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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K/A
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File No. 0-28081
CONSTELLATION 3D, INC.
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(Exact Name of Registrant as Specified in its Charter)
Florida 13-4064492
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
230 Park Avenue, Suite 453, New York, New York 10169
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(Address of Principal Executive Offices) (Zip Code)
(212) 983-1107
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(Registrant's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Title of Each Class Name of Each Market on Which Registered
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Common Stock, par value National Association of Securities
$.001 per share Dealers' Over-the-Counter Bulletin
Board Quotation Service
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of the shares of common stock of the
registrant (the "Common Stock") on March 27, 2000 as reported by the National
Association of Securities Dealers' Over-the-Counter Bulletin Board quotation
service, was approximately $526,774,014. Shares of Common Stock held by each
officer and director and by each person who owns 5% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The number of outstanding shares of the registrant's Common Stock on March 27,
2000 was 46,501,609, including the 5,500,000 shares of Common Stock issued to
Constellation 3D Trust LLC, a Delaware limited liability company wholly owned by
the registrant. EXCEPT WHERE AND AS OTHERWISE STATED TO THE CONTRARY IN THIS
ANNUAL REPORT, ALL SHARE AND OPTION AMOUNTS, PRICES PER SHARE, EXERCISE PRICES
AND VOTE TABULATIONS HAVE BEEN ADJUSTED TO GIVE RETROACTIVE EFFECT TO THE CHANGE
IN THE PRICE PER SHARE OF THE COMMON STOCK RESULTING FROM THE THREE-FOR-ONE
FORWARD SPLIT OF THE COMMON STOCK THAT TOOK EFFECT ON JANUARY 18, 2000.
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TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS................................................................................ 1
ITEM 2. PROPERTIES.............................................................................. 25
ITEM 3. LEGAL PROCEEDINGS....................................................................... 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................... 26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................... 27
ITEM 6. SELECTED FINANCIAL DATA................................................................. 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR
CONSTELLATION 3D, INC................................................................... 30
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................................................. 36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.............................................. 36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.... 37
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN SIGNIFICANT
EMPLOYEES OF C3D........................................................................ 37
ITEM 11. EXECUTIVE COMPENSATION.................................................................. 41
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......................... 43
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................................... 45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K............................................................................. 47
SIGNATURES ........................................................................................ 48
EXHIBIT INDEX ........................................................................................ 49
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PART I
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ITEM 1 BUSINESS
Except where the context indicates otherwise, references in this
document to "we," "us" and "our" refer to the registrant, Constellation 3D, Inc.
(individually referred to in this Annual Report as "C3D", and together with all
of its directly and indirectly owned subsidiaries, collectively referred to in
this Annual Report as the "Company").
FORWARD LOOKING STATEMENTS
Some of the information in this Annual Report or the documents
incorporated by reference in this Annual Report may contain forward-looking
statements. You can identify these statements by the appearance of words and
phrases such as "will likely result," "may," "believes," "are expected to," "is
anticipated to," "is forecasted to," "is designed to," "plans to," "predict,"
"seek," "estimate," "projected," "intends to" or other similar words and
phrases. Important factors that could cause actual results to differ materially
from expectations include:
o failure to raise sufficient capital to fund business operating plans;
o market conditions and demand for new data storage technology;
o our competitors' ability to successfully develop new technologies to
satisfy demand for data storage;
o difficulties in achieving sales, gross margin and operating expense
targets based on competitive market factors;
o difficulties in competing successfully in the markets for new products
with established and emerging competitors;
o difficulties with single source supplies, product defects or product
delays;
o our status as a going concern;
o difficulties in forming and maintaining successful joint venture
relationships;
o difficulties in negotiating and receiving licensing royalties;
o difficulties in obtaining, maintaining and using intellectual property
protections;
o changes in data storage technological protocols and standards;
o volatility in interest rates and currency exchange rates;
o difficulties in state, federal, foreign and international regulation
and licensing requirements;
o economic and political instability in the foreign countries where we
conduct operations;
o litigation actions by directors, employees, investors and others;
o limited operation and management history;
o dependence on key personnel; and
o other factors discussed in this Annual Report.
All of the above factors could cause our actual results to differ
materially from historical results and those presently anticipated. When
considering forward-looking statements, you should keep these factors in mind as
well as the other cautionary statements in this Annual Report, including without
limitation, the Risk Factors beginning on page 16 of this Annual Report.
1
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Overview
The Company is a development stage company. The Company has no revenue
history and therefore has not achieved profitability. The Company is an
international enterprise headquartered in New York, New York. With operations in
the United States, Israel and Russia and a subcontractor who performs services
for the Company in Ukraine, the Company researches and develops data storage
technology products with flexibility in commercial applications. The Company has
developed what it believes to be a state-of-the-art optical, data storage
product that surpasses the physical limits of two-dimensional memory technology.
Research and development work on the Company's technology has been conducted and
is being conducted in the United States, Israel, Russia and Ukraine.
The mission of the Company is to develop state-of-the-art technologies
and products to serve the growing data storage needs of customers in government,
business, education and consumer segments through continuous research and
product innovation. By providing new data storage solutions to its customers
through joint ventures, strategic alliances, and licensing agreements, the
Company intends to become a pre-eminent provider in the data storage research
and development market and thereby provide significant returns to its
shareholders. It is anticipated that the signing of a joint venture, strategic
alliance or licensing agreement would provide the Company with a significant
capital infusion as well as the development, marketing and distribution
expertise that the Company would require for commercialization of the
technology.
The Company's new technology implements the concept of the volumetric
storage of information. Data is recorded on multiple layers located inside a
disk or a card, as opposed to the single or double layer method available in
optical disks ("ODs"), compact discs ("CDs") and DVDs. The recording, reading
and storing of the information is done by using fluorescent materials embedded
in pits and grooves in each of the layers. The fluorescent material emits
radiation when excited by an external light source. The information is then
decoded as modulations of the intensity and color of the emitted radiation.
The Company's research has determined that these fluorescent multilayer
disks and cards furnish the user with considerably improved storage space and
storage time and deliver substantial performance advantages when compared to the
CDs and DVDs currently produced.
Company History and Structure
C3D was incorporated on December 27, 1995 under the name Latin Venture
Partners, Inc. The name of Latin Venture Partners, Inc. was changed to C3D Inc.
on March 24, 1999 in anticipation of a proposed transaction with Constellation
3D Technology, Limited, a corporation organized under the laws of the British
Virgin Islands ("Constellation Tech"). As approved by the necessary number of
votes at the Annual Meeting of Shareholders of C3D held on December 27, 1999,
C3D Inc. changed its name to Constellation 3D, Inc. effective December 29, 1999.
For purposes of this Annual Report, and except where the context clearly
indicates otherwise, Constellation 3D, Inc. will be called "C3D," and
Constellation 3D, Inc., together with its directly and indirectly owned
subsidiaries, will be collectively called the "Company." From its inception
until October 1, 1999, C3D had no business operations.
On October 1, 1999, C3D purchased certain assets of Constellation Tech
for total consideration of 29,250,000 shares of Common Stock and C3D's
assumption of substantially all liabilities and obligations of Constellation
Tech (the "Acquisition").
2
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In the Acquisition, C3D acquired the following assets:
o Constellation's Tech's then sole existing membership interest in
TriDStore IP, L.L.C.;
o all of the issued and outstanding ordinary shares in TriD Store
Vostok;
o 99 ordinary shares of the 100 ordinary shares then allotted of
C-TriD Israel Ltd.; and
o all of the issued and outstanding shares of common stock of
TriD SV, Inc.
TriDStore IP, L.L.C., known as OMD Devices, L.L.C. until March 9, 1999,
is a Delaware limited liability company formed on February 2, 1998. TriDStore
IP, L.L.C. owns a substantial majority of the material intellectual property
owned by the Company, which consists mostly of patent registrations and
applications. See "Risk Factors -- Intellectual Property/Proprietary Rights."
TriD Store Vostok is a Russian company formed on January 15, 1999. The
Company conducts its Russian operations through TriD Store Vostok.
C-TriD Israel Ltd. is an Israeli company formed on December 2, 1996.
C3D is the record owner of 99 of 100 allotted ordinary shares but is the
beneficiary of all 100 allotted ordinary shares, one of which is held in trust
for C3D by Rapids Trusts Ltd., an Israeli trust. The Company conducts its
Israeli operations through C-TriD Israel Ltd.
TriD SV, Inc. is a Delaware corporation formed on August 10, 1998. As
of March 21, 2000, TriD SV, Inc. has had no operations.
On February 8, 2000, C3D formed Constellation 3D Trust LLC, a Delaware
limited liability company wholly owned by C3D. C3D then issued 2,500,000 (Two
Million Five Hundred Thousand) shares of Common Stock and then another 3,000,000
(Three Million) shares of Common Stock to Constellation 3D Trust LLC as capital
contributions. Constellation 3D Trust LLC intends to use the 5,500,000 (Five
Million Five Hundred Thousand) shares to raise debt or equity capital and
contribute the proceeds thereof to C3D, which proceeds shall be used for general
corporate purposes. There is no assurance that the issuance of the shares will
result in the raising of any debt or equity capital.
C3D expects that in the near future, it will form a wholly owned
corporation for the sole purpose of acquiring Reflekt Technology, Inc., a
Massachusetts corporation pursuant to the letter of intent executed by both
parties on February 15, 2000. The consummation of the acquisition is not
assured. It is possible that the parties to the letter of intent for such
acquisition will agree to modify or waive one or more terms and/or conditions of
the letter of intent in accordance therewith. If the acquisition is consummated,
it is also possible that, by agreement of the parties, one or more terms and/or
conditions of any legally binding definitive acquisition agreements will differ
materially from the terms and conditions of the letter of intent.
3
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The Company's organizational structure is as follows:
[organizational chart appears here]
Products
The Company has developed Fluorescent Memory Technology and plans to
develop end-user products over the next two years. With each of these products,
the Company intends to seek and establish joint ventures with strategic partners
who are already established with market share and manufacturing capabilities in
the appropriate markets. The initial three products that are expected to be
developed by the Company include:
o Micro Read/Write ("R/W") Disk;
o ClearCard Read Only Memory ("ROM"); and
o ClearCard Read/Write.
Micro Read/Write Disk
Micro Read/Write is a 30 millimeter recordable disk that is expected to
fit in many portable devices. The Company anticipates that this technology will
be applied to devices such as laptop and hand-held computers, digital cameras
and video recorders and players. For laptop and hand-held computers, it is
expected to offer lightweight, high capacity storage and quick access to data.
The Company believes that for cameras and video players, Micro R/W will not only
offer the same gains as laptop and hand-held computers, but that it also will
offer higher quality video. The Company also believes that this technology will
be ideal for downloading information from the Internet.
Micro R/W disks will be largely similar to existing CD and DVD drives.
Therefore, new designs of ODD players would not be required to be able to read
the Micro R/W disks.
The Company has entered into a relationship with Toolex International,
N.V., a Dutch company, ("Toolex") regarding the production and manufacture of
Micro R/W disks.
ClearCard ROM
The Company intends for this technology to be applied to many portable
devices including global positioning and navigating systems, hand-held gaming
devices, automobile systems and electronic book devices. It is anticipated that
ClearCard ROM will be read in very low-cost players. The Company believes that
this technology will be the first of its products to become commercially
available. It is expected to be available by the last quarter of 2000.
ClearCard R/W
This technology is one step beyond ClearCard ROM in that it is expected
to offer a one-time recording function. The Company anticipates that ClearCard
R/W will be used with the same low-cost players for reading as ClearCard ROM.
While many of the same product applications apply to this technology, the
expected added benefit of ClearCard R/W is its ability to allow a user to
download or determine the information that he or she is interested in having on
a particular device. The Company believes that this technology will present a
storage advantage for Internet-based data.
The Clear Card drives do not have an analogous system in the current
market. These products are completely new designs. However, the materials and
machinery for manufacturing the devices are all available. In addition, the
interface between ClearCard devices and hand held electronic devices, such as
laptops and handheld computes, for instance, will be in accordance with accepted
standards.
4
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Products and Markets in Development
The Company believes that three-dimensional Fluorescent Memory
Technology will allow the creation of user-oriented products with new
performance qualities that form a solid base for consumer technologies. The
following are products in the development stage which the Company intends to
bring to market through joint ventures and strategic partnerships, such as the
existing relationship with Toolex.
o Fluorescent Memory Disk ROM (diameter of 120 millimeters with 140
to 420 gigabytes (GB) of data storage capacity) is expected to
provide the user with a wide range of large volume archive and
reference information, as well as with much more detailed video
information. The Company believes that this product will produce
home cinema technology with cinema-tape quality;
o Fluorescent Memory Disk ROM and Fluorescent Memory Disk R/W
(diameter of 120 millimeters with 70 gigabytes (GB) of data
storage capacity) is expected to allow the user to create his or
her own library of digital material;
o Fluorescent Memory Disk ROM, Fluorescent Memory Disk R/W and
Fluorescent Memory Disk RAM (diameter of 120 millimeters with
various data storage capacities) is a product which is expected to
permit users to utilize supplied archive and reference data, and
add to one's own recordings for constant storage;
o Fluorescent Memory Disk ROM (diameter of 30 to 40 millimeters with
12 to 15 gigabytes (GB) of data storage capacity) is designed for
information storing in portable devices;
o Fluorescent Memory Disk R/W and Fluorescent Memory Disk ROM
(diameter of 30 to 40 millimeters with 10 to 13.5 gigabytes (GB)
of data storage capacity) is expected to be a base for
extra-portable information recording and storing device with new
quality functions. It is anticipated that it will enable the
addition of the user's own data, audio and video recordings, as
well as those received via the Internet. The Company intends that
this product will provide new possibilities for the individual to
integrate into the global information network;
o Fluorescent Memory Disk R/W (diameter of 30 to 40 millimeters with
9 to 12 gigabytes (GB) of data storage capacity) is a new product
expected to promote digital photo and video systems' development.
The Company intends that the product will promote the further
development of recorded photo and video on PCs and the restoration
of them by means of photographic printing or different
video-restoration systems;
o Super Fluorescent Memory Disk ROM (diameter of 120 millimeters
with 1.4 terabytes (TB) of data storage capacity) is intended to
promote the idea of advanced reference books and archives, art and
cinema collections, new generations of video games (with virtual
reality effects and extended video environment development and
real presentation effect);
o Super Fluorescent Memory Disk R/W (diameter of 120 millimeters
with 1 terabyte (TB) of data storage capacity) is designed as a
base for stable storage systems for large and extra-large
databases with high data access rate;
o Super Fluorescent Memory Disk RAM (diameter of 120 millimeters
with 1 terabyte (TB) of data storage capacity) is intended to be a
base for secondary memory systems for large and extra-large PCs
with much greater access restrictions because of the ability to
remove the disk from the system;
o ClearCard-ROM (credit card-sized memory carrier with 1 to 20
gigabytes (GB) of data storage capacity) is expected to take the
form of a one square centimeter-sized spot on a card. Such a card
is intended to be a mass produced product designed for persons to
carry and to use in inexpensive miniature reading devices and
electronic books; and
o Recordable R/W and Recordable ClearCard (with 1 to 3 gigabytes
(GB) of data storage capacity) are envisioned as a part of 'I-net
Video Terminal' systems. The Company anticipates that Recordable
ClearCard will be recorded at the locations of various providers
of information such as bookstores and information kiosks and that
they will be read in inexpensive reading devices which may use
ClearCard-ROM.
5
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The Company believes that its Fluorescent Memory Technology has a wide
variety of applications and markets. It is expected that these technologies will
continue to evolve after they are brought to market and the Company begins to
better understand how customers and users respond to these technologies.
Strategic Partners and Joint Ventures
The data storage industry is a very capital-intensive industry. The
core competency of the Company lies in research and development of data storage
technologies. The facilities that the Company leases are used for research and
development and/or administrative purposes. The Company does not plan to
vertically integrate its business to manufacture, or to undertake mass
manufacturing of, the products that it proposes to introduce to the market. The
Company plans to enter the market through licensing the technology, strategic
alliances and joint venture programs. The Company expects to engage in research
and development and administration only and will rely on future strategic
partners to perform and fund the marketing and mass production of its
Fluorescent Memory Technology.
The Company anticipates that any agreements with potential partners
will most likely involve a commitment, by the partner, of a significant amount
of capital and resources to the Company, including experienced management and
personal, facilities and market know-how to successfully develop and market the
technology.
In December 1999, the Company signed a letter of intent with Toolex
(the "Letter of Intent"). The Letter of Intent provides that the Company and
Toolex will cooperate to develop processes and machinery to mass produce
Fluorescent Memory Disks ("FMDs"). The Company and Toolex believe that the
outcome of their co-operative efforts will be a technique for embossing,
metalizing and laminating the FMDs to levels necessary for mass production. In
connection with the Letter of Intent, the Company and Toolex signed a
Co-Invention Agreement, which governs the ownership of inventions and patents
that are developed pursuant to the Letter of Intent.
As a result of its joint venture approach to entering the market, the
Company does not plan to engage in marketing efforts on its own. Instead, it
intends to rely on others' expertise in this area. Despite this intention, the
Company believes that it will need to develop market intelligence so as to keep
abreast of the technological requirements demanded by its customers. The Company
believes also that in order to negotiate the most advantageous licensing
agreements with joint venture partners and other licensees, the Company will
need to maintain a knowledge of the market size and growth parameters for each
of the target markets. Similarly, the Company expects that an intimate knowledge
of pricing and cost trends in the market will be required to realize the most
value from each licensing agreement into which it will enter. Notwithstanding
the foregoing, the Company may engage directly in marketing its Fluorescent
Memory Technology at some time in the future.
6
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The Company intends to identify a partner for introducing the Company's
products to the market based on the following criteria:
o The partner should have an established presence in the data
storage market. The Company believes that an established presence
includes market share and leadership, as well as ownership of
assets in the form of capital, production facilities, employees,
etc. The Company expects that it would provide the necessary
intellectual property;
o The partner should be able and willing to make the investments
needed for successful product launch, including marketing,
advertising, sales and promotions; and
o The partner should also have the ability to differentiate itself
on the basis of the quality and quantity of service. The Company
believes that it is imperative that the partner be able to
dedicate enough quality service and support staff long-term to the
marketing of the Company's products.
In addition to the existing relationship with Toolex, the Company is
presently engaged in preliminary talks with a number of companies regarding
joining in a strategic partnership for the commercial production of the
Company's products.
The Data Storage Technology Market and Competition
The data storage industry is very dynamic and very competitive. Trends
can quickly change and competing companies are constantly involved in product
improvement and innovation in order to keep up with customers' increasing demand
for faster and smaller storage devices with high data storage capacity. The
activities driving demand in the data storage market include diverse
applications such as analysis of meteorological data, printing of payroll
checks, letter writing, Internet browsing, the editing of television
commercials, the searching of data warehouses, and the playing of computer
games. Businesses have witnessed a significant increase in the amount of data
used and stored in the past decade, and the Company believes that they will
continue to do so for the next few years to come.
Trends in the Data Storage Industry
Increased Demand for Removable Storage
The Company believes that there is a rising demand for removable disk
drives of varying storage capacities due to the significant advantages of
removable drives compared to floppy disks. While both floppy disks and removable
drives are portable and can interface with other systems, the removable disk
drive can substantially exceed the floppy disk in terms of storage capacity.
Transition from Older Drive Technologies to New Technologies
The Company anticipates that the CD and optical disk drive industry
will undergo a major transition over the next several years as drive producers
begin manufacturing technologies that have been recently introduced. The
Company, after reviewing Frost & Sullivan's "World Compact Disc and Optical Disk
Drive Market" (1997), believes these new technologies, including the DVD drive,
will account for the majority of the CD and ODD market. The Company believes
that new technology with varying applications and cost effectiveness, including
the Company's Fluorescent Memory Technology, will be readily accepted into the
market.
7
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Downward Price Pressure in the CD/ODD Industry
Price declines have played a significant role in the mainstream
acceptance of CD/ODD technology. The Company anticipates that new technology
acceptance over existing technologies will be gauged by pricing. The Company
predicts that, as new technologies are introduced, they will have a price
premium over existing technologies. However, the Company believes that, as these
new technologies are accepted and unit shipments increase, they will benefit
from economies-of-scale, allowing them to significantly compete with older
technologies. Consequently, the Company believes that it must (i) lower its
production costs in order to maintain adequate margin, (ii) increase its
production volume and (iii) remain on the cutting edge of data storage
technology with the innovation of new products.
Increased Demand for Increased Performance
The Company anticipates that data storage performance levels will
increase in a pattern similar to the past, resulting in faster spin rate,
shorter access times and higher capacities. Performance increases have become
relatively common in the industry, and many consumers now expect them on a
regular basis. In keeping with this user demand for performance, the Company
believes that it must maintain its current emphasis on research and development
in order to maintain the Company's viability.
Magnetic Storage Continues to Dominate the Mass Storage Industry
Magnetic disk drives ("MDDs") and ODDs comprise the substantial
majority of the data storage market in terms of market share. Historically, MDDs
have been in higher demand for mass storage use and have cost less per gigabyte
(GB) of data storage memory space than ODDs. It is expected that most mass
storage industry leaders will continue to use magnetic drives as their primary
storage medium. The Company believes that in order to remain competitive with
the magnetic mass storage industry, it must continue to improve the
cost-effectiveness, as well as product acceptance by the public, of its
Fluorescent Memory Technology.
Competing Products and Technologies
The Company's Fluorescent Memory Technology disks and cards are in
competition with other types of storage devices, which come in various formats.
While hard disk drives are the most common form of mass data storage, they are
not the only storage media available to computer users. A variety of options
exist, each with unique price and performance characteristics that meet specific
requirements. Some other forms of storage devices are Removable Storage Devices,
such as Tape Drives, Magneto-Optical ("MO") Disks, Personal Computer ("PC")
Cards, ROM and One Time Programmable Cards, Static Random Access Memory Cards,
Flash Cards, ODDs, CDs, and Redundant Arrays of Inexpensive Disks, among others.
Removable Mass Storage Devices
The trend of processing sensitive data on desktop PCs instead of on
mainframe computers has made removable mass storage solutions increasingly
important. Floppy diskettes, which have been the most commonly used removable
storage devices, often have been insufficient for certain data-intensive
applications. For these applications, high capacity removable mass storage
devices offer advantages. Removable mass storage devices, which are particularly
suitable for secondary storage applications like data backup and archiving,
rather than as a primary form of online storage, come in many forms, such as
tape cartridges, Compact Disk Read Only Memory ("CD-ROMs") and other optical
disks, MO disks, and PC cards.
8
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Tape Drives
The magnetic tape drive was one of the first computer storage
technologies, and was commonly used on early mainframe computers. However, its
inability to randomly access or write data like disk drives makes it much slower
than newer data storage technologies. It has therefore been replaced as the
primary storage device in most computer applications. However, due to its high
storage capabilities and low cost-to-megabyte ratio, it is still very much in
use as a storage medium for archiving large amounts of data. Additionally,
recent advances in tape technology, such as digital audio tape cartridges, have
also made tape a preferred technology for backing up network servers and other
critical data.
Optical Disk Drives
The three primary optical disk storage technologies are available, as
follows: CD-ROM drives, Read/Write drives and rewritable optical disks. ODDs can
hold relatively large amounts of data. Rewriteable optical disks typically are
used for data backup and archiving massive amounts of data, such as image
databases.
ODDs are used for a diverse mixture of applications. The principal
performance advantage of ODDs as compared to MDDs is their ability to provide
greater track density than MDDs, thus enabling them to store more data per disk.
The principal disadvantage of ODDs as compared to MDDs is a slower average data
access time. The Company believes that its Fluorescent Memory Technology has a
cost/price advantage over the currently available ODDs.
CD-ROM drives are by far the most widely used ODDs and are the computer
industry's standard for distribution of software products. They are typically
used to distribute large databases and documents that require only periodic
access. Read/Write drives, on the other hand, are used almost exclusively for
archival storage where it is important that the data cannot be changed or erased
after it is written for example, for financial records storage.
Retail price levels for CD-RW rewritable drives have decreased. The
writable CD format, which was heretofore dominated by write-once CD-R drives, is
currently being replaced by CD-RW as a result of the combination of CD-RW's
media flexibility and lower prices. The Company anticipates rapid growth for
rewritable DVD drives starting in year 2000, with shipment levels rising to
rival those of CD-RW drives. The Company believes that its proposed Fluorescent
Memory rewritable disks and drives will be the medium through which the Company
will be able to gain a large share of the market for rewritable data storage
media.
Magneto-Optical Disks
Magneto-optical disk systems combine the technology of traditional
magnetic media, like hard disk drives, with optical disk technology. It is
expected that MO technology will allow users to store hundreds of megabytes of
data on a disk that looks similar to a traditional 3.5-inch floppy disk and
typically comes in a 3.5-inch or 5.25-inch form factor. MO disks have many
advantages. They provide relatively high data densities. The data stored on them
can be changed at will and is resistant to magnetic fields, unlike a traditional
floppy or hard disk. The disadvantage of MO technology is that, because of the
relatively high intensity of the magnetic field created with the combined use of
the read/write head and laser, the two rotations required for writing data make
them twice as slow as hard disk drives during write operations. The Company
believes that its Fluorescent Memory Technology, due to its faster read/write
capability coupled with high data storage capacity, has a distinct advantage in
this product category.
9
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Personal Computer Cards
PC Cards are built using the Personal Computer Memory Card
International Association ("PCMCIA") standard, and can be either storage or
Input/Output cards. By virtue of being compact, highly reliable, lightweight and
requiring less power, some consider them to be ideal for battery-powered
notebook and palmtop computers, hand-held personal digital assistants and
personal communicator devices. Due to their diminutive size, PC cards used for
storage, commonly called "memory cards," make transporting data relatively easy.
They can be used for program storage or data interchange between systems. A big
deterrent to the widespread use of PC cards is their high cost relative to hard
disk drives. The Company believes that the ClearCard that the Company proposes
for introduction to the market will not be as expensive as a PC Card and, thus,
will have a distinct advantage in this product category.
Competing Technologies in Development and Advancement
In addition to the existing storage devices, there are some comparable
data storage technologies in the research and development phase, such as the
following technologies:
Magnetic Hard Disk Drives. One of the original data storage media, some
view magnetic disk drives as the most reliable source of storage media. Despite
the advent of alternate technologies, magnetic storage remains dominant,
particularly where mass storage is concerned. Magnetic disk heads fly on a
slider approximately one ten-millionth of a meter over the surface of the
storage medium. During the writing process, small magnetic domains are written
and the magnetic fields of these domains are detected during the read process.
The information can be overwritten indefinitely. The area density of magnetic
recording has grown about 60% per year during the last decade. Devices with an
area density of 4 gigabytes per square inch are in production, and area
densities of 20 gigabytes per square inch have been created. However, the
magnetic domains become unstable at a physical and technical limit called the
super-paramagnetic limit. Therefore, further growth in area density is limited,
although it is not certain where this limit puts an end to the further density
increase of magnetic memory. Furthermore, many magnetic memory carriers are not
easily removable, are not easily disposable and are relatively expensive.
Optical Disk Drives. Optical Disk Drives, which include compact disc
drives, DVDs, and magneto-optical drives, entered into the marketplace in the
mid 1980's and have gained mainstream acceptance, particularly CD-ROM drives as
a result of their entertainment and educational uses. The Company anticipates
that the advent of rewritable optical disks will make the optical disk drive an
increasingly important segment of the data storage industry. In ODDs, such as
CDs, DVDs, and MOs, light from a semiconductor laser is focused onto the storage
layer to perform writing or reading. The storage layer is protected through the
disk substrate or a thick overcoat, making this technology well-suited for
removable media. CDs, CD-ROM, and DVD media are commonly used around the world
for both entertainment and commercial purposes. The Company expects that, at
least in the next few years, they will continue to be commonly used in these
ways around the world.
Near Field Drives. In some of the proposed near field recording, light
is focused onto the front surface of a storage medium, thereby avoiding some
problems with distortions of the focused beam in a protected layer. High density
is achievable, but at high cost, as the medium remains exposed to dust and
remains vulnerable to crashes of the drive head. Thus, this technology is not
suitable for portable devices. The storage capacity is limited, because in near
field optics, data is stored in a thin layer at the surface.
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Volumetric/Holographic. Volumetric or holographic storage allows data
to be stored in three dimensions, which increases actual storage capacity
exponentially. Although holographic storage was considered feasible almost 40
years ago, attempts at commercialization of holographic storage devices have not
achieved great success largely because, there continues to be a lack of
applicable components and of suitable storage material. The Company believes
that its development of its patented processes has resulted in, among other
things, the availability of sufficient components and suitable storage material
for the commercialization of the Company's Fluorescent Memory Technology. The
Company's products' components and materials for fluorescent disks and cards are
either available or have been developed by the Company and can be manufactured
by using available machinery and materials.
