<PAGE>
EXECUTION COPY
COMMON STOCK INVESTMENT AGREEMENT
COMMON STOCK INVESTMENT AGREEMENT ("Agreement") dated as of
August 23, 2000 among CONSTELLATION 3D, INC., a Florida corporation (the
"Company"), and each person or entity listed as an investor on Schedule I
attached to this Agreement (each individually an "Investor" and collectively the
"Investors").
W I T N E S S E T H:
--------------------
WHEREAS, the Company desires to sell and issue to the
Investors, and the Investors, severally, not jointly, wish to purchase from the
Company, (i) an aggregate number of shares of the Company's Common Stock, $.001
par value ("Common Stock") calculated by dividing $5,000,000 by the Share
Purchase Price (as hereinafter defined) (all of such shares of Common Stock
being the "Initial Shares"), (ii) five (5) year warrants, in the form attached
hereto as Annex A, to purchase 196,984 shares of Common Stock at an initial
exercise price of $14.6656 per share (the "Initial Warrants"), (iii) warrants,
in the form attached hereto as Annex B, to purchase a number of shares of Common
Stock calculated pursuant to a formula set forth therein (the "Adjustment
Warrants") and (iv) one (1) year warrants, in the form attached hereto as Annex
C, to purchase 246,229 shares of Common Stock at an initial exercise price of
$10.15313 and additional Adjustment Warrants pertaining to such shares of Common
Stock (the "Optional Warrants" and together with the Initial Warrants and the
Adjustment Warrants, the "Warrants"), all on the terms and conditions described
below;
WHEREAS, the Investors may be entitled to receive additional
shares of Common Stock from the Company ("Anti-Dilution Shares") upon the
occurrence of certain events described in Section 7.1 below; and
WHEREAS, the Initial Shares, the Anti-Dilution Shares, the
shares of Common Stock underlying the Initial Warrants (the "Warrant Shares"),
the shares of Common Stock underlying the Adjustment Warrants (the "Adjustment
Shares"), the shares of Common Stock underlying the Optional Warrants (the
"Optional Warrant Shares") and the MDP Shares (as defined in the Registration
Rights Agreement) (collectively being the "Registrable Securities") will carry
registration rights, pursuant to the terms of that certain Registration Rights
Agreement to be entered into between the Company and the Investors substantially
in the form annexed hereto (the "Registration Rights Agreement").
NOW, THEREFORE, in consideration of the foregoing premises and
the covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I
Purchase and Sale of Shares and Warrants
----------------------------------------
Section 1.1 Issuance of Initial Shares and Warrants. Upon the following
terms and conditions, the Company shall issue and sell to the Investors, and the
Investors, severally, not jointly, shall purchase from the Company, the number
of Initial Shares and Warrants indicated next to the Investors' names on
Schedule I attached hereto.
<PAGE>
(a) Purchase Price. The purchase price for the Initial Shares and
Warrants to be acquired by each Investor (the "Purchase Price") shall be the
Purchase Price set forth next to each such Investor's name on Schedule I. The
purchase price per share of Common Stock (the "Share Purchase Price") shall
equal ninety percent (90%) of the average of the closing bid prices of a share
of Common Stock on the Principal Market on the 5 Trading Days leading up to and
ending on the day prior to the Closing Date, or $10.15313 (and as such term is
used in this Agreement, it shall be adjusted proportionately for stock splits,
reverse stock splits, stock dividends, recapitalizations, and the like). For
purposes of this Agreement, the term "Principal Market" shall mean the OTC
Bulletin Board or if the Common Stock is not quoted thereon, on such exchange or
market (which for purposes of this Agreement shall mean the New York Stock
Exchange, the American Stock Exchange, the Nasdaq National Market System and the
NASDAQ Small Cap Market) upon which the Common Stock is principally traded or
quoted, and "Trading Day" shall mean (x) if the Common Stock is listed on the
New York Stock Exchange or the American Stock Exchange, a day on which there is
trading on such stock exchange, or (y) if the Common Stock is not listed on
either of such stock exchange but sale prices of the Common Stock are reported
on an automated quotation system, a day on which trading is reported on the
principal automated quotation system on which sales of the Common Stock are
reported, or (z) if the foregoing provisions are inapplicable, a day on which
quotations are reported by National Quotation Bureau Incorporated.
(b) The Closing.
(i) The closing of the purchase and sale of the Initial Shares
and Warrants (the "Closing") shall take place at the offices of
Kleinberg, Kaplan, Wolff & Cohen, P.C. ("KKWC"), on the date hereof
(the "Closing Date").
(ii) On the Closing Date, the Company shall deliver to the
Investors all the Initial Shares, with the number and denomination of
certificates requested by the Investors, and the Warrants purchased
hereunder, each registered in the name of each such Investor or its
nominee. On the Closing Date, each Investor shall deliver its Purchase
Price by wire transfer, to an account designated in writing by the
Company. In lieu of delivering physical certificates representing the
Initial Shares, provided the Company's transfer agent is participating
in the Depository Trust Company ("DTC") Fast Automated Securities
Transfer ("FAST") program, upon request of an Investor, the Company
shall use its best efforts to cause its transfer agent to
electronically transmit the Initial Shares to such Investor by
crediting the account of such Investor's prime broker with DTC through
its Deposit Withdrawal Agent Commission ("DWAC") system. The time
periods for delivery described above shall apply to the electronic
transmittals described herein. In addition, each party shall deliver
all documents, instruments and writings required to be delivered by
such party pursuant to this Agreement at or prior to the Closing.
Additionally, at the Closing the Company shall pay (or Halifax Fund,
L.P. shall pay for the account of the Company, with such payment being
credited towards Halifax Fund, L.P.'s payment of its Purchase Price) to
KKWC its legal fees and disbursements as set forth in Section 3.4.
-2-
<PAGE>
ARTICLE II
Representations and Warranties
------------------------------
Section 2.1 Representations and Warranties of the Company. The Company
hereby makes the following representations and warranties to the Investors as of
the Closing Date and as of the date of an exercise of the Optional Warrant (with
the Schedules referenced herein updated, as necessary, and delivered to the
Investors prior to the delivery of the Optional Warrant Shares):
(a) Organization and Qualification; Material Adverse Effect. The
Company is a corporation duly incorporated and existing in good standing under
the laws of the State of Florida and has the requisite corporate power to own
its properties and to carry on its business as now being conducted. The Company
does not have any direct or indirect subsidiaries (defined as any entity of
which the Company owns, directly or indirectly, 50% or more of the equity or
voting power) other than the subsidiaries listed in the Pre-Agreement SEC
Documents (as defined herein). Except where specifically indicated to the
contrary, all references in this Agreement to subsidiaries shall be deemed to
refer to all direct and indirect subsidiaries of the Company. Except where
specifically indicated to the contrary, all references in this Article II to the
Company shall be deemed to refer to the Company and its consolidated
subsidiaries. Each of the Company and its subsidiaries is duly qualified as a
foreign corporation to do business and is in good standing in every jurisdiction
in which the nature of the business conducted or property owned by it makes such
qualification necessary other than those in which the failure so to qualify
would not have a Material Adverse Effect. "Material Adverse Effect" means any
adverse effect on the business, operations, properties or financial condition of
the entity with respect to which such term is used and which is (either alone or
together with all other adverse effects) material to such entity and other
entities controlling or controlled by such entity taken as a whole, and any
material adverse effect on the transactions contemplated under this Agreement,
the Registration Rights Agreement or any other agreement or document
contemplated hereby or thereby.
(b) Authorization; Enforcement. (i) The Company has all requisite
corporate power and authority to enter into and perform this Agreement, the
Warrants and the Registration Rights Agreement (the "Transaction Documents") and
to issue the Initial Shares, the Warrant Shares, the Adjustment Shares, the
Optional Warrant Shares, the Anti-Dilution Shares, the MDP Shares and the
Warrants (collectively, the "Securities") in accordance with the terms hereof
and thereof, (ii) the execution and delivery of the Transaction Documents by the
Company and the consummation by it of the transactions contemplated hereby and
thereby, including the issuance of the Registrable Shares, have been duly
authorized by all necessary corporate action, and no further consent or
authorization of the Company or its Board of Directors (or any committee or
subcommittee thereof) or stockholders is required, (iii) the Transaction
Documents have been duly executed and delivered by the Company and (iv) the
Transaction Documents constitute valid and binding obligations of the Company
enforceable against the Company in accordance with their terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally the enforcement of creditors' rights and remedies or by
other equitable principles of general application.
-3-
<PAGE>
(c) Capitalization. The authorized capital stock of the Company
consists of 100,000,000 shares of Common Stock and 10,000,000 shares of
preferred stock; as of July 31, 2000 there were 51,501,609 shares of Common
Stock and no shares of preferred stock issued and outstanding; and, except as
set forth on Schedule 2.1(c), no shares of Common Stock and no shares of
preferred stock were reserved for issuance to persons other than the Investors.
