting from the provisions of
this Agreement and the Securities Purchase Agreement dated as of May 6, 1998 by
and among the Company and the Investors parties thereto relating to the initial
sale of the Series A Preferred Stock, and in each case the documents executed,
filed or delivered in connection therewith or Series C Preferred Stock and (iii)
grant options to purchase up to an aggregate of 10% of the shares of Common
Stock outstanding, as determined on a fully-diluted basis.
7.5 Dividends; Changes in Capital Stock. The Company shall not, nor
shall it permit any of its Subsidiaries to, nor shall it propose to: (i)
declare, set aside, make or pay any dividend or other distribution, payable in
cash, stock, property or otherwise, with respect to any of its Capital Stock,
except with respect to the Series A Preferred Stock and the Series B Convertible
Preferred Stock; or (ii) reclassify, combine, split, subdivide or redeem,
purchase or otherwise acquire, directly or indirectly, any of its Capital Stock.
7.6 Change in Condition. The Company shall promptly advise the
Purchasers in writing of any change in the condition (financial or otherwise),
operations or properties or businesses of the Company or any of its Subsidiaries
which would have a Material Adverse Effect.
7.7 No Action. The Company shall not, and shall not permit any of
its Subsidiaries to, take or agree or commit to take any action, (i) that is
likely to make any of its representations or warranties hereunder inaccurate; or
(ii) that is prohibited pursuant to the provisions of this Section 7.
7.8 Replacement of Certificates. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or mutilation of
any certificate representing any of the Securities, and in the case of loss,
theft or destruction, upon receipt of indemnity in reasonable form and scope,
the Company will issue a new certificate representing such Securities in lieu of
such lost, stolen, destroyed, or mutilated certificate.
80 Covenants of the Purchasers.
8.1 Conversion Right. Any holder of the Notes may, upon five
Business Days notice furnished to the Company, convert all, but not less than
all, of the Notes beneficially owned by such holder into (i) a number of shares
of Series A Preferred Stock having a liquidation preference equal to the
principal amount outstanding of the Notes and (ii) Warrants, in the form of
Exhibit C attached hereto to purchase 250,000 shares of Common Stock , at an
exercise price of $.01 per share, for each $1,000,000 principal amount of Notes
surrendered. The Company shall pay all accrued but unpaid interest on the Notes
through the date of such conversion. In the event that the issuance of the
Warrants on such conversion would cause a violation of any rule, law or
regulation applicable to the Company or its stock, the Company shall on the date
of conversion issue the maximum amount of Warrants as would not cause such
violation and no later than 90 days after the conversion date issue the balance
of Warrants regardless of whether such issuance would cause such
18
violation. The Purchasers agree to vote any shares of Common Stock beneficially
owned by them or by any of their affiliates in favor of the amendment to the
Company's Certificate of Incorporation contemplated by the Series A Preferred
Stock Certificate of Designations attached as Exhibit A hereto and the Company
may request voting agreements to be executed by all such affiliates.
8.2 Purchase Obligation. If the Purchasers do not exercise their
conversion rights set forth in Section 8.1, the holders of the Notes may, upon
notice furnished during the period specified in clauses (a), (b) or (c) below to
the Company, convert all but not less than all, of the Notes beneficially owned
by such holder into (i) a number of shares of Series B Preferred Stock having a
liquidation preference equal to the principal amount outstanding of the Notes
and (ii) Warrants, in the form of Exhibit C attached hereto to purchase 250,000
shares of Common Stock for each $1,000,000 principal amount of Notes
surrendered: (a) during the 30 day period following the date the amendment to
the Company's Certificate of Incorporation contemplated by the Series A
Preferred Stock Certificate of Designations attached as Exhibit A hereto is
filed with the Secretary of State of the State of Delaware, (b) during the 30
day period ending on the 7-year anniversary of the date hereof, or (c) during a
30 day period following the first 20 Business Day Period after the filing of the
Amendment in which the average Market Price of the Common Stock is greater than
$4.00 per share. The Company shall pay all accrued but unpaid interest on the
Notes through the date of such conversion.
8.3 Reservation of Securities. The Company shall reserve and set
apart and have at all times, free from preemptive rights, the number of
authorized but unissued shares of Series A Preferred Stock, and shall use its
best efforts to reserve and set apart and have all times, free from preemptive
rights, the number of authorized but unissued shares of Series B Convertible
Preferred Stock (and shares of Common Stock convertible upon conversion of the
Series B Convertible Preferred Stock), to conform to the Company's obligations
set forth in Sections 8.1 and 8.2.