Atomic Force Microscopy. In the field of probe-based storage,
scientists are fabricating tiny silicon cantilevers 10 microns long and 0.3
microns thick, with an even smaller silicon probe tip (.008 microns in
diameter). The tip rests on a rotating plastic disk. To store data, heat from an
electric pulse through the tip momentarily softens the surface of the plastic,
and the slight force that the tip exerts on the plastic pokes a tiny depression.
As the tip is pulled across the tip on playback, its dip into the pit is
detected. Researchers report that this technique can reliably read and write
data at a density of 64 gigabits (GB) per square inch and have developed the
basics for a read only system holding a CD's worth of data on a disk the size of
a penny.
Scanning Tunneling Microscopy. Scanning Tunneling Microscopy reportedly
has the potential to store as many as one million gigabytes (GB) per square
inch, although the Company expects that commercial usage of this technique is
not in the foreseeable future. The technique involves moving xenon on a nickel
surface with a scanning tunneling microscope. As attempted, this process
required a temperature of near absolute zero and several hours to complete.
Market Segmentation
The three primary CD and ODD data storage market segments are: (i) CD
Drive, (ii) Stand-alone Drives and (iii) CD and ODD Jukebox. The CD Drive
segment can be further broken into the CD and ODD drive, the CD and DVD drive,
the CD-ROM drive, the CD-R drive, the DVD-ROM drive, the CD-RW drive and the
DVD-RAM drive markets. Stand-alone drives include both the magneto optical drive
and large form factor markets. The CD and ODD Jukebox market includes magneto
optical drive jukeboxes, large form factor jukeboxes and CD drive jukeboxes.
The Company's contemplated product line will create new product lines
and new products. The ClearCards will create entirely new products. That market
is just developing and the Company plans to be one of the early players in that
market.
Geographically, the CD and ODD market is segmented into four regions:
the United States, European, Pacific Rim and Rest-of-World ("ROW") markets. The
United States is usually an early adopter of a new technology, with Europe
following later. The Pacific Rim and ROW markets are heavily impacted by the
economic well being of the constituent nations, which in turn decide whether
that market is going to be an early or late adopter. However, the Pacific Rim
and ROW markets are also the ones with good growth projections for all the
storage device product categories. With this trend in perspective, the Company
believes that it can be inferred that these markets will adopt and proliferate
the Fluorescent Memory Technology. The Company expects that the Company and its
partners should therefore focus their marketing efforts worldwide if they are to
achieve the goal of their technology becoming the standard for the data storage
industry.
CD and ODD Market
After reviewing Frost & Sullivan's "World Compact Disc and Optical Disk
Drive Market" (1997), the Company projects the revenues for the total CD and ODD
market to reach $19.12 billion in 2000 and to increase to $25 billion in 2003.
The Company further expects CD and DVD drives to account for 96.37% of unit
shipments and 85.5% of revenues. A slight decrease in these numbers, perhaps no
more than 1%, is expected to occur in 2003 due to growth in other segments such
as 3.5-inch MO drives.
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The United States, which was originally the largest market for CD and
ODD revenues, is projected to account for only 46.8% of the market in 2003,
totaling $11.69 billion. The Pacific Rim and European markets, on the other
hand, are projected to grow to 24.6% and 21.5% respectively in 2003. This change
in market share is attributed to the early adoption by the U.S. compounded by a
healthy economy. The Pacific Rim, though an early adopter, suffered because of
its economic setback, and the European market is a late adopter. The ROW segment
is expected to grow from 5.3% in 2000 to 7% of the total market in 2003. The
Company believes that these growth projections are indicative of the viability
of the Fluorescent Memory Technology in the data storage market.
CD and DVD Drive Market
The CD and DVD Drive market is expected to continue its rapid rate of
growth during the next few years. It is projected that the market will have
overall revenues of $16.34 billion in 2000 and $21.17 billion in 2003. The
Company believes that its entry into the market at this point in time is crucial
because of the tremendous growth potential that it offers. The Company believes
also that any further delay will only result in loss of market share to
competitors, and loss of opportunity.
Based on the Frost & Sullivan study, the Company anticipates the
replacement of CD-ROM drives with DVD-ROM drives as the primary drives in the
next few years. In the recordable subsegment, there is a transition projected to
occur from CD-R drives to CD-RW drives, and then from CD-RW drives to DVD-RAM
drives. The major change that is anticipated in the market is the shift from CD
technology to DVD technology, and that the DVD technology will become the
market's mass storage medium of choice. This is due to higher storage capacity
of the DVD technology and also because DVD is backward compatible with most CD
media. It is further anticipated that the DVD technology will be used in three
different industries -- computers, movies and music -- which will allow it to
reach the economies of scale not experienced by other optical technologies. The
study forecasts that DVD technology will account for 61% of the total CD and DVD
drive market shipments.
The United States, which was an early adopter of the CD technology,
continues to have the largest market share in terms of revenues. However, market
forecasts predict that by the year 2002, market share will decline to about
48.4%. It is anticipated that the U.S. market share of the CD and DVD drive
market will decline to 46.4% of the total market in 2003. It is also expected
that the European market share will be 22.19%, the Pacific Rim market share will
be 24.3% and that of the ROW market will be 7.2% in 2003. Additionally, the ROW
region may very well account for a larger portion of sales due to stronger
economic growth of its constituent nations.
CD-ROM Drive Market
For multimedia applications, the usage of CD-ROM systems is in
accessing large databases and also in distributing other large software
packages. Growth in the installed base of CD-recordable drives and CD jukeboxes
has further strengthened the CD-ROM format. Frost & Sullivan forecast the unit
shipments for CD-ROM to reach 65.8 million units in 2000, which is equivalent to
revenues of $5.52 billion. However, as DVD-ROMs gain increased presence,
revenues from CD-ROM are expected to decline to $1.34 billion in 2003.
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CD-Recordable Drive Market
The Compact Disc-Recordable ("CD-R") drive market has become an
important part of the CD and DVD drive market. The advantages that CD-R drives
offer include low media cost, high reliability, the ability to perform a random
data search, and media able to be read by a large installed base of CD-ROM
drives. However, this technology is expected to be replaced in the CD and DVD
markets in 2000 by the technologies that allow for recording and rewriting data
such as CD-RW and DVD-RAM. The Company believes that this product category will
be a high-growth area for the Company should the Company enter into this market,
because the Company believes that its Fluorescent Memory Technology could
potentially become the technology that replaces existing technologies.
DVD Read Only Memory Market
The DVD Read Only Memory ("DVD-ROM") is a high-density, read-only,
optical disk format. It is expected to become the logical successor to the
CD-ROM technology, and also that its sales will be further enhanced with the
introduction of the DVD-RAM technology. Revenues for the DVD-ROM drives are
projected to reach $12.63 billion in 2003. It is also anticipated that DVD-ROM
drives will replace CD-ROM drives as the choice medium of data storage in 2003.
CD-Rewritable Drive Market
The CD-Rewritable ("CD-RW") drive technology is expected to gain market
acceptance due to the additional applications it opens up to the CD format.
However, it is not expected to be sustained for long, because DVD-RAM technology
is expected to offer greater data storage density. The Frost & Sullivan study
predicts that by 2003, unit shipments of CD-R drives will decrease to 5 million
units.
DVD Random Access Memory Market
DVD-RAM refers to the optical technology that allows users to record
information on DVD media. It is expected to replace technologies such as CD-R
and CD-RW. By 2003, unit shipments of these drives are forecast to be at 9.4
million. The Company expects that the disks and drives that the Company intends
for High Definition Television format stand to gain from this projection of
market growth.
World Magneto-Optical and Large Form Factor Market
The magneto-optical and large form factor market is expected to earn
revenues of up to $1.23 billion in 2000, and approximately $1.7 billion in 2003.
Of all the products in the MO and large form factor market, the
3.5-inch MO has had the highest growth in the overall stand-alone market from
1998 to the present. Despite its rapidly falling prices, it is expected that the
3.5-inch MO will account for 73.5% of revenues, and 93.1% of unit shipments of
the entire MO and large form factor market in 2003. The Company believes that
ClearCard-ROM and ClearCard-R disks and drives, by virtue of their small size
and high capacity, can take advantage of this growing product segment.
The 5.25-inch, on the other hand, is projected to account for only 8.5%
of the total shipments of MO and large form factor ODD shipments. It is also
expected that it will account for only 26.8% of the stand-alone ODD revenues in
2000 and approximately 22% in 2003. The 12-inch and 14-inch Read/Write drive
products are targeted at niche markets, and their revenues and unit shipments
are expected to decline to 5.4% and 0.1%, respectively, by 2003.
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The United States market, which has been an early adopter of new
optical technology, has a major share of the MO and large form factor ODD
market. It is projected that United States will have a 42% share of the total
ODD market, which is then projected to increase to 46.7% in 2003. Europe, on the
other hand, is expected to have a shrinking market share that decreases from
19.9% in 2000 to 18.6% in 2003. However, the European market's revenue is
expected to increase from $244.8 million in 2000 to $317 million in 2003. The
3.5-inch and 5.25-inch MO were successful in the Pacific Rim market. Despite
growing revenues in the ODD market in this region, its market share is declining
due to the rapid growth in U.S. market share. Revenues from Pacific Rim ODD
market are expected to reach $417.7 million in 2000, and $500.1 million in 2003.
The Rest of the World segment is also expected to have increased revenues from
ODD sales due to increasing adoption of all high-technology products by the
nations in this region. It is expected that this segment will have revenues of
$50.7 million in 2000 and $91.2 million in 2003 which translates to market
shares of 4.1% and 5.4%, respectively.
The most common applications for these products are storage-intensive
applications. Growth of the jukebox market has been attributed to the increasing
needs of government agencies and private businesses for of reliable mass storage
solutions. The need of engineering, education, medical imaging and storage,
legal document imaging, and other such storage-intensive areas also have
contributed to the jukebox market. The Company believes that the entry of
Fluorescent Memory Technology could potentially force this product segment into
obsolescence, because the basic idea behind a Fluorescent Memory device is to
eliminate the need for multiple layers of disks and drives, and instead provide
for storage of terabytes of data on one disk or card.
Growth in the market share of the magneto optical 5.25-inch and
3.5-inch form factor segment has been eroded by a more rapid growth in the CD
jukebox segment. By 2003, this segment is expected to contribute to 56.1% of the
total CD and ODD jukebox market.
The large form factor (12-inch and 14-inch) segment is considered to be
the most mature of all segments in the CD and ODD jukebox market, and is
expected to remain on a course of slow steady growth. By 2003, this segment is
projected to account for only 0.8% of the total jukebox shipments.
The CD jukebox segment is forecasted to have the largest number of
units shipped in the total CD and ODD jukebox market by 2003. In that year, it
is expected to contribute 36.9% of the entire jukebox market's earnings.
The U.S. was an early adopter of the jukebox technology. Growth of the
U.S. market's share of the CD and ODD jukebox market is attributed to the
overall size and health of its economy. However, as other regions of the world
become technologically more sophisticated, the U.S. market share is expected to
decrease to about 50.6% in 2003 from 53.5% in 2000.
The European market share has been declining steadily due to strict
market regulations as compared to the other regions. It is projected that this
market will have an 18.2% share of the CD and ODD jukebox market in 2003, which
is equal to revenues of $387.2 million.
The Pacific Rim region is the fastest growing market for the CD and ODD
jukebox technology. It is anticipated that this region will account for 21.7% of
the market in 2000 and grow to 24.3% in 2003, equivalent to revenues of $516.9
million.
The adoption of newer technologies by countries in the ROW segment will
result in increased revenues from the CD and ODD jukebox sales. Sales in this
region are expected to account for 5.7% of the total market in 2000 and 6.9% in
2003, which translate into sales of $146.8 billion.
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The Company's success and ability to compete will depend in part on its
ability to protect proprietary technology and other intellectual property. The
Company, through its wholly owned subsidiary TriDStore IP, L.L.C., seeks patents
on its important inventions, primarily in the United States, Israel, European
Community Countries and Japan. Additional countries that belong to the Patent
Cooperation Treaty may also be designated if it is deemed to be cost-effective
and sufficiently beneficial to the Company.
Currently, the Company, through its wholly owned subsidiary TriDStore
IP, L.L.C., owns five U.S. Patents, as follows:
o U.S. Patent No. 5,847,141, entitled "Photochromic Material for
Electro-Optic Storage Memory," which was issued on December 8,
1998 and which expires on December 22, 2015. This patent covers
photochromically modified pyridones which are useful in three
dimensional, stable, optical memory storage devices.
o U.S. Patent No. 5,936,878, entitled "Polymeric Photo-Chromic
Composition," which was issued on August 10, 1999 and which
expires on December 12, 2017. This patent covers the use of
photochromically modified spiropyrans in three dimensional,
stable, optical memory storage devices.
o U.S. Patent No. 5,945,252, entitled "Photochemical Generation of
Stable Fluorescent Amines from Peri-Phenoxiderivatives of
Polycyclic P-Quinones," which was issued August 31, 1999 and which
expires on December 11, 2017. This patent covers the use of
photochromically modified polycyclic quinones in three
dimensional, stable, optical memory storage devices.
o U.S. Patent No. 6,009,065, entitled "Optical Pickup for 3-D Data
Storage Reading from the Multilayer Fluorescent Optical Disk,"
which was issued on December 28, 1999 and which expires on
December 4, 2017. This patent covers an optical pickup capable of
reading binary optical information from a multilayer fluorescent
disk.
o U.S. Patent No. 6,027,855, entitled "Photo-Chemical Generation of
Stable Fluorescent Derivatives of Rhodamine B," which was issued
on February 22, 2000 and which expires on December 12, 2017. This
patent covers a method for optically recording information in a
three-dimensional memory system having an active medium which
includes a Rhodamine B compound.
The Company has filed more than forty (40) additional pending U.S.,
international and foreign applications covering compositions, methods, and
apparatus which relate to the Company's Fluorescent Memory Technology. Other
patent applications are in the process of being prepared.
There can be no assurance that any of the Company's patent applications
will issue as patents, or that if patents are issued on the Company's
applications, they will be of sufficient scope and strength to provide
meaningful protection of the Company's technology or any commercial advantage to
the Company, or that such patents will not be challenged, invalidated or
circumvented in the future. Moreover, there can be no assurance that the
Company's competitors, many of which have substantial resources and have made
substantial investments in competing technologies, do not presently have or will
not seek patents that will prevent, limit or interfere with the Company's
ability to make, use or sell its products either in the U.S. or in other
countries.
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The Company intends to rely on a combination of patents, trade secrets,
copyrights and trademarks to protect its intellectual property rights. No
assurance can be given, however, that competitors will not independently develop
substantially equivalent proprietary technology, or that the Company can
meaningfully protect its rights in unpatented proprietary technology.
Nevertheless, the Company intends to enforce its intellectual property rights
whenever it becomes aware of any infringement or violation to its rights.
The Company's success and ability to compete will depend in part upon
its ability to protect its proprietary technology and other intellectual
property. As earlier noted, the Company has filed numerous patent applications
to protect technology, inventions and improvements it believes are significant
to the development of its business and are protectable under applicable patent
laws. However, the Company's patented products may be sold in foreign countries
where the Company has not applied for patent protection, or, if a patent
application was filed, where a patent may not be granted. In those countries
where no patents are obtained, there is a risk that competitors may be able to
reverse engineer the Company's products and undermine the ability of the Company
to compete in such markets. In addition, there are foreign countries whose
intellectual property laws are not enforced or, if enforced, are enforced to a
lesser extent than the intellectual property laws of the United States. In the
event that the Company markets its patented products in such countries, there is
a risk of piracy or reverse engineering by competitor(s) that may undermine the
ability of the Company to compete in such markets.
The Company has not received any notices alleging, and is not aware of
any infringement by the Company of any patents or intellectual property of
others. However, there can be no assurance that current and potential
competitors and other third parties have not filed or in the future will not
file applications for patents, or have not received or in the future will not
receive, patents or other proprietary rights relating to devices, apparatus,
materials or processes used or proposed to be used by the Company.
Employees
As of March 21, 2000, the Company had 59 workers, including 17 in the
research and development office in Israel, 35 in the research and development
office in Moscow, one subcontractor in Ukraine and five in management, finance
and administration and one in research and development in North America. None of
the Company's employees are covered by a collective bargaining agreement.
RISK FACTORS
No History of Revenue
As a research and development enterprise, the Company has no revenue
history and therefore has not achieved profitability. The Company expects to
continue to incur operating losses until late in the third or fourth quarter of
2001. The Company incurred a net loss of $4,866,687 for the year ended December
31, 1999 and $3,191,902 for the year ended December 31, 1998. The Company has
never been profitable, and there can be no assurance that, in the future, the
Company will be profitable on a quarterly or annual basis. In addition, over the
next twelve months, the Company plans to increase its operating expenses from
approximately $600,000 per month to $1,100,000 per month in order to fund
research and development and increase its administration resources. However, the
Company expects to receive revenues by the end of 2000. Nevertheless, it is
possible that the revenue of the Company may never be sufficient to recognize a
profit.
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Limited Operating History
The operations of the Company began in January of 1997, when it
continued the performance of research and development of three-dimensional
technology for the storage of digital information on disc that had begun in
1995.
The Company's proposed operations will be subject to the problems,
expenses, difficulties, complications, and delays frequently encountered in
connection with starting a new operation. Primarily, there is the risk that the
Company may not be able to transform the technology into commercially profitable
products. Also, there is the risk that once introduced into the market place,
the Company's products will not be embraced by the market.
The Company as a Going Concern
Due to its lack of operating revenues, accumulated operating losses of
$10,671,334 and the need for additional working capital, there is no assurance
that the Company will be able to continue as a going concern. The Company's
independent certified public accountants modified their opinion on the Company's
Financial Statements to express their substantial doubt about the Company's
ability to continue as a going concern.
Need for Additional Capital
The Company believes that it has sufficient working capital to sustain
its operations through September 2000. However, as a research and development
company in the data storage technology field, the Company continually expends
large amounts of capital over short periods of time. The Company is currently
generating no revenues and does not expect to do so until the end of 2000. There
is no assurance that revenues generated in future operations, if any, will be
sufficient to finance the complete cost of the Company's research and
development. Additional funds will be required before the Company achieves
positive cash flow from operations. Future capital requirements and
profitability depend on many factors, including, but not limited to, the timely
success of product development projects and the timeliness and success of joint
venture and corporate alliance strategies and marketing. The Company is actively
in the process of raising additional capital, including the issuance of
convertible debt securities and the potential issuance of preferred shares. The
Company's outstanding convertible debt contains no restrictions on the further
incurrence of indebtedness nor does such debt adversely effect the Company's
liquidity. However, future debt or preferred share offerings could result in
restrictions that could make payments of such debts difficult, create
difficulties in obtaining further financings, limit the flexibility of changes
in the business, and cause substantial liquidity problems. However, there can be
no assurances that financing or additional funds needed will be available when
needed or, if available, on terms acceptable to the Company. Additional equity
or convertible debt financing, if obtained, could result in substantial dilution
to shareholders. The Company is not currently considering acquiring a bank
credit facility.
Foreign Operations
In addition to its activities in the United States, the Company
conducts business operations in Israel and Russia, and it has hired a
subcontractor to perform various activities for the Company in Ukraine. In
recent history, these three nations have experienced significant economic and
political instability. It is possible that present or future economic or
political instability in those nations will have a material adverse impact on
the Company's ability to conduct its business and/or its financial condition.
The rate of inflation in Israel, Russia and Ukraine has not materially adversely
affected the Company's financial condition.
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Economic Instability
Economic instability may encompass unstable price level (i.e.
inflation), unstable interest levels or rates (i.e. fluctuation of capital) and
social unrest.
The rate of inflation in Israel, Russia and Ukraine has not materially
adversely affected the Company's financial condition. It is not possible for the
Company to predict whether the rate of inflation in Israel, Russia or Ukraine
will materially adversely affect the Company's financial condition in the
future. However, the Company believes that it is possible that such adverse
effects might result in the future. High rates of inflation have occurred in the
above-mentioned countries on numerous occasions in the past, and they may
reoccur in the future. High rates of inflation may cause insecurity and
uneasiness in the local populace in general, including the Company's employees.
In such situations, there is often concern about the increasing cost of living
(as measured in local currency) and attempts to keep pace with it. This
situation by itself might adversely affect the performance of the Company.
Whenever inflation is not matched proportionately by the currency exchange rate
(as has happened as a matter of governmental policy in countries such as Israel,
Argentina, and Russia), generally there is an increase in the costs to the
Company in U.S. dollars. Such increases in costs might materially adversely
affect the Company's financial condition.
The Company does not have, at the moment, a hedging policy for
protecting against changes in the dollar costs of the activities.
Changes and fluctuations of interest rates might, in principle, affect
the operations of the Company in each of the aforementioned countries. The
changes in the interest rates might create flows of capital that might affect
the economy of an entire country, and thus also the Company's employees. Since
most of the financing of the non-U.S. operations is provided by the Company, and
since such financing is expected to continue in the future, the Company believes
that local interest rate fluctuations will not have a material adverse impact on
the Company's financial condition.
The economic situation in each of the above-mentioned countries might
eventually develop into extended social unrest. Such social unrest might
materially adversely affect the financial performance of the Company's local
activities and of the Company as a whole.
Political Instability
The Company does not possess "political risk" or other insurance to
protect it against business interruption losses caused by political acts.
Israel's physical security and integrity have been at risk since
Israel's inception as a modern nation. Recently, Israel and Syria have restarted
peace negotiations. However, there is no formal peace between Israel and Syria
or Lebanon, and there are conflicts also between Israel and Iraq and between
Israel and Iran. Furthermore, Israel and the Palestinian Authority have been
conducting negotiations with respect to the legal status of the West Bank and
Gaza Strip, and negotiations concerning the legal status of Jerusalem, the
current Israeli capitol, may ensue. In connection with those negotiations and
their results, violent activity has occurred, and may reoccur. Therefore, to the
extent that the Company has operations in Israel, there is risk that the
political instability will have an adverse impact on the Company's ability to
conduct its business. It is highly unlikely, but possible, that Israel's
compulsory military service obligation for its citizens, which lasts until an
individual is 50 years of age, could disrupt the scheduled work of the Company's
Israeli research and development facility, which in turn could delay the
commercial launch of the Company's planned volumetric storage product line and
materially adversely affect the Company's results of operations and financial
condition.
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Russia's significant political and economic instability could have a
material adverse effect on the results of our operations and the market price of
our stock. Russia has incurred significant debt, which it may fail to adequately
service. Russian currency, the ruble, has encountered foreign exchange
volatility. The Russian government has experienced frequent political
instability and change, including wars inside Russia, acts of terrorism, power
struggles among government officials and among big commercial enterprises, which
included allegations of high levels of corruption, and allegations of organized
or other crime. In the recent years, prime ministers have been replaced
frequently, and parties with radical positions regarding intervention of the
government in the economy, like the Communist Party, have gained in influence.
Although we do not believe that the Company has been materially adversely
affected by these activities to date, in the future, such factors may have a
material adverse effect on our operations. Our ability to conduct operations in
Russia could be adversely affected by difficulties in protecting and enforcing
our rights and by future changes to local laws and regulations.
Other Adversities
Additional strains on our local operations might result from other
factors, such as the delay of Moscow banks in acknowledging wire transfers of
funds into Russia. These delays can be anywhere from a day to a week. Also,
Moscow banks often charge very expensive and somewhat arbitrary fees with
respect to wire transfers.
The Company's activities in Ukraine are limited to the operations of a
single subcontractor. Economic or political instability in Ukraine might have a
material adverse impact on the Company's ability to conduct its business and/or
its financial condition. It should be noted that, as in Russia, Ukraine has
experienced significant political and economic change. The Ukrainian economy is
less developed than that of Russia. Ukraine is susceptible to most of the same
economic risks as Russia, including sovereign debt defaults and/or
restructurings, foreign exchange volatility and political instability.
Deterioration in the Ukrainian economic or political situation could materially
adversely impact our results of operations.
Need for Additional Technology
The Company believes that it has developed a substantial amount of
technology for developing its products. Nevertheless the Company foresees the
need to recruit more employees with relevant technological knowledge and
capabilities and/or to purchase the right for specific technologies from others.
However, there can be no assurances that the Company will succeed in performing
these acquisitions.
19
<PAGE>
Proprietary Rights Protection
Although the Company intends to rely on trade secret, trademark,
copyright and other intellectual property laws to protect its Fluorescent Memory
Technology, currently the Company relies and expects to rely almost entirely on
patent laws for such protection. While the Company currently intends to
vigorously enforce its intellectual property rights, there can be no assurance
that the steps taken by the Company to protect its Fluorescent Memory Technology
and to enforce its rights will be successful. The Company, through its wholly
owned subsidiary TriDStore IP, L.L.C., individually holds five U.S. patents
relating to its Fluorescent Memory Technology. Through its wholly owned
subsidiary TriDStore IP, L.L.C., the Company holds more than forty U.S. and
foreign regular patent applications relating to its Fluorescent Memory
Technology. However, there can be no assurance that patents will be issued for
those patent applications. As of March 21, 2000, through its wholly owned
subsidiary TriDStore IP, L.L.C., the Company holds thirteen pending provisional
patent applications. There is no assurance that the Company will timely exercise
its right to convert provisional patent applications into regular or
international patent applications or that patents will be issued for any regular
or international patent applications into which the Company does convert such
provisional patent applications.
The Company expects that it will develop trade secrets. The Company may
seek patent or copyright protection for such trade secrets. There is no
assurance that the Company will develop trade secrets or seek patent or
copyright protection for any or all of them. The Company intends to enter into
confidentiality and non-disclosure agreements to protect one or more trade
secrets which it or its employees or independent contractors may develop, but
there is no assurance that the Company will do so or that the confidentiality
necessary to protect a Company trade secret will be maintained. Such failure to
maintain one or more trade secrets could have a material adverse financial
impact on the Company.
The Company may offer products in the U.S. and in foreign countries
based on its patented Fluorescent Memory Technology. Certain foreign countries
in the Pacific Rim and elsewhere may not offer the same degree of intellectual
property protection that is afforded in the U.S., European Community and Japan,
and the Company may be unable to enforce its patent rights in such
jurisdictions, even if it were able to obtain such rights.
Pending Intellectual Property Applications
The Company has filed intent to use trademark applications with the
U.S. Patent and Trademark Office for the trademarks "CLEARCARD" and
"CONSTELLATION 3D". There is no assurance that these applications will mature
into registrations or that the Company will even use these marks. Furthermore,
the Company has acquired the internet domain names "C-3D.NET," "C-TRID.COM,"
"C-TRID.NET", "CONSTELLATION3D.COM", and "CONSTELLATION3D.NET". Currently, the
Company maintains a web site at http://www.c-3d.net.
There can be no assurance that any patents, copyrights, trade secrets,
trademarks or domain names developed or obtained by the Company will provide
substantial or sufficient value or protection to the Company. Furthermore, there
is no assurance that their validity will not be challenged or that affirmative
defenses to infringement will not be asserted. With respect to trademarks,
affirmative defenses to both infringement or dilution may be asserted. If
another party were to succeed in developing data storage technology comparable
to the Company's Fluorescent Memory Technology without infringing, diluting,
misusing, misappropriating or otherwise violating the Company's intellectual
property rights, the Company's financial condition might suffer a material
adverse effect.
20
<PAGE>
Possible Intellectual Property Litigation
As is typical in the data storage industry, from time to time, the
Company may in the future be notified of claims that it may be infringing,
diluting, misusing, misappropriating or otherwise violating patents, copyrights,
trademarks, trade secrets and/or other intellectual property rights of third
parties. It is not possible to predict the outcome of such claims, and there can
be no assurance that such claims will be resolved in the Company's favor. If one
or more of such claims is resolved unfavorably, there can be no assurance that
such outcomes will not have a material adverse effect on the Company's business
or financial results. In particular, the data storage industry has been
characterized by significant litigation relating to infringement of patents and
other intellectual property rights. There can be no assurance that future
intellectual property claims will not result in litigation. If infringement,
dilution, misuse, misappropriation or another intellectual property rights
violation were established, the Company and/or its joint ventures (to the extent
that it has any) could be required to pay substantial damages or be enjoined
from developing, marketing, manufacturing and selling the infringing product(s)
in one or more countries, or both. In addition, the costs of engaging in
intellectual property litigation may be substantial regardless of outcome. If
the Company seeks licensure for intellectual property that it cannot otherwise
lawfully use, there can be no assurance that the Company will be able to obtain
such licensure on satisfactory terms.
Intellectual Property Ownership
In the future, a Company employee or contractor, and not the Company,
might be deemed the legal and/or record owner of one or more patents, patent
applications or other intellectual property which is material to protecting the
Company's data storage technology. The Company typically requires that its
employees and contractors assign to the Company all right, title and interest in
and to the intellectual property which they develop for the Company. However,
there can be no assurance that the Company will obtain legal or record ownership
of, or one or more licenses to use, such intellectual property on satisfactory
terms. It is possible that failure to obtain such legal or record ownership, or
one or more licenses to use, such intellectual property will have a material
adverse effect on the Company's business or financial results.