All of the outstanding shares of the Company's Common Stock and preferred stock
have been validly issued and are fully paid and non-assessable. No shares of
capital stock are entitled to preemptive rights and, except as set forth on
Schedule 2.1(c), there are no outstanding options and outstanding warrants for
shares of Common Stock (excluding the Warrants). Except as set forth on Schedule
2.1(c)(i), there are no other scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
exchangeable for or convertible into, any shares of capital stock of the
Company, or contracts, commitments, understandings, or arrangements by which the
Company is or may become bound to issue additional shares of capital stock of
the Company or options, warrants, scrip, rights to subscribe to, or commitments
to purchase or acquire, any shares, or securities or rights convertible or
exchangeable into shares, of capital stock of the Company. Included as exhibits
to the SEC Documents are a true and correct copy of the Company's Certificate of
Incorporation (the "Charter"), as in effect on the date hereof, and a true and
correct copy of the Company's By-Laws, as in effect on the date hereof (the
"By-Laws").
(d) Issuance of Registrable Shares. The Registrable Securities are duly
authorized and reserved for issuance and, when issued in accordance with this
Agreement or upon exercise in accordance with the Warrants, the Registrable
Securities, will be validly issued, fully paid and non-assessable, free and
clear of any and all liens, claims and encumbrances, and, subject to the
registration of such shares in accordance with the applicable provisions of the
Securities Act of 1933, as amended (the "Securities Act" or the "Act") and the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), will be
entitled to be quoted and/or listed (as the case may be) on the OTC Bulletin
Board (or the American Stock Exchange, the New York Stock Exchange, Nasdaq Small
Cap Market or the Nasdaq National Market System collectively, the "Approved
Markets"), and the holders of such Registrable Shares shall be entitled to all
rights and preferences then accorded to a holder of Common Stock. The
outstanding shares of freely tradable Common Stock are currently quoted on the
OTC Bulletin Board.
(e) No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby and the issuance of the Securities
do not and will not (i) result in a violation of the Company's Charter or
By-Laws or (ii) conflict with, or constitute a default (or an event which with
notice or lapse of time or both would become a default) under, or give to others
any rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture, patent, patent license or instrument to which the Company
or any of its subsidiaries is a party (collectively, "Company Agreements"), or
(iii) result in a violation of any federal, state, local or foreign law, rule,
regulation, order, judgment or decree (including federal and state securities
laws and regulations) applicable to the Company or any of its subsidiaries or by
which any property or asset of the Company or any of its subsidiaries is bound
or affected, except (other than in the case of clause (i) above) where such
-4-
<PAGE>
violation would not reasonably be expected to have a Material Adverse Effect.
The business of the Company and its direct and indirect subsidiaries is being
conducted in material compliance with (i) its Charter and By-Laws, (ii) all
Company Agreements and (iii) all applicable laws, ordinances or regulations of
any governmental entity, except (other than in the case of clause (i) above)
where such violation would not reasonably be expected to have a Material Adverse
Effect. Except for filings, consents and approvals required under applicable
state and federal securities laws, rules or regulations, or the rules and
regulations of the Approved Markets and covered by the Registration Rights
Agreement, the Company is not required under federal, state, local or foreign
law, rule or regulation to obtain any consent, authorization or order of, or
make any filing or registration with, any court or governmental agency in order
for it to execute, deliver or perform any of its obligations under the
Transaction Documents, or to issue and sell the Securities, except for the
registration provisions provided in the Registration Rights Agreement.
(f) SEC Documents; No Non-Public Information; Financial Statements. The
Common Stock of the Company is registered pursuant to Section 12(g) of the
Exchange Act and the Company and its subsidiaries have filed all reports,
schedules, forms, statements and other documents required to be filed by it with
the SEC pursuant to the reporting requirements of the Exchange Act, including
all such proxy information, solicitation statement and registration statements,
and any amendments thereto required to have been filed as of the Closing Date
(all of the foregoing including filings incorporated by reference therein being
referred to herein as the "SEC Documents"). The Company has not directly or
indirectly provided, and will not directly or indirectly provide, to the
Investors any material non-public information or any information which,
according to applicable law, rule or regulation, should have been disclosed
publicly by the Company but which has not been so disclosed. As of their
respective dates, the SEC Documents complied in all material respects with the
requirements of the Exchange Act and the rules and regulations of the SEC
promulgated thereunder and other federal, state and local laws, rules and
regulations applicable to such SEC Documents, and none of the SEC Documents
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The SEC Documents contain all material information concerning the
Company and its subsidiaries, and no event or circumstance has occurred prior to
the date hereof or will have occurred on the Closing Date which would require
the Company to disclose such event or circumstance in order to make the
statements in the SEC Documents not misleading but which has not, or will have
not, been so disclosed.
(g) Financial Statements. The financial statements of the Company and
its subsidiaries included in the SEC Documents comply as to form and substance
in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC or other applicable rules and
regulations with respect thereto. Such financial statements have been prepared
in accordance with United States generally accepted accounting principles
applied on a consistent basis during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto or (ii) in
the case of unaudited interim statements, to the extent they may not include
footnotes, may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company and its subsidiaries as
of the dates thereof and the results of operations and cash flows for the
periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments). The audited financial statements of each of the
Company and its subsidiaries for the fiscal year ending December 31, 1999 have
-5-
<PAGE>
been prepared in accordance with United States generally accepted accounting
principles applied on a consistent basis during the periods involved (except (i)
as may be otherwise indicated in such financial statements or the notes thereto
or (ii) in the case of unaudited interim statements, to the extent they may not
include footnotes or may be condensed or summary statements) and fairly present
in all material respects the financial position of the Company and its
subsidiaries, as the case may be, as of the dates thereof and the results of
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments).
(h) Principal Exchange/Market. The principal market on which the Common
Stock is currently quoted is the OTC Bulletin Board.
(i) No Material Adverse Change. Except as disclosed in the
Pre-Agreement SEC Documents, since December 31, 1999, no Material Adverse Effect
has occurred or exists, and no event or circumstance has occurred that with
notice or the passage of time or both is reasonably likely to result in a
Material Adverse Effect with respect to the Company or its subsidiaries on a
consolidated basis.
(j) No Undisclosed Liabilities. The Company and its subsidiaries have
no liabilities or obligations not disclosed in the Pre-Agreement SEC Documents
(as defined below), other than those liabilities incurred in the ordinary course
of the Company's or its subsidiaries' respective businesses since December 31,
1999, which liabilities, individually or in the aggregate, do not have a
Material Adverse Effect on the Company or its direct or indirect subsidiaries.
(k) No Undisclosed Events or Circumstances. To the best knowledge of
the Company, no material event or circumstance has occurred or exists with
respect to the Company or its direct or indirect subsidiaries or their
respective businesses, properties, prospects, operations or financial condition,
which, under applicable law, rule or regulation, requires public disclosure or
announcement by the Company but which has not been so publicly announced or
disclosed.
(l) No General Solicitation. Neither the Company, nor any of its
affiliates, or, to its knowledge, any person acting on its or their behalf has
engaged in any form of general solicitation or general advertising (within the
meaning of Regulation D under the Securities Act) in connection with the offer
or sale of the Securities.
(m) No Integrated Offering. Neither the Company, nor any of its
affiliates, nor to its knowledge any person acting on its or their behalf has,
directly or indirectly, made any offers or sales of any security or solicited
any offers to buy any security, under circumstances that would require
registration of the Securities.
The issuance of the Securities to the Investors will not be integrated
with any other issuance of the Company's securities (past, current or future)
which requires stockholder approval under the rules of the NASDAQ National
Market System.
(n) Form S-1. The Company is eligible to file the Registration
Statement (as defined in the Registration Rights Agreement) on Form S-1 under
the Act and rules promulgated thereunder, and Form S-1 is permitted to be used
for the transactions contemplated hereby under the Act and rules promulgated
thereunder.
-6-
<PAGE>
(o) Intellectual Property. The Company and/or its wholly-owned
subsidiaries owns or has licenses to use certain patents, copyrights and
trademarks ("intellectual property") associated with its business. The Company
and its subsidiaries have all intellectual property rights which are needed to
conduct the business of the Company and its subsidiaries as it is now being
conducted or as proposed to be conducted as disclosed in the SEC Documents. The
Company and its subsidiaries have no reason to believe that the material
intellectual property rights which it owns are invalid or unenforceable or that
the use of such intellectual property by the Company or its subsidiaries
infringes upon or conflicts with any right of any third party, and except as
disclosed on Schedule 2.1(o) no director or officer of the Company or any of its
subsidiaries has received notice of any alleged infringement or conflict, which
individually or in the aggregate, would reasonably be expected to have a
Material Adverse Effect if proven true. The Company and its subsidiaries have no
actual knowledge of any infringement of its intellectual property by any third
party.