8.4 Release of Collateral. Upon the earlier of (i) the date of
repayment in full of the Notes and all accrued and unpaid interest due thereon,
or (ii) the date of conversion of the Notes into shares of Series B Convertible
Preferred Stock, each Purchaser shall deliver or file, as the case may be, such
instruments as the Company reasonably requests (including Uniform Commercial
Code termination statements on Form UCC-3) acknowledging the termination of the
Security Agreement and the release of the Collateral (as defined in the Security
Agreement).
90 Restrictions on Transfer.
9.1 Restrictive Legends. Except as otherwise permitted by this
Section 9, each Security issued pursuant to this Agreement shall be stamped or
otherwise imprinted with a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
19
AMENDED, OR PURSUANT TO THE SECURITIES OR "BLUE SKY" LAWS OF ANY
STATE. SUCH SECURITIES MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED,
HYPOTHECATED OR OTHERWISE ASSIGNED, EXCEPT PURSUANT TO (i) A
REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS
EFFECTIVE UNDER SUCH ACT, (ii) RULE 144 OR RULE 144A UNDER SUCH ACT,
OR (iii) ANY OTHER EXEMPTION FROM REGISTRATION UNDER SUCH ACT,
PROVIDED THAT, IF REQUESTED BY THE COMPANY, AN OPINION OF COUNSEL
REASONABLY SATISFACTORY IN FORM AND SUBSTANCE IS FURNISHED TO THE
COMPANY THAT AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH
ACT IS AVAILABLE.
The Company shall maintain a copy of this Agreement and any amendments
thereto on file in its principal office, and will make such copy available
during normal business hours for inspection to any party thereto or will provide
such copy to any Purchaser upon its request.
9.2 Notice of the Proposed Transfer; Opinion of Counsel. Each
Purchaser of each Security bearing the restrictive legend set forth in Section
9.1 above ("Restricted Security") agrees that prior to any transfer or attempted
transfer of such Restricted Security to give to the Company (a) written notice
describing the manner or circumstances of such transfer or proposed transfer,
and (b) an opinion of counsel, which is knowledgeable in securities law matters,
in form and substance reasonably satisfactory to the Company, to the effect that
the proposed transfer of such Restricted Security may be effected without
registration of such Restricted Security under the Securities Act. If the
holder of the Restricted Security delivers to the Company an opinion of counsel
in form and substance reasonably satisfactory to the Company that subsequent
transfers of such Restricted Security will not require registration under the
Securities Act, the Company will after such contemplated transfer deliver new
Securities for such Restricted Security which do not bear the Securities Act
legend set forth in Section 9.1 above. The restrictions imposed by this Section
9 upon the transferability of any particular Restricted Security shall cease and
terminate (i) when such Restricted Security has been sold pursuant to an
effective registration statement under the Securities Act, (ii) when such
Restricted Security has been transferred pursuant to Rule 144 or Rule 144A
promulgated under the Securities Act, or (iii) upon the date which is two (2)
years after the later of (A) the original issue date of the Restricted Security
and (B) the last date on which the Company or any Affiliate of the Company was
the owner of the Restricted Security (or any predecessor Restricted Security).
As used in this Section 9.2, the term "transfer" encompasses any sale, transfer
or other disposition of any Securities referred to herein.
100 Miscellaneous.
10.1 Indemnification; Expenses, Etc.
20
(a) The Company agrees to indemnify and hold harmless each
Purchaser, its Affiliates and each of its and their respective directors,
officers, partners, principals and attorneys (individually, an "Indemnified
Party" and, collectively, the "Indemnified Parties") from and against any and
all losses, claims, damages, liabilities, costs (including reasonable attorneys'
fees) and expenses (collectively, "Losses") to which any Indemnified Party may
become subject, insofar as such Losses arise out of, in any way relate to, or
result from (i) any breach of any representation or warranty made by the
Company, or the failure of the Company to fulfill any agreement or covenant
contained in this Agreement or any other Transaction Document, or (ii) any
proceeding against the Company or any Indemnified Party brought by any third
party arising out of or in connection with this Agreement or the other
Transaction Documents; provided, however, that the Company shall not have any
obligation under this indemnity provision after twelve months from the date
hereof, or for liabilities resulting from the gross negligence or willful
misconduct of any Indemnified Party. The Company agrees to reimburse any
Indemnified Party for all such Losses as they are incurred or suffered by such
Indemnified Party.