Product Liability Considerations
The Company may face inherent business risk of exposure to product
liability claims in the event that the use or misuse of its future products is
alleged to have resulted in the death or injury of a customer, consumer or user
or to have had some other adverse effect. The Company does not presently have
product liability insurance. Currently, the Company's technology is not mass
manufactured and it is not expected to be mass manufactured in the near future.
Although the Company might obtain product liability insurance and the Company
might protect itself against product liability claims by contractually requiring
its joint ventures (to the extent that it has any): (a) to have continuous
quality control inspections, detailed training and instructions in the
manufacture of its products; (b) to indemnify the Company for damages caused by
the joint venture's own tortuous acts or omissions; and/or (c) to obtain and
maintain adequate product liability insurance, product liability lawsuits may
affect the reputation of the Company's future products and services (to the
extent that it has any) or otherwise diminish the financial resources of the
Company. If product liability suits are brought, there is no assurance that any
existing product liability insurance of the Company or a joint venture or any
existing indemnification by the Company's joint ventures will be adequate to
cover the liability claims. However, there is no assurance that product
liability insurance will continue to be available to the Company or the
Company's joint ventures in sufficient amounts at acceptable costs.
21
<PAGE>
Supply of Components and Raw Materials
It is not uncommon in the data storage technology manufacturing and
assembly industry that certain components are available only from a few or
sole-source suppliers. However, the Company anticipates that the key components
for its future products (to the extent that it has any) will be available from a
number of source suppliers and that the Company and its joint ventures will not
experience difficulty in obtaining a sufficient supply of key components on a
timely basis. As discussed below, the Company intends to develop relationships
with qualified manufacturers with the goal of securing high-volume manufacturing
capabilities and controlling the cost of current and future models of the
Company's future products (to the extent that it has any).
However, there can be no assurance that the Company will be able to
obtain a sufficient supply of components on a timely basis or on commercially
reasonable terms or realize any future cost savings. Sales may be adversely
affected for these or similar reasons. The inability to obtain sufficient
components and equipment, to obtain or develop alternative sources of supply at
competitive prices and quality or to avoid manufacturing delays could prevent
the Company's joint ventures (to the extent that it has any) from producing
sufficient quantities of the Company's products to satisfy market demand. In
addition, in the case of a component purchased exclusively from one supplier,
the Company's joint ventures (to the extent that it has any) could be prevented
from producing any quantity of the affected product(s) until such component
becomes available from an alternative source. Such adverse events could cause
delays to product shipments, thereby increasing the joint venture's material or
manufacturing costs or causing an imbalance in the inventory levels of certain
components. Moreover, difficulties in obtaining sufficient components may cause
the Company's joint venture(s) to modify the design of the Company's products to
use a more readily available component, and such design modifications may result
in product performance problems. Any or all of these problems could result in
the loss of customers, provide an opportunity for competing products to achieve
market acceptance and otherwise adversely affect the Company's business and
financial results. The Company does not believe that there are any raw materials
on which its products depend whose unavailability is a material risk to the
financial condition of the Company.
Customers
As solely a research and development company, the Company has not yet
had any customers for its products. As discussed above, the Company intends to
establish joint ventures with strategic partners to market and sell the
Company's Fluorescent Memory Technology. In the future, it is possible that the
Company or its joint ventures will have sales to one or more customers which
equal ten percent (10%) or more of the Company's consolidated revenues. However,
the Company does not intend to become financially dependent on a small number
of, or any single, customer.
Directors' and Officers' Involvement in Other Projects
Some of the officers and directors of C3D, notably Leonardo Berezowsky
and Michael Goldberg, serve and are expected to serve as directors, officers
and/or employees of companies other than C3D. See "Directors, Executive Officers
and Certain Significant Employees." While the Company believes that such
officers and directors will be devoting adequate time to effectively manage C3D,
there can be no assurance that such other positions will not negatively impact
an officer's or a director's duties for C3D and that such impact will not have a
material adverse effect on the Company's financial condition. The Company
believes that such other company positions do not raise actual or potential
conflicts of interest that could interfere with the carrying out of the
respective duties of Messrs. Berezowsky and Goldberg at C3D.
22
<PAGE>
Legal and Regulatory Controls
The Company is not aware of any particular electrical,
telecommunication, environmental, health or safety laws and standards that will
apply to the Company's products. While the Company does not anticipate
regulation of its products, there can be no assurances that the Company will not
have to comply with laws and regulations of domestic, international or foreign
governmental or legal authorities, compliance with which could have a material
adverse affect on the Company. The U.S. Federal Communications Commission (the
"FCC") regulates computer hardware that contains or utilizes magnetic forces to
store information. To the extent the FCC may regulate in the future
fluorescent-based computer storage devices, such as our products, compliance
with those regulations could have a material adverse effect on our financial
condition.
Market Risk
The Company expects that, like many companies, it may be exposed to
some degree of market risk, particularly for its Ukrainian, Israeli and Russian
operations. The Company cannot provide any assurance that future developments in
each respective country will not generally have an adverse effect on the
financial condition of the Company. Therefore, the Company does not anticipate
that it will enter into derivative transactions (e.g., foreign currency forward
or option contracts) to hedge against known or forecasted market changes.
No Dividends
The Company does not intend to pay dividends to the holders of any of
the Company's outstanding stock for the foreseeable future. Therefore, investors
who anticipate the need for immediate or future income by way of dividends from
their investment should refrain from the purchase of the Company's shares.
Year 2000
As of March 21, 2000, the Company's management does not have any actual
knowledge of any Year 2000 computer problem that has had, is having or will have
a material adverse effect on the Company's financial condition.
The Year 2000 issue arises with the change in century and the potential
inability of information systems to correctly "rollover" dates to the new
century. To save on computer storage space, many systems were programmed with a
two-digit century (e.g., December 31, 1999 would appears as 12/31/99) assuming
that all years would be part of the 20th century. On January 1, 2000, systems
with this programming would have defaulted to 01/01/1900 instead of 01/01/2000
and calculations using or reporting the date would not be correct and errors
would arise. To prevent this from occurring, information systems need to be
updated to ensure that they recognize the Year 2000. The Company does not
anticipate any material exposure to the Year 2000 issue. As of the date of this
Annual Report, the Company has not experienced any material adverse effects
resulting from the arrival of January 1, 2000.
The Company has completed its assessment of its information technology
systems, as well as its non-information technology systems. The Company
reasonably believes that it was not materially adversely affected by the Year
2000.
The Company's research records are primarily handwritten. The Company's
computer hardware and software is relatively new and all have been purchased
with Year 2000 computer risks in mind. The Company does not reasonably
anticipate that any of its computer hardware or software will malfunction as a
result of the Year 2000.
23
<PAGE>
The Company expects that its research prototypes will accurately and
unambiguously display, reconfigure, interrupt and process all date codes
designating the Year 2000 and beyond, including leap years. However, the
Company's research prototypes may encounter a Year 2000 problem because of the
interaction of a third party's product with the Company's prototypes.
The Company is primarily relying on Year 2000 Readiness Disclosures in
its assessment of its principal suppliers. After reviewing these Year 2000
Readiness Disclosures, the Company does not foresee that any of its principle
suppliers will suffer Year 2000 issues. The Company has one supplier from which
it purchases the raw materials needed for its research operations. The Company
believes that this suppler will not face Year 2000 problems that would affect
the supplier's ability to provide the materials the Company needs to continue
its research operations. However, in the event the supplier is unable to fill
orders to the Company as a result of a Year 2000 computer failure, the Company
is prepared to utilize other suppliers to fill its orders for raw materials.
Finally, the Company has determined that its operations in Russia,
which account for a material portion of the Company's business, were not
materially adversely affected by the Year 2000 problem. The Company's concerns
stem from the state of readiness of third parties, including the Russian
government, and not from its own level of preparation. The Company reasonably
believes that the Russian government was able to handle the possible problems
that may have arisen from the Year 2000 problem and which could put at material
risk the financial condition of the Company. However, it is possible that some
unexpected problem may arise as a result of a Year 2000 problem and cause a
material adverse impact on the Company's financial condition. The Company has
put contingency plans in place to deal with a possible Year 2000 failure in
Russia. These contingency plans include a complete back-up of all computer
files, as well as the creation of paper copies of all computer files.
Dependence on Key Personnel
The Company's success depends, to a great extent, upon its ability to
attract and retain highly qualified technical and management personnel,
including experts in the field of data storage technology and the sciences
underlying such technology. Such individuals are in high demand and are often
subject to competing offers. The Company faces competition for such personnel
from other companies, research and academic institutions, government entities
and other organizations. There can be no assurances that the Company will be
able to attract and retain other qualified personnel needed for its business.
Furthermore, the Company does not currently maintain "key man" insurance for any
personnel.
Competitors in the Data Storage Technology Industry
The Company estimates that there are approximately 14 enterprises
researching, developing and/or producing data storage technology which the
Company believes to be the Company's material competitors. The data storage
technology industry is fiercely competitive, and a number of the Company's
competitors have already established their names, brands, products and
technologies in the marketplace. Some competitors are expected to have
significant market shares. Mergers, acquisitions and research and development by
the Company's competitors might further increase their market shares.
24
<PAGE>
While the Company believes that its Fluorescent Memory products and
joint venture strategies will result in competitive advantages, there is no
assurance that any such advantages will be obtained or, if obtained, can be
maintained over time, that a competitor will not invent a superior technology,
or that the Company's products and services will be able to penetrate the data
storage market. Many of the Company's current and potential competitors have or
may have advantages over the Company such as greater financial, personnel,
marketing, sales and public relations resources. Existing or future competitors
may develop or offer products that provide significant performance, price,
creative or other advantages over those offered by the Company.
Restricted Securities
Sales of a substantial number of shares of our Common Stock after the
filing of this Annual Report could adversely affect the market price of our
Common Stock by introducing a large number of sellers to the market. Given the
potential volatility in the price of our shares, these sales could cause the
market price of our Common Stock to decline.
The majority of our outstanding shares of Common Stock have been issued
in private placements and are restricted securities under the U.S. Securities
Act of 1933, as amended. These restricted securities will be subject to
restrictions on the timing, manner and volume of sales of restricted shares.
We cannot predict if future sales of our Common Stock or the
availability of our Common Stock for sale will adversely affect the market price
for our Common Stock or our ability to raise capital by offering equity
securities.
ITEM 2. PROPERTIES
C3D is leasing facilities at 230 Park Avenue, Suite 453, New York, New
York 10169 for administrative purposes. The facilities serve as the office of
C3D's Chief Executive Officer. The lease expires December 31, 2000 with an
option to renew for one year.
C-TriD Israel Ltd. has entered into two operating lease agreements for
the facilities it uses at 2 Prof. Bergman Str., Rechovot 76327 Israel. The first
lease was to expire on May 14, 1999, but C-TriD Israel Ltd. exercised its option
to extend the lease period until May 14, 2000. There is another option to extend
the lease period until May 14, 2001. The second lease is to expire on April 5,
2001, but there is an option to extend the lease period until April 4, 2003. The
Company conducts research and development at the Rechovot facilities.
TriD Store Vostok leases two sets of facilities in Moscow, Russia
primarily to conduct research and development. The lease for the facilities at
119146, Moscow, 2nd Frunzenskaya ul., 8, Building 1, expired December 1, 1999,
and the lease for the facilities at MSU Science Park Building 5, Locations 513A,
514 and 522 expired December 30, 1999. However, TriD Store Vostok has renewed
both leases. The lease for the facilities at 119146, Moscow, 2nd Fruzenskaya
ul., 8, Building 1 will now expire on December 30, 2000. The lease for the
facilities at MSU Science Park has changed. It is now a lease for premises at
Leninsky Hills, Possession 1, Building 75, Entrance 5, Premises 514, 515 and
523, and will now expire December 31, 2000.
C3D leases facilities at 1875 Charleston Road, Mountain View,
California 94043. The lease is month-to-month and includes the right of C3D to
certain services such as secretarial support. The Company conducts research and
development at these facilities.
Presently, C3D is using the Fort Lauderdale, Florida office located at
2625 NE 11th Court, Fort Lauderdale, Florida 33304, owned by one of C3D's
directors. The offices are primarily being used for administrative functions of
C3D. The Company currently has no lease arrangement for the Fort Lauderdale
offices but is not at material risk of losing its capacity to adequately use the
facilities.
25
<PAGE>
The Company has determined that, for the foreseeable future, the
facilities at all of the addresses referenced are suitable, adequate and capable
of the necessary productivity for the activities undertaken and to be undertaken
there. The Company expects that it will continue to fully utilize these
facilities and that it will renew its leases and rental agreements before their
termination or find other adequate facilities to conduct the operations. The
Company might acquire additional facilities as it deems appropriate.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business, to which the registrant or any of
its subsidiaries is a party or of which any of their property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1999 Annual Meeting of Shareholders of C3D was held on December 27,
1999 (the "Annual Meeting"). THE FOLLOWING VOTE TABULATIONS HAVE BEEN ADJUSTED
TO GIVE RETROACTIVE EFFECT TO THE CHANGE IN THE PRICE PER SHARE OF THE COMMON
STOCK RESULTING FROM THE THREE-FOR-ONE FORWARD SPLIT OF THE COMMON STOCK THAT
TOOK EFFECT ON JANUARY 18, 2000.
At the Annual Meeting, the following persons, constituting the entire
Board of Directors of C3D, were re-elected as directors of C3D: Itzhak Yaakov,
Eugene Levich, Lev Zaidenberg and Michael Goldberg. At the Annual Meeting,
29,250,000 votes were cast in favor of the re-election of Itzhak Yaakov, none
against his re-election or withheld, none in abstention, and there were no
broker non-votes in respect thereto. At the Annual Meeting, 29,250,000 votes
were cast in favor of the re-election of Eugene Levich, none against his
re-election or withheld, none in abstention, and there were no broker non-votes
in respect thereto. At the Annual Meeting, 29,250,000 votes were cast in favor
of the re-election of Lev Zaidenberg, none against his re-election or withheld,
none in abstention, and there were no broker non-votes in respect thereto. At
the Annual Meeting, 29,250,000 votes were cast in favor of the re-election of
Michael Goldberg, none against his re-election or withheld, none in abstention,
and there were no broker non-votes in respect thereto.
Also at the Annual Meeting, certain amendments to C3D's Articles of
Incorporation were approved, including a change of C3D's corporate name to
"Constellation 3D, Inc." At the Annual Meeting, 29,250,000 votes were cast in
favor of this matter, none against it or withheld, none in abstention, and there
were no broker non-votes.
At the Annual Meeting, C3D's 1999 Stock Option Plan was approved. At
the Annual Meeting, 29,250,000 votes were cast in favor of this matter, none
against it or withheld, none in abstention, and there were no broker non-votes.
26
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The common equity of C3D, which are common shares, $.001 par value per
share, are quoted on the NASD's Over-the-Counter Bulletin Board quotation
service (the "Bulletin Board") under the symbol "CFMD". C3D's securities are not
and have not been listed or quoted on any exchange or other quotation system.
On December 17, 1999, C3D's Board of Directors approved a three-for-one
forward split of its Common Stock for those shareholders of record as of
December 16, 1999. The adjustment of the price per share of the Common Stock
that resulted from such forward split took effect on January 18, 2000 and before
trading of the Common Stock began on January 18, 2000. ALL OF THE HIGH AND LOW
BIDS REPORTED IN THE CHART IMMEDIATELY BELOW HAVE BEEN ADJUSTED TO GIVE
RETROACTIVE EFFECT TO THE CHANGE IN THE PRICE PER SHARE OF THE COMMON STOCK
RESULTING FROM THAT STOCK SPLIT.
Time Period High Bid Low Bid
- --------------------------------------------- ------------ ----------
Fiscal Year Ending 2000:
First Quarter*............................ $ 63.625 $ 19.33
Fiscal Year Ending 1999:
Fourth Quarter............................ $ 32.63 $ 5.35
Third Quarter............................. $ 7.92 $ 3.33
Second Quarter............................ $ 4.04 $ 0.58
First Quarter............................. -- --
- ----------------------------
* For the period January 1, 2000 through and including March 21, 2000.
Such over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
As of March 7, 2000, there were approximately 64 shareholders of record
of the Common Stock.
C3D has never paid any cash dividends to any of its shareholders,
because it has lacked earnings to pay such dividends, and it has no present
intention to pay cash dividends.
The information below relates to securities of C3D sold by C3D during
the period covered by this Annual Report, as well as the subsequent interim
period, that were not registered under the U.S. Securities Act of 1933 (the
"Securities Act"). THE SHARE AMOUNTS AND PRICES PER SHARE HAVE BEEN ADJUSTED TO
GIVE RETROACTIVE EFFECT TO THE CHANGE IN THE PRICE PER SHARE OF THE COMMON STOCK
RESULTING FROM THE THREE-FOR-ONE FORWARD SPLIT OF C3D'S COMMON STOCK THAT TOOK
EFFECT ON JANUARY 18, 2000.
27
<PAGE>
Section 4(2) Offering to Sands Brothers
---------------------------------------
On March 24, 2000, C3D issued a 10% Subordinate Convertible Debenture
due September 24, 2001 in principal amount of $4.0 million to Sands Brothers
Venture Capital Associates LLC, a limited liability company organized under the
laws of New York ("Sands Brothers VC"). In connection with such issuance, C3D
granted to Sands Brothers VC certain registration rights with respect to the
underlying Common Stock. The issuance of the convertible debenture, convertible
at $17.65 per share as of the issue date, was made as an exempt offering under
Section 4(2) of the Securities Act. In connection with such issuance, pursuant
to the terms of the Warrant Agreement dated as of December 1, 1999, by and
between the Company and Sands Brothers & Co. Ltd., a Delaware corporation
("Sands Brothers"), the Company issued to Sands Brothers warrants to purchase
1,050,000 shares of Common Stock at an exercise price of $3.67 per share and
warrants to purchase 2,400,000 shares of Common Stock at an exercise price of
$15.13 per share. Both warrants expire on December 1, 2004.
Section 4(2) Offering to Winnburn Advisory
------------------------------------------
On December 24, 1999, C3D entered into an agreement to issue $1,600,000
of convertible subordinated debt to Winnburn Advisory, a corporation organized
under the laws of Nevis, West Indies ("Winnburn"). In connection with such
issuance, C3D granted to Winnburn certain registration rights with respect to
the underlying common stock. The issuance of the convertible note was made as an
exempt offering under Section 4(2) of the Securities Act.
Section 4(2) Offering to Wilbro Nominees Limited
------------------------------------------------
On November 11, 1999, C3D issued $500,000 of convertible subordinated
debt to Wilbro Nominees Limited, a corporation organized under the laws of
England ("Wilbro"). In connection with such issuance, C3D granted to Wilbro
certain registration rights with respect to the underlying common stock. The
issuance of the convertible note was made as an exempt offering under Section
4(2) of the Securities Act. The financing was arranged by Moorwood Investment
Limited, a British Virgin Islands company ("Moorwood"), and in consideration
therefor, Moorwood was paid a finder's fee of twenty percent of the principal
amount of the convertible note (i.e., $100,000) and was granted warrants to
purchase up to 300,000 shares of Common Stock at an exercise price of $3.33 per
share, provided that, among other conditions, Moorwood successfully places
financing in an aggregate amount of $2,500,000. Upon the filing date of this
Annual Report, Moorwood has placed only $500,000 in financings.
Section 4(2) Offering to MBA-on-Demand, L.L.C.
----------------------------------------------
On November 8, 1999, the Board of Directors of C3D authorized, pursuant
to that certain Engagement Letter dated as of May 23, 1999, the issuance of
7,500 shares of Common Stock, which C3D valued at $28,750, to MBA-on-Demand,
L.L.C., a Texas limited liability company, as consideration for services
rendered pursuant to the Engagement Letter. In connection with such issuance,
C3D granted to MBA-on-Demand, L.L.C. certain registration rights with respect to
such Common Stock. C3D made the exempt offering under Section 4(2) of the
Securities Act.
Section 4(2) Offering to Individual Investor
--------------------------------------------
On November 1, 1999, C3D's Board of Directors authorized the issuance
of 25,509 shares of Common Stock to an individual investor for a total purchase
price of $125,000. In connection with such subscription, C3D paid a commission
in the amount of $25,000 to Challis International Limited. C3D made the offering
of the Common Stock as an exempt offering under Section 4(2) of the Securities
Act.
Section 4(2) Offering to Constellation Tech
-------------------------------------------
On October 1, 1999, in connection with the Acquisition, among other
undertakings, C3D issued 29,250,000 shares of Common Stock to Constellation Tech
as consideration for the sale of certain assets of Constellation Tech. C3D made
the exempt offering under Section 4(2) of the Securities Act. See "Certain
Relationships and Related Transactions."
Section 4(2) Offering to Seattle Investments LLC
------------------------------------------------
On August 10, 1999, C3D issued $1 million of convertible subordinated
debt to Seattle Investments LLC, a limited liability company organized under the
laws of Nevis, West Indies ("Seattle Investments"). In connection with such
issuance, C3D granted to Seattle Investments certain registration rights with
respect to the underlying Common Stock. On October 22, 1999, Seattle Investments
converted its 10.0% Series A Convertible Note due December 31, 1999 and related
accrued interest into 608,835 shares of Common Stock. The issuance of the
convertible note and the conversion were each made as an exempt offering under
Section 4(2) of the Securities Act.
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Regulation S Offering to Twenty-Five Foreign Investors
------------------------------------------------------
On May 7, 1999, C3D issued 1,359,765 shares of its Common Stock at an
aggregate offering price of $1,813,020 to twenty-five individuals and entities
then residing outside of the United States pursuant to Regulation S under the
Securities Act.
Regulation D Offering to Sixteen Individuals
--------------------------------------------
On March 24, 1999, C3D issued 9,375,000 shares of its Common Stock at
an aggregate offering price of $250,000 to sixteen individuals and entities. C3D
filed under SEC Rule 504 for an exemption from registration of those common
shares under the Securities Act.
Issuance of Stock to Messrs. Yaakov and Goldberg
------------------------------------------------
As compensation for services rendered, on March 8, 1999, C3D's Board of
Directors authorized the issuance of 150,000 shares of Common Stock, valued for
accounting purposes at an aggregate of $200,000, to Brigadier General Itzhak
Yaakov, Chairman of the Board of Directors of C3D, and 150,000 shares of Common
Stock, valued for accounting purposes at an aggregate of $200,000, to Michael
Goldberg, Secretary, Director of Legal Affairs, interim Chief Operating Officer
and Member of the Board of Directors of C3D. The issuance of both sets of
150,000 shares occurred on December 7, 1999. Furthermore, as compensation for
services rendered, the Board authorized the issuance to General Yaakov of
options to purchase 300,000 shares of Common Stock and the issuance to Mr.
Goldberg of options to purchase 225,000 shares of Common Stock. General Yaakov's
options and Mr. Goldberg's options expire after five years. The Company made the
offering of the Common Stock and options as exempt offerings under Section 4(2)
of the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data of C3D for, and as of
each of the years ended December 31, 1999, 1998 and 1997 has been derived from
the Company's financial statements, including the notes thereto, which have been
audited by BDO International, independent auditors. The information set forth
below is qualified in its entirety by reference to, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and Notes thereto
included elsewhere in this Annual Report.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------- Period from
Inception
(September 25,
1997) through
December 31,
1998 1999 1997
----------- ----------- ------------
<S> <C> <C> <C>
Statement of Operations Data:
Operating Expenses....................... $ 4,497,266 $ 3,195,425 $ 2,558,894
Interest (Income) Expense................ $ 305,833 $ (6,985) $ 53,851
Net Loss for the period.................. $ 4,866,687 $ 3,191,902 $ 2,612,745
Loss per common share.................... $ (0.15) $ (6.80) $ (4,354.57)
Weighted average number of shares
outstanding.............................. 32,148,978 469,275 600
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------
1998 1999 1997
----------- ----------- ------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.............. $ 2,030,139 $ 123,097 $ 2,818,719
Working capital (deficiency)........... (1,415,276) (1,136,513) (2,686,560)
Due to related parties ................ 360,711 422,790 531,067
Due to shareholder .................... 1,316,712 -- 4,152,521
Total assets........................... 2,422,228 561,589 2,954,929
Non-current liabilities................ 2,145,449 46,825 26,345
Stockholders' deficit.................. $(3,319,625) $ (916,107) $(2,612,742)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR CONSTELLATION 3D, INC.
The following discussion contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those discussed in these forward-looking statements as a result
of various factors, including risk factors set forth in this Annual Report. The
following discussion should be read in conjunction with the financial statements
and notes thereto included elsewhere in this Annual Report.
Overview
Constellation 3D, Inc., a Florida corporation ("C3D"), was incorporated
on December 27, 1995, under the name Latin Venture Partners, Inc. The name of
the company was changed to C3D Inc. on March 24, 1999 in anticipation of a
proposed transaction with Constellation 3D Technology Limited, a British Virgin
Islands company, ("Constellation Tech"). As approved by the requisite number of
shares at the Annual Meeting of Shareholders of C3D held on December 27, 1999,
C3D Inc. changed its name to Constellation 3D, Inc. effective December 29, 1999.
On January 18, 2000, a three-for-one forward split of C3D's Common Stock took
effect for shareholders of record as December 16, 1999.
In early 1999, C3D raised approximately $2 million in capital to fund
C3D's operations, which consisted primarily of management fees, consulting fees,
professional fees, and general and administrative expenses. These expenses were
incurred in the course of completing the due diligence review of Constellation
Tech, continued financing activities, support negotiations for the acquisition
between C3D and Constellation Tech, and the preparation of the Form 10.
C3D and Constellation Tech entered into an asset purchase agreement
which was completed on October 1, 1999, whereby C3D acquired from Constellation
Tech substantially all liabilities and certain assets, including the following
ownership interests in the following companies:
o 99 of the 100 issued and outstanding shares of C-TriD Israel Ltd.,
which operates research and development facilities in Rechovot Park
and Tel Aviv, Israel;
o all of the issued and outstanding shares of TriD Store Vostok, which
operates research and development facilities in Moscow, Russia;
o the sole membership interest of Constellation Tech in TriDStore IP,
L.L.C., which has had no active operations but which, commencing
November 3, 1999, holds the patents and the patent applications for
the Company's Fluorescent Memory Technology; and
o all of the issued and outstanding shares of TriD SV, Inc., which has
had no operations but is expected to head C3D's California
operations.
30
<PAGE>
The predecessor company, Constellation Tech, commenced operations in
January of 1997 through its Israeli subsidiaries, O.M.D. Optical Memory Devices
Ltd. and Tridstore Ltd. Both subsidiaries were active in 1997 and 1998 and
performed the initial research and development of the Company's Fluorescent
Memory Technology. Neither subsidiary was acquired by C3D, because neither was
active at the time C3D entered into an asset purchase agreement with
Constellation Tech. On December 2, 1996, C-TriD Israel Ltd. ("C-TriD") was
formed and began operations in Park Rabin, Rechovot, Israel, and the
enterprise's activities in Israel started moving to it. C-TriD's main function
has been the testing and ongoing development of the Company's current products,
the Micro Read/Write Disk and ClearCard ROM. Research and development is
expected to increase at the Israeli facility for further testing and the
development of new products such as ClearCard R/W.
In January 1999, TriD Store Vostok ("Vostok") was formed in Russia.
Vostok is also conducting research and development of the Company's technology,
supporting C-TriD's research and development activity because of the Russian
subsidiary's talent pool and reduced labor costs.
In February 1998, TriDStore IP, L.L.C. ("TriDStore"), a Delaware
limited liability company, was formed. It has had no active operations but
currently holds the patents and patent applications for the Company's
Fluorescent Memory Technology. At present, TriDStore holds five U.S. patents,
more than forty U.S. and foreign regular patent applications and thirteen
pending provisional applications. The Company plans to continue to use TriDStore
as a holding company for its patent registrations and applications.
In August 1998, TriD SV, Inc. ("TriD SV"), a Delaware corporation, was
formed. It has had no operations since its formation. It is anticipated that
TriD SV will be the operating vehicle of the California operations. The General
Manager of Products, Ingolf Sander, currently resides and conducts operations in
Mountain View, California and expects to increase activities in California
significantly when the Company's products have reached the point of
commercialization. Mountain View is expected to be an ideal location for the
Company, because the area has the infrastructure and talent pool for the data
storage industry already in place.
On October 1, 1999, the date on which C3D acquired certain subsidiaries
of Constellation Tech, C3D had 11,109,765 shares issued and outstanding, and
Constellation Tech received 29,250,000 newly issued shares. As a result of the
acquisition, Constellation Tech owned approximately 72% of the Common Stock of
C3D. In an instance like this, accounting principles require that the
transaction be reflected in financial statements as a "reverse acquisition"
where the acquired subsidiaries essentially acquire the parent. In this form of
accounting, the statements are created by aggregating the accounts of the two
subsidiaries, as would have been the case if Constellation Tech had retained
ownership, and then adding the accounts of the parent for the relevant period
when C3D and Constellation Tech came under common control. In this case, common
control started immediately after the completion of the acquisition which was
effective October 1, 1999.