(p) Poison Pill Provisions. Neither Company nor its wholly-owned
subsidiaries have a stockholder rights plan. None of the acquisition of the
Securities nor the deemed beneficial ownership of shares of Common Stock prior
to, or the acquisition of such shares pursuant to the exercise of the Warrants
will in any event under any circumstance trigger the poison pill provisions of
any other or subsequently adopted plan or agreement, or a substantially similar
occurrence under any successor or similar plan.
(q) No Litigation. Except as set forth in the reports or documents
filed at least 5 Trading Days prior to the Closing Date by the Company pursuant
to Section 13(a) or 15(d) of the Exchange Act (the "Pre-Agreement SEC
Documents"), no litigation or claim (including those for unpaid taxes) against
the Company or any of its subsidiaries is pending or, to the Company's
knowledge, threatened, and no other event has occurred, which if determined
adversely could reasonably be expected to have a Material Adverse Effect on the
Company or could reasonably be expected to materially and adversely affect the
transactions contemplated hereby. There is no legal proceeding described in the
Pre-Agreement SEC Documents that could reasonably be expected to have a Material
Adverse Effect on the Company.
(r) Brokers. The Company has taken no action which would give rise to
any claim by any person, other than The Shemano Group and Koor Underwriters
Ltd., for brokerage commissions, finder's fees or similar payments by the
Company or any Investor relating to this Agreement or the transactions
contemplated hereby. The Company shall be responsible for any payments to all
such brokers.
(s) Other Investors. Except as set forth on Schedule 2.1(s)(i), there
are no outstanding securities issued by the Company that are entitled to
registration rights under the Act. Except as set forth on Schedule 2.1(s)(ii),
there are no outstanding securities issued by the Company that are directly or
indirectly convertible into, exercisable into, or exchangeable for, shares of
Common Stock of the Company, or that have anti-dilution or similar rights that
would be affected by the issuance of any of the Securities.
-7-
<PAGE>
(t) Certain Transactions. Except as disclosed in the Pre-Agreement SEC
Documents and except as disclosed on Schedule 2.1(t), none of the officers,
directors, or key employees of the Company is presently a party to any
transaction with the Company or any of its subsidiaries (other than for services
as employees, officers and directors), including any contract, agreement or
other arrangement providing for the furnishing of services to or by, providing
for rental of real or personal property to or from, or otherwise requiring
payments to or from any officer, director or such employee or, to the knowledge
of the Company, any corporation, partnership, trust or other entity in which any
officer, director, or any such employee has a substantial interest or is an
officer, director, trustee or partner.
(u) Insurance. The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as management of the Company believes to be prudent and
customary in the businesses in which the Company and its direct and indirect
subsidiaries are engaged. Neither the Company nor any such subsidiary has any
reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business without a
significant increase in cost.
(v) No Reliance on Investors. The Company acknowledges and agrees that
each Investor is acting solely in the capacity of an arm's length purchaser with
respect to the Transaction Documents and the transactions contemplated hereby
and thereby. The Company further acknowledges that no Investor is acting as a
financial advisor or fiduciary of the Company (or in any similar capacity) with
respect to the Transaction Documents and the performance hereunder and
thereunder and the transactions contemplated hereby and thereby. The Company
further represents to the Investors that the Company's decision to enter into
the Transaction Documents and the performance hereunder and thereunder has been
based solely on the independent evaluation by the Company and its
representatives.
(w) Foreign Corrupt Practices Act. Neither the Company, nor any
director, officer, agent, employee or other person acting on behalf of the
Company or any subsidiary has, in the course of acting for, or on behalf of, the
Company, directly or indirectly used any corporate funds for any unlawful
contribution, gift, entertainment or other unlawful expenses relating to
political activity; directly or indirectly made any direct or indirect unlawful
payment to any foreign or domestic government or party official or employee from
corporate funds; violated or is in violation of any provision of the U.S.
Foreign Corrupt Practices Act of 1977, as amended, or any similar treaties of
the United States; or directly or indirectly made any bribe, rebate, payoff,
influence payment, kickback or other unlawful payment to any foreign or domestic
government or party official or employee.
(x) Application of Takeover Protections. The Company and its board of
directors have taken all necessary action, if any, in order to render
inapplicable anti-takeover provision contained in the Company's Certificate of
Incorporation or By-Laws or Florida law which is or could become applicable to
the Investors as a result of the transactions contemplated by the Transaction
Documents, including, without limitation, the Company's issuance of the Common
Stock and the Investors' ownership of Common Stock.
-8-
<PAGE>
(y) Acknowledgement of Dilution. The number of shares of Common Stock
constituting the Initial Shares, Anti-Dilution Shares, MDP Shares, Adjustment
Shares, Optional Warrant Shares and Warrant Shares may increase substantially in
certain circumstances. The Company acknowledges that its obligation to issue
shares of Common Stock in accordance with the Transaction Documents is absolute
and unconditional, regardless of the dilution that such issuance may have on
other shareholders of the Company.
Section 2.2 Representations and Warranties of the Investors. Each Investor
as to itself only, hereby makes the following representations and warranties to
the Company as of the Closing Date and as of the date of an exercise of an
Optional Warrant by such Investor:
(a) Organization and Qualification. Such Investor is duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization and is duly qualified to do business and in good standing in each
jurisdiction in which the nature of the business conducted by it makes such
qualification necessary except where the failure to be so qualified or in good
standing would not reasonably be expected to have a Material Adverse Effect on
such Investor.
(b) Authorization; Enforcement. (i) Such Investor has the requisite
power and authority to enter into and perform the Transaction Documents and to
purchase the Securities being sold to it hereunder, (ii) the execution and
delivery of the Transaction Documents by such Investor and the consummation by
it of the transactions contemplated thereby have been duly authorized by all
necessary corporate or partnership action, and (iii) the Transaction Documents
constitute valid and binding obligations of such Investor enforceable against
such Investor in accordance with their terms, except as such enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation or similar laws relating to, or affecting generally the enforcement
of creditors' rights and remedies or by other equitable principles of general
application.
(c) No Conflicts. The execution, delivery and performance of the
Transaction Documents and the consummation by such Investor of the transactions
contemplated thereby do not and will not (i) result in a violation of such
Investor's organizational documents, or (ii) conflict with any agreement,
indenture or instrument to which such Investor is a party, or (iii) result in a
material violation of any law, rule, or regulation, or any order, judgment or
decree of any court or governmental agency applicable to such Investor. Such
Investor is not required to obtain any consent or authorization of any
governmental agency in order for it to perform its obligations under the
Transaction Documents.
(d) Investment Representations.
(i) Access to Other Information. Such Investor acknowledges
that the Company has made available to such Investor the opportunity to
examine such additional documents from the Company and to ask questions
of, and receive full answers from, the Company concerning, among other
things, the Company, its financial condition, its management, its prior
activities and any other information which such Investor considers
relevant or appropriate in connection with entering into this
Agreement.
-9-
<PAGE>
(ii) Risks of Investment. Such Investor acknowledges that the
Securities have not been registered under the Act. Such Investor is
familiar with the provisions of Rule 144 and understands that in the
event all of the applicable requirements of Rule 144 are not satisfied,
registration under the Act or some other exemption from the
registration requirements of the Act will be required in order to
dispose of the Registrable Shares, and that such Investor may be
required to hold the Registrable Shares for a significant period of
time prior to reselling them, subject to the Company successfully
registering the Registrable Shares pursuant to the Registration Rights
Agreement. Such Investor is capable of assessing the risks of an
investment in the Registrable Shares and is fully aware of the economic
risks thereof.
(iii) Investment Representation. Such Investor is purchasing
the Initial Shares and Warrants, and may purchase the, Warrant Shares,
the Adjustment Shares and the Optional Warrant Shares in each case, for
its own account and not with a view to distribution in violation of any
securities laws. Such Investor has no present intention to sell any
Securities in violation of federal or state securities laws and such
Investor has no present arrangement (whether or not legally binding) to
sell any Securities to or through any person or entity; provided,
however, that by making the representations herein, such Investor does
not agree to hold the Securities for any minimum or other specific term
and reserves the right to dispose of the Securities at any time in
accordance with federal and state securities laws applicable to such
disposition.
(iv) Restricted Securities. Such Investor acknowledges and
understands that the terms of issuance have not been reviewed by the
SEC or by any state securities authorities and that the Securities have
been issued in reliance on the certain exemptions for non-public
offerings under the Act, which exemptions depend upon, among other
things, the representations made and information furnished by such
Investor, including the bona fide nature of such Investor's investment
intent as expressed above.
(v) Ability to Bear Economic Risk. Such Investor is an
"accredited" investor as defined in Rule 501 of Regulation D, as
amended, under the Act, and that it (i) is able to bear the economic
risk of its investment in the Securities, (ii) is able to hold the
Securities for an indefinite period of time, (iii) can afford a
complete loss of its investment in the Securities and (iv) has adequate
means of providing for its current needs.