(b) If any Indemnified Party is entitled to indemnification
hereunder, such Indemnified Party shall give prompt notice to the Company of any
claim or of the commencement of any proceeding against the Company or any
Indemnified Party brought by any third party with respect to which such
Indemnified Party seeks indemnification pursuant hereto; provided, however, that
the delay to so notify the Company shall not relieve the Company from any
obligation or liability except to the extent the Company is prejudiced by such
delay. The Company shall have the right, exercisable by giving written notice to
an Indemnified Party within 30 days after the receipt of written notice from
such Indemnified Party of such claim or proceeding, to assume, at the expense of
the Company, the defense of any such claim or proceeding with counsel reasonably
satisfactory to such Indemnified Party. The Company shall not consent to entry
of any judgment or enter into any settlement that does not include as an
unconditional term thereof the giving by claimant or plaintiff to such
Indemnified Party or Parties of a release, in form and substance satisfactory to
the Indemnified Party or Parties, from all liability in respect of such claim,
litigation or proceeding.
10.2 Survival of Representations and Warranties. All representations
and warranties contained in this Agreement or in the other Transaction Documents
shall survive, for the duration of any statutes of limitation applicable
thereto, the execution and delivery of this Agreement, any investigation at any
time made by any Purchaser or on such Purchaser's behalf, the purchase of the
Securities by the Purchasers under this Agreement and any disposition of or
payment on the Securities; provided, however, that such representations and
warranties shall expire upon the earlier of the consummation of the Permanent
Financing.
10.3 Amendment and Waiver. This Agreement may be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may be given, provided that the same are in writing and signed by the Purchasers
and/or the other holders of the Notes, holding a majority of the aggregate
principal amount of the Notes, and the Company.
21
10.4 Notices, Etc. Except as otherwise provided in this Agreement,
notices and other communications under this Agreement shall be in writing and
shall be delivered personally, sent by telecopier (with written confirmation of
receipt), mailed by registered or certified mail, return receipt requested, or
by a nationally recognized overnight courier, postage prepaid, addressed, (a) if
to any Purchaser, at such address or telecopier number as is set forth next to
such Purchaser's name on the signature page hereto, or as any such Purchaser
shall have furnished to the Company in writing, or (b) if to the Company, at
▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇, ▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇, telecopier no.:
(▇▇▇) ▇▇▇-▇▇▇▇, to the attention of President, or at such other address or
telecopier number, or to the attention of such other officer, as the Company
shall have furnished to the Purchasers in writing, with a copy to The ▇▇▇▇▇▇▇
Group, ▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇, telecopier no.
(▇▇▇) ▇▇▇-▇▇▇▇, to the attention of ▇▇▇▇▇▇ ▇▇▇▇▇▇▇, and with a copy to Shereff,
Friedman, ▇▇▇▇▇▇▇ and ▇▇▇▇▇▇▇, LLP, ▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇,
telecopier no.: (▇▇▇) ▇▇▇-▇▇▇▇, to the attention of ▇▇▇▇▇▇ ▇▇▇▇▇, Esq.
10.5 Entire Agreement. This Agreement, the other Transaction
Documents embody the entire agreement and understanding between the Purchasers
and the Company and supersede all prior agreements and understandings relating
to the subject matter hereof.
10.6 Successors and Assigns. Whenever in this Agreement any of the
parties hereto are 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 respective parties which are contained in this Agreement
shall bind and inure to the benefit of the successors and assigns of all other
parties. The terms and provisions of this Agreement and the other Transaction
Documents shall inure to the benefit of and shall be binding upon any assignee
or transferee of any Purchaser, and in the event of such transfer or assignment,
the rights and privileges herein conferred upon any such Purchaser shall
automatically extend to and be vested in, and become an obligation of, such
transferee or assignee, all subject to the terms and conditions hereof. In
connection therewith, such transferee or assignee may disclose all documents and
information which such transferee or assignee now or hereafter may have relating
to the Notes, the Warrants, this Agreement, the other Transaction Documents, the
Company, any other Persons referred to herein or any of the business of any of
the foregoing entities, subject to such transferee or assignee executing a
confidentiality agreement reasonably satisfactory to the Company.