Also, according to proper accounting practice, in order to portray all
three operating companies (i.e. C3D, Vostok and C-TriD) as if they were
operating as a single entity, transactions between the three companies have been
eliminated.
For purposes of this Management Discussion and Analysis of the this
Annual Report, and except where the context clearly indicates otherwise,
Constellation 3D, Inc. and its wholly owned subsidiaries will be collectively
called the "Company".
The Company plans to continue its focus on research and development of
its data storage technology and to develop strategic alliances, joint ventures
and licensing arrangements with established companies in the data storage
industry. The Company expects that its operating expenses will increase
significantly during the foreseeable future as the result of its plans to:
31
<PAGE>
o increase expenditures on marketing and business development by
hosting demonstrations of the Company's technology to potential
strategic partners, continually obtaining information about the
market size and growth parameters to update the market analysis,
updating industry pricing and cost trends, enlarging the team
responsible for establishing partnerships, and monitoring new
technological developments in the industry. The Company expects to
increase expenditures from the current levels of approximately
$80,000 per month to $150,000 per month for the above activities;
o enhance existing capabilities of products by increasing the levels of
research and development expenditures and capital assets from the
current levels of $300,000 per month to $600,000;
o increase expenditures on administration to provide the overall
management of the parent company as well as the subsidiaries from the
current levels of $100,000 per month to $200,000 per month;
o increase monthly expenditures on professional fees for patent
registration, licensing and joint venture agreements from $100,000
per month to $150,000 per month; and
o establish research and development facilities with initial
manufacturing capabilities in the United States by hiring additional
staff and transferring equipment and personnel. The Company expects
such expenses to be approximately $1,000,000 over the next twelve
months.
On February 15, 2000, the Company entered into a letter of intent to
acquire Reflekt Technology, Inc., a Massachusetts corporation. There is no
assurance that the transaction will be consummated. It is possible that the
parties to the letter of intent will agree to modify or waive one or more terms
and/or conditions of the letter of intent in accordance with such letter of
intent. If the acquisition is consummated, it is also possible that, by
agreement of the parties, one or more terms and/or conditions of any legally
binding definitive acquisition agreements will differ materially from the terms
and conditions of the letter of intent.
The Company must raise additional funds as a result of the planned
significant increase in its operating expenditures and anticipates that it will
require approximately $15 million in order to fund its operations over the next
twelve months. The Company has sufficient working capital to support its
operations through September 2000 and is in the process of negotiating for
additional capital. The Company does not expect to receive revenues until the
end of the fiscal year 2000 and expects to continue to incur operating losses
until late in the third or fourth quarter of fiscal year 2001. The Company is
currently exploring additional financing alternatives, including the possibility
of private equity or debt offerings. In December 1999, the Company entered into
an agreement with Sands Brothers & Co., Ltd., a Delaware corporation, as first
amended on December 22, 1999, as second amended on March 7, 2000 and as third
amended on March 23, 2000, pursuant to which Sands Brothers & Co., Ltd. is to
raise, on a best efforts basis, a minimum of $4.0 million and a maximum of
$120.0 million of financing for the Company through the issuance of the
Company's capital stock. Sands Brothers & Co., Ltd. was issued warrants to
purchase up to 16,050,000 shares of Common Stock at a price starting at $3.67
per share. Although the Company's existing debt securities contain no such
restrictions, the signing of future convertible debt or preferred share
agreements could result in restrictions being placed on dividends, interest and
principle payments, or any other covenant restrictions that could make payments
of such debts difficult, create difficulties in obtaining further financings,
limit the flexibility of changes in the business, and cause substantial
32
<PAGE>
liquidity problems. There can be no assurance, however, that such financing will
be available to the Company or, if it is, that it will be available on terms
acceptable to the Company. If the Company is unable to obtain the financing
necessary to support its operations, its may be unable to continue as a going
concern.
The Company has a limited operating history upon which to base an
evaluation of its business. The Company's business and prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stages of development, particularly
companies in new and rapidly evolving markets such as data storage. These risks
include, but are not limited to, rapid technological change, inability to manage
growth, competition from more established companies, dependence on suppliers,
internal system problems, risks relating to the Year 2000 issue, inability to
obtain sufficient financing and an unproven business record.
Results of Operations for the Year Ended December 31, 1999 Compared to the Year
Ended December 31, 1998
Our reported financial condition includes all amounts for the parent
company, C3D, and our two wholly owned operating subsidiary companies, C-TriD
and Vostok. Our reported earnings from operations include the combined earnings
of the two subsidiaries for the full 1999 year, the earnings of the predecessor
company, Constellation Tech, for the nine months ended September 30, 1999,
together with the earnings of C3D after October 31, 1999, the date on which we
completed the acquisition of certain assets.
Revenue. The Company generated no revenue in the years ended December
31, 1999 and 1998.
Research and System Development Expenses. Research and development
expenses consist primarily of expenses incurred for the development of the data
storage technology, including compensation of technical staff and contractors,
materials consumed in the development process, and professional fees for
intellectual property. The Company incurred research and development expenses of
$2,413,239 for the year ended December 31, 1999 and $1,534,948 for the year
ended December 31, 1998. The significant costs were payroll for staff and
contractors which amounted to $1,366,002 for the year ended December 31,1999 and
$965,114 for year ended December 31, 1998. The increase in payroll expenditures
was due to the increase in staff levels to 54 for the year ended December 31,
1999 from 35 for the year ended December 31, 1998. Professional fees were
$556,432 for patent preparation and filing for the year ended December 31, 1999
and $312,612 for the year ended December 31, 1998. The increase in patent costs
was due to the expanded coverage in scope and geography of the Company's
Fluorescent Memory Technology. Materials consumed amounted to $64,155 for the
year ended December 31, 1999 and $139,565 for the year ended December 31, 1998.
This decrease was due to the reduction of new materials required as the
Company's products went from prototypes to a demonstrable product in 1999.
General and Administrative Expenses. General and administrative
expenses consist of management compensation, rent, professional services,
telephone expense, travel and other general corporate expenses. General and
administrative expenses were $ 2,084,027 for the year ended December 31, 1999
compared with $1,660,477 for the year ended December 31, 1998. This increase
reflected the hiring of additional management, increased facilities charges and
expansion of operations. Payroll expenses and management fees relating to
general and administrative expenses were $466,034 in the year ended December 31,
1999 and $690,066 for the year ended December 31, 1998. The decrease was due to
the reduction of a management contract from $400,000 for the year ended December
31, 1998 to $100,000 for the year ended December 31, 1999. Office and
maintenance charges consisting of expenditures on rent, general maintenance, and
communications were $436,903 for the year ended December 31, 1999 and $491,322
for the year ended December 31, 1998. Travel and accommodation expenses were
$303,443 for the year ended December 31, 1999 and $327,355 for the year ended
33
<PAGE>
December 31, 1998. Professional fees were $328,480 for the year ended December
31, 1999 and $56,180 for the year ended December 31, 1998, the majority of which
were related to legal support for the Company's financing transactions and the
preparation of the previously filed Registration Statement. Business development
expenses were $97,635 for the year ended December 31, 1999 and $0 for the year
ended December 31, 1998.
Interest and other charges. The Company has recorded net interest
expense of $305,833 for the year ended December 31, 1999 and a net interest
income of $6,985 for the year ended December 31, 1998. Interest income and
expense consisted of bank overdrafts, shareholder loans and subordinated
convertible debt.
Income Taxes. The Company has generated inter-company taxable income to
date and therefore has paid $63,588 for the year ended December 31, 1999 and
$3,462 for the year ended December 31, 1998. The taxes were incurred in the
Israeli and Russian subsidiaries, C-TriD and Vostok, due to their treatment of
inter-company advances as taxable revenue. The Company has not generated any
taxable income to date and therefore has not paid any federal income taxes since
its inception. Deferred tax assets created primarily from net operating loss
carry-forwards have been fully reserved as management is unable to conclude that
future realization is more likely than not.
Liquidity and Capital Resources
As of December 31, 1999, the Company's cash position was $2,030,139 and
its working capital deficit was $1,415,276 compared to a cash position of
$123,097 and a working capital deficit of $1,136,513 as at December 31, 1998.
Since inception, the Company has financed its operations from capital
contributions, shareholder loans and subordinated convertible debt. During the
year ended December 31, 1999, the Company received proceeds of $3,100,000 from
the sale of subordinated convertible debt and $1,300,000 from shareholder loans.
The capital contribution, net of financings costs, during the year amounted to
$100,000.
Net cash used in operating activities was $3,719,345 for the year ended
December 31, 1999, including a net loss of $4,866,687 and an increase in
payables of $618,514. Non-cash transactions involved the issuance of shares for
services of $28,750 and the beneficial conversion feature on the subordinated
convertible note of $125,000. The Company's current operating expenditures are
approximately $600,000 per month and the Company plans to increase its operating
expenditures to $1,100,000 a month in order to expand its operations. The
Company has not generated any revenues to date and does not anticipate cash flow
from operations to be sufficient to fund its cash requirements until late in
2001.
The Company incurred net capital expenditures of $65,581 for the year
ended December 31, 1999 and $200,197 for the year ended December 31, 1998. These
expenditures were primarily for laboratory equipment associated with the
Company's continued research and development.
The Company currently has no commitments for any credit facilities such
as revolving credit agreements or lines of credit that could provide additional
working capital. Based on its existing capital resources, the Company believes
that it will be able to fund operations through September 2000. The Company's
capital requirements depend on several factors, including the success and
progress of research development programs, the resources devoted to developing
products, the extent to which products achieve market acceptance and other
factors. The Company anticipates that it will require substantial additional
financing to fund its working capital requirements. There can be no assurance,
34
<PAGE>
however, that additional funding will be available or, if available, that it
will be available on terms acceptable to the Company. If adequate funds are not
available, it may not be able to continue. There can be no assurance that the
Company will be able to raise additional cash if its cash resources are
exhausted. The Company's ability to arrange such financing in the future will
depend in part upon the prevailing capital market conditions as well as the
Company's business performance.
The Company has been in the development stage since its inception. It
has had no operating revenue to date, has accumulated losses of $10,671,334 and
will require additional working capital to complete its business development
activities and generate revenue adequate to cover operating and further
development expenses. Thus, there is no assurance that the Company will be able
to continue as a going concern. As a result of these factors, the Company's
independent certified public accountants modified their opinion with an
explanatory paragraph addressing the Company's ability to continue as a going
concern.
Market Risk
The Company expects that, like many companies, it may be exposed to
some degree of market risk particularly, for its Ukrainian, Israeli and Russian
operations. The Company cannot provide any assurance that future developments in
each respective country will not generally have an adverse effect on the
financial condition of the Company. The Company does not anticipate that it will
enter into derivative transactions (e.g., foreign currency forward or option
contracts) to hedge against known or forecasted market changes.
The Company believes that it does face political risk based on having
operations in the Ukraine, Israel and Russia. These countries do face political
instability that could have a material adverse effect on the Company's
operations, however, the Company believes that this is unlikely to occur. The
Company does not possess "political risk" or other insurance to protect it
against business interruption losses caused by political acts.
Year 2000 Issue
As of March 21, 2000, the Company's management does not have any actual
knowledge of any Year 2000 computer problem that has had, is having or will have
a material adverse effect on the Company's financial condition.
The Year 2000 issue arises with the change in century and the potential
inability of information systems to correctly "rollover" dates to the new
century. To save on computer storage space, many systems were programmed with a
two-digit century (e.g., December 31, 1999 would appears as 12/31/99) assuming
that all years would be part of the 20th century. On January 1, 2000, systems
with this programming would have defaulted to 01/01/1900 instead of 01/01/2000
and calculations using or reporting the date would not be correct and errors
would arise. To prevent this from occurring, information systems need to be
updated to ensure that they recognize the Year 2000. The Company does not
anticipate any material exposure to the Year 2000 issue. As of the date of this
Annual Report, the Company has not experienced any material adverse effects
resulting from the arrival of January 1, 2000.
The Company has completed its assessment of its information technology
systems, as well as its non-information technology systems. The Company
reasonably believes that it will not be materially adversely affected by the
Year 2000.
The Company's research records are primarily handwritten. The Company's
computer hardware and software is relatively new and all have been purchased
with Year 2000 computer risks in mind. The Company does not reasonably
anticipate that any of its computer hardware or software will malfunction as a
result of the Year 2000.
35
<PAGE>
The Company expects that its research prototypes will accurately and
unambiguously display, reconfigure, interrupt and process all date codes
designating the Year 2000 and beyond, including leap years. However, the
Company's research prototypes may encounter a Year 2000 problem because of the
interaction of a third party's product with the Company's prototypes.
The Company is primarily relying on Year 2000 Readiness Disclosures in
its assessment of its principal suppliers. After reviewing these Year 2000
Readiness Disclosures, the Company does not foresee that any of its principle
suppliers will suffer Year 2000 issues. The Company has one supplier from which
it purchases the raw materials needed for its research operations. The Company
believes that this suppler will not face Year 2000 problems that would affect
the supplier's ability to provide the materials the Company needs to continue
its research operations. However, in the event the supplier is unable to fill
orders to the Company as a result of a Year 2000 computer failure, the Company
is prepared to utilize other suppliers to fill its orders for raw materials. As
a further precaution, the Company has purchased enough raw materials to last
through the first quarter of 2000.
Finally, the Company has determined that its operations in Russia,
which account for a material portion of the Company's business, may be
materially adversely affected by the Year 2000 problem. The Company's concerns
stem from the state of readiness of third parties, including the Russian
government, and not from its own level of preparation. The Company reasonably
believes that the Russian government was able to handle the possible problems
that may have arisen from the Year 2000 problem and which could put at material
risk the financial condition of the Company. However, it is possible that some
unexpected problem may arise as a result of a Year 2000 problem and cause a
material adverse impact on the Company's financial condition. The Company has
put contingency plans in place to deal with a possible Year 2000 failure in
Russia. These contingency plans include a complete back-up of all computer
files, as well as the creation of paper copies of all computer files.
Recent Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). The Statement establishes
accounting and reporting standards requiring that every derivative instrument
(including some types of derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The Statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. SFAS 133, as
amended by SFAS No. 137 defining SFAS No. 133's effective date, is effective for
fiscal years beginning after June 15, 2000, and must be applied to instruments
issued, acquired, or substantively modified after December 31, 1997. Also, SOP
98-5, "Reporting the Costs of Start-up Activities" is effective for the year
ended January 1, 2000. The Company does not expect the adoption of the
accounting pronouncement to have a material effect on its financial position or
results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company did not hold any material market rate sensitive
instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
36
<PAGE>
Constellation 3D, Inc.
(A Development Stage Company)
Consolidated Financial Statements
From the date of inception (September 25, 1997)
through December 31, 1999
<PAGE>
Constellation 3D, Inc.
(A Development Stage Company)
Contents
================================================================================
Report of Independent Certified Public Accountants.................... 1
Financial Statements
Consolidated Balance Sheets........................................ 2
Consolidated Statements of Operations.............................. 3
Consolidated Statement of Changes in Stockholders' Deficit......... 4
Consolidated Statements of Cash Flows.............................. 5 - 6
Notes to Consolidated Financial Statements......................... 7 - 13
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Stockholders of
Constellation 3D, Inc.
We have audited the accompanying consolidated balance sheets of Constellation
3D, Inc. (a development stage company) and its subsidiaries ("the Company") as
of December 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' deficit and cash flows for the years ended December
31, 1999 and 1998, the period from inception (September 25, 1997) through
December 31, 1997, and the period from inception (September 25, 1997) through
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in Israel, which do not differ in any material respects from auditing standards
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the financial position of Constellation 3D,
Inc. (a development stage company) and its subsidiaries at December 31, 1999 and
1998, and the results of their operations and their cash flows for the years
ended December 31, 1999 and 1998, the period from inception (September 25, 1997)
through December 31, 1997 and the period from inception (September 25, 1997)
through December 31, 1999 in conformity with generally accepted accounting
principles in the United States.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company is in the development stage and has generated
no operating revenue to date and will need to raise additional working capital
for future development costs. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regards
to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
BDO International
Tel-Aviv, Israel
February 22, 2000, (Except for Note 11 which
is as of March 24, 2000)
1
<PAGE>
Constellation 3D, Inc.
(A Development Stage Company)
Consolidated Balance Sheets
================================================================================
<TABLE>
<CAPTION>
December 31, 1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 2,030,139 $ 123,097
Prepaid and other 150,989 171,261
- ------------------------------------------------------------------------------------------------------------------
Total Current Assets 2,181,128 294,358
Property, Plant and Equipment, net 241,100 267,231
- ------------------------------------------------------------------------------------------------------------------
Total Assets $ 2,422,228 $ 561,589
==================================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Note payable $ 650,577 $ 377,624
Accounts payable and accrued expenses 1,268,404 630,457
Due to related parties 360,711 422,790
Due to shareholder 1,316,712 -
- ------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 3,596,404 1,430,871
Convertible Notes Payable 2,105,480 -
Other Long Term Liabilities 39,969 46,825
- ------------------------------------------------------------------------------------------------------------------
Total Liabilities 5,741,853 1,477,696
- ------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Stockholders' Deficit
Preferred stock, no par value; 10,000,000 shares authorized, 0 issued and
outstanding - -
Common stock, $0.001 par value; 100,000,000 shares authorized, 41,001,609
and 29,214,000 issued and outstanding 41,001 29,214
Additional paid-in capital 7,310,708 4,859,326
Deficit accumulated during the development stage (10,671,334) (5,804,647)
- ------------------------------------------------------------------------------------------------------------------
Total Stockholders' Deficit (3,319,625) (916,107)
- ------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Deficit $ 2,422,228 $ 561,589
==================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
Constellation 3D, Inc.
(A Development Stage Company)
Consolidated Statements of Operations
================================================================================
<TABLE>
<CAPTION>
Period from
Cumulative Amounts Inception
from Inception (September 25,
(September 25, Year Ended 1997) through
1997) through December 31, December 31,
December 31, ------------------------- ---------------
1999 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING EXPENSES:
Research and development $ 5,439,894 $ 2,413,239 $ 1,534,948 $ 1,491,707
General, administrative and other 4,811,691 2,084,027 1,660,477 1,067,187
- -----------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 10,251,585 4,497,266 3,195,425 2,558,894
OTHER EXPENSE (INCOME):
Interest expense (income), net 352,699 305,833 (6,985) 53,851
Taxes 67,050 63,588 3,462 -
- -----------------------------------------------------------------------------------------------------------------------
Net Loss $ (10,671,334) $ (4,866,687) $ (3,191,902) $ (2,612,745)
=======================================================================================================================
Net loss per common share - basic and
diluted $ (.15) $ (6.80) $ (4,354.57)
Weighted average number of common shares
outstanding 32,148,978 469,275 600
=======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
Constellation 3D, Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Stockholders' Deficit
<TABLE>
<CAPTION>
Common Stock
-----------------------------------
Additional
Shares Amount Paid-in Capital
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Constellation 3D, Inc. activities (Formerly known as Constellation 3D
Holdings Limited):
Issuance of common stock for cash 600 $ 3 $ -
Net loss - - -
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 600 3 -
Issuance of common stock for cancellation of shareholders' advance,
December 27, 1998 3,749,400 39,906 4,848,631
Recapitalization, December 27, 1998 25,464,000 (10,695) 10,695
Net loss - - -
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 29,214,000 29,214 4,859,326
Debt settlement through the issuance of common stock, April 1, 1999 36,000 36 241,454
Common stock issued in connection with reverse acquisition, October 1,
1999 11,109,765 11,109 942,096
Conversion of notes payable ($1.67/share), October 22, 1999 608,835 609 1,014,116
Sale of common stock for cash, net ($4.90/share), November 1, 1999 25,509 25 99,974
Issuance of common stock for service ($3.83/share), November 8, 1999 7,500 8 28,742
Beneficial conversion discount of convertible debt - - 125,000
Net loss - - -
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 41,001,609 $ 41,001 $ 7,310,708
===============================================================================================================================
</TABLE>
<PAGE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Deficit
Accumulated
During the
Development Stage Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Constellation 3D, Inc. activities (Formerly known as Constellation 3D
Holdings Limited):
Issuance of common stock for cash $ - $ 3
Net loss (2,612,745) (2,612,745)
- -----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 (2,612,745) (2,612,742)
Issuance of common stock for cancellation of shareholders' advance,
December 27, 1998 - 4,888,537
Recapitalization, December 27, 1998 - -
Net loss (3,191,902) (3,191,902)
- -----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 (5,804,647) (916,107)
Debt settlement through the issuance of common stock, April 1, 1999 - 241,490
Common stock issued in connection with reverse acquisition, October 1,
1999 - 953,205
Conversion of notes payable ($1.67/share), October 22, 1999 - 1,014,725
Sale of common stock for cash, net ($4.90/share), November 1, 1999 - 99,999
Issuance of common stock for service ($3.83/share), November 8, 1999 - 28,750
Beneficial conversion discount of convertible debt - 125,000
Net loss (4,866,687) (4,866,687)
- -----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ (10,671,334) $ (3,319,625)
=================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
Constellation 3D, Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Period from
Cumulative Amounts Inception
from Inception (September 25,
(September 25, Year Ended 1997) through
1997) through December 31, December 31,
December 31, ------------------------- --------------
1999 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net loss $ (10,671,334) $ (4,866,687) $ (3,191,902) $ (2,612,745)
Adjustments to reconcile net loss to net
cash used in operating activities:
Discount amortization on convertible
debt 125,000 125,000 - -
Depreciation and amortization 79,363 40,438 33,129 5,796
Issuance of common stock for services 28,750 28,750 - -
Change in assets and liabilities, net of
business acquisitions:
Other receivable (58,036) 113,225 (135,214) (36,047)
Prepaid and other (107,887) (107,887) - -
Accounts payable 1,626,595 618,514 150,343 857,738
Other accrued expenses 292,385 292,385 - -
Accrued interest on convertible
notes payable 36,917 36,917 - -
- ------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Operating Activities (8,648,247) (3,719,345) (3,143,644) (1,785,258)
- ------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Purchase of furniture and equipment (452,142) (145,986) (200,197) (105,959)
Sale of furniture and equipment 80,405 80,405 - -
Cash acquired in purchase of business 1,019,413 1,019,413 - -
- ------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing
Activities 647,676 953,832 (200,197) (105,959)
- ------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Net borrowings (repayments) from
shareholder 1,541,490 1,541,490 (4,152,521) 4,152,521
Issuance of common stock 4,988,540 100,000 4,888,537 3
Net change in other long-term debt 39,969 (6,856) 20,480 26,345
Net advances from related parties 360,711 (62,079) (108,277) 531,067
Proceeds on borrowings on convertible
debt 3,100,000 3,100,000 - -
- ------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 10,030,710 4,672,555 648,219 4,709,936
- ------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash 2,030,139 1,907,042 (2,695,622) 2,818,719
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
Constellation 3D, Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Period from
Cumulative Amounts Inception
from Inception (September 25,
(September 25, Year Ended 1997) through
1997) through December 31, December 31,
December 31, ------------------------- --------------
1999 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and Cash Equivalents, beginning of
period - 123,097 2,818,719 -
- ----------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, end of period $ 2,030,139 $ 2,030,139 $ 123,097 $ 2,818,719
======================================================================================================================
Supplemental Disclosure of Cash Flow Information:
Cash paid for taxes $ 67,050 $ 63,588 $ 3,462 $ -
Non-cash Investing and Financing Activities
Conversion of note payable $ 1,014,725 $ 1,014,725 $ - $ -
Net assets disposed of upon acquisition $ 66,208 $ 66,208 $ - $ -
Stock issued in reverse acquisitions $ 953,205 $ 953,205 $ - $ -
Debt settlement through issuance of
common Stock $ 241,490 $ 241,490 $ - $ -
======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
Constellation 3D, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
================================================================================
NOTE 1:
Description of Business and Summary of Significant Accounting Policies
Operations - Constellation 3D, Inc. ("the Company"), formerly known as C3D Inc.
("C3D"), develops data storage technology products which it intends to produce
and market in future periods. The Company is headquartered in New York and has
operations in the United States, Israel and Russia.
The Company has two wholly owned operating subsidiaries. C-TriD Israel Ltd. is
an Israeli company formed on December 2, 1996. JSC TriD Vostok is a Russian
company formed on January 15, 1999.
Business Form and Organization - On October 1, 1999, C3D completed an asset
purchase agreement and acquired substantially all the operations of
Constellation 3D Technology Limited ("Constellation Tech") for a total
consideration of 29,250,000 shares of the Company's $.001 par value common
stock, and assumption of substantially all liabilities and obligations of
Constellation Tech. The asset purchase agreement also provided for the
cancellation of 2,925,000 shares of treasury stock.
The acquisition of Constellation Tech was treated as a reverse acquisition
whereby C3D was acquired by Constellation Tech, with the balance sheets being
combined using each company's historical cost bases. The results of operations
include that of both companies from the date of acquisition forward. The
financial statements for the period prior to the date of acquisition are those
of Constellation Tech. As the transaction is a reverse acquisition with a public
shell, no pro forma information related to this transaction is provided. The
equity section of the balance sheet and the earnings per share of the Company
are retroactively restated to reflect the effect of the exchange ratio
established in the asset purchase agreement.
The Company declared a three-for-one split of its common stock outstanding on
December 16, 1999. The effective date of the split was January 18, 2000. All per
share information in the Company's financial statements has been adjusted to
reflect the stock split.
The Company amended its Articles of Incorporation on December 27, 1999. The
amendment allowed for an increase in the number of shares authorized from
50,000,000 shares to 100,000,000 shares of common stock ($.001 par value). In
addition, the Company is authorized to issue 10,000,000 shares of preferred
stock (no par value).
On December 29, 1999, the Company changed its name from C3D Inc. to
Constellation 3D, Inc.
7
<PAGE>
Constellation 3D, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
================================================================================
NOTE 1:
Description of Business and Summary of Policies (continued)
Principles of Consolidation - The consolidated financial statements of the
Company include the accounts of its subsidiaries after elimination of
intercompany balances and transactions.
Cash and Cash Equivalents - For the purposes of balance sheet classification and
the statements of cash flows, the Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
Property, Plant and Equipment - Property, plant and equipment are stated at
cost. Depreciation and amortization are computed utilizing straight-line and
accelerated methods over estimated useful lives ranging from three to seven
years.
Income Taxes - The Company accounts for income taxes in accordance with the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS 109"). SFAS 109 requires the recognition of deferred
tax assets and liabilities for the expected future income tax consequences of
events that have been recognized in a company's financial statements or tax
return. Under this method, deferred tax assets and liabilities are determined
based on the temporary differences between the financial statement carrying
amounts and their tax basis using enacted tax rates in effect in the years in
which the temporary differences are expected to reverse. Valuation allowances
are provided when management determines that the realization of deferred tax
assets fails to meet the more likely than not standard imposed by SFAS 109.
Fair Value of Financial Instruments - Carrying amounts reported in the balance
sheet for cash and cash equivalents, other receivable, accounts payable, other
accrued expenses, and due to related parties and shareholders approximate fair
value because of their immediate or short-term nature. The fair value of
long-term debt and convertible debt approximates their carrying value because
the stated rates of the debt either reflect recent market conditions or are
variable in nature.
Revenue Recognition -The Company is conducting research and development
activities to develop new multi-layer data storage media and currently has no
operating revenues. It is the intent of this company to enter into strategic
alliances to license its technology to its strategic partners.
Research and Development - Costs will be expensed as incurred until
technological feasibility has been obtained, product design has been completed
and a working model has been developed and tested.
8
<PAGE>
Constellation 3D, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
================================================================================
NOTE 1:
Description of Business and Summary of Policies (continued)
Foreign Currency Translation - The financial statements of the subsidiaries are
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation" ("SFAS 52"), as
applied to highly inflationary economies. Under SFAS 52, revenues, costs,
capital and non-monetary assets and liabilities are translated at historical
exchange rates prevailing on the transaction date. Translation gains and losses
from remeasurement of monetary assets and liabilities that are not denominated
in U.S. dollars are not material to the consolidated operations of the Company.
Stock-Based Compensation - Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation" ("SFAS 123"), establishes a fair value
method of accounting for stock-based compensation plans and for transactions in
which a company acquires goods or services from non-employees in exchange for
equity instruments. SFAS 123 also gives the option to account for stock-based
employee compensation in accordance with Accounting Principles Board Opinion No.
25 ("APB 25"), "Accounting for Stock Issued to Employees," or SFAS 123. The
Company elected to follow APB 25 which measures compensation cost for employee
stock options as the excess, if any, of the fair market price of the Company's
stock at the measurement date over the amount an employee must pay to acquire
stock.
Net Loss Per Share - Basic loss per share is computed by dividing net loss by
the weighted average number of common shares outstanding. As of December 31,
1999, the Company had outstanding options to purchase 525,000 shares of common
stock, which were not included in the calculation of loss per share, as their
effect was anti-dilutive. All per share information has been adjusted to reflect
the three-for-one stock split declared on December 16, 1999.
Accounting Estimates - The Company's financial statements are prepared in
conformity with generally accepted accounting principles of the United States,
which requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from these estimates.