(vi) No Public Solicitation. At no time was such Investor
presented with or solicited by any general mailing, leaflet, public
promotional meeting, newspaper or magazine article, radio or television
advertisement, or any other form of general advertising or general
solicitation in connection with the issuance.
-10-
<PAGE>
(vii) Reliance by the Company. Such Investor understands that
the Securities are being or will be, as the case may be, offered and
sold and will be issued, in reliance on a transactional exemptions from
the registration requirements of federal and state securities laws and
that the Company is relying upon the truth and accuracy of the
representations, warranties, agreements, acknowledgments and
understandings of such Investor set forth herein in order to determine
the applicability of such exemptions and the suitability of such
Investor to acquire the Securities.
(e) Brokers. Except for the brokers listed in Section 2.1(r), such
Investor has taken no action which would give rise to any claim by any person
for brokerage commissions, finder's fees or similar payments by the Company
relating to the Transaction Documents or the transactions contemplated thereby.
All fees and amounts payable to the brokers listed in Section 2.1(r) shall be
solely the responsibility of the Company.
-11-
<PAGE>
ARTICLE III
Covenants
---------
Section 3.1 Registration and Listing; Effective Registration. Until the
earlier of (i) five (5) years from the Closing Date and (ii) the date on which
the Investors neither hold any Registrable Securities nor have the right to
acquire any Registrable Securities, the Company will cause the Common Stock
issuable upon the exercise of the Warrants to continue at all times to be
registered under Section 12(b) or Section 12(g) of the Exchange Act, will comply
in all respects with its reporting and filing obligations under the Exchange
Act, and will not take any action or file any document (whether or not permitted
by the Exchange Act or the rules thereunder) to terminate or suspend such
reporting and filing obligations. Until the earlier of (i) five (5) years from
the Closing Date and (ii) the date on which the Investors neither hold any
Registrable Securities nor have the right to acquire any Registrable Securities,
the Company shall continue the listing and/or quoting of the Registrable
Securities on the OTC Bulletin Board or one of the other Approved Markets and
comply in all respects with the Company's reporting, filing and other
obligations under the bylaws or rules of the Approved Market on which the
Registrable Securities are listed and/or quoted, as the case may be. The Company
shall cause the Registrable Securities to be quoted on the OTC Bulletin Board no
later than the registration of the Registrable Securities under the Act, and at
all times shall continue such listing(s) and/or quoting on one of the Approved
Markets. As used herein and in the other Transaction Documents, the term
"Effective Registration" shall mean: (i) the Company is in compliance with the
Transaction Documents; (ii) the resale of Registrable Securities (as defined in
the Registration Rights Agreement) is covered by an effective registration
statement and such registration statement is not subject to any suspension or
stop orders; (iii) the resale of such securities may be effected pursuant to a
current and deliverable prospectus that is not subject to any blackout or
similar circumstance; (iv) the securities are listed on an Approved Market and
are not subject to any trading suspension; (v) no Interfering Event (as
described in the Registration Rights Agreement) then exists; and (vi) none of
the Company or any direct or indirect subsidiary of the Company is subject to
any bankruptcy, insolvency or similar proceeding.
Section 3.2 Warrants on Exercise. Upon any partial exercise by an
Investor (or then holder of the Warrants) of the Warrants, the Company shall
issue and deliver to such Investor (or holder) within 3 Trading Days of the date
on which such Warrants are exercised, a new Warrant or Warrants representing the
number of adjusted Warrant Shares, Adjustment Shares or Optional Warrant Shares,
as the case may be, in accordance with the terms of such Warrants.
Section 3.3 Replacement Certificates. The certificate(s) representing
the Securities held by any Investor (or then holder) may be exchanged by such
Investor (or such holder) at any time and from time to time for certificates
with different denominations representing an equal aggregate number of
Securities as requested by such Investor (or such holder) upon surrendering the
same. The Company will deliver such substitute certificates within 3 trading
days. No service charge will be made for such registration or transfer or
exchange.
-12-
<PAGE>
Section 3.4 Expenses. The Company shall pay to KKWC in immediately
available funds, at the Closing and promptly upon receipt of any further
invoices relating to the same, all reasonable legal fees and expenses incurred
by the Investors in connection with the transactions contemplated by this
Agreement, the Registration Rights Agreement and the Warrants. At the Closing,
the Company shall pay the amount due for such fees and expenses (which may
include fees and expenses estimated to be incurred for the completion of the
transaction, including post-closing matters). In the event such amount is
ultimately less than actual fees and expenses, the Company shall promptly pay
such deficiency to KKWC upon receipt of an invoice therefor. In lieu thereof,
Halifax Fund, L.P. may pay such amounts due to KKWC, with the amount of such
payment being credited towards the payment of its Purchase Price.
Section 3.5 Securities Compliance. The Company shall notify the SEC, in
accordance with their requirements, of the transactions contemplated by
Transaction Documents, and shall take all other necessary action and proceedings
as may be required and permitted by applicable law, rule and regulation, for the
legal and valid issuance of the Securities.
Section 3.6 Dividends or Distributions; Purchases of Equity Securities. For
so long as any Warrants remain outstanding, the Company agrees that it shall not
(a) declare or pay any dividends or make any distributions to any holder or
holders of Common Stock (other than dividends payable in Common Stock) in their
capacity as shareholders, or (b) purchase or otherwise acquire for value,
directly or indirectly, any shares of Common Stock or other equity security of
the Company; provided that the Company may purchase or acquire shares of Common
Stock that are hereafter issued to employees pursuant to employment, stock
repurchase or other similar agreements.
Section 3.7 Notices. The Company agrees to provide all holders of Warrants
with copies of all notices and information, including without limitation notices
and proxy statements in connection with any meetings, that are provided to the
holders of shares of Common Stock, contemporaneously with the delivery of such
notices or information to such Common Stock holders.
Section 3.8 Use of Proceeds. The Company agrees that the proceeds received
by the Company from the sale of the Initial Shares and Warrants hereunder shall
be used for general corporate purposes.
-13-
<PAGE>
Section 3.9 Notification of Additional Financings; Adjustments. The Company
agrees that until the first anniversary of the Closing Date, the Investors shall
have a right of first refusal with respect to all non-public capital raising
transactions as set forth in this Section 3.9. The Company shall give advance
written notice to the Investors prior to any offer or sale of any of its equity
securities or any securities convertible into or exchangeable or exercisable for
such securities in a non-public capital raising transaction, including, without
limitation, all private placements, equity lines and private financings (each a
"Financing Transaction"). The Investors shall have 10 business days from receipt
of such notice to deliver a written notice to the Company that one or more of
such Investors elects to exercise its right of first refusal. If, subsequent to
the Company giving notice to the Investors hereunder, the terms and conditions
of the proposed Financing Transaction are changed in any way, the Company shall
be required to provide a new notice to the Investors hereunder and the Investors
shall have the right of refusal again to purchase all of the securities in the
offering on such changed terms and conditions as provided hereunder. In such
event, if such other Financing Transaction provides for non-cash consideration,
in whole or in part, from such other potential investor(s), the Investors shall
still have the right to participate in the Financing Transaction as provided
herein, provided that cash or cash equivalents may be substituted by the
Investors for such non-cash consideration. This right of first refusal shall
continue even if the Investors elect not to participate in one or more Financing
Transactions. Notwithstanding anything herein to the contrary, this right of
first refusal shall not apply to issuances of the Company's securities pursuant
to (i) the Company's current or future employee, director or bona fide
consultant options plans and/or compensation arrangements, (ii) strategic
corporate alliances not undertaken principally for financing purposes, and (iii)
revolving or term loans provided to the Company by federal or state chartered
banks or thrifts.
Section 3.10 Reservation of Stock Issuable Upon Exercise of the Warrants.
The Company shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
exercise of the Warrants and the issuance of Anti-Dilution Shares and MDP
Shares, such number of its shares of Common Stock as shall from time to time be
sufficient to effect the full exercise of the Warrants and issuance of the
Anti-Dilution Shares and MDP Shares and if at any time the number of authorized
but unissued shares of Common Stock shall not be sufficient to effect the full
exercise of the Warrants and issuance of the Anti-Dilution Shares and MDP
Shares, the Company will take such corporate action as may, in the opinion of
its counsel, be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such purposes,
including without limitation engaging in best efforts to obtain the requisite
shareholder approval. Without in any way limiting the foregoing, the Company
agrees to reserve and at all times keep available solely for purposes of the
exercise of the Warrants and the issuance of the Anti-Dilution Shares and MDP
Shares such number of authorized but unissued shares of Common Stock that is at
least equal to 150% of the aggregate shares issuable upon exercise of the
Initial Warrants and the Optional Warrants, plus 300% of the number of Initial
Shares, which numbers shall be appropriately adjusted for any stock split,
reverse split, stock dividend or reclassification of the Common Stock. If the
Company falls below the reserves specified in the immediately preceding sentence
and does not cure such non-compliance within 30 days of its start, then the
Investors will be entitled to the compensatory payments specified in Section
2(b)(i) of the Registration Rights Agreement. If at any time the number of
authorized but unissued shares of Common Stock is not sufficient to effect the
full exercise of the Warrants, the Investors shall be entitled to, inter alia,
the premium price redemption rights provided in the Registration Rights
Agreement.