10.7 Agreement and Action of the Purchasers. Upon any occasion
requiring, permitting or referencing an act or an approval, consent, waiver,
election or other action on the part of the Purchasers, any such action shall
(i) be taken upon the affirmative vote of the Purchasers and/or the other
holders of the Notes, holding a majority or agreeing to purchase a majority
under this Agreement of the aggregate principal amount of the Notes, or (ii) be
deemed to have been taken by the Purchasers upon such action being taken by the
Purchasers and/or the other holders of the Notes, holding a majority of the
aggregate principal amount of the Notes.
10.8 Descriptive Headings. The headings in this Agreement are for
purposes of reference only and shall not limit or otherwise affect the meaning
hereof.
22
10.9 GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED
IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE
INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO ANY CHOICE-OF-LAW
PRINCIPLES THEREOF.
10.10 Counterparts. This Agreement may be executed simultaneously
in two or more counterparts, each of which shall be deemed an original.
23
If this Agreement is satisfactory, please so indicate by signing the
applicable attached signature page of this Agreement and delivering such
counterpart to the Company, whereupon this Agreement will become binding among
the parties hereto in accordance with its terms.
7TH LEVEL, INC.
By: /s/ ▇▇▇▇▇▇ ▇▇▇▇▇▇▇
----------------------------------------------
Name: ▇▇▇▇▇▇ ▇▇▇▇▇▇▇
Title:
Chairman of the Board
24
SECURITIES PURCHASE AGREEMENT FOR
SECURED PROMISSORY NOTES AND WARRANTS
PURCHASER SIGNATURE PAGE
Accepted and agreed as of the Aggregate Principal Amount
date first written above: and Purchase Price of
Notes to be Purchased: $3,000,000
Aggregate Amount of
ALPINE ASSOCIATES, a New Jersey Warrants to be Purchased: 450,000
Limited Partnership (reduced by warrant exercisable for
50,000 shares previously issued)
By: ▇▇▇▇▇▇ Corp.,
Its General Partner
By: /s/ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
-----------------------------
▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
President
Address: ▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Telecopy: (▇▇▇) ▇▇▇-▇▇▇▇
WITH A COPY TO:
Address: Tax I.D. Number:
------------------------
(if acquired in the name of a
nominee, the taxpayer I.D. number
of such nominee)
Telephone:
Telecopy:
Designated Bank:
Nominee (name in which the -----------------------------------
Notes and Warrants are to be registered, Name
if different than name of
Purchaser): -----------------------------------
ABA #
-----------------------------------
Street Address
---------------------------------------- -----------------------------------
(Nominee's Name) City State Zip Code
-----------------------------------
Account Number Attention
25
SECURITIES PURCHASE AGREEMENT FOR
SECURED PROMISSORY NOTES AND WARRANTS
PURCHASER SIGNATURE PAGE
Accepted and agreed as of the Aggregate Principal Amount
date first written above: and Purchase Price of
Notes to be Purchased: $1,500,000
Aggregate Amount of
EAST WEST CAPITAL ASSOCIATES, INC. Warrants to be Purchased: 225,000
(reduced by warrants exercisable
for 25,000 shares previously
issued)
By: /s/ ▇▇▇▇ ▇▇▇▇▇
----------------------------------
Name: ▇▇▇▇ ▇▇▇▇▇
Title:
Address: ▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇
▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Telecopy: (▇▇▇) ▇▇▇-▇▇▇▇
WITH A COPY TO:
Address: Tax I.D. Number: ▇▇-▇▇▇▇▇▇▇
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇, Esq. -----------------------
▇▇▇ ▇. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇ (if acquired in the name of a
▇▇▇ ▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇ nominee, the taxpayer I.D.
Telephone: ▇▇▇-▇▇▇-▇▇▇▇ number of such nominee)
Telecopy: 213-896-0400
Designated Bank:
Nominee (name in which the
Notes and Warrants are to be registered, -----------------------------------
if different than name of Name
Purchaser):
-----------------------------------
---------------------------------------- ABA #
(Nominee's Name)
-----------------------------------
▇▇▇▇▇▇ ▇▇▇▇▇▇▇
-----------------------------------
▇▇▇▇ ▇▇▇▇▇ Zip Code
-----------------------------------
Account Number Attention
26