Reclassifications - Certain reclassifications have been made to the prior year's
financial statement amounts to conform to the current year's presentation.
9
<PAGE>
Constellation 3D, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
================================================================================
NOTE 2:
Development Stage Operations
The Company has been in the development stage since its inception. It has had no
operating revenues to date, has accumulated losses of $10,671,334, and will
require additional working capital to complete its business development
activities and generate revenues adequate to cover operating and further
development expenses. These conditions raise substantial doubt as to the
Company's ability to continue as a going concern.
The Company believes it can raise adequate working capital through future sales
of its common stock or subordinated debt in private placement transactions.
However, there can be no assurance that the Company will be successful in its
efforts to raise these funds.
The financial statements do not contain any adjustments that might be necessary
if the Company is unable to continue as a going concern.
NOTE 3:
Property, Plant and Equipment
Property, plant and equipment consists of the following:
December 31 1999 1998
- ------------------------------------------------------------------------------
Property, plant and equipment $ 291,236 $ 306,156
Less accumulated depreciation 50,136 38,925
- ------------------------------------------------------------------------------
Property, plant and equipment, net $ 241,100 $ 267,231
==============================================================================
NOTE 4:
Note Payable
The Company entered into a short-term unsecured loan agreement with Formula
Ventures, Ltd. in 1997 for $270,000. The agreement was amended on October 15,
1998, increasing the facility to $600,000. The loan is payable upon demand and
bears interest at LIBOR +3% (8.3% at December 31, 1999).
NOTE 5:
Convertible Notes Payable
Long-term obligations consist of the following:
December 31 1999 1998
- -------------------------------------------------------------------------------
Convertible note payable, interest at 8%, due
October 31, 2001 $ 505,480 $ -
Convertible note payable, interest at 8%, due
October 31, 2001 1,600,000 -
- -------------------------------------------------------------------------------
Convertible notes payable $ 2,105,480 $ -
===============================================================================
10
<PAGE>
Constellation 3D, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
================================================================================
NOTE 5:
Convertible Notes Payable (continued)
On November 11, 1999, the Company issued $500,000 of convertible subordinated
debt to Wilbro Nominee Limited. The note is due October 31, 2001 with interest
at the rate of 8% per annum. The note is convertible into common stock at a
price equal to 80% of the average posted price for the 20 days preceding the
conversion date, beginning May 11, 2000. The quoted price for the Company's
stock on November 11, 1999 was $7.67, resulting in a deemed beneficial
conversion feature and discount of approximately $125,000, which was recorded as
an increase to additional paid-in capital and interest expense.
On December 24, 1999, the Company issued $1.6 million of convertible
subordinated debt to Winnburn Advisory. The note is due October 31, 2001 with
interest at the rate of 8% per annum. The note could be converted immediately
into common stock at the greater of $16.67 per common share or the average
posted price for the Company's common stock for the 20 days preceding the
conversion date.
NOTE 6:
Income Taxes
At December 31, 1999, the Company has net deferred tax assets of $519,000
available to offset future US source income and $880,000 to offset future
Israeli source income, primarily due to net operating loss carry forwards, which
begin to expire in 2018. A 100% valuation allowance has been recorded against
the deferred tax asset as management has yet to establish that recovery of this
asset is more likely than not.
The Company recognized tax expense of $63,588 and $3,462 for 1999 and 1998,
respectively. Russian and Israeli tax legislation requires taxes be paid on cash
receipts.
NOTE 7:
Related Party Transactions
The Company retained all key employees under informal consulting agreements
during the year ended December 31, 1999. These agreements may be cancelled at
any time. The expense of these agreements totaled $437,500 for the year ended
December 31, 1999. As of year-end, due to related parties included $190,000 of
unpaid expenses under those consulting agreements.
The Company assumed amounts due to a related party for $164,385 at the time of
acquisition. There is no maturity date or interest bearing on this debt.
11
<PAGE>
Constellation 3D, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
================================================================================
NOTE 7:
Related Party Transactions (continued)
The Company borrowed $1.3 million from an existing shareholder, and issued a
$300,000 promissory note on October 29, 1999 and a $1 million note on November
18, 1999. Both notes are unsecured, bear interest at 10% per annum, and mature
on the earlier date of July 31, 2000 or consummation of various levels of
financing transactions.
NOTE 8:
Stock Grants Stock Options And Warrants
On March 8, 1999, certain board members were granted options to purchase up to
525,000 shares of the Company's common stock at $1.33 per share. These options
will vest immediately, and expire in 2004. At December 31, 1999, these 525,000
options remain outstanding. No expense was recognized upon granting of the
options as the strike price was equal to the estimated market price, as
evidenced by the sale of 1,359,765 shares of common stock to unrelated third
parties completed on March 15, 1999 but not issued until May 15, 1999.
On November 10, 1999, the Company approved the issuance of warrants to purchase
300,000 shares of common stock at a price of $3.33 per share to an investment
banker, subject to certain terms and conditions, including successful placement
of $2.5 million convertible subordinated debt. As at December 31, 1999, $500,000
has been completed.
The pro forma information required by FAS 123 was estimated at the date of grant
using a Black-Scholes multiple option pricing model with the following
assumptions: Risk free interest rate of 5.84%, expected volatility of 192%,
expected life of 60 months, and no expected dividend. Pro forma net loss and
loss per share for the year ended December 31, 1999 is $5,547,700 and $0.17
respectively.
NOTE 9:
Commitments and Contingencies
The shareholders approved the 1999 stock option plan ("the Plan") on December
27, 1999. The Plan allows the Company to grant stock options to officers, other
key employees, directors and other important consultants at prices not less than
fair market value at date of grant. A maximum of 4,617,540 shares were approved
to be issued under the Plan. There were no options under this plan outstanding
at December 31, 1999.
12
<PAGE>
Constellation 3D, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
================================================================================
NOTE 10:
Operating Leases
The Company has entered into operating lease agreements for buildings used for
office space and research activities. The leases expire on various dates through
2001. Future minimum lease payments approximate $166,000 in 2000 and $20,000 in
2001. Rent expense was approximately $160,000 and $116,800 for the years ended
December 31, 1999 and 1998, respectively.
NOTE 11:
Subsequent Events
On February 8, 2000, the Company formed Constellation 3D Trust LLC, a Delaware
limited liability Company. The Company then issued 2,500,000 shares of common
Stock to Constellation 3D Trust LLC (the "Trust") as a capital contribution.
Constellation 3D Trust LLC intends to use the shares to raise debt or equity
capital and contribute the proceeds thereof to C3D, which proceeds shall be used
for general corporate purposes. There is no assurance that the issuance of the
shares will result in the raising of any debt or equity capital.
On February 15, 2000, the Company entered into a letter of intent to acquire
Reflekt Technology, Inc. ("Reflekt") of Concord, Massachusetts in exchange for
common stock of the Company and assumption of certain liabilities. Reflekt is an
advanced research and development company that designs, patents and sells
leading edge replication equipment to the global optical industry.
On March 24, 2000, the Company issued $4,000,000 of convertible subordinated
debt to Sand Brothers Venture Capital Associates LLC. The note is due on
September 24, 2001 with interest at rate of 10 % per annum. Interest shall be
payable in semi-annual installments on September 24, 2000 and March 24, 2001.
The note could be converted immediately into common stock at a price at $17.65
per common share. Additionally, Sands Brothers was granted warrants to purchase
1,050,000 shares of the Company's common stock at $3.67 per share, in accordance
with the investment banking agreement dated December 1, 1999.
13
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Barry L. Friedman, P.C., Certified Public Accountant previously served
as auditor for C3D. He resigned as the auditor on October 19, 1999 due to C3D's
quotation on the NASD's Over-the-Counter Bulletin Board service. BDO
International was appointed as auditor for C3D and its subsidiaries. There have
not been any disagreements with Mr. Friedman on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedures. Within C3D's past two fiscal years and any subsequent interim
periods preceding his resignation, Mr. Friedman has not issued a report
containing an adverse disclaimer or qualified opinion concerning C3D or any of
its subsidiaries.
During C3D's two most recent fiscal years, and the subsequent interim
period prior to engaging BDO International, neither C3D nor someone on its
behalf consulted BDO International regarding (i) either the application of
accounting principles to a specified transaction, either completed or proposed,
or the types of audit opinion that might be rendered on C3D's financial
statements, and neither a written report was provided to C3D nor oral advice
provided that BDO International concluded was an important factor considered by
C3D in reaching a decision as to an accounting auditing or financial reporting
issue or (ii) any matter that was either the subject of a disagreement (as
defined in Item 304(a)(iv) of SEC Regulation S-K and the instructions related to
that item) or a reportable event (as described in Item 304(a)(1)(v) of SEC
Regulation S-K).
PART III
--------
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN SIGNIFICANT EMPLOYEES OF C3D
<TABLE>
<CAPTION>
Name: Age: Position:
- ------------------------------------------------ ---- -------------------------------------------------
<S> <C> <C>
Brigadier General Itzhak Yaakov................. 73 Chairman of the Board of Directors
Professor Eugene Levich......................... 51 President, Chief Executive Officer and Member of
Board of Directors
Michael Goldberg................................ 50 Secretary, Director of Legal Affairs, Chief
Operating Officer (interim) and Member of Board of
Directors
Lev Zaidenberg.................................. 45 Member of Board of Directors
Leonardo Berezowsky............................. 42 Senior Vice President of Finance and Chief
Financial Officer
Ronen Yaffe..................................... 29 Treasurer
Professor Sergey A. Magnitskii.................. 44 Chief Scientist
Professor Jacob Malkin.......................... 49 Chief Chemist
Professor Mark Alperovich....................... 61 General Manager, Chemical Division
Dr. Ingolf Sander............................... 49 General Manager of Products
</TABLE>
37
<PAGE>
Directors and Executive Officers
Brigadier General Itzhak Yaakov serves as Chairman of the Board of
Directors of C3D. He was elected Chairman of the Board of Directors of C3D
effective April 19, 1999. He graduated from the Israeli Institute of Technology
as a Mechanical Engineer in 1953 and from the Massachusetts Institute of
Technology in 1963 with a M.Sc. in Industrial Management. During his last 10
years of military service, he was Chief of Defense Research and Development for
the State of Israel, and after retirement, was appointed Chief Scientist of the
Ministry of Industry and Trade of Israel. He was the first Chairman of the
U.S.-Israeli Bi-national Industrial R&D Fund and Chairman of the Israeli
Standard Institute. Since 1979, he has been a private businessman and a partner
in the formation of several high-tech start-up companies in the field of
electronics, telecommunications, robotics, electro-optics and medical equipment.
He has been the sole owner of Yakov Consultants since 1985. From 1990 to the
present, he has been a partner in Goncharoff Inc., engaged in trading in Russia.
From 1995 to the present, he has been a partner in Tecnomatix NV, Belgium, which
manufactures medical machines. His academic activity has included lecturing at
the Hebrew University of Jerusalem and a professorship at Ben Gurion University
in the Negev, as well as lecturing in several seminars and publishing several
papers. He served as consultant to international organizations such as the
Korean Technology Development Corporation, the World Bank, the International
Financial Corporation, the Organization of American States and the United States
Department of Commerce, as well as the governments of Taiwan, Venezuela,
Singapore, Peru and Chile. He published several papers and a book about
innovation and the management of R&D.
Professor Eugene Levich serves as President, Chief Executive Officer
and Member of the Board of Directors of C3D. He was appointed President and
Chief Executive Officer of C3D effective April 19, 1999. He was elected as a
member of the Board of Directors of C3D effective April 19, 1999. Professor
Levich received a M.Sc. in Physics from Moscow University in 1968 and a Ph.D. in
Theoretical Physics from the Landau Institute in 1970. He has served in varying
academic capacities at a range of research institutions, including Harvard
University (as Visiting Fellow); Oxford University (Magdalene College) (three
times as Senior Visiting Fellow at the Department of Theoretical Physics); City
University of New York (as Professor at the Faculties of Physics and
Engineering); the Weizman Institute of Sciences (as Associate Professor at the
Department of Nuclear Physics); and Tel-Aviv University Faculty of Engineering
(as Visiting Professor). Since 1990, Professor Levich has been working as a
chief scientist and partner in high technology industries and has authored over
28 patents. He has published over 90 papers in the fields of astrophysics,
plasma turbulence and chaos, nonlinear phenomena in optics and turbulence in
fluids. His most recent scientific contribution in the field of turbulence
control was in cooperation with Professor D. ter Haar (Professor Emeritus of
Oxford University), entitled "The Origin of Coherence in Turbulence."
Michael Goldberg serves as Secretary, Director of Legal Affairs,
interim Chief Operating Officer and Member of the Board of Directors of C3D. He
was appointed Secretary of C3D effective August 9, 1999, Director of Legal
Affairs of C3D effective March 8, 1999 and interim Chief Operating Officer
effective February 3, 2000. He was elected as a member of the Board of Directors
of C3D effective April 19, 1999. Mr. Goldberg graduated as Asper Fellow from the
University of Maryland Law School in 1974. Upon graduation from law school, he
worked within the Criminal Division of the United States Attorney's Office in
Washington, DC. He interned on security cases at the Department of Justice such
as the Watergate case. He was the Assistant District Attorney in the City of
Philadelphia, Commonwealth of Pennsylvania, covering narcotics, homicide and
major trials. From 1978 to 1986, he was in private practice. Presently, he
serves as Chairman and Chief Executive Officer of Rx Medical Services and as an
advisor to private clients. On average, Mr. Goldberg spends no less than
thirty-five (35) hours per week devoted exclusively to the affairs of the
Company.
38
<PAGE>
Lev Zaidenberg serves as a Member of the Board of Directors of C3D. He
was elected as a member of the Board of Directors of C3D on April 19, 1999. Mr.
Zaidenberg received a B.Sc. in Applied Mathematics and a M.Sc. in Information
Systems and Business Administration from Tel-Aviv University. From 1988 to 1994,
he was a partner and executive at DCL Systems Engineering Ltd., responsible for
the development of computer products for molecular modeling and financial
trading. From 1984 to 1988, he served as Vice President of IET Ltd., leading the
development and marketing of advanced expert systems for Computer Aided
Design/Computer Aided Manufacturing, image processing, satellite data
interpretation, military command and control, resource allocation and associated
business applications. Since 1984, he has served as a consultant to the Israeli
Defense Forces in computer auditing and security. Mr. Zaidenberg is Chief
Executive Officer and President of Mutek Solutions, a software company with
headquarters in Israel and subsidiaries in the United States and Germany.
Leonardo Berezowsky serves as Senior Vice President of Finance and
Chief Financial Officer of C3D. He was appointed Senior Vice President of
Finance and Chief Financial Officer effective November 5, 1999. Mr. Berezowsky
received a B.A in Economics in 1980, a B.A. in Computer Sciences in 1981 and an
M.A. in Economics in 1982 from the Hebrew University in Jerusalem. During the
years 1980 to 1983, he served as Lecturer Assistant at that institution. During
the years 1981 to 1983, he worked in software development. During the years 1984
to 1986, he served as Systems and Financial manager in Pelanar SA (Argentina), a
company involved in industrial and exporting activities. From 1986 to 1987, Mr.
Berezowsky served as consultant for international projects for that company.
From 1987 to 1994, he worked as Chief Financial Officer of a company engaged in
research and development in the energy field. Since 1995, he has served as Chief
Operational Officer of Constellation Group, a high tech entrepreneurship
company, mainly in the computer field. Since 1996, he has served as Chief
Operating Officer of Mutek Solutions Ltd., a software company with headquarters
in Israel and subsidiaries in the United States and Germany, and as director of
Mutek Solutions Inc., a company related to Mutek Solutions Ltd. On average, Mr.
Berezowsky spends no less than forty (40) hours per week devoted exclusively to
the affairs of the Company.
Ronen Yaffe serves as Treasurer of C3D. He was appointed Treasurer
effective November 5, 1999. From 1994 to 1998, he was a Manager for Deloitte
Touche Tohmatsu International Israel Ltd., where he oversaw the audit of Israeli
high-tech public and private companies and advised such companies regarding
Enterprise Resource Providers. He also led the process of integrating Deloitte
Touche's accounting software into Deloitte Touche's Israeli operations. In
August 1996, he graduated from The School of Business Administration at the
College of Management located in Tel Aviv, Israel. In 1998, he became a
Certified Public Accountant.
Significant Employees
Professor Sergey A. Magnitskii serves as General Manager of Lasers and
Electronics of C3D. Mr. Magnitskii received a Dr. Sci. in Physics from Moscow
State University. From 1975 to 1976, he developed technologies in quantum
electronics under thermo-nuclear fusion with Nobel Prize winner N. Basov. In
1976, he worked with the founder of nonlinear optics, academician Rem Khokhlov,
to research experimental laser and nonlinear spectroscopy. He was a Professor of
the Physics Department of Moscow State University and of the International Laser
Center at Moscow State University. He has authored over 100 papers in
international journals and has given 39 papers and 25 presentations at
international conferences in the last three years.
Professor Jacob Malkin serves as General Manager of the Chemical
Division. Professor Malkin received a Ph.D. from Moscow State University in
1972. At the age of 22, he was recruited as a chemist by the Institute of
Chemical Physics of the Russian Academy of Sciences (formerly USSR Academy of
39
<PAGE>
Sciences) where he collaborated with chemist academician N.M. Emanuel on the
development of new photo-chromic systems based on polymer materials. He received
a Ph.D. from the Syemenov Institute of Chemical Physics in 1976. He was a
Professor of Chemical Physics in 1985. He was a Professor of Physical Chemistry
at Moscow Lomonosov Institute until 1989. He was elected Gastella Fellow at the
Weizmann Institute of Sciences in 1990 for photo-dynamic therapy. For the study
of photo-dissociation in molecular beams, he received grants for 5 years from
the U.S.-Israel Binational Fund and was Visiting Fellow at Heriott-Watt
University (Edinburgh) in 1990, and he received a British Royal Society Award
for this work. From 1991 to 1992, he was a Visiting Professor at the University
of California, where he (together with Prof. P. Rentzepis) formulated basic
principles for the applications of photo-chromic substances to three-dimensional
memory devices based on the process of two-photon absorption. He was a Visiting
Professor at the Imperial College (London) from 1994 to 1995. He has over 16
years of experience in the fields of photochemistry and spectroscopy with over
60 publications, including a theory of photo-dissociation of organic compounds.
He authored the Computerized Encyclopedia of Photochemistry and Photobiology in
6 volumes.
Professor Mark Alperovich serves as Chief Chemist of C3D. He received a
Ph.D in chemistry from Moscow State University. C3D considers Professor
Alperovich to be a world authority in photo-chemistry. He has developed key
chemical substances for memory storage for ROM and R/W. He has authored and/or
published a number of papers, patents and other scientific contributions. C3D
considers Professor Alperovich to be one of the world leading experts and
developers of dyes and photochromic substances.
Dr. Ingolf Sander serves as General Manager of Products of C3D. He
received a Ph. D. in Physics at Hamburg University. In 1984, he served as
Director of Optical Disk Drive Research and Development for Verbatim-Kodak in
Sunnyvale, California, where he headed a team of forty optical, electrical,
mechanical, and software engineers from the product development phase to the
commercial application of the world's first 3.5" Magnetic Optical drive. He was
appointed Group Director to research holographic storage and R/W for CD editing.
He developed a two-inch MO drive in a co-development with Philips Data Systems
for personal computer application and optical scanner for three-dimensional
characterization of surfaces. In 1995, he became a Vice President of Optitek in
Mountain View, California, where he oversaw the development of holographic
storage and fast image processing in the field of image registration, remapping,
and Viterbi decoding. During the period from 1989 to 1995, he was Founder,
President and Chief Executive Officer of LaserByte, in Sunnyvale, California, a
joint venture with Hyundai to develop optical disk drives. He developed a
methodology to improve read channel reliability and data throughput and set up a
laboratory to investigate the use of drives for document storage and multi-media
applications. In 1975, he worked at Philips Research Lab in Hamburg, then West
Germany. He has authored 12 patents in the field of optical and magneto-optical
memory.
Board of Directors
All holders of C3D Common Stock generally may vote in the election of
directors. The terms of all directors expire at the next annual shareholders'
meeting following their election. The term of a director elected to fill a
vacancy expires at the next shareholders' meeting at which directors are
elected. C3D's Bylaws provide that annual meetings of shareholders will be held
on such date and at such time fixed, from time to time, by the Board of
Directors (provided that there will be an annual meeting held every calendar
year at which the shareholders will elect a Board of Directors and transact such
other business as may properly be brought before the meeting).
The Board of Directors has two committees, the Compensation Committee
and the Audit Committee. The Compensation Committee, which consists of two
directors: (1) reviews and recommends each year to the Board of Directors the
40
<PAGE>
form and amount of compensation to be received by executive officers of C3D; (2)
initiates, at its discretion, investigations within the parameters of the
foregoing responsibilities and for that purpose retains outside legal counsel,
or any other such experts as it shall deem appropriate; and (3) reports to the
entire Board of Directors at such time as the Compensation Committee determines,
but not less than once each year. Each member of the Compensation Committee must
be nominated by a Board member and elected by a majority of the Board of
Directors. Each member of the Compensation Committee serves for a term of one
year and until the member's successor has been duly elected and qualified,
except in the event of any early resignation or removal. The current members of
the Compensation Committee are Michael Goldberg and Lev Zaidenberg, who were
elected effective June 17, 1999.
The Audit Committee, which consists of two directors: (1) recommends
accountants to C3D to audit the financial statements of C3D and its consolidated
subsidiaries and to review the fees charged for such audits or for special
engagements given to such accounts; (2) meets with the independent accountants,
Chief Executive Officer and any other executives of the Company as the Audit
Committee deems appropriate at such times as the Audit Committee determines to
review (a) the scope of the audit plan, (b) the Company's financial statements,
(c) the results of external and internal audits, (d) the effectiveness of the
Company's system of internal controls, (e) any limitations imposed by Company
personnel on the independent public accountants and (f) such other matters by
the Audit Committee deems appropriate; and (3) reports to the entire Board of
Directors at such time as the Audit Committee determines but not less than once
each year. Each member of the Audit Committee must be nominated by a Board
member and elected by a majority of the Board of Directors. Each member of the
Audit Committee serves for a term of one year and until the member's successor
has been duly elected and qualified, except in the event of any early
resignation or removal. The current members of the Audit Committee are Michael
Goldberg and Lev Zaidenberg, who were elected effective June 17, 1999.
None of C3D's directors or executive officers are parties to any
arrangement or understanding with any other person pursuant to which said
individual was elected as a director or officer of C3D. There is no relationship
by blood, marriage or adoption not more remote than first cousin between any
director, executive officer, or person nominated or chosen by C3D to become a
director or executive officer.
Section 16(a) Beneficial Ownership Reporting Compliance
-------------------------------------------------------
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the registrant pursuant to Rule 16a-3(e) of the U.S. Securities
Exchange Act of 1934, as amended, (the "Exchange Act") during its most recent
fiscal year and Forms 5 and amendments thereto furnished to the registrant with
respect to its most recent fiscal year, and any representation referred to in
(b)(2)(i) of Item 405 of Regulation SK of the Exchange Act, there was no person
who, at any time during the fiscal year, was a director, officer, beneficial
owner of more than ten percent of any class of equity securities of the
registrant pursuant to section 12 of the Exchange Act, or any other person
subject to section 16 of the Exchange Act with respect to the registrant because
of the requirements of section 30 of the Investment Company Act or section 17 of
the Public Utility Holding Company Act that failed to file on a timely basis, as
disclosed in the above Forms, reports required by section 16(a) of the Exchange
Act during the most recent fiscal year or prior fiscal years.
ITEM 11. EXECUTIVE COMPENSATION
Except for Eugene Levich, the Chief Executive Officer, President and
Chief Operating Officer of C3D, no executive officer of C3D had, as an executive
officer of C3D, a total annual salary and bonus exceeding $100,000 for fiscal
year 1999. There is no additional individual who would have been one of C3D's
four other most highly compensated executive officers had he served as an
executive officer through the end of fiscal year 1999.
41
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------------------------------- ----------------------------
Other Annual Securities
Fiscal Compensation Underlying All other
Name and Principal Position Year Salary ($) Bonus($) ($) Options (#) Compensation
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Professor Eugene Levich, 1999 $105,000 -- -- -- --
Chief Executive Officer
1998 $65,000 -- $20,000 (1) -- --
(approx.) (approx.)
1997 $65,000 -- $20,000 (1) -- --
(approx.) (approx.)
</TABLE>
- -----------------------------
(1) Until the end of 1998, Professor Levich was not directly compensated by
Constellation Tech, Constellation Holdings or C3D for his position as
Chief Executive Officer. However, in 1998 and 1997, Constellation Holdings
paid management fees to Constellation Memory Division, a Nevis company
("CMD"), which transferred, among other amounts, approximately $85,000 to
Memde Israel Ltd., an Israeli company related to CMD ("Memde"). This
$85,000 was paid by Memde as compensation, including non-salary and
non-bonus compensation, to Professor Levich, who was then a principal and
the president of Memde.
As of March 21, 2000, no executive officer of C3D has held any stock
appreciation rights with respect to the stock of C3D. Furthermore, as of March
21, 2000, no named executive officer of C3D (as defined in SEC Regulation S-K
Item 402(a)(3)) has held any stock options with respect to the stock of C3D. The
authorization and/or granting of stock options to directors of C3D and to other
executive officers of C3D is discussed elsewhere in this Annual Report.
On December 17, 1999, C3D's Board of Directors approved a three-for-one
forward split of its Common Stock for those shareholders of record as of
December 16, 1999. The adjustment of the price per share of the Common Stock
that resulted from such forward split took effect on January 18, 2000 and before
trading of the Common Stock began on January 18, 2000.
On December 27, 1999, at the Annual Meeting of Shareholders of C3D, the
necessary number of votes of C3D's shareholders approved and adopted a 1999
Stock Option Plan (the "Plan"). The purpose of the Plan is to provide additional
incentive to officers, other key employees, and directors of, and important
consultants to C3D and each present or future parent or subsidiary corporation,
by encouraging them to invest in shares of Common Stock and thereby acquire a
proprietary interest in C3D and an increased personal interest in the Company's
continued success and progress.
All officers and key employees of C3D and of any present or future C3D
parent or subsidiary corporation are eligible to receive an option or options
under the Plan. All directors of, and important consultants to, C3D and of any
present or future C3D parent or subsidiary corporation would also be eligible to
receive an option or options under the Plan. The individuals who would, in fact,
receive an option or options would be selected by the Company's Compensation
Committee, in its sole discretion, except as otherwise specified in the Plan.
Options issued pursuant to the Plan would be either incentive stock options or
non-qualified stock options, as determined by the Compensation Committee.
42
<PAGE>
In response to the three-for-one forward split of the Common Stock that
took effect on January 8, 2000, the aggregate number of shares of Common Stock
which may be issued under the Plan has been increased by C3D's Board of
Directors to 4,617,540. Notwithstanding the foregoing, in the event of any
change in the outstanding shares of the Common Stock of C3D by reason of a stock
dividend, stock split, combination of shares, recapitalization, merger,
consolidation, transfer of assets, reorganization, conversion or what C3D's
Board of Directors or C3D's Compensation Committee deems in its sole discretion
to be similar circumstances, the aggregate number and kind of shares which may
be issued under the Plan will be appropriately adjusted in a manner determined
in the sole discretion of the Board of Directors or Compensation Committee of
C3D. Reacquired shares of C3D's Common Stock, as well as unissued shares, may be
used for the purpose of the Plan. Common Stock of C3D subject to options which
have terminated unexercised, either in whole or in part, will be available for
future options granted under the Plan.
As of March 21, 2000, C3D has no long-term incentive plan or pension
plan.
Director Compensation
THE AMOUNTS OF THE SHARES OR OPTIONS ISSUED OR GRANTED PRIOR TO JANUARY
18, 2000 AND MENTIONED IN THIS DISCUSSION OF DIRECTOR COMPENSATION HAVE BEEN
ADJUSTED DUE TO THE THREE-FOR-ONE FORWARD SPLIT OF C3D'S COMMON STOCK THAT TOOK
EFFECT JANUARY 18, 2000.
For services rendered by General Yaakov as director of C3D, starting
July 1999, Yakov Consultants, of which General Yaakov is the sole owner, is to
receive a monthly fee of $5,000 until C3D receives an investment of $2 million,
and thereafter, $10,000 per month. There is no written contract for this
compensation. In addition, for services rendered on March 8, 1999, the Board of
Directors of C3D authorized the issuance of 150,000 shares of Common Stock and
300,000 options to purchase Common Stock at an exercise price of $1.33 per share
and an exercise period of five (5) years to General Yaakov. The issuance of the
150,000 shares occurred on December 7, 1999.
For services rendered by Michael Goldberg as Director of C3D, on March
8, 1999, the Board of Directors of C3D authorized the issuance of 150,000 shares
of Common Stock and 225,000 options to purchase Common Stock at an exercise
price of $1.33 per share and for an exercise period of five (5) years to Michael
Goldberg. The issuance of the 150,000 shares occurred on December 7, 1999.