-14-
<PAGE>
Section 3.11 Best Efforts. The parties shall use their best efforts to
satisfy timely each of the conditions described in Article 3 of this Agreement.
Section 3.12 Limitations on Transfers. The Company shall not contribute or
transfer its assets to any of its subsidiaries, other than a subsidiary that has
delivered its guarantee to the Investors in form and substance satisfactory to
the Investors.
Section 3.13 Form D; Blue Sky Laws. The Company agrees to file a Form D
with respect to the Securities, as required under Regulation D and to provide a
copy thereof to each Investor promptly after such filing. The Company shall, on
or before the Closing Date, take such action as the Company shall have
reasonably determined is necessary to qualify the applicable Securities for sale
to the Investors at the Closing pursuant to this Agreement under applicable
securities or "blue sky" laws of the states of the United States (or to obtain
an exemption from such qualification), and shall provide evidence of any such
action so taken to each Investor on or prior to the Closing Date.
Section 3.14 Nasdaq Rule. The Investors shall, in the aggregate, be
entitled to exercise Adjustment Warrants (with respect to the Initial Shares
only) for Adjustment Shares and receive Anti-Dilution Shares resulting in a
total of 10,295,171 shares of Common Stock (19.99% of the Common Stock issued
and outstanding on the date hereof, which number shall be subject to
readjustment for any stock split, stock dividend or reclassification of the
Common Stock) (the "20% Cap"). Each Investor shall be entitled to receive
Adjustment Shares and Anti-Dilution Shares such that, together with its Initial
Shares, it will own such total number of shares of Common Stock equal to such
Investor's pro rata share of the 20% Cap. An Investor shall have the right to
receive cash payments from the Company for all shares of Common Stock that this
Section 3.14 renders the Company incapable of issuing to such Investor
("Deficiency Shares") at the Premium Redemption Price for such Deficiency Shares
(as defined in the Registration Rights Agreement). If an Investor has received
its Adjustment Shares and Anti-Dilution Shares but has not depleted the total
number of pro rata shares allocated to it, its remaining pro rata shares shall
be reallocated amongst the Investors still to receive Adjustment Shares and/or
Anti-Dilution Shares on a pro rata basis. If applicable, the restrictions and
redemption obligations set forth in this Section 3.14 shall cease to apply if
(a) the Company obtains written shareholder approval to issue Common Shares in
excess of the 20% Cap pursuant to Nasdaq Rule 4460 or (b) the Company provides
the Investors with irrevocable written notice, based upon the advice of its
counsel, that any such issuance of Common Shares is not subject to the 20% Cap
pursuant to Nasdaq Rule 4460. The Company will use its best efforts promptly to
obtain either the shareholder approval or the irrevocable notice described in
the preceding sentence and to provide the Investors with a copy of same. Without
limiting the foregoing, the Company shall solicit the aforementioned shareholder
approval at the next shareholders meeting (for whatever purpose it may be
called) which, in any event, shall not be later than December 31, 2000 in which
the Company will solicit the aforementioned shareholder approval, will solicit
proxies in favor of issuing Common Shares in excess of the 20% Cap and will use
its best efforts to have all affiliates of the Company which own or control
shares of Common Stock to vote their shares in favor of such resolution.
-15-
<PAGE>
Section 3.15 Transactions With Affiliates. The Company agrees that any
transaction or arrangement between it or any of its subsidiaries and any
affiliate or employee of the Company shall be effected on an arms' length basis
in accordance with customary commercial practice and, except with respect to
grants of options and stock to service providers, including employees, shall be
approved by a majority of the Company's outside directors.
Section 3.16 Press Release. Immediately following the Closing, the Company
shall issue a press release in the form set forth in Exhibit 3.16 hereto.
Investors shall have the opportunity to review such press release prior to its
issuance. No press release shall name the Investors except as shall be required
by law. If the Company fails to issue a press release within 2 business days of
the Closing, the Investors may issue a press release covering the Closing and
complying with any legal requirement applicable to the Investors.
Section 3.17 Reporting Lack of Effective Registration. The Company shall
promptly notify each Investor in writing if there shall ever be a lack of
Effective Registration, as well as when Effective Registration is
re-established.
Section 3.18 Rule 144. With a view to making available to the Investors the
benefits of Rule 144 promulgated under the 1933 Act or any other similar rule or
regulation of the SEC that may at any time permit the Investors to sell
securities of the Company to the public without registration ("Rule 144"), the
Company agrees, until such time as all of the Securities may be freely sold to
the public under Rule 144(k) (or any successor thereto), to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the 1934 Act so long as the
Company remains subject to such requirements (it being understood that nothing
herein shall limit any of the Company's other obligations under this Agreement
and the filing of such reports and other documents is required for the
applicable provisions of Rule 144); and
(c) furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144, the Act and the
1934 Act, (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the Company, and (iii)
such other information as may be reasonably requested to permit the investors to
sell such securities pursuant to Rule 144 without registration.
Section 3.19 The Company agrees to use its best efforts to have the Common
Stock listed on the NASDAQ National Market System as expeditiously as possible.
-16-
<PAGE>
ARTICLE IV
Conditions to Closings
----------------------
Section 4.1 Conditions Precedent to the Obligation of the Company to Sell.
The obligation hereunder of the Company to issue and/or sell the Initial Shares
and Warrants to the Investors at the Closing is subject to the satisfaction at
or before the Closing of each of the applicable conditions set forth below.
These conditions are for the Company's sole benefit and may be waived by the
Company at any time in its sole discretion.
(a) Accuracy of the Investors' Representations and Warranties. The
representations and warranties of the Investors will be true and correct as of
the date when made and as of the Closing Date.
(b) Performance by the Investors. The Investors shall have performed
all agreements and satisfied all conditions required to be performed or
satisfied by the Investors at or prior to the Closing including payment of the
applicable purchase price.
(c) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction which
prohibits the consummation of any of the transactions contemplated by the
Transaction Documents.
Section 4.2 Conditions Precedent to the Obligation of the Investors to
Purchase. The obligation hereunder of the Investors to acquire and pay for the
Initial Shares and Warrants at the Closing is subject to the satisfaction, at or
before the Closing, of each of the applicable conditions set forth below. These
conditions are for the Investors' benefit and may be waived by the Investors at
any time in their sole discretion.
(a) Accuracy of the Company's Representations and Warranties. The
representations and warranties of the Company shall be true and correct as of
the date when made and as of the Closing date as though made at that time
(except for representations and warranties expressly as of an earlier date,
which shall be true and correct in all material respects as of such date).
(b) Performance by the Company. The Company shall have performed all
agreements and satisfied all conditions required to be performed or satisfied by
the Company at or prior to the Closing, including, without limitation, delivery
of certificates representing the applicable Securities.
(c) Trading and/or Quotation. Trading in and/or quotation of the
Company's Common Stock shall not have been suspended by the SEC and trading in
securities generally as reported by the Principal Market (or other Approved
Market) shall not have been suspended or limited, and the Common Stock shall be
listed on an Approved Market.
(d) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction which
prohibits the consummation of any of the transactions contemplated by
Transaction Documents. The NASD shall not have objected or indicated that it may
object to the consummation of any of the transactions contemplated by this
Agreement.
-17-
<PAGE>
(e) Opinion of Counsel. The Investors shall have received an opinion of
counsel to the Company in the applicable form attached hereto as Exhibit 4.2(e)
and such other opinions, certificates and documents as the Investors or their
counsel shall reasonably require incident to the closing.
(f) Registration Rights Agreement. The Company and the Investors shall
have executed and delivered the Registration Rights Agreement in the form and
substance of Exhibit 4.2(f) attached hereto.
(g) Officer's Certificate. The Company shall have delivered to the
Investors a certificate in form and substance satisfactory to the Investors and
the Investors' counsel, executed by an officer of the Company, certifying as to
satisfaction of applicable closing conditions, incumbency of signing officers,
and the true, correct and complete nature of the Certificate of Incorporation,
By-laws, good standing and authorizing resolutions of the Company.
(h) Diligence. The Investors shall have completed their business,
financial and legal due diligence to their sole satisfaction.
(i) Miscellaneous. The Company shall have delivered to the Investors
such other documents relating to the transactions contemplated by this Agreement
as the Investors or their counsel may reasonable request.