On December 27, 1999, at the Annual Meeting of Shareholders of C3D, the
necessary number of votes of C3D shareholders approved and adopted a 1999 Stock
Option Plan. The purpose of the Plan is to provide additional incentive to
officers, other key employees, and directors of, and important consultants to
C3D and each present or future parent or subsidiary corporation, by encouraging
them to invest in shares of Common Stock and thereby acquire a proprietary
interest in C3D and an increased personal interest in C3D's continued success
and progress. Further details of the Plan are provided above in the "Executive
Compensation" section.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 27, 2000, excluding any exercise of options or conversion
of convertible securities, there were 46,501,609 shares of Common Stock issued
and outstanding, including the 5,500,000 shares of Common Stock issued to
Constellation 3D Trust LLC, a Delaware limited liability company wholly owned by
C3D. THESE FIGURES, THE FIGURES SET FORTH IN THE FOLLOWING TABLE AND THE
FOOTNOTES TO THAT TABLE REFLECT THE ADJUSTMENT IN PRICE PER SHARE RESULTING FROM
THE THREE-FOR-ONE FORWARD SPLIT OF THE COMMON STOCK THAT TOOK EFFECT ON JANUARY
18, 2000. The following table sets forth the beneficial ownership of the Common
Stock as of March 27, 2000 by each person known by C3D to own beneficially more
than five percent (5%) of the issued and outstanding Common Stock, each of C3D's
directors, each of C3D's named executive officers (as defined in SEC Regulation
S-K Item 402(a)(3)), and those directors and named executive officers as a
group.
Unless otherwise indicated, each person or entity named below has sole
voting and investment power with respect to all shares of Common Stock shown as
beneficially owned by such person or entity, subject to the information set
forth in the footnotes to the table below. The securities beneficially owned by
a person are determined in accordance with the definition of "beneficial
ownership" set forth in the regulations of the Securities and Exchange
Commission and, accordingly, may include securities owned by or for, among
others, a spouse, children or certain other relatives of such person as well as
other securities as to which the person has or shares voting or investment power
or has the right to acquire within sixty (60) days after March 27, 2000. The
same shares may be beneficially owned by more than one person. Beneficial
ownership may be disclaimed as to certain of the securities.
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<PAGE>
<TABLE>
<CAPTION>
Number of Shares
Beneficially
Name of Beneficial Owner Owned Percent
- ------------------------------------------------------------------ ------------------ -------
<S> <C> <C>
Constellation 3D Technology Limited (2)
235 West 76th Street, Suite 8D, New York, New York 10023......... 29,250,000 (2) 62.9%
Rapids Trust Limited (2)
56 Mazah Street, Tel Aviv, Israel 55905........................... 29,250,000 (2) 62.9%
United European Enterprises (2)
56 Mazah Street, Tel Aviv, Israel 55905........................... 29,250,000 (2) 62.9%
Constellation Group Investments Inc. (2)
c/o Euro-American Trust and Management Services Limited
P.O. Box 3161
Road Town, Tortola, British Virgin Islands........................ 29,250,000 (2) 62.9%
Markus Banzer (2)
Gr. Bongert 9
Triesen, Liechtenstein............................................ 29,250,000 (2) 62.9%
Hubert Buchel (2)
Salums 63
Gamprin, Liechtenstein............................................ 29,250,000 (2) 62.9%
Criterion Treuunternehmen reg., (2)
Austr. 49
Vaduz, Liechtenstein.............................................. 29,250,000 (2) 62.9%
Constellation 3D Trust LLC (1) ................................... 5,500,000 (3) 11.8%
Sands Brothers & Co., Ltd. (10) ................................... 3,676,629 (10) 7.3%
90 Park Avenue
New York, NY 10016
Brigadier General Itzhak Yaakov................................... 450,000 (4) *
Professor Eugene Levich (1)....................................... 29,250,000 (5) 62.9%
Lev Zaidenberg (1)................................................ 29,250,000 (6) 62.9%
Leonardo Berezowsky (1)........................................... 29,250,000 (7) 62.9%
Michael Goldberg.................................................. 375,000 (8) *
All directors and executive officers as a group................... 30,075,000 (9) 64.7%
</TABLE>
- -----------------------------
* Less than one percent but greater than zero percent.
(1) The business address of such person or entity is 230 Park Avenue, Suite 453,
New York, New York 10169.
(2) Constellation 3D Technology Limited, a British Virgin Islands company,
directly owns 29,250,000 shares of Common Stock of C3D. United European
Enterprises, a Nevis company, owns approximately 52.5% of the voting shares
of Constellation 3D Technology Limited and, through its instructions to
Rapids Trusts Limited, an Israeli trust, thereby controls how Constellation
3D Technology Limited votes and invests its 29,250,000 shares of C3D.
Constellation Group Investments Inc., a British Virgin Islands company,
directly owns approximately 54.8% of the voting shares of United European
Enterprises and thereby indirectly controls how Constellation 3D Technology
Limited votes and invests its 29,250,000 shares of C3D. Markus Banzer,
Hubert Buchel and Criterion Treuunternehmen reg., as the sole three trustees
of the Alex-L Foundation, the Lion & Heart Foundation and Lediligi, three
Liechtenstein trusts, have, through those trusts, complete ownership of all
of the voting shares of Constellation Group Investments Inc. and thereby
indirectly control how Constellation 3D Technology Limited votes and invests
its 29,250,000 shares of C3D. No individual, trust or business entity
controls the three trustees. Upon the death or disability of a trustee, the
remaining trustee(s) choose his or her replacement. Upon the death or
disability of all trustees before any living and able replacement is chosen,
a court of Liechtenstein chooses their replacements.
(3) On February 8, 2000, C3D formed Constellation 3D Trust LLC, a Delaware
limited liability company wholly owned by C3D. C3D then issued 2,500,000
(Two Million Five Hundred Thousand) shares of Common Stock and then another
3,000,000 (Three Million) shares of Common Stock to Constellation 3D Trust
LLC as a capital contribution. Constellation 3D Trust LLC intends to use the
5,500,000 (Five Million Five Hundred Thousand) shares to raise debt or
equity capital and contribute the proceeds thereof to C3D, which proceeds
shall be used for general corporate purposes. There is no assurance that the
issuance of the shares will result in the raising of any debt or equity
capital.
44
<PAGE>
(4) Represents 150,000 shares of Common Stock issued and outstanding and 300,000
shares of Common Stock issuable upon exercise of options which are
exercisable within 60 days of March 27, 2000.
(5) Professor Levich is a director and the Chief Executive Officer and President
of C3D and a director and/or executive officer of Constellation 3D
Technology Limited, United European Enterprises and/or Constellation Group
Investments Inc. Certain members of Professor Levich's family are among the
beneficiaries of the Alex-L Foundation. See footnote (2).
(6) Mr. Zaidenberg is a director of C3D and a director and/or executive officer
of Constellation 3D Technology Limited, United European Enterprises and/or
Constellation Group Investments Inc. Certain members of Mr. Zaidenberg's
family are among the beneficiaries of the Lion & Heart Foundation. See
footnote (2).
(7) Mr. Berezowsky is the Senior Vice President of Finance and Chief Financial
Officer of C3D and executive officer of Constellation Group Investments Inc.
Mr. Berezowsky and certain members of his family are among the beneficiaries
of the Lediligi Foundation. See footnote (2).
(8) Represents 150,000 shares of Common Stock issued and outstanding and 225,000
shares of Common Stock issuable upon exercise of options which are
exercisable within 60 days of March 27, 2000.
(9) Includes: (a) 300,000 shares of Common Stock issued to Messrs. Yaakov and
Goldberg in total and outstanding; (b) 525,000 shares of Common Stock
issuable upon Messrs. Yaakov and Goldberg's exercise of options which are
exercisable within 60 days of March 27, 2000; and (c) 29,250,000 shares of
Common Stock controlled by Constellation 3D Technology Limited, United
European Enterprises, Constellation Group Investments Inc., and the trustees
of certain trusts. See footnote (2).
(10) Represents (a) 3,450,000 shares of Common Stock issuable upon exercise of
warrants which are exercisable by Sands Brothers & Co. Ltd. within 60 days
of March 27, 2000 and (b) 226,629 shares of Common Stock which may be
acquired by Sands Brothers Venture Capital Associates LLC, of which Sands
Brothers & Co. Ltd. is member manager, within 60 days of March 27, 2000
upon conversion of a debenture in the principal amount of $4,000,000 (Four
Million Dollars). For further discussion, see Part II - Item 5 - "Section
4(2) Offering to Sands Brothers."
C3D does not know of any arrangements, including any pledge by any
person of securities of C3D, the operation of which may at a subsequent date
result in a change in control of C3D.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE AMOUNTS OF SHARES OR OPTIONS ISSUED OR GRANTED PRIOR TO JANUARY 18,
2000 AND MENTIONED IN THIS DISCUSSION OF CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AS WELL AS THE PRICES PER SHARE FOR SUCH SHARES OR OPTIONS HAVE
BEEN ADJUSTED DUE TO THE THREE-FOR-ONE FORWARD SPLIT OF C3D'S COMMON STOCK THAT
TOOK EFFECT JANUARY 18, 2000.
Except as set forth below, there is no transaction, or series of
similar transactions, since the beginning of C3D's last fiscal year, or any
currently proposed transaction, or series of similar transactions, to which C3D
or any of its subsidiaries was or is to be a party, in which the amount involved
exceeds $60,000 and in which any of the following persons had, or will have, a
direct or indirect material interest: (1) any director or executive officer of
C3D; (2) any nominee for election as a director; (3) any security holder who is
known to C3D to own of record or beneficially more than five percent of any
class of C3D's voting securities; and (4) any member of the immediate family of
any of the foregoing persons.
On February 8, 2000, C3D formed Constellation 3D Trust LLC, a Delaware
limited liability company wholly owned by C3D. C3D then issued 2,500,000 (Two
Million Five Hundred Thousand) shares of Common Stock and then another 3,000,000
(Three Million) shares of Common Stock to Constellation 3D Trust LLC as a
capital contribution. Constellation 3D Trust LLC intends to use the 5,500,000
(Five Million Five Hundred Thousand) shares to raise debt or equity capital and
contribute the proceeds thereof to C3D, which proceeds shall be used for general
corporate purposes. There is no assurance that the issuance of the shares will
result in the raising of any debt or equity capital.
For services rendered by General Yaakov as Director of C3D, starting
July 1999, Yakov Consultants, of which General Yaakov is the sole owner, is to
receive a monthly fee of $5,000 until C3D receives an investment of $2 million,
and thereafter, $10,000 per month. There is no written contract for this
compensation.
45
<PAGE>
For services rendered by General Yaakov and Michael Goldberg as
directors of C3D, on March 8, 1999, C3D's Board of Directors authorized the
issuance of 150,000 shares of Common Stock to each of General Yaakov and Michael
Goldberg. Furthermore, the Board authorized the issuance to General Yaakov of
options to purchase 300,000 shares of Common Stock and the issuance to Mr.
Goldberg of options to purchase 225,000 shares of Common Stock. The issuance of
Common Stock to Messrs. Yaakov and Goldberg occurred on December 7, 1999.
On June 17, 1999, the Compensation Committee of C3D set certain
compensations. There are no written contracts for such compensations. Professor
Eugene Levich, President and Chief Executive Officer of C3D, is to receive
$15,000 per month as of June 1, 1999. Leonardo Berezowsky, Senior Vice President
of Finance and Chief Financial Officer of C3D, is to receive $10,000 per month,
$5,000 monthly as of June 1, 1999, and $5,000 to accrue monthly until the
financing next following June 17, 1999. Michael Goldberg, Secretary, Director of
Legal Affairs, interim Chief Operating Officer and Member of the Board of
Directors of C3D, is to receive $10,000 per month, $5,000 monthly as of June 1,
1999, and $5,000 to accrue monthly until the financing next following June 17,
1999. In his capacity as consultant to the Company, Lev Zaidenberg, Director of
C3D, is to receive $10,000 per month, $5,000 monthly as of June 1, 1999, and
$5,000 to accrue monthly until the financing next following June 17, 1999.
On July 15, 1999, Ronen Yaffe, C3D's Treasurer, entered into an
employment contract with C-TriD Israel Ltd. The contract is still effective.
Pursuant to the contract, as orally amended, for services rendered as the Chief
Financial Officer of C-TriD Israel Ltd., C-TriD Israel Ltd. is to pay Mr. Yaffe
27,000 New Israeli Shekels (approximately U.S. $6,636.53 based on a March 24,
2000 interbank exchange rate of approximately 4.07 New Israeli Shekels per U.S.
Dollar, without fees or surcharges) per month in addition to (1) a bonus if
C-TriD Israel Ltd. distributes a bonus to its employees, as determined by the
Board of Directors of C-TriD Israel Ltd. and dependent on Mr. Yaffe's
performance and the financial results of C-TriD Israel Ltd. and (2) stock
options in C-TriD Israel Ltd. if C-TriD Israel Ltd. adopts a stock option plan
for its employees.
C3D and Constellation Tech entered into an asset purchase agreement
which was completed on October 1, 1999, whereby C3D acquired certain assets and
liabilities from Constellation Tech, including the following directly and
indirectly owned subsidiaries:
o 99 of the 100 issued and outstanding shares of C-TriD Israel Ltd.;
o all of the issued and outstanding shares of TriD Store Vostok;
o the sole membership interest of Constellation Tech in TriDStore IP,
L.L.C.; and
o all of the issued and outstanding shares of TriD SV, Inc.
The consideration paid to Constellation Tech was based on the $1.33 per
share price of C3D Common Stock in connection with the Regulation S offering
dated May 7, 1999. The $1.33 per share price was negotiated, at arms length in
March 1999, before the C3D's common stock began trading using the NASD
Over-the-Counter Bulletin Board service. The 29,250,000 shares of C3D Common
Stock paid to Constellation Tech were therefore valued at $39 million. The
acquisition was recorded at no value on the pro-forma consolidated financial
statements to comply with reverse-takeovers accounting per U.S. generally
accepted accounting principles. No fairness opinion was rendered in connection
with such transaction.
46
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits
The Exhibit Index and Exhibits follow the Signature Page of this Annual
Report.
(b) Financial Statements
The following financial statements and related schedules are included
in Item 8 of this Annual Report:
Report of Independent Certified Public Accountants
Financial Statements of Constellation 3D, Inc.
Consolidated Balance Sheets as of December 31, 1999 and December 31,
1998;
Consolidated Statements of Operation, Stockholders' Deficit and Cash
Flows for the years ended December 31, 1999 and 1998, the period
from inception (September 25, 1997) through December 31, 1997, and
the period from inception (September 25, 1997) through December 31,
1999; and
Notes to Consolidated Financial Statements.
(c) Reports on Form 8-K
No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CONSTELLATION 3D, INC.
By: /s/ Eugene Levich
--------------------------------
Eugene Levich, President,
Chief Executive Officer and
Member of the Board
of Directors
Date: March 30, 2000
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
/s/ Itzhak Yaakov /s/ Eugene Levich
- ----------------------------------------- ------------------------------------
Name: Itzhak Yaakov Name: Eugene Levich
Title: Chairman of the Board of Directors Title: President, Chief Executive
Date: March 30, 2000 Officer and Member of the Board
of Directors
Date: March 30, 2000
/s/ Lev Zaidenberg /s/ Michael Goldberg
- ----------------------------------------- ------------------------------------
Name: Lev Zaidenberg Name: Michael Goldberg
Title: Member of the Board of Directors Title: Secretary, Director of Legal
Date: March 30, 2000 Affairs, interim Chief Operating
Officer and Member of the Board
of Directors
Date: March 30, 2000
/s/ Leonardo Berezowsky /s/ Ronen Yaffe
- ----------------------------------------- ------------------------------------
Name: Leonardo Berezowsky Name: Ronen Yaffe
Title: Senior Vice President of Finance Title: Treasurer
and Chief Financial Officer Date: March 30, 2000
Date: March 30, 2000
48
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
2.1* Asset Purchase Agreement by and between C3D INC., a Florida corporation
as Buyer, CONSTELLATION C3D TECHNOLOGY LIMITED, a British Virgin
Islands corporation, as Seller, TRID STORE, INC., a Delaware
corporation and TRID IP S.A., a Luxembourg corporation dated as of
October 1, 1999.
3.1* Articles of Incorporation of Latin Venture Partners, Inc., filed
December 27, 1995.
3.2* Articles of Amendment to Articles of Incorporation of Latin Venture
Partners, Inc., filed August 3, 1998.
3.3* Articles of Amendment to Articles of Incorporation of Latin Venture
Partners, Inc., filed March 24, 1999.
3.3A*** C3D Inc. Articles of Amendment to the Articles of Incorporation, filed
December 29, 1999
3.4* Bylaws of C3D Inc.
4.1* Investor's Rights Agreement, dated August 10, 1999, by and between C3D
Inc. and Seattle Investment L.L.C.
4.2** Subscription Agreement, dated November 29, 1999, by and between C3D
Inc. and MBA-on-Demand, L.L.C.
4.3** Purchase Agreement, dated November 11, 1999, by and between Wilbro
Nominees Limited and C3D Inc.
4.4** Registration Rights Agreement, dated November 11, 1999, by and between
Wilbro Nominees Limited and C3D Inc.
4.5** Warrant dated November 11, 1999 issued to Moorwood Investment Limited
4.6** Purchase Agreement, dated as of December 24, 1999, by and between
Winnburn Advisory and C3D Inc.
4.7** Registration Rights Agreement, dated as of December 24, 1999, by and
between Winnburn Advisory and C3D Inc.
4.8*** Warrant Agreement, dated December 1, 1999, by and between Sands
Brothers & Co., Ltd. and C3D, Inc.
4.9 Amendment No. 1 to Warrant Agreement, dated March 23, 2000, by and
between Sands Brothers & Co., Ltd. and C3D, Inc. (same as Exhibit
10.17)
4.10 Securities Purchase Agreement made the 23rd day of March 2000 by and
between Constellation 3D, Inc. and Sands Brothers Venture Capital
Associates LLC.
4.11 Registration Rights Agreement dated as of March 24, 2000 by and among
Constellation 3D, Inc. and Sands Brothers Venture Capital LLC.
4.12 10% Subordinate Convertible Debenture, dated March 24, 2000, made by
Constellation 3D, Inc. to Sands Brothers Venture Capital Associates
LLC.
4.13 Warrant Certificate, No. SB-1, dated as of March 24, 2000, issued to
Sands Brothers & Co., Ltd.
4.14 Warrant Certificate, No. SB-2, dated as of March 24, 2000, issued to
Sands Brothers & Co., Ltd.
10.1* Rental Contract, Unprotected According to the Tenant's Protection Law
(Various Instructions) of 1968 as Drafted into the Tenant's Protection
Law (Consolidated Version) of 1972, made and signed in Tel Aviv on
March 25, 1997.
49
<PAGE>
10.2** Rental Contract, Unprotected According to the Tenant's Protection Law
(Various Instructions) of 1968 as Drafted into the Tenant's Protection
Law (Consolidated Version) of 1972, made and signed in Tel Aviv on
February 8, 1998.
10.3* Agreement N. 356/181298 on the rent of office premises, dated December
18, 1998 between MACHMIR Co., Ltd. as "Lessor" and ZAO "TriD Store
Vostok" as "Renter."
10.4* The Rent Agreement, No. 5/8, dated July 5, 1999, between MSU Science
Park as "Lessor" and ZAO "TriD Store Vostok" as "Tenant."
10.5* Attachment No. 1 to The Rent Agreement, No. 5/8, dated July 5, 1999,
between MSU Science Park as "Lessor" and ZAO "TriD Store Vostok" as
"Tenant."
10.6** Sublease Agreement, dated November 18, 1999, by and between Harex
Global Corporation, as lessor, and C3D Inc., as lessee.
10.7** Optima Services Agreement (Member), dated April 23, 1999, by and
between Omni Offices Inc. and C3D Inc.
10.8* Employment Agreement dated July 15, 1998, by and between Memory
Services (M.D.) (1996) Ltd. and Ronen Yaffe.
10.9** Letter of Intent, dated December 20, 1999, by and between Toolex
International N.V. and C3D Inc.
10.10** Co-Invention Agreement, dated December 20, 1999, by and between Toolex
International N.V. and C3D Inc.
10.11*** Stock Option Agreement, dated December 27, 1999, made by and between
C3D Inc. and Brigadier General Itzhak Yaakov
10.12*** Stock Option Agreement, dated December 27, 1999, made by and between
C3D Inc. and Michael L. Goldberg, Esquire
10.13*** Constellation 3D, Inc. 1999 Stock Option Plan
10.14*** Placement Agency Agreement, dated December 1, 1999, by and between
Sands Brothers & Co., Ltd. and C3D, Inc.
10.15*** Amendment No. 1 to Placement Agency Agreement, dated December 22, 1999
by and between Sands Brothers & Co., Ltd. and C3D, Inc.
10.16 Amendment No. 2 to Placement Agency Agreement, dated March 7, 2000, by
and between Sands Brothers & Co., Ltd. and C3D, Inc.
10.17 Amendment No. 3 to Placement Agency Agreement, dated March 23, 2000,
by and between Sands Brothers & Co., Ltd. and C3D, Inc.
10.18*** Agreement N. 356A/291299 on the rent of the office premises, dated
December 29, 1999 between MACHMIR Co., Ltd. as "Lessor" and ZAO "TriD
Store Vostok" as "Renter."
10.19*** The Rent Agreement of office premises No. 5/2, dated January 5, 2000,
between MSU Science Park as "Lessor" and ZAO "TriD Store Vostok" as
"Renter."
50
<PAGE>
16.1** Auditor's Resignation letter dated December 20, 1999.
21.1+ Subsidiaries of the Registrant
27.1 Financial Data Schedule
- -----------------------------------
* Incorporated by reference to exhibits filed in response to Item
15(b),"Financial Statements and Exhibits," of C3D's Registration Statement
on Form 10 dated November 12, 1999.
** Incorporated by reference to exhibits filed in response to Item
15(b),"Financial Statements and Exhibits," of C3D's Registration Statement
on Form 10/A No. 1 dated December 27, 1999.
*** Incorporated by reference to exhibits filed in response to Item
15(b),"Financial Statements and Exhibits," of C3D's Registration Statement
on Post-Effective Form 10/A No. 2 dated January 14, 2000.
+ The subsidiaries of C3D and their places of organization are listed in the
Business Section of this Annual Report.
51
<PAGE>
March 23, 2000
Constellation 3D, Inc.
230 Park Avenue, Suite 453
New York, NY 10169
Attn: Eugene Levich
President and CEO
Re: Amendment No. 3 to Placement Agency Agreement; Amendment No. 1 to
Warrant Agreement
-----------------------------------------------------------------------
Dear Dr. Levich:
The parties hereto, Constellation 3D, Inc. (f/k/a C3D Inc.), a Florida
corporation (the "Company") and Sands Brothers & Co., Ltd., a Delaware
corporation ("Sands Brothers") have entered into (A) that certain placement
agency agreement (hereinafter the "Agency Agreement") dated as of December 1,
1999, as amended December 22, 1999 and March 7, 2000, and as supplemented by
that certain letter agreement dated February 8, 2000 (hereinafter the "Agency
Agreement") and (B) that certain Warrant Agreement dated as of December 1, 1999
(the "Warrant Agreement") .
In connection therewith, the parties hereto agree that the Agency
Agreement and Warrant Agreement are hereby amended as follows (which, among
other things, gives effect to the 3 for 1 stock split of the Company effectuated
in December 1999):
1. The introductory paragraph of the Agency Agreement is hereby deleted
in its entirety and in its place and stead the following is inserted:
"The undersigned, Constellation 3D, Inc. (f/k/a/ C3D Inc.), a
corporation organized under the laws of the state of Florida (together
with any of its subsidiaries, affiliates,
<PAGE>
Constellation 3D, Inc.
March 23, 2000
Page 2
successors or assigns the "Company"), proposes to offer for sale to certain
"accredited investors, through Sands Brothers & Co., Ltd., in accordance with
the terms and conditions specified in the letter agreement dated October 25,
1999 between the parties hereto (the "Letter Agreement"), as exclusive placement
agent ("Sands Brothers" or the "Placement Agent") on a best efforts basis, a
minimum of $4,000,000 (the "Minimum Amount") and a maximum of $120,000,000 (the
"Maximum Amount") of (a) the Company's capital stock (whether Common Stock or
Preferred Stock convertible into Common Stock) (collectively, the "Capital
Stock"), at a price equal to a 30% discount to the average of the bid price for
the 120 day period prior to the Closing (the "Minimum Offering Price") with
respect to the Minimum Amount, and with respect to an amount in excess of the
Minimum Amount and up to the Maximum Amount, at the Minimum Offering Price but
in no event less than $4.00 per share and/or (b) any other similar form of debt
financing transactions (hereinafter, collectively "Other Financing"). The
Capital Stock and Other Financing instruments (the "Securities") to be offered
pursuant to the Offering Documents (as hereinafter defined) and Other Financing
transactions to be consummated are sometimes hereinafter referred to
collectively as the "Financing" or the "Offering."
2. Paragraph 4(e) of the Agency Agreement is hereby deleted in
its entirety and in its place and stead the following is inserted:
"(e) Issuance of Placement Agent Warrants. At each Closing as provided
in paragraph 4(a) above, the Company shall issue to the Placement Agent
or its designee(s), subject to the ratable adjustment of the shares
underlying the Placement Agent Warrants (hereinafter defined) and the
exercise price thereof in the event of any Company dividend, stock
split or reclassification declared after the date hereof, (i) with
respect to the sale of the Minimum Amount, warrants to purchase
1,050,000 shares of the Company's Common Stock ("Initial Placement
Agent Warrants") and (ii) 600,000 warrants for each $1,000,000 of all
Securities sold in the Financing up to an aggregate of $25,000,000
("the Additional Placement Agent Warrants") (collectively referred to
as the "Placement Agent Warrants"). The Initial Placement Agent
Warrants shall be exercisable for five (5) years, commencing upon the
date of their issuance, at a price of $3.67 per share of Common Stock.
The Additional Placement Agent Warrants shall be exercisable for five
(5) years, commencing upon the date of their issuance, at a price equal
to a 40% discount to the average of the bid price of the Common Stock
for the 120 day period prior to any Closing, but in no event less than
of $5.00 per share. The Placement Agent Warrants shall be in the form
attached hereto as Exhibit B, and will be governed by the terms of the
Warrant Agreement attached hereto as Exhibit C. The certificates
representing the Placement Agent Warrants will be in such denominations
and such names as the Placement Agent may request prior to each
closing. The Placement Agent Warrants may not be assigned by Sands
Brothers, except to Sands Brothers' officers, employees or other
designees, without the written consent of the Company. All issuance of
Placement agent warrants will be done in full compliance with
applicable law."
<PAGE>
Constellation 3D, Inc.
March 23, 2000
Page 3
3. Paragraph 1 of the Warrant Agreement is hereby deleted in its
entirety and in its place and stead the following is inserted:
1. Grant. The Holder and its designees is hereby granted the right to
purchase, at any time from December 1, 1999, until 5:30 p.m., New York
time, on December 1, 2004, up to an aggregate of 16,050,000 Warrant
Shares (subject to adjustment as provided in Section 8 hereof) at the
initial exercise price per share as provided in Section 6 hereof,
vesting as follows:
(i) 1,050,000 Warrant Shares shall vest upon the sale
of the Minimum Amount (the "Initial Warrant Shares");
(ii) 600,000 Warrant Shares for each $1,000,000 of
all Securities sold in the Financing ("the Additional
Warrant Shares").
4. Paragraph 6.1 of the Warrant Agreement is hereby deleted in its
entirety and in its place and stead the following is inserted:
ss.6.1 Initial and Adjusted Exercise Price. Except as otherwise
provided in Section 8 hereof, the initial exercise price with respect
to the Initial Warrant Shares shall be $3.67 per share of Common Stock,
and the initial exercise price with respect to the Additional Warrant
Shares shall be equal to a 40% discount to the average of the bid price
of the Common Stock for the 120 day period prior to any Closing, but in
no event less than of $5.00 per share of Common Stock. The adjusted
exercise price shall be the price which shall result from time to time
from any and all adjustments of the initial exercise price in
accordance with the provisions of Section 8 hereof.
5. Except as set forth herein, the Agency Agreement and the Warrant
Agreement shall remain in full force and effect.
<PAGE>
Constellation 3D, Inc.
March 23, 2000
Page 4
IN WITNESS WHEREOF, the Company and Sands Brothers have caused
this Agreement to be executed by its duly authorized representative.
CONSTELLATION 3D, INC. SANDS BROTHERS & CO., LTD.
By: /s/ Eugene Levich By: /s/ Mark Hollo
----------------------------- --------------------------------
Name: Eugene Levich Name: Mark Hollo
Title: President Title: Managing Director
Date: March 23, 2000 Date: March 23, 2000
---------------------------- -------------------------------
<PAGE>
CONSTELLATION 3D, INC.
SECURITIES PURCHASE AGREEMENT
March 23, 2000
<PAGE>
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (the "Agreement") is made as of the 23rd
day of March, by and between Constellation 3D, Inc., a Florida corporation (the
"Company"), and the investors listed on Schedule A hereto, each of which is
herein referred to as an "Investor."
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock.
1.1 Issuance and Sale of 10% Subordinated Convertible Debenture.
(a) Subject to the terms and conditions of this Agreement, each
Investor severally and not jointly agrees to purchase at the Closing and the
Company agrees to issue and sell to each Investor at the Closing, that principal
amount of the Company's 10% Subordinated Convertible Debenture ("Debenture" or,
collectively, the "Debentures") at the purchase price set forth opposite each
Investor's name on Schedule A hereto. The Company's sale of the Debentures to
each Investor is a separate sale.
1.2 Closing.
(a) The initial purchase and sale of the Debentures (the "Initial
Closing") shall take place at the offices of Littman Krooks Roth & Ball P.C.,
655 Third Avenue, New York New York 10017, at 9:00 a.m., on March 24, 2000, or
at such other time and place as the Company and the Investors mutually agree
upon orally or in writing. For purposes of this Agreement, the term "Closing,"
unless otherwise indicated, refers to the applicable closing of the Initial
Closing or the Subsequent Closing(s), as the case may be.
(b) At the Closing, the Company shall deliver to each Investor,
as applicable, a certificate representing the aggregate principal amount of the
Debentures to be purchased by such Investor as specified on Schedule A hereto,
against payment of the purchase price therefor, by check or wire transfer
payable to the Company, or cancellation of Company indebtedness.
2. Representations and Warranties of the Company. The Company hereby
represents and warrants to each Investor, except as set forth on a Schedule of
Exceptions to Representations and Warranties attached hereto as Exhibit A (the
Schedule of Exceptions), the following:
2.1 Subsidiaries. The Company does not presently own or control, directly
or indirectly, any interest in any other corporation, association, or other
business entity except as set forth in Exhibit A or as disclosed in the SEC
Reports (as hereinafter defined) (each, a "Subsidiary" and collectively, the
"Subsidiaries"). Unless the context requires otherwise, all references herein to
the "Company" shall refer to the Company and its Subsidiaries. The Company is
not a party to any joint venture, partnership, or similar arrangement.
2.2 Organization, Good Standing, and Qualification. The Company is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Florida, and has all requisite corporate power and
authority to carry on its business as now conducted. The Subsidiaries are duly
<PAGE>
organized in their respective jurisdictions of organization, validly existing
and in good standing in such respective jurisdictions and each has the power and
authority to carry on its respective business as now conducted. The Company and
the Subsidiaries are duly qualified to transact business and are in good
standing in each jurisdiction in which the failure so to qualify would have a
material adverse effect on the Company's business or properties.
2.3 Capitalization and Voting Rights. The number of authorized, issued and
outstanding capital stock of the Company is set forth in Exhibit A. Except as
disclosed in Exhibit A, no securities of the Company or any Subsidiary are
entitled to preemptive or similar rights, nor is any holder of securities of the
Company or any Subsidiary entitled to preemptive or similar rights arising out
of any agreement or understanding with the Company or any Subsidiary by virtue
of any of the Transaction Documents (defined hereinafter). Except as disclosed
in Exhibit A, there are no outstanding options, warrants, script rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities, except as a result of the purchase and sale of the Securities, or
rights or obligations convertible into or exchangeable for, or giving any Person
(as defined below) any right to subscribe for or acquire, any shares of Common
Stock, or contracts, commitments, understandings, or arrangements by which the
Company or any Subsidiary is or may become bound to issue additional shares of
Common Stock, or securities or rights convertible or exchangeable into shares of
Common Stock. To the knowledge of the Company, except as specifically disclosed
in the SEC Reports (as defined below) or Exhibit A, no Person or group of
related Persons beneficially owns (as determined pursuant to Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), or has the right to acquire by agreement with or by obligation binding
upon the Company, beneficial ownership of in excess of 5% of the Common Stock. A
"Person" means an individual or corporation, partnership, trust, incorporated or
unincorporated association, joint venture, limited liability company, joint
stock company, government (or an agency or subdivision thereof) or other entity
of any kind.
2.4 Authorization. All corporate action on the part of the Company, its
officers, directors, and shareholders necessary for the authorization,
execution, and delivery of this Agreement and the Registration Rights Agreement
(the "Transaction Documents"), the performance of all obligations of the Company
hereunder and thereunder and the authorization, issuance (or reservation for
issuance), and delivery of the Debentures being sold hereunder, and the Common
Stock issuable upon conversion of the Debentures, has been taken or will be
taken prior to the Closing, and the Transaction Documents constitute valid and
legally binding obligations of the Company, enforceable in accordance with their
respective terms, except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting
enforcement of creditorS' rights generally, (ii) as limited by laws relating to
the availability of specific performance, injunctive relief, or other equitable
remedies, and (iii) to the extent the indemnification provisions contained in
the Transaction Documents may be limited by applicable federal or state laws.
2.5 Valid Issuance of Debentures and Common Stock.
(a) The Debentures being purchased by the Investors hereunder, when
issued, sold, and delivered in accordance with the terms hereof for the
consideration provided for herein, will be duly and validly issued, and, based
in part upon the representations of the Investors in this Agreement, will be
issued in compliance with all applicable federal and state securities laws. The
Common Stock issuable upon conversion of the Debentures purchased under this
Agreement has been duly and validly reserved for
-2-
<PAGE>
issuance and, upon issuance in accordance with the terms of the Debentures,
shall be duly and validly issued, fully paid and nonassessable, and issued in
compliance with all applicable securities laws, as presently in effect, of the
United States and each of the states whose securities laws govern the issuance
of any of the Debentures hereunder.
(b) All outstanding shares of Common Stock of the Company are duly and
validly authorized and issued, fully paid and nonassessable, and were issued in
compliance with all applicable federal and state securities laws.
2.6 Filings, Consents and Approvals. Neither the Company nor any Subsidiary
is required to obtain any consent, waiver, authorization or order of, give any
notice to, or make any filing or registration with, any court or other federal,
state, local or other governmental authority or other Person in connection with
the execution, delivery and performance by the Company of the Agreement and the
Ancillary Agreements, other than (i) the application(s) to the Nasdaq National
Market ("NASDAQ") for the listing of the shares of Common Stock issuable upon
conversion of the Debentures with the NASDAQ (and with any other national
securities exchange of market on which the Common Stock is then listed), (ii)
applicable Blue Sky filings, and (iii) in all other cases where the failure to
obtain such consent, waiver, authorization or order, or to give such notice or
make such filing or registration could not have or result in, individually or in
the aggregate, a material adverse effect on the results or operations of the
Company and its Subsidiaries taken as a whole ("Material Adverse Effect").
2.7 Litigation. There is no action, suit, proceeding, claim or
investigation pending or, to the knowledge of the Company, currently threatened
against the Company which questions the validity of this Agreement or the
Ancillary Agreements, or the right of the Company to enter into any of them, or
to consummate the transactions contemplated hereby or thereby, or which might
result, either individually or in the aggregate, in any material adverse changes
in the assets, condition, affairs, or prospects of the Company, financially or
otherwise, or any change in the current equity ownership of the Company, nor is
the Company aware that there is any basis for the foregoing. The foregoing
includes, without limitation, actions, pending or threatened (or any basis
therefor known to the Company) involving the prior employment of any of the
Company's employees, their use in connection with the Company's business of any
information or techniques allegedly proprietary to any of their former
employers, or their obligations under any agreements with prior employers. The
Company is not a party or subject to the provisions of any order, writ,
injunction, judgment, or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding, or investigation by the
Company currently pending or which the Company intends to initiate.
2.8 Patents and Trademarks. The Company has sufficient title and ownership
of all patents, trademarks, service marks, trade names, copyrights, trade
secrets, information, inventions, proprietary rights, and processes necessary
for its business as now conducted without any conflict with or infringement of
the rights of others. The Company has not received any communications alleging
that the Company has violated or, by conducting its business would violate any
of the patents, trademarks, service marks, trade names, copyrights, or trade
secrets, or other proprietary rights of any other person or entity. The Company
is not aware that any of its employees, officers, or consultants are obligated
under any contract (including licenses, covenants, or commitments of any nature)
or other agreement, or subject to any judgment, decree, or order of any court or
administrative agency, that would interfere with the use of such employee's,
officer's, or consultant's commercially reasonable efforts to promote the
interests of the
-3-
<PAGE>
Company or that would conflict with the Company's business as conducted. Neither
the execution nor delivery of the Transaction Documents, nor the carrying on of
the Company's business by the employees of the Company, nor the conduct of the
Company's business, will, to the Company's knowledge, conflict with or result in
a breach of the terms, conditions, or provisions of, or constitute a default
under, any contract, covenant, or instrument under which any of such employees,
officers or consultants are now obligated.
2.9 Compliance with Other Instruments. The Company is not in violation or
default of any provisions of its Articles of Incorporation or Bylaws or, to its
knowledge, of any instrument, judgment, order, writ, decree, mortgage,
indenture, lease, license or contract to which it is a party or by which it is
bound or, to its knowledge, of any provision of federal, state, or local
statute, rule, or regulation applicable to the Company. The execution, delivery,
and performance of the Transaction Documents and the consummation of the
transactions contemplated thereby will not result in any such violation or be in
conflict with or constitute, with or without the passage of time and giving of
notice, either a default under any such provision, instrument, judgment, order,
writ, decree or contract, or an event which results in the creation of any lien,
charge, or encumbrance upon any assets of the Company or the suspension,
revocation, impairment, forfeiture, or nonrenewal of any material permit,
license, authorization, or approval applicable to the Company, its business or
operations, or any of its assets or properties.
2.10 Agreements.
(a) Except as set forth in the Disclosure Materials (defined
hereinafter), or for agreements explicitly contemplated hereby and by the
Transaction Documents, the Company is a party to no material agreements,
understandings, or proposed transactions.
2.11 Permits. The Company has all material franchises, permits, licenses,
and any similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
business, properties, prospects, or financial condition of the Company and
believes it can obtain, without undue burden or expense, any similar authority
for the conduct of its business as planned to be conducted. The Company is not
in default in any material respect under any of such franchises, permits,
licenses, or other similar authority.
2.12 Compliance with Laws. The conduct of business by the Company and each
Subsidiary as presently and proposed to be conducted is not subject to
continuing oversight, supervision, regulation or examination by any governmental
official or body of the United States or any other jurisdiction wherein the
Company or any Subsidiary conducts or proposes to conduct such business, except
such regulation as is applicable to commercial enterprises generally. Neither
the Company nor any of the Subsidiaries has received any notice of any violation
of or noncompliance with, any Federal, state, local or foreign laws, ordinances,
regulations and orders (including, without limitation, those relating to
environmental protection, occupational safety and health, Federal securities
laws, equal employment opportunity, consumer protection, credit reporting,
"truth-in-lending", and warranties and trade practices) applicable to its
business or to the business of any Subsidiary, the violation of, or
noncompliance with, which would have a materially adverse effect on either the
Company's business or operations, or that of any Subsidiary, and the Company
knows of no facts or set of circumstances which would give rise to such a
notice.
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<PAGE>
2.13 Manufacturing and Marketing Rights. The Company has not granted rights
to manufacture, produce, assemble, license, market, or sell its products to any
other person and is not bound by any agreement that affects the Company's
exclusive right to develop, manufacture, assemble, distribute, market, or sell
its products.
2.14 Disclosure. Neither this Agreement nor the Ancillary Agreements, nor
any other statements or certificates made or delivered in connection herewith or
therewith contains any untrue statement of a material fact or omits to state a
material fact necessary to make the statements herein or therein not misleading.
2.15 Registration Rights. Except as disclosed on Exhibit A and as provided
in the Registration Rights Agreement, the Company has not granted or agreed to
grant any registration rights, including piggyback rights, to any person or
entity.
2.16 Title to Property and Assets. The Company owns its property and assets
free and clear of all mortgages, liens, loans, pledges, security interests,
claims, equitable interests, charges, and encumbrances, except such encumbrances
and liens which arise in the ordinary course of business and do not materially
impair the Company's ownership or use of such property or assets. With respect
to the property and assets it leases, the Company is in compliance with such
leases and, to its knowledge, holds a valid leasehold interest free of any
liens, claims, or encumbrances.
2.17 Financial Statements. The Company has delivered to each Investor its
audited financial statements (balance sheet and profit and loss statement,
statement of shareholder's equity and statement of cash flows including notes
thereto) at December 31, 1998 and December 31, 1999 and for the fiscal years
then-ended and its unaudited financial statements (balance sheet and profit and
loss statement, statement of shareholder's equity and statement of cash flows
including notes thereto) at February 29, 2000 and for the two month period
then-ended (collectively, the "Financial Statements"). The Financial Statements
have been prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods indicated and with each
other, except that unaudited Financial Statements may not contain all footnotes
required by generally accepted accounting principles. The Financial Statements
fairly present the financial condition and operating results of the Company as
of the dates, and for the periods, indicated therein, subject in the case of the
unaudited Financial Statements to normal year-end audit adjustments. Except as
set forth in the Financial Statements, the Company has no material liabilities,
contingent or otherwise, other than (i) liabilities incurred in the ordinary
course of business subsequent to December 31, 1999 and (ii) obligations under
contracts and commitments incurred in the ordinary course of business and not
required under generally accepted accounting principles to be reflected in the
Financial Statements, which, in both cases, individually or in the aggregate are
not material to the financial condition or operating results of the Company.
Except as disclosed in the Financial Statements, the Company is not a guarantor
or indemnitor of any indebtedness of any other person firm, corporation or other
entity, and the Company has not assumed or otherwise become directly or
contingently liable on any indebtedness of any other person.
2.18 Changes. Since December 31, 1999 there has not been any material
adverse change in the business or prospects of the Company and its Subsidiaries
taken as a whole.
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<PAGE>
2.19 Employee Benefit Plans. The Company does not have any Employee Benefit
Plan as defined in the Employee Retirement Income Security of 1974.
2.20 Tax Returns, Payments, and Elections. The Company has timely filed all
tax returns and reports as required by law, and all such returns and reports are
true and correct in all material respects. The Company has paid all taxes and
other assessments due, if any, except those contested by it in good faith which
are listed in the Schedule of Exceptions. The provision for taxes of the Company
as shown in the Financial Statements is adequate for taxes due or accrued as of
the date thereof. The Company has not elected pursuant to the Internal Revenue
Code of 1986, as amended ("Code"), to be treated as a Subchapter S corporation
or a collapsible corporation pursuant to Section 341(f) or Section 1362(a) of
the Code.
2.21 Insurance. The Company has in full force and effect fire and casualty
insurance policies, with extended coverage, sufficient in amount (subject to
reasonable deductibles) to allow it to replace any of its properties that might
be damaged or destroyed, and the Company has insurance against other hazards,
risks, and liabilities to persons and property to the extent and in the manner
customary for companies in similar businesses similarly situated.
2.22 Minute Books. The minute books of the Company provided to the
Investors contain a complete summary of all meetings and actions of the
Company's Board of Directors and shareholders since the time of incorporation
and reflect all transactions referred to in such minutes accurately in all
material respects.
2.23 Labor Agreements and Actions. The Company is not aware that any
officer or key employee, or that any group of key employees, intends to
terminate their employment with the Company, nor does the Company have a present
intention to terminate the employment of any of the foregoing. Subject to
general legal principles related to wrongful termination of employees, the
employment of each officer and employee of the Company is terminable at the will
of the Company, with or without cause.
2.24 SEC Reports; Financial Statements. The Company has filed all reports
required to be filed by it under the Exchange Act, including pursuant to Section
13 (a) or 15(d) thereof, for the two years preceding the date hereof (or such
shorter period as the Company was required by law to file such material) (the
foregoing materials being collectively referred to herein as the "SEC Reports"
and, together with the Schedule of Exceptions to this Agreement the "Disclosure
Materials") on a timely basis or has received a valid extension of such time of
filing and has filed any such SEC Reports prior to the expiration of any such
extension. As of their respective dates, the SEC Reports complied in all
material respects with the requirements of the Securities Act and the Exchange
Act and the rules and regulations of the Commission promulgated thereunder, and
none of the SEC Reports, when filed, 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. All material
agreements to which the Company is a party or to which the property or assets of
the Company are subject have been filed as exhibits to the SEC Reports to the
extent required. The financial statements of the Company included in the SEC
Reports comply in all material respects with applicable accounting requirements
and the rules and regulations of the Commission with respect thereto as in
effect at the time of filing. Such financial statements have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis during the periods involved ("GAAP"), except as may be otherwise
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<PAGE>
specified in such financial statements or the notes thereto, and fairly present
in all material respects the financial position of the Company and its
consolidated subsidiaries as of and for 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, immaterial, year-end audit adjustments. Except
as set forth on Exhibit A or except as specifically disclosed in the SEC
Reports, since December 31, 1999 (a) there has been no event, occurrence or
development that has had or that could reasonably be expected to have or result
in a Material Adverse Effect, (b) the Company has not incurred any liabilities
(contingent or otherwise) other than (x) liabilities incurred in the ordinary
course of business consistent with past practice and (y) liabilities not
required to be reflected in the Company's financial statements pursuant to GAAP
or required to be disclosed in filings made with the Commission, (c) the Company
has not altered its method of accounting or the identity of its auditors and (d)
the Company has not declared or made any payment or distribution of cash or
other property to its stockholders or officers or directors (other than in
compliance with existing Company stock or stock option plans) with respect to
its capital stock, or purchased, redeemed (or made any agreements to purchase or
redeem) any shares of its capital stock.
3. Representations and Warranties of the Investors. Each Investor hereby
severally and not jointly represents and warrants that:
3.1 Authorization. The Transaction Documents constitute valid and
legally binding obligations of such Investor enforceable in accordance with
their terms, except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting
enforcement of creditors' rights generally, (ii) as limited by laws relating to
the availability of specific performance, injunctive relief, or other equitable
remedies, and (iii) to the extent the indemnification provisions contained in
the Investors Rights Agreement may be limited by applicable federal or state
laws.
3.2 Purchase Entirely for Own Account. The Debentures to be purchased
by such Investor and the Common Stock issuable upon conversion thereof
(collectively, the "Securities") will be acquired for investment for such
Investor's own account, not as a nominee or agent, and not with a view to the
resale or distribution of any part thereof, and such Investor has no present
intention of selling, granting any participation in, or otherwise distributing
the same. Such Investor does not have any contract, undertaking, agreement, or
arrangement with any person to sell, transfer, or grant participation to any
person with respect to any of the Securities. Investor represents that it has
full power and authority to enter into this Agreement.
3.3 Disclosure of Information. Investor acknowledges that it has
received all the information that it has requested relating to the purchase of
the Debentures. Investor further represents that it has had an opportunity to
ask questions and receive answers from the Company regarding the terms and
conditions of the offering of the Debentures. The foregoing, however, does not
limit or modify the representations and warranties of the Company in Section 2
of this Agreement or the right of the Investors to rely thereon.
3.4 Investment Experience. Investor is an investor in securities of
companies in the development stage and acknowledges that it is able to fend for
itself, can bear the economic risk of its investment, and has such knowledge and
experience in financial or business matters that it is capable of evaluating the
merits and risks of the investment in the Debentures. If other than an
individual, Investor also represents it has not been organized for the purpose
of acquiring the Debentures.
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<PAGE>
3.5 Accredited Investor. Investor is an "accredited investor" within
the meaning of Rule 501 of Regulation D of the Securities and Exchange
Commission (the "SEC"), as presently in effect.
3.6 Restricted Securities. Investor understands that the Debentures
that it is purchasing are characterized as "restricted securities" under the
federal securities laws inasmuch as they are being acquired from the Company in
a transaction not involving a public offering, and that under such laws and
applicable regulations such securities may be resold without registration under
the Securities Act of 1933, as amended (the "Act"), only in certain limited
circumstances. In this connection, Investor represents that it is familiar with
SEC Rule 144, as presently in effect, and understands the resale limitations
imposed thereby and by the Act.
3.7 Legends. It is understood that the certificates evidencing the
Debentures (and the Common Stock issuable upon conversion thereof) may bear one
or all of the following legends:
"These securities have not been registered under the Securities Act of
1933, as amended. They may not be sold, offered for sale, pledged or
hypothecated in the absence of a registration statement in effect with respect
to the securities under such Act or an opinion of counsel reasonably
satisfactory to the Company."
4. Conditions of Investor's Obligations at Closing. The obligations of each
Investor under subsection 1.1(a) of this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions, the
waiver of which shall not be effective against any Investor who does not consent
thereto:
4.1 Representations and Warranties. The representations and warranties
of the Company contained in Section 2 hereof shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the date of such Closing.
4.2 Performance. The Company shall have performed and complied with
all agreements, obligations, and conditions contained in this Agreement that are
required to be performed or complied with by it on or before the Closing.
4.3 Compliance Certificate. The President of the Company shall deliver
to each Investor at the Closing a certificate certifying that the conditions
specified in Sections 4.1 and 4.2 have been fulfilled and stating that there has
been no adverse change in the business, affairs, prospects, operations,
properties, assets, or condition of the Company since December 31, 1999.
4.4 Proceedings and Documents. All corporate and other proceedings in
connection with the transactions contemplated at the Closing and all documents
incident thereto shall be reasonably satisfactory in form and substance to the
Investors and their counsel, and they shall have received all such counterpart
original and certified or other copies of such documents as they may reasonably
request.
-8-
<PAGE>
4.5 Opinion of Company Counsel. Each Investor shall have received from
Blank Rome Comisky & McCauley LLP, an opinion, dated as of the Closing, in form
attached hereto as Exhibit B.
4.6 Ancillary Agreements. The Company and each Investor shall have
entered into the Registration Rights Agreement dated of even date herewith, a
form of which is attached hereto as Exhibit C (the "Registration Rights
Agreement").
4.7 Good Standing Certificates. The Company and the Subsidiaries shall
have delivered to the Investors, dated as of a date within five business days of
the Closing, certificates issued by the proper authorities in each of their
respective jurisdictions of organization to the effect that each of them is
legally existing and in good standing.
4.8 Secretary's Certificate. The Company shall have delivered to the
Investors a certificate executed by the Secretary of the Company dated as of the
Closing certifying the following matters: (a) the resolutions adopted by the
Company's Board of Directors and shareholders relating to the transactions
contemplated by this Agreement; (b) the Articles of Incorporation and Bylaws of
the Company; and (c) such other matters as special counsel may reasonably
request.
4.9 Debenture. The Company shall have delivered to each Investor a
debenture certificate for aggregate principal amount of Debentures set forth
opposite such Investor's name on Schedule A hereto.
4.10 Sale of Debentures. A minimum aggregate principal amount of
$4,000,000 of Debentures shall be purchased by the Investors for a minimum
aggregate purchase price of $4,000,000.
4.11 Sands Brothers. The Company shall pay Sands Brothers & Co., Ltd.
all commissions, fees and warrants due as set forth in that certain placement
agency agreement dated December 1, 1999, as amended December 22, 1999 and March
7, 2000.
5. Conditions of the Company's Obligations at Closing. The obligations of
the Company to each Investor under this Agreement are subject to the fulfillment
on or before any Closing of each of the following conditions by that Investor:
5.1 Representations and Warranties. The representations and warranties
of each Investor contained in Section 3 shall be true on and as of such Closing
with the same effect as though such representations and warranties had been made
on and as of such Closing.
5.2 Payment of Purchase Price. Each Investor shall have delivered the
purchase price specified in Section 1.2.
5.3 Registration Rights Agreement. The Company and each Investor shall
have entered into the Registration Rights Agreement.
5.4 Sale of Debentures. A minimum aggregate principal amount of
$4,000,000 of Debentures shall be purchased by the Investors for a minimum
aggregate purchase price of $4,000,000.
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<PAGE>
6. Miscellaneous.
6.1 Survival of Warranties. The warranties, representations, and
covenants of the Company and Investors contained in or made pursuant to this
Agreement shall survive the execution and delivery of this Agreement and the
Closing and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of the Investors or the Company.
6.2 Successors and Assigns. Except as otherwise provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any Debentures sold hereunder or any Common Stock issued upon
conversion thereof). Nothing in this Agreement, express or implied, is intended
to confer upon any party other than the parties hereto or their respective
successors and assigns any rights, remedies, obligations, or liabilities under
or by reason of this Agreement, except as expressly provided in this Agreement.
6.3 Governing Law. This Agreement shall be governed by and construed
under the laws of the State of New York as applied to agreements among New York
residents entered into and to be performed entirely within New York. The Company
(1) agrees that any legal suit, action or proceeding arising out of or relating
to this Agreement shall be instituted exclusively in New York State Supreme
Court, County of New York, or in the United States District Court for the
Southern District of New York, (2) waives any objection which the Company may
have now or hereafter to the venue of any such suit, action or proceeding, and
(3) irrevocably consents to the jurisdiction of the New York State Supreme
Court, County of New York, and the United States District Court for the Southern
District of New York in any such suit, action or proceeding. The Company further
agrees to accept and acknowledge service of any and all process which may be
served in any such suit, action or proceeding in the New York State Supreme
Court, County of New York, or in the United States District Court for the
Southern District of New York and agrees that service of process upon the
Company mailed by certified mail to the Company's address shall be deemed in
every respect effective service of process upon the Company, in any such suit,
action or proceeding. THE PARTIES HERETO AGREE TO WAIVE THEIR RESPECTIVE RIGHTS
TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF
THIS AGREEMENT OR ANY DOCUMENT OR AGREEMENT CONTEMPLATED HEREBY.
6.4 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
6.5 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
6.6 Notices. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or five (5)
days following deposit with the United States Post Office, by registered or
certified mail, postage prepaid, and addressed to the party to be notified at
the address indicated for such party on the signature page hereof, or at such
other address as such party may designate by ten (10) days' advance written
notice to the other parties.
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6.7 Finder's Fee. Each party represents that it neither is nor will be
obligated for any finders' or brokers' fee or commission in connection with this
transaction, except for commissions, fees and other compensation due to Sands
Brothers & Co., Ltd.
6.8 Expenses. If any action at law or in equity is necessary to
enforce or interpret the terms of the Transaction Documents the prevailing party
shall be entitled to reasonable attorney's fees, costs, and necessary
disbursements in addition to any other relief to which such party may be
entitled.
6.9 Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
a majority of the Common Stock issued or issuable upon conversion of the
Debentures sold and issued pursuant to this Agreement. Any amendment or waiver
effected in accordance with this paragraph shall be binding upon each holder of
any securities purchased under this Agreement at the time outstanding (including
securities into which such securities are convertible), each future holder of
all such securities, and the Company.
6.10 Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of this Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
6.11 Entire Agreement. This Agreement and the documents referred to
herein constitute the entire agreement among the parties and no party shall be
liable or bound to any other party in any manner by any warranties,
representations, or covenants except as specifically set forth herein or
therein.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
COMPANY: Constellation 3D, Inc.
By:/s/ Eugene Levich
--------------------------------
Address: 230 Park Avenue
Suite 453
New York, New York 10169
SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT
<PAGE>
INVESTORS:
Sands Brothers Venture Capital LLC
By: SB Venture Capital Management LLC
By: /s/ Martin S. Sands
----------------------------------
Martin S. Sands, Manager
SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT
<PAGE>
SCHEDULE A
----------
Schedule of Investors -- Initial Closing (March 24, 2000)
Aggregate Total
Principal Amount No. Shares
of Debentures Convertible
------------- -----------
Sands Brothers Venture Capital Associates LLC $4,000,000 226,629
Total $4,000,000
<PAGE>
EXHIBIT A
Schedule of Exceptions
The sections referenced herein correspond to the sections of the Agreement.
Unless the context otherwise requires, all capitalized terms used herein shall
have the meanings as set forth in the Agreement.
Section 2.1 Subsidiaries.
In addition to the subsidiaries set forth in the SEC Reports,
the Company owns 100% of Constellation 3D Trust L.L.C., which is inactive.
Section 2.2 Capitalization and Voting Rights.
As of March 24, 2000 (i) there were 46,501,609 shares of
Common Stock issued and outstanding; (ii) the Company has issued no additional
capital stock; (iii) no shareholder is entitled to preemptive or similar
rights; (iv) each of the 8.0% Series B Convertible Note due October 31, 2001
in principal amount of $500,000 (the "Series B Note") and the 8.0% Series C
Convertible Note due October 31, 2001 in principal amount of $1,600,000 (the
"Series C Note") are convertible into shares of Common Stock; (v) General
Itzhak Yaakov and Michael Goldberg hold options to purchase 100,000 and 75,000
shares of Common Stock, respectively, each at an exercise price of $4.00 per
share; and (vi) Moorwood Investment Limited holds warrants to purchase up to
100,000 shares of Common Stock at an exercise price of $10.00 per share.
Section 2.10 Registration Rights.
The Company has granted registration rights to the holders of
the Series B and Series C Notes and to MBA-on-Demand, L.L.C. (2,500 shares of
Common Stock; piggyback only).