Section 4.3 Closing Date Deliveries.
(a) On the Closing Date, the Company shall deliver to the Investor:
(i) Certificates representing the Initial Shares;
(ii) Warrants in the form attached as Annex A, Annex B and
Annex C;
(iii) The certificate referred to in Section 4.2(g) above;
(iv) The executed Registration Rights Agreement; and
(v) The opinion of counsel referred to in Section 4.2(e)
above.
(b) On the Closing Date, the Investors shall deliver to the Company:
(i) The Purchase Price set forth on Schedule I hereto; and
(ii) The executed Registration Rights Agreement.
-18-
<PAGE>
ARTICLE V
Legend and Stock
----------------
Each certificate representing the Common Stock issued hereunder shall
be stamped or otherwise imprinted with a legend substantially in the following
form:
THESE SECURITIES HAVE NOT BEEN REGISTERED FOR OFFER OR SALE UNDER THE
SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR
OFFERED FOR SALE EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAW OR AN APPLICABLE EXEMPTION FROM
SUCH REGISTRATION REQUIREMENTS.
The Company agrees to reissue within 3 trading days certificates for
Common Stock without the legend set forth above at such time as such Common
Stock (i) is sold to a purchaser or purchasers who (in the opinion of counsel to
the seller or such purchaser(s), in form and substance reasonably satisfactory
to the Company and its counsel) are able to dispose of such shares publicly
without registration under the Act, (ii) are registered pursuant to an effective
registration statement, or (iii) may be sold pursuant to Rule 144.
Any Common Stock issued pursuant to exercise of Warrants shall bear a
legend in the same form as the legend indicated above; provided that such legend
shall be removed from the Common Stock and the Company shall issue new
certificates without such legend if (i) such Common Stock is registered for
resale under the 1933 Act, (ii) such Common Stock may be sold pursuant to Rule
144, or (iii) such Common Stock is sold to a purchaser or purchasers who (in the
opinion of counsel to the seller or such purchaser(s), in form and substance
reasonably satisfactory to the Company and it counsel) are able to dispose of
such shares publicly without registration under the 1933 Act. Upon the
applicable trade date of each such sale, the Company agrees to issue within 3
trading days new certificates representing such Common Stock without such
legend. The Investors agree to sell the Common Stock represented by the new
certificates in accordance with the applicable prospectus delivery requirements
(if copies of a current prospectus are provided to the Investors by the Company)
or in accordance with an exemption from the registration requirements of the
1933 Act.
Nothing herein shall limit the right of any holder to pledge these
securities pursuant to a bona fide margin account or lending arrangement entered
into in compliance with law, including applicable securities laws.
ARTICLE VI
Indemnification
---------------
(a) In consideration of the Investors' execution and delivery of this
Agreement, the Warrants and the Registration Rights Agreement and in addition to
all of the Company's other obligations under the Transaction Documents, the
Company shall defend, protect, indemnify and hold harmless the Investors and all
of their partners, officers, directors, employees, members and direct or
indirect investors and any of the foregoing persons' agents or other
representatives (including, without limitation, those retained in connection
with the transactions contemplated by this Agreement) (collectively, the
"Indemnitees") from and against any and all actions, causes of action, suits,
-19-
<PAGE>
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in
connection therewith (irrespective of whether any such Indemnitee is a party to
the action for which indemnification hereunder is sought), and including
reasonable attorneys' fees and disbursements (the "Indemnified Liabilities"),
incurred by any Indemnitee as a result of, or arising out of, or relating to (a)
any misrepresentation or breach of any representation or warranty made by the
Company in the Transaction Documents or any other certificate or document
contemplated hereby or thereby, (b) any breach of any covenant, agreement or
obligation of the Company contained in the Transaction Documents or any other
certificate or document contemplated hereby or thereby, and (c) any cause of
action, suit or claim brought or made against such Indemnitee by a third party
and arising out of or resulting from (i) the execution, delivery, performance,
breach by the Company or enforcement of the Transaction Documents or any other
certificate, instrument or document contemplated hereby or thereby, (ii) any
transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Securities or (iii) the
status of the Investor or holder of the Securities or Warrants as investors in
the Company, and (d) the enforcement of this Section. Notwithstanding the
foregoing, Indemnified Liabilities shall not include any liability of any
Indemnitee arising solely out of such Indemnitee's willful misconduct or
fraudulent action(s). To the extent that the foregoing undertaking by the
Company may be unenforceable for any reason, the Company shall make the maximum
contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law. Except as otherwise set
forth herein, the mechanics and procedures with respect to the rights and
obligations under this Article VIII shall be the same as those set forth in
Section 6 (other than Section 6(b)) of the Registration Rights Agreement,
including, without limitation, those procedures with respect to the settlement
of claims and Company's right to assume the defense of claims.
(b) In consideration of the Company's execution and delivery of this
Agreement, the Warrants and the Registration Rights Agreement, each Investor,
severally and not jointly, shall defend, protect, indemnify and hold harmless
the Company and all of its officers, directors and employees, and any of the
foregoing persons' agents or other representatives (including, without
limitation, those retained in connection with the transactions contemplated by
this Agreement) (collectively, the "Indemnitees") from and against any and all
actions, causes of action, suits, claims, losses, costs, penalties, fees,
liabilities and damages, and expenses in connection therewith (irrespective of
whether any such Indemnitee is a party to the action for which indemnification
hereunder is sought), and including reasonable attorneys' fees and disbursements
(the "Indemnified Liabilities"), incurred by any Indemnitee as a result of, or
arising out of, or relating to (a) any misrepresentation or breach of any
representation or warranty made by such Investor in the Transaction Documents or
any other certificate or document contemplated hereby or thereby, (b) any breach
of any covenant, agreement or obligation of such Investor contained in the
Transaction Documents or any other certificate or document contemplated hereby
or thereby, and (c) the enforcement of this Section. Notwithstanding the
foregoing, Indemnified Liabilities shall not include any liability of any
Indemnitee arising solely out of such Indemnitee's willful misconduct or
fraudulent action(s). To the extent that the foregoing undertaking by an
Investor may be unenforceable for any reason, such Investor shall make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law. Except as otherwise set
forth herein, the mechanics and procedures with respect to the rights and
obligations under this Article VIII shall be the same as those set forth in
Section 6 (other than Section 6(a)) of the Registration Rights Agreement,
adjusted as applicable. Notwithstanding the above, in no event shall an
Investor's indemnification obligations under this Agreement exceed such
Investor's Purchase Price.
-20-
<PAGE>
ARTICLE VII
Adjustments; 9.99% Limitation.
------------------------------
Section 7.1 Purchase Price Adjustments.
(a) Required Adjustments. Subject to the exclusions contained in
Section 7.1(f) below, if during the MFN Period (defined below) the Company
issues or sells any shares of Common Stock at a Per Share Selling Price (as
defined below) lower than either (i) the Share Purchase Price, or (ii) at a
discount from Fair Market Value greater than 10%, the Share Purchase Price of
the Initial Shares and the Optional Warrant Shares sold to the Investors
hereunder shall be adjusted downward (the "Adjusted Per Share Purchase Price")
to equal the lower of (x) such lower Per Share Selling Price or (y) the product
of (A) the Share Purchase Price divided by .9 and (B) 1.00 minus the discount
from Fair Market Value (as defined in the Initial Warrant) in such transaction
(expressed as a fraction) and the Investors shall be entitled to receive the
additional shares (the "Anti-Dilution Shares") as provided by Section 7.1(c),
subject to Section 7.1(d). The Company shall give the Investors written notice
of, and issue a press release announcing, any such sale within 24 hours of the
closing of any such sale.
(b) Definitions.
(i) For the purposes of this Section 7.1, the term "Per Share
Selling Price" shall include the amount actually paid by third parties
for each share of Common Stock. A sale of shares of Common Stock shall
include the sale or issuance of rights, options, warrants or
convertible securities under which the Company is or may become
obligated to issue shares of Common Stock, and in such circumstances
the Per Share Selling Price of the Common Stock covered thereby shall
also include the exercise or conversion price thereof (in addition to
the consideration received by the Company upon such sale or issuance
less the fee amount as provided above). In case of any such security
issued within the MFN Period in a "Variable Rate Transaction" or an
"MFN Transaction" (each as defined below), the Per Share Selling Price
shall be deemed to be the lowest conversion or exercise price at which
such securities are converted or exercised or might have been converted
or exercised in the case of a Variable Rate Transaction, or the lowest
adjustment price in the case of an MFN Transaction, over the life of
such securities. If shares are issued for a consideration other than
cash, the Per Share Selling Price shall be the fair value of such
consideration as determined in good faith by independent certified
public accountants mutually acceptable to the Company and the
Investors.
-21-
<PAGE>
(ii) The term "Variable Rate Transaction" shall mean a
transaction in which the Company issues or sells (a) any debt or equity
securities that are convertible into, exchangeable or exercisable for,
or include the right to receive additional shares of Common Stock
either (x) at a conversion, exercise or exchange rate or other price
that is based upon and/or varies with the trading prices of or
quotations for the Common Stock at any time after the initial issuance
of such debt or equity securities, or (y) with a fixed conversion,
exercise or exchange price that is subject to being reset at some
future date after the initial issuance of such debt or equity security
or upon the occurrence of specified or contingent events directly or
indirectly related to the business of the Company or the market for the
Common Stock (but excluding standard stock split anti-dilution
provisions), or (b) any securities of the Company pursuant to an
"equity line" structure which provides for the sale, from time to time,
of securities of the Company which are registered for resale pursuant
to the Act.
(iii) The term "MFN Transaction" shall mean a transaction in
which the Company issues or sells any securities in a capital raising
transaction or series of related transactions (the "New Offering")
which grants to the investor (the "New Investor") the right to receive
additional securities based upon future capital raising transactions of
the Company on terms more favorable than those granted to the New
Investor in the New Offering.
(iv) The term "MFN Period" shall mean, with respect to the
Initial Shares, the period commencing on the Closing Date and ending on
the second anniversary of the Closing Date, and with respect to the
Optional Warrant Shares, the period commencing on the date the Investor
receives such shares and ending on the second anniversary of such date.
(c) Adjustment Mechanism. Subject to Section 7.1(d) below, if an
adjustment of the Share Purchase Price is required pursuant to Section 7.1(a),
the Company shall deliver to the Investors within 10 business days of the
closing of the transaction giving rise to the adjustment (as may be adjusted
pursuant to Section 7.1(d) below, the "Delivery Date") each Investor's pro-rata
share of such number of additional shares of Common Stock equal to (i) the
Purchase Price paid by the Investor divided by the Adjusted Per Share Purchase
Price as required under Section 7.1(a), minus (ii) the sum of (x) the total
number of Initial Shares or Optional Warrant Shares, as applicable, and (y)
Anti-Dilution Shares previously delivered to that Investor hereunder with
respect to such shares; provided however, that the Company shall effect such
adjustment in cash, in whole or in part, to the extent required by Section
7.1(d). In the event the Company fails to deliver the additional shares by the
Delivery Date, the Company shall be liable to the Investors for a Monthly Delay
Payment (as defined in the Registration Rights Agreement) with respect to such
additional shares.
-22-
<PAGE>
(d) Limitation on Number of Shares.
(i) Notwithstanding anything to the contrary contained herein,
the number of Anti-Dilution Shares and MDP Shares that may be acquired
by any Investor shall not exceed a number that, when added to the total
number of shares of Common Stock deemed beneficially owned by such
Investor (other than by virtue of the ownership of securities or rights
to acquire securities (including this Section 7.1) that have
limitations on the Investor's right to convert, exercise or purchase
similar to the limitation set forth herein), together with all shares
of Common Stock deemed beneficially owned (other than by virtue of the
ownership of securities or rights to acquire securities that have
limitations on the right to convert, exercise or purchase similar to
the limitation set forth herein) by the holder's "affiliates" (as
defined in Rule 144) ("Aggregation Parties") that would be aggregated
for purposes of determining whether a group under Section 13(d) of the
Securities Exchange Act of 1934 as amended, exists, would exceed 9.99%
of the total issued and outstanding shares of the Common Stock (the
"Restricted Ownership Percentage"). Each holder shall have the right
(w) at any time and from time to time to reduce its Restricted
Ownership Percentage immediately upon notice to the Company and (x)
(subject to waiver) at any time and from time to time, to increase its
Restricted Ownership Percentage immediately in the event of the
announcement as pending or planned, of a change of control transaction
(including without limitation a transaction that would result in a
transfer of more than 50% of the Company's voting power or equity, or a
transaction that would result in a person or "group" being deemed the
beneficial owner of 50% or more of the Company's voting power or
equity).
(ii) Each Investor covenants at all times on each day (each
such day being referred to as a "Covenant Day") as follows: During the
balance of such Covenant Day and the succeeding sixty-one (61) days
(the balance of such Covenant Day and the succeeding 61 days being
referred to as the "Covenant Period") such Investor will not acquire
shares of Common Stock pursuant to any right (including pursuant to
this Section 7.1) existing at the commencement of the Covenant Period
to the extent the number of shares so acquired by such Investor and its
Aggregation Parties (ignoring all dispositions) would exceed:
(x) the Restricted Ownership Percentage of the total number of
shares of Common Stock outstanding at the commencement of
the Covenant Period, minus
(y) the number of shares of Common Stock actually owned by
such Investor and its Aggregation Parties at the
commencement of the Covenant Period.
-23-
<PAGE>
A new and independent covenant will be deemed to be given by the Investor as of
each moment of each Covenant Day. No covenant will terminate, diminish or modify
any other covenant. The Investor agrees to comply with each such covenant. This
Section 7.1(d)(ii) controls in the case of any conflict with any other provision
of this Agreement or any agreement entered into in connection herewith.
(iii) The Company's obligation to issue Common Stock which
would exceed such limits referred to in this Section 7.1(d) shall be
suspended to the extent necessary until such time, if any, as shares of
Common Stock may be issued in compliance with such restrictions.
(iv) If by way of any adjustment required by this Section 7.1,
the Investor would receive a number of shares of Common Stock such that
the total number of such shares held by the Investor as of the date of
such adjustment would equal or exceed the Restricted Ownership
Percentage, then the Company shall not effect the adjustment required
by this Section only to the extent necessary to avoid causing the
aforesaid limitation to be exceeded. With respect to such shares of
Common Stock which may not be issued to an Investor on the Delivery
Date due to the limitation contained in this paragraph ("Excess
Shares"), the Delivery Date for such Excess Shares, or any portion
thereof from time to time as specified by the Investor, shall be
extended to such date which is 8 calendar days following delivery of
written notice to the Company from the Investor stating that the Excess
Shares (or such portion thereof), are no longer subject to the
limitation contained in this paragraph since such Excess Shares (or
portion thereof) may be issued without violating the Restricted
Ownership Percentage.
(e) Capital Adjustments. In case of any stock split or reverse stock
split, stock dividend, reclassification of the common stock, recapitalization,
merger or consolidation, or like capital adjustment affecting the Common Stock
of the Company, the provisions of Section 7.1 shall be applied in a fair,
equitable and reasonable manner so as to give effect, as nearly as may be, to
the purposes hereof.
(f) Exclusions. Section 7.1(a) shall not apply to:
(i) sales of shares of Common Stock by the Company pursuant to
the provisions of any existing option, compensation or similar plan or
agreement heretofore adopted by the Company; provided, that the primary
purpose of any such plan or agreement is not the raising of capital;
-24-
<PAGE>
(ii) sales of shares of Common Stock by the Company upon
conversion or exercise of any convertible securities, options or
warrants outstanding prior to the date hereof; or
(iii) sales of shares of Common Stock by the Company (in one
or more tranches to the same or different purchasers) that, in the
aggregate, have a fair market value of less than $500,000 at the
time(s) they are sold.
(g) Rule 144. The Company agrees to take the position that, for
purposes of determining the holding period under Rule 144 for Anti-Dilution
Shares and MDP Shares, the holding period of such shares shall be tacked to the
holding period of the Initial Shares.
ARTICLE VIII
Governing Law; Miscellaneous.
-----------------------------
Section 8.1 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS TO BE EXECUTED AND PERFORMED EXCLUSIVELY IN NEW YORK. EACH PARTY
HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND
FEDERAL COURTS SITTING IN THE CITY OF NEW YORK, BOROUGH OF MANHATTAN, FOR THE
ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR WITH ANY
TRANSACTION CONTEMPLATED HEREBY OR DISCUSSED HEREIN, AND HEREBY IRREVOCABLY
WAIVES, AND AGREES NOT TO ASSERT IN ANY SUIT, ACTION OR PROCEEDING, ANY CLAIM
THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY SUCH COURT, THAT
SUCH SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE
VENUE OF SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER. EACH PARTY HEREBY
IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO PROCESS BEING
SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF TO SUCH
PARTY AT THE ADDRESS FOR SUCH NOTICES TO IT UNDER THIS AGREEMENT AND AGREES THAT
SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE
THEREOF. NOTHING CONTAINED HEREIN SHALL BE DEEMED TO LIMIT IN ANY WAY ANY RIGHT
TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW. IF ANY PROVISION OF THIS
AGREEMENT SHALL BE INVALID OR UNENFORCEABLE IN ANY JURISDICTION, SUCH INVALIDITY
OR UNENFORCEABILITY SHALL NOT AFFECT THE VALIDITY OR ENFORCEABILITY OF THE
REMAINDER OF THIS AGREEMENT IN THAT JURISDICTION OR THE VALIDITY OR
ENFORCEABILITY OF ANY PROVISION OF THIS AGREEMENT IN ANY OTHER JURISDICTION.
EACH PARTY HEREBY WAIVES ALL RIGHTS TO TRIAL BY JURY.
Section 8.2 Counterparts. This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party; provided that a facsimile signature
shall be considered due execution and shall be binding upon the signatory
thereto with the same force and effect as if the signature were an original, not
a facsimile signature.
-25-
<PAGE>
Section 8.3 Headings. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
Section 8.4 Severability. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
Section 8.5 Entire Agreement; Amendments; Waivers.
(a) This Agreement supersedes all other prior oral or written
agreements between the Investors, the Company, their affiliates and persons
acting on their behalf with respect to the matters discussed herein, and this
Agreement and the instruments referenced herein (including the other Transaction
Documents) contain the entire understanding of the parties with respect to the
matters covered herein and therein and, except as specifically set forth herein
or therein, neither the Company nor the Investors make any representation,
warranty, covenant or undertaking with respect to such matters. No provision of
this Agreement may be amended other than by an instrument in writing signed by
the Company and the Investor, and no provision hereof may be waived other than
by an instrument in writing signed by the party against whom enforcement is
sought.
(b) The Investors may at any time elect, by notice to the Company, to
waive (whether permanently or temporarily, and subject to such conditions, if
any, as the Investors may specify in such notice) any of their respective rights
(but not obligations) under any of the Transaction Documents to acquire shares
of Common Stock from the Company, in which event such waiver shall be binding
against the Investors in accordance with its terms.
Section 8.6 Notices. Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Agreement must be in
writing, must be delivered by (i) courier, mail or hand delivery or (ii)
facsimile, and will be deemed to have been delivered upon receipt. The addresses
and facsimile numbers for such communications shall be:
-26-
<PAGE>
If to the Company:
Constellation 3D, Inc.
230 Park Avenue
Suite 453
New York, New York 10169
Telephone: 212-983-1107
Facsimile: 212-983-1108
Attention: Eugene Levich, President
with a copy to:
Blank Rome Comisky & McCauley LLP
One Logan Square
Philadelphia, PA 19103
Telephone: 215-569-5754
Facsimile: 215-569-5628
Attention: Alan L. Zeiger, Esq.
If to the Investors:
To each Investor at the address and/or fax number set
forth in Schedule I of this Agreement.
with a copy to:
Kleinberg, Kaplan, Wolff & Cohen, P.C.
551 Fifth Avenue
New York, New York 10176
Telephone: 212-986-6000
Facsimile: 212-986-8866
Attention: Stephen M. Schultz, Esq.
Each party shall provide five (5) days prior written notice to the
other party of any change in address, telephone number or facsimile number.
Written confirmation of receipt (A) given by the recipient of such notice,
consent, waiver or other communication, (B) mechanically or electronically
generated by the sender's facsimile machine containing the time, date, recipient
facsimile number and an image of the first page of such transmission or (C)
provided by a nationally recognized overnight delivery service shall be
rebuttable evidence of personal service, receipt by facsimile or receipt from a
nationally recognized overnight delivery service in accordance with clause (i),
(ii) or (iii) above, respectively.
Section 8.7 Successors and Assigns. Except as otherwise provided herein,
this Agreement shall be binding upon and inure to the benefit of the parties and
their respective successors and assigns. An Investor may assign some or all of
its rights hereunder without the consent of the Company in connection with any
sale or transfer of all or any portion of the Securities held by such Investor.
Section 8.8 No Third Party Beneficiaries. This Agreement is intended for
the benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
-27-
<PAGE>
Section 8.9 Survival. The representations, warranties and agreements of the
Company and the Investors contained in the Agreement shall survive the Closing.
Section 8.10 Further Assurances. Each party shall do and perform, or cause
to be done and performed, all such further acts and things, and shall execute
and deliver all such other agreements, certificates, instruments and documents,
as the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
Section 8.11 Remedies. Each Investor and each Permitted Assignee shall have
all rights and remedies set forth in this Agreement, the Warrants and the
Registration Rights Agreement and all rights and remedies which such holders
have been granted at any time under any other agreement or contract and all of
the rights which such holders have under any law. Any person having any rights
under any provision of this Agreement shall be entitled to enforce such rights
specifically (without posting a bond or other security), to recover damages by
reason of any breach of any provision of this Agreement and to exercise all
other rights granted by law. Each Investor and each Permitted Assignee without
prejudice may withdraw, revoke or suspend its pursuit of any remedy at any time
prior to its complete recovery as a result of such remedy.
Section 8.12 Days. Unless the context refers to "business days" or "trading
days," all references herein to "days" shall mean calendar days.
Section 8.13 Rescission and Withdrawal Right. Notwithstanding anything to
the contrary contained in (and without limiting any similar provisions of) the
Transaction Documents, wherever the Investors exercise a right, election, demand
or option under a Transaction Document and the Company does not timely perform
its related obligations within the periods therein provided, then the Investors
may rescind or withdraw, in their sole discretion from time to time upon written
notice to the Company, any such notice, demand or election in whole or in part
without prejudice to its future actions and rights.
Section 8.14 Obligations Absolute. The Company's obligations under the
Transaction Documents are unconditional and absolute and not subject to any
right of set off, counterclaim, delay or reduction. This Section 8.14 shall not
be deemed a waiver by the Company of any of its rights at law under this
Agreement to sue an Investor for a breach of its representations, warranties,
covenants and/or obligations under this Agreement.
Section 8.15 Publicity. The Company agrees that it will not disclose, and
will not include in any public announcement, the name of any Investor without
the express written agreement of such Investor (such agreement not to be
unreasonably withheld), unless and until such disclosure is required by law or
applicable regulation, and then only to the extent of such requirement. The
Company agrees that it will deliver a copy of any public announcement regarding
the matters covered by this Agreement or any agreement and document executed
herewith to each Investor and any public announcement including the name of an
Investor to such Investor, reasonably in advance of the release of such
announcements.
Section 8.16 Like Treatment of Investors and Holders. Neither the Company
nor any of its affiliates shall, directly or indirectly, pay or cause to be paid
any consideration (immediate or contingent), whether by way of interest, fee,
payment for the redemption, conversion of Debentures or exercise of the
Securities, or otherwise, to any Investor or holder of Securities, for or as an
-28-
<PAGE>
inducement to, or in connection with the solicitation of, any consent, waiver or
amendment. of any terms or provisions of the Transaction Documents, unless such
consideration is required to be paid to all Investors or holders of Securities
bound by such consent, waiver or amendment. The Company shall not, directly or
indirectly, redeem any Securities unless such offer of redemption is made pro
rata to all Investors or holders of Securities, as the case may be, on identical
terms.
Section 8.17 Actions of Investors. Notwithstanding anything herein to the
contrary, the actions and obligations of the Investors hereunder shall at all
times be considered several and not joint, and the Investors are, under no
circumstances, agreeing to act jointly with respect to the Securities or any of
their actions or obligations under the Transaction Documents.
* * * * *
[Signature Page Follows]
-29-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Common Stock
Investment Agreement to be duly executed as of the date and year first above
written.
CONSTELLATION 3D, INC.
By: /s/ E. Levich
------------------------------------------
Name: Eugene Levich
Title: President
INVESTORS:
HALIFAX FUND, L.P.
By: /s/ Steven W. Weiner
------------------------------------------
Name: Steven Weiner
Title: Managing Director
The Palladin Group, L.P.
As Investment Advisor
Signature page to Common Stock Investment Agreement
-30-
<PAGE>
List of Schedules
-----------------
Schedule 1 List of Investors
Schedule 2.1(c) Reservation of Common Shares and Preemptive Rights
Schedule 2.1(c)(i) Convertible Securities
Schedule 2.1(o) Intellectual Property
Schedule 2.1(s)(i) Outstanding securities entitled to registration rights
Schedule 2.1(s)(ii) Outstanding securities affected by the issuance
of Securities
Schedule 2.1(t) Certain Transactions
List of Exhibits
----------------
Exhibit 3.16 Press Release
Exhibit 4.2(e) Opinion of Counsel
Exhibit 4.2(f) Registration Rights Agreement
Annexes
-------
Annex A Initial Warrant
Annex B Adjustment Warrant
Annex C Optional Warrant
-31-
<PAGE>
SCHEDULE 1
----------
<TABLE>
<CAPTION>
Number of Number of
Investor Address Initial Shares Initial Warrants Purchase Price
-------- ------- -------------- ---------------- --------------
<S> <C> <C> <C> <C>
Halifax Fund, L.P. c/o The Palladin Group, L.P. 492,459 196,984 $5,000,000
195 Maplewood Avenue
Maplewood, N.J. 07040
Attention: Steve Weiner
Telephone: (973) 313-6478
</TABLE>