<PAGE>
EXHIBIT B
Opinion of Blank Rome Comisky & McCauley LLP
<PAGE>
EXHIBIT C
Registration Rights Agreement
<PAGE>
CONSTELLATION 3D, INC.
Registration Rights Agreement
Registration Rights Agreement (the "Agreement") dated as of March 24,
2000 by and among Constellation 3D, Inc., a Florida corporation (the "Company"),
and the investors listed on Exhibit A hereto (the "Investors").
WHEREAS, contemporaneously with the execution and delivery of this
Agreement, the Company and the Investors have entered into a Securities Purchase
Agreement dated as of the date hereof (as in effect from time to time, the
"Purchase Agreement") in connection with the issuance and sale by the Company to
the Investors of 10% Subordinated Convertible Debentures (the "Debentures");
WHEREAS, it is a condition to the purchase of the Debentures pursuant
to the Purchase Agreement that the Company and the Investors enter into this
Agreement; and
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual covenants and agreements herein contained, the parties hereto agree as
follows:
1. Certain Definitions. As used in this Agreement, the following terms
shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission, or any
other federal agency at the time administering the Securities Act.
"Common Stock" shall mean the Common Stock, par value $.001 per share,
of the Company, as constituted as of the date of this Agreement.
"Eligible Securities" shall mean all Registrable Securities other than
Excluded Securities.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission thereunder, all as the
same shall be in effect at the time.
"Excluded Securities" shall mean Registrable Securities that are free
of restriction on resale under the Securities Act (by removal of all restrictive
legends, instructions to transfer agent or otherwise) pursuant to Rule 144(k).
"Register," "registered" and "registration" each shall refer to a
registration effected by preparing and filing a registration statement or
statements or similar documents in compliance with the Securities Act and the
declaration or ordering of effectiveness of such registration statement or
document by the Commission.
"Registrable Securities" shall mean (i) the Common Stock issuable upon
conversion of the Debentures purchased by the Investors, (ii) any Common Stock
of the Company issued in exchange for or in replacement of such Debentures, or
Common Stock issued upon conversion thereof.
<PAGE>
"Requisite Period" shall mean, with respect to a firm commitment
underwritten public offering, the period commencing on the effective date of the
registration statement and ending on the date each underwriter has completed the
distribution of all securities purchased by it and, with respect to any other
registration, the period commencing on the effective date of the registration
statement and ending on the earlier of (i) the date on which the sale of all
Registrable Securities covered thereby is completed and (ii) 180 days after such
effective date.
"Securities Act" shall mean the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder, all as the same shall be
in effect at the applicable time.
"Capitalized terms" used but not defined herein shall have the meanings
set forth in the Purchase Agreement.
2. Intentionally Omitted.
3.A Piggyback Registration. If the Company at any time (other than
pursuant to Section 2) from the date of this Agreement through the third
anniversary of the closing of the Purchase Agreement, proposes to register any
of its securities under the Securities Act for sale to the public, whether for
its own account or for the account of other security holders or both (except
with respect to registration statements on Forms S-4, S-8 and any successor
forms thereto as well as registrations that do not permit resales), each such
time it will give written notice to such effect to all holders of outstanding
Registrable Securities at least 30 days prior to such filing. Upon the written
request of any such holder received by the Company within 20 days after the
giving of any such notice by the Company to register any of its Eligible
Securities, the Company will cause the Eligible Securities as to which
registration shall have been so requested to be included in the securities to be
covered by the registration statement proposed to be filed by the Company, all
to the extent required to permit the sale or other disposition by the holder of
such Eligible Securities so registered. Notwithstanding the foregoing, in the
event that any registration pursuant to this Section 3.A shall be, in whole or
in part, an underwritten public offering of Common Stock, the number of Eligible
Securities to be included in such an underwriting may be reduced (pro rata among
the requesting holders and Sands Brothers & Co., Ltd., as placement agent for
the Company, and its assigns and the other selling stockholders (based upon the
number of Eligible Securities requested to be registered by them)) if and to the
extent that the managing underwriter shall be of the good faith opinion that
such inclusion would adversely affect the success of such an underwriting,
provided, that such number of Eligible Securities shall not be reduced if any
shares of Common Stock are to be included in such underwriting for the account
of any person other then the Company and its assigns or requesting holders of
Eligible Securities. Notwithstanding the foregoing provisions, the Company may
withdraw any registration statement referred to in this Section 3.A without
thereby incurring any liability to the holders of Eligible Securities.
3.B S-3 Registration. In case the Company shall receive from any Holder
or Holders of not less than thirty-five percent (35%) of the Registrable
Securities then outstanding a written request or requests that the Company
effect a registration on Form S-3 and any related qualification or compliance
with respect to all or a part of the Registrable Securities owned by such Holder
or Holders, the Company will:
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<PAGE>
(a) promptly give written notice of the proposed registration,
and any related qualification or compliance, to all other Holders; and
(b) as soon as practicable, effect such registration and all
such qualifications and compliances as may be so requested and as would permit
or facilitate the sale and distribution of all or such portion of such Holder's
or Holders' Registrable Securities as are specified in such request, together
with all or such portion of the Registrable Securities of any other Holder or
Holders joining in such request as are specified in a written request given
within 15 days after receipt of such written notice from the Company; provided,
however, that the Company shall not be obligated to effect any such
registration, qualification or compliance pursuant to this Section 3.B: (i) if
Form S-3 is not available for such offering by the Holders; (ii) if the Holders,
together with the holders of any other securities of the Company entitled to
inclusion in such registration, propose to sell Registrable Securities and such
other securities (if any) at an aggregate price to the public (net of any
underwriters' discounts or commissions) of less than $500,000; (iii) if the
Company shall furnish to the Holders a certificate signed by the President of
the Company stating that, in the good faith judgment of the Board of Directors
of the Company, it would be seriously detrimental to the Company and its
stockholders for such Form S-3 Registration to be effected at such time, in
which event the Company shall have the right to defer the filing of the Form S-3
registration statement for a period of not more than 60 days after receipt of
the request of the Holder or Holders under this Section 3.B (provided, however,
that the Company shall not utilize this right more than once in any twelve month
period); or (iv) if the Company would be required to qualify to do business or
to execute a general consent to service of process in effecting such
registration, qualification or compliance.
(c) Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Holders.
4. Holdback Agreements.
(a) In connection with any registration of Registrable
Securities in connection with an underwritten public offering, each holder of
Registrable Securities, agrees, if so requested by the underwriter or
underwriters, not to effect any public sale or distribution (including any sale
pursuant to Rule 144 under the Securities Act) of any Registrable Securities,
and not to effect any such public sale or distribution of any other equity
security of the Company or of any security convertible into or exchangeable or
exercisable for any equity security of the Company (in each case other than as
part of such underwritten public offering), during the 180-day period, or such
other period as the managing underwriter of such offering shall reasonably
require, or such other period agreed to by the Attorney-in-fact or Power of
Attorney on behalf of the holders, beginning on the effective date of such
registration statement, provided that (i) such holder has received written
notice of such registration at least 15 days prior to such effective date and
(ii), with respect to any offering other than pursuant to a firm commitment
underwriting, the underwriters continue to actively market the Registrable
Securities until the earlier of the end of such lock-up period and the closing
with respect to the sale of all, or the final portion of, the Registrable
Securities offered by such holders;
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provided, however, that the immediately foregoing restrictions imposed on such
holder(s) by this Section 4(a)(ii) shall terminate on the earlier of the end of
such lock-up period and thirty (30) days after such closing.
(b) If any registration of Registrable Securities shall be in
connection with an underwritten public offering, the Company agrees (i) if
requested by the underwriter or underwriters, not to effect any public sale or
distribution of any of its equity securities or of any security convertible into
or exchangeable or exercisable for any equity security of the Company (other
than in connection with any employee stock option or other benefit plan which
has been duly adopted by the Company and which provides for the distribution to
participants in the plan of equity securities of the Company or securities
convertible or exchangeable or exercisable for equity securities of the Company,
or in connection with a merger or acquisition approved by the Board of Directors
of the Company) during the seven days prior to, and during the 180-day period,
or such other period as the managing underwriter of such offering shall
reasonably require, beginning on the effective date of such registration
statement (except as part of such registration) and (ii) that any agreement
entered into after the date of this Agreement pursuant to which the Company
issues or agrees to issue any privately placed equity securities shall contain a
provision under which holders of such securities agree that, if required by the
underwriter or underwriters, they will not effect any public sale or
distribution or any such securities during the period referred to in the
foregoing clause (i), including any sale pursuant to Rule 144 under the
Securities Act (except as part of such registration, if permitted), if such
holder is participating in the offering pursuant to such registration.
5. Registration Procedures. If and whenever the Company is required by
the provisions hereof to use its best efforts to effect the registration of any
Registrable Securities under the Securities Act, the Company will, as
expeditiously as possible:
(a) prepare and file with the Commission a registration
statement with respect to such securities and use its best efforts to cause such
registration statement to become effective not later than 120 days from the date
of its filing and to remain effective for the Requisite Period;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
the Requisite Period and comply with the provisions of the Securities Act with
respect to the disposition of all Registrable Securities covered by such
registration statement in accordance with the intended method of disposition set
forth in such registration statement for such period;
(c) furnish to each seller of Registrable Securities and to
each underwriter such number of copies of the registration statement and the
prospectus included therein (including each preliminary prospectus) as such
persons reasonably may request in order to facilitate the intended disposition
of the Registrable Securities covered by such registration statement;
(d) use its best efforts (i) to register or qualify the
Registrable Securities covered by such registration statement under the
securities or "blue sky" laws of such jurisdictions as the sellers of
Registrable Securities or, in the case of an underwritten public offering, the
managing
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underwriter, reasonably shall request, (ii) to prepare and file in those
jurisdictions such amendments (including post-effective amendments) and
supplements, and take such other actions, as may be necessary to maintain such
registration and qualification in effect at all times for the period of
distribution contemplated thereby and (iii) to take such further action as may
be necessary or advisable to enable the disposition of the Registrable
Securities in such jurisdictions, provided, that the Company shall not for any
such purpose be required to qualify generally to transact business as a foreign
corporation in any jurisdiction where it is not so qualified or to consent to
general service of process in any such jurisdiction;
(e) use its best efforts to list the Registrable Securities
covered by such registration statement with any securities exchange on which the
Common Stock of the Company is then listed, or, if the Common Stock is not then
listed on a national securities exchange, use its best efforts to facilitate the
reporting of the Common Stock on the Nasdaq National Market or SmallCap Market;
(f) immediately notify each seller of Registrable Securities
and each underwriter under such registration statement, at any time when a
prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event of which the Company has knowledge as a
result of which the prospectus contained in such registration statement, as then
in effect, includes any untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing and promptly
amend or supplement such registration statement to correct any such untrue
statement or omission;
(g) notify each seller of Registrable Securities of the
issuance by the Commission of any stop order suspending the effectiveness of the
registration statement or the initiation of any proceedings for that purpose and
make every reasonable effort to prevent the issuance of any stop order and, if
any stop order is issued, to obtain the lifting thereof at the earliest possible
time;
(h) permit a single firm or counsel designated as selling
stockholders' counsel by the holders of a majority in interest of the
Registrable Securities being registered to review the registration statement and
all amendments and supplements thereto for a reasonable period of time prior to
their filing (provided, however, that in no event shall the Company be required
to reimburse legal fees in excess of $10,000 per registration statement pursuant
to this Section 5(h));
(i) if the offering is an underwritten offering, enter into a
written agreement with the managing underwriter selected in the manner herein
provided in such form and containing such provisions as are usual and customary
in the securities business for such an arrangement between such underwriter and
companies of the Company's size and investment stature, including, without
limitation, customary indemnification and contribution provisions;
(j) if the offering is an underwritten offering, at the
request of any seller of Registrable Securities, use its best efforts to furnish
to such seller on the date that Registrable Securities are delivered to the
underwriters for sale pursuant to such registration: (i) a copy of an opinion
dated such date of counsel representing the Company for the purposes of such
registration,
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addressed to the underwriters, stating that such registration statement has
become effective under the Securities Act and that (A) to the best knowledge of
such counsel, no stop order suspending the effectiveness thereof has been issued
and no proceedings for that purpose have been instituted or are pending or
contemplated under the Securities Act, (B) the registration statement, the
related prospectus and each amendment or supplement thereof comply as to form in
all material respects with the requirements of the Securities Act (except that
such counsel need not express any opinion as to financial statements or other
financial or statistical information contained therein) and (C) to such other
effects as reasonably may be requested by counsel for the underwriters; and (ii)
a copy of a letter dated such date from the independent public accountants
retained by the Company, addressed to the underwriters, stating that they are
independent public accountants within the meaning of the Securities Act and
that, in the opinion of such accountants, the financial statements of the
Company included in the registration statement or the prospectus, or any
amendment or supplement thereof, comply as to form in all material respects with
the applicable accounting requirements of the Securities Act, and such letter
shall additionally cover such other financial matters (including information as
to the period ending no more than five business days prior to the date of such
letter) with respect to such registration as such underwriters reasonably may
request;
(k) take all actions reasonably necessary to facilitate the
timely preparation and delivery of certificates (not bearing any legend
restricting the sale or transfer of such securities) representing the
Registrable Securities to be sold pursuant to the Registration Statement and to
enable such certificates to be in such denominations and registered in such
names as the Investors or any underwriters may reasonably request; and
(l) take all other reasonable actions necessary to expedite
and facilitate the registration of the Registrable Securities pursuant to the
Registration Statement.
In connection with each registration hereunder, the sellers of
Registrable Securities will furnish to the Company in writing such information
with respect to themselves and the proposed distribution by them as reasonably
shall be necessary in order to assure compliance with federal and applicable
state securities laws.
6. Expenses. All expenses incurred by the Company in complying with
Sections 2, 3.A and 3.B, including, without limitation, all registration and
filing fees, printing expenses, fees and disbursements of counsel and
independent public accountants for the Company, fees and expenses (including
counsel fees) incurred in connection with complying with state securities or
"blue sky" laws, fees of the National Association of Securities Dealers, Inc.,
fees of transfer agents and registrars and fees and disbursements of one counsel
for the sellers of Registrable Securities (subject to the limitation in Section
5(h)), but excluding any Selling Expenses, are called "Registration Expenses."
All underwriting discounts and selling commissions applicable to the sale of
Registrable Securities are called "Selling Expenses."
The Company will pay all Registration Expenses in connection with any
registration statement filed hereunder, and the Selling Expenses in connection
with each such registration statement shall be borne by the participating
sellers in proportion to the number of Registrable Securities sold by each or as
they may otherwise agree.
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7. Indemnification and Contribution.
(a) In the event of a registration of any of the Registrable
Securities under the Securities Act pursuant to the terms of this Agreement, the
Company will indemnify and hold harmless and pay and reimburse, each seller of
such Registrable Securities thereunder, each underwriter of such Registrable
Securities thereunder and each other person, if any, who controls such seller or
underwriter within the meaning of the Securities Act, against any losses,
claims, damages or liabilities, joint or several, to which such seller,
underwriter or controlling person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any registration statement
under which such Registrable Securities were registered under the Securities Act
pursuant hereto or any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereof, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
or any violation or alleged violation of the Securities Act or any state
securities or blue sky laws and will reimburse each such seller, each such
underwriter and each such controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, that the Company will
not be liable in any such case if and to the extent that any such loss, claim,
damage or liability arises out of or is based upon the Company's reliance on an
untrue statement or alleged untrue statement or omission or alleged omission so
made in conformity with information furnished by any such seller, any such
underwriter or any such controlling person in writing specifically for use in
such registration statement or prospectus.
(b) In the event of a registration of any of the Registrable
Securities under the Securities Act pursuant hereto each seller of such
Registrable Securities thereunder, severally and not jointly, will indemnify and
hold harmless the Company, each person, if any, who controls the Company within
the meaning of the Securities Act, each officer of the Company who signs the
registration statement, each director of the Company, each underwriter and each
person who controls any underwriter within the meaning of the Securities Act,
against all losses, claims, damages or liabilities, joint or several, to which
the Company or such officer, director, underwriter or controlling person may
become subject under the Securities Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon reliance on any untrue statement or alleged untrue statement of
any material fact contained in the registration statement under which such
Registrable Securities were registered under the Securities Act pursuant hereto
or any preliminary prospectus or final prospectus contained therein, or any
amendment or supplement thereof, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and will
reimburse the Company and each such officer, director, underwriter and
controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability or action, provided, that such seller will be liable hereunder in any
such case if and only to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in reliance upon and in
conformity with information pertaining to such seller, as such, furnished in
writing to the Company by such seller specifically for use in such
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<PAGE>
registration statement or prospectus, and provided, that the liability of each
seller hereunder shall be limited to the proceeds received by such seller from
the sale of Registrable Securities covered by such registration statement.
Notwithstanding the foregoing, the indemnity provided in this Section 7(b) shall
not apply to amounts paid in settlement of any such loss, claim, damage,
liability or expense if such settlement is effected without the consent of such
indemnified party and provided further, that the Company shall not be liable in
any such case to the extent that any such loss, claim, damage or liability (or
action in respect thereof) arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission in such registration
statement, which untrue statement or alleged untrue statement or omission or
alleged omission is completely corrected in an amendment or supplement to the
registration statement and the undersigned indemnitees thereafter fail to
deliver or cause to be delivered such registration statement as so amended or
supplemented prior to or currently with the sale of the Registrable Shares to
the person asserting such loss, claim, damage or liability (or actions in
respect thereof) or expense after the Company has furnished the undersigned with
the same.
(c) Promptly after receipt by an indemnified party hereunder
of notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against the indemnifying party hereunder,
notify the indemnifying party in writing thereof, but the omission so to notify
the indemnifying party shall not relieve it from any liability which it may have
to such indemnified party other than under this Section 7 and shall only relieve
it from any liability which it may have to such indemnified party under this
Section 7 if and to the extent the indemnifying party is materially prejudiced
by such omission. In case any such action shall be brought against any
indemnified party and it shall notify the indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to participate in and, to the
extent it shall wish, to assume and undertake the defense thereof with counsel
reasonably satisfactory to such indemnified party, and, after notice from the
indemnifying party to such indemnified party of its election so to assume and
undertake the defense thereof, the indemnifying party shall not be liable to
such indemnified party under this Section 7 for any legal expenses subsequently
incurred by such indemnified party in connection with the defense thereof other
than reasonable costs of investigation and of liaison with counsel so selected,
provided, that if the defendants in any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have reasonably
concluded based upon written advise of its counsel that there may be reasonable
defenses available to it which are different from or additional to those
available to the indemnifying party or if the interests of the indemnified party
reasonably may be deemed to conflict with the interests of the indemnifying
party, the indemnified party shall have the right to select a separate counsel
and to assume such legal defenses and otherwise to participate in the defense of
such action, with the expenses and fees of such separate counsel and other
expenses related to such participation to be reimbursed by the indemnifying
party as incurred.
(d) In order to provide for just and equitable contribution to
joint liability under the Securities Act in any case in which either (i) any
holder of Registrable Securities exercising rights under this Agreement, or any
controlling person of any such holder, makes a claim for indemnification
pursuant to this Section 7 but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
this Section 7 provides for indemnification in such case, or (ii)
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contribution under the Securities Act may be required on the part of any such
selling holder or any such controlling person in circumstances for which
indemnification is provided under this Section 7; then, and in each such case,
the Company and such holder will contribute to the aggregate losses, claims,
damages or liabilities to which they may be subject (after contribution from
others) in such proportion so that such holder is responsible for the portion
represented by the percentage that the public offering price of its Registrable
Securities offered by the registration statement bears to the public offering
price of all securities offered by such registration statement, and the Company
is responsible for the remaining portion; provided, that, in any such case, (A)
no such holder will be required to contribute any amount in excess of the public
offering price of all such Registrable Securities offered by it pursuant to such
registration statement and (B) no person or entity guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
will be entitled to contribution from any person or entity who was not guilty of
such fraudulent misrepresentation.
8. Changes in Capital Stock. If, and as often as, there is any change
in the capital stock of the Company by way of a stock split, stock dividend,
combination or reclassification, or through a merger, consolidation,
reorganization or recapitalization, or by any other means, appropriate
adjustment shall be made in the provisions hereof so that the rights and
privileges granted hereby shall continue as so changed.
9. Rule 144 Reporting. With a view to making available the benefits of
certain rules and regulations of the Commission which may at any time permit the
sale of the Registrable Securities to the public without registration, at all
times, the Company agrees to:
(a) make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act;
(b) file with the Commission in a timely manner all reports
and other documents required of the Company under the Exchange Act; and
(c) furnish to each holder of Registrable Securities forthwith
upon request a copy of the most recent annual or quarterly report of the
Company, and such other reports and documents so filed by the Company as such
holder may reasonably request in availing itself of any rule or regulation of
the Commission allowing such holder to sell any Registrable Securities without
registration.
10. Intentionally deleted.
11. Representations and Warranties of the Company. The Company
represents and warrants to the Investors as follows:
(a) The execution, delivery and performance of this Agreement
by the Company have been duly authorized by all requisite corporate action and
will not violate any provision of law, any order of any court or other agency of
government, the Charter or By-laws of the Company or any provision of any
indenture, agreement or other instrument to which it or any or its properties or
assets is bound, conflict with, result in a breach of or constitute (with due
notice or lapse of time or
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<PAGE>
both) a default under any such indenture, agreement or other instrument or
result in the creation or imposition of any lien, charge or encumbrance of any
nature whatsoever upon any of the properties or assets of the Company or its
subsidiaries.
(b) This Agreement has been duly executed and delivered by the
Company and constitutes the legal, valid and binding obligation of the Company,
enforceable in accordance with its terms, subject to any applicable bankruptcy,
insolvency or other laws affecting the rights of creditors generally and to
general equitable principles and the availability of specific performance.
12. Assignment of Registration Rights. The rights to have the Company
register Registrable Securities pursuant to this Agreement may be assigned by
the Investors to transferees or assignees of such securities; provided, that the
Company is, within a reasonable time after such transfer, furnished with written
notice of the name and address of such transferee or assignee and the securities
with respect to which such registration rights are being assigned. The term
"Investors" as used in this Agreement shall include such permitted assigns.
13. Miscellaneous.
(a) All covenants and agreements contained in this Agreement
by or on behalf of any of the parties hereto shall bind and inure to the benefit
of the respective successors and assigns of the parties hereto (including
without limitation transferees of any Registrable Securities), whether so
expressed or not.
(b) All notices, requests, consents and other communications
hereunder shall be in writing and shall be delivered in person, mailed by
certified or registered mail, return receipt requested, or sent by telecopier or
telex, addressed (i) if to the Company, at 230 Park Avenue, Suite 453, New York,
New York 10169; (ii) if to any other party hereto, at the address of such party
set forth beneath such party's signature to this Agreement; and (iii) if to any
subsequent holder of Registrable Securities, to it at such address as may have
been furnished to the Company in writing by such holder; or, in any case, at
such other address or addresses as shall have been furnished in writing to the
Company (in the case of a holder of Registrable Securities) or to the holders of
Registrable Securities (in the case of the Company) in accordance with the
provisions of this paragraph.
(c) This Agreement shall be governed by and construed in
accordance with the laws of the State of New York applicable to contracts
entered into and to be performed wholly within said State.
(d) Any judicial proceeding brought against any of the parties
to this Agreement on any dispute arising out of this Agreement of any matter
related hereto shall be brought in the courts of the State of New York and
County of New York or in the United States District Court for the Southern
District of New York, and, by execution and delivery of this Agreement, each of
the parties hereto accepts for itself and himself the process in any such action
or proceeding by the mailing of copies of such process to it or him, at its or
his address as set forth in paragraph 13(b) and irrevocably agrees to be bound
by any judgment rendered thereby in connection with this Agreement. Each party
hereto irrevocably waives to the fullest extent permitted by law any objection
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that it or he may now or hereafter have to the laying of the venue of any
judicial proceeding brought in such courts and any claim that any such judicial
proceeding has been brought in an inconvenient forum. The foregoing consent to
jurisdiction shall not constitute general consent to service of process in the
State of New York for any purpose except as provided above and shall not be
deemed to confer rights on any person other than the respective parties to this
Agreement.
(e) This Agreement may not be amended or modified without the
written consent of the Company and the holders of at least a majority of the
Registrable Securities.
(f) Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such right or
remedy, shall not operate as a waiver thereof. No waiver shall be effective
unless and until it is in writing and signed by the party granting the waiver.
(g) This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(h) The Company shall not grant to any third party any
registration rights more favorable than or inconsistent with any of those
contained herein, or which would in any way adversely affect the rights of
Investors hereunder, so long as any of the registration rights under this
Agreement remains in effect.
(i) If any provision of this Agreement shall be held to be
illegal, invalid or unenforceable, such illegality, invalidity or
unenforceability shall attach only to such provision and shall not in any manner
affect or render illegal, invalid or unenforceable any other provision of this
Agreement, and this Agreement shall be carried out as if any such illegal,
invalid or unenforceable provision were not contained herein.
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<PAGE>
REGISTRATION RIGHTS AGREEMENT
SIGNATURE PAGE
IN WITNESS WHEREOF, the undersigned has executed this Agreement as of
this day 24th of March, 2000.
If the Investor is an INDIVIDUAL, or if purchased as JOINT TENANTS, as
TENANTS IN COMMON or as COMMUNITY PROPERTY:
- -------------------------- --------------------------
Print Name(s) Social Security Number(s)
- -------------------------- --------------------------
Signature(s) of Purchaser(s) Signature(s) of Purchaser(s)
- -------------------------- --------------------------
Date Address
If the Investor is a PARTNERSHIP, CORPORATION, LIMITED LIABILITY COMPANY OR
TRUST:
SANDS BROTHERS VENTURE CAPITAL LLC
- ----------------------------------
Name of Partnership,
Corporation, Limited Liability
Company or Trust
By: /s/ Martin S. Sands
------------------------------
Name: Martin S. Sands
Title: Manager, SB Venture Capital Management LLC, Manager
- ------------------------------
Address: 90 Park Avenue, NY NY 10016
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<PAGE>
ACCEPTED AND AGREED this 24th day of March, 2000.
Constellation 3D, Inc.
By: /s/ Eugene Levich
----------------------
Name: Eugene Levich
Title: Chief Executive Officer
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<PAGE>
NEITHER THIS DEBENTURE NOR THE SHARES OF COMMON STOCK UNDERLYING THIS DEBENTURE
(COLLECTIVELY THE "SECURITIES") HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 NOR UNDER ANY STATE SECURITIES LAWS AND MAY NOT BE PLEDGED, SOLD, ASSIGNED
OR TRANSFERRED UNTIL (i) A REGISTRATION STATEMENT WITH RESPECT THERETO IS
EFFECTIVE UNDER THE SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE SECURITIES
LAWS OR (ii) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE COMPANY OR OTHER
COUNSEL TO THE HOLDER OF SUCH DEBENTURE, WHICH OPINION IS REASONABLY
SATISFACTORY TO THE COMPANY, THAT SUCH SECURITIES MAY BE PLEDGED, SOLD, ASSIGNED
OR TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS.
CONSTELLATION 3D, INC.
(Incorporated under the laws of
the State of Florida)
No. D-1
$4,000,000 Dated: March 24, 2000
10% Subordinated Convertible Debenture
FOR VALUE RECEIVED, CONSTELLATION 3D, INC., a Florida corporation (the
"Company"), promises to pay to SANDS BROTHERS VENTURE CAPITAL ASSOCIATES LLC or
registered assigns (the "Holder"), the principal amount of Four Million
($4,000,000) Dollars (the "Principal Amount") in such coin or currency of the
United States of America as at the time of payment shall be legal tender for the
payment of public and private debts, with interest (computed on the basis of a
360 day year of twelve 30 day months) on the unpaid balance of such principal
amount at the rate of 10% per annum from the date hereof. Interest hereunder
shall be payable in semi-annual installments on September 24 , 2000 and March
24, 2001 with all outstanding principal and interest due on September 24, 2001
(the "Maturity Date") unless this Debenture is converted before such date as
provided herein.
1. The Debentures. This Debenture is one of a series of convertible
debentures designated as 10% Subordinated Convertible Debentures in the
aggregate principal amount of up to $4.0 million (individually, a "Debenture",
and together, the "Debentures"). This Debenture has been issued by the Company
pursuant to the terms and subject to the conditions of, and is entitled to the
benefits of a Securities Purchase Agreement of even date herewith (the
"Securities Purchase Agreement") between the Company and the Holder. Reference
is made to the Securities Purchase Agreement for certain agreements of the
parties applicable to this Debenture.
The Holder of this Debenture may, at its option and either in person or by
duly authorized attorney, surrender the same at the office of the Company and,
without expense to the Holder (other than transfer taxes, if any, arising in
connection with a transfer hereof), receive in exchange therefor a Debenture or
Debentures, for the same aggregate unpaid principal amount as the Debenture or
Debentures so surrendered for exchange and each payable to such person or
persons as may be designated by such Holder. Every Debenture so made and
delivered in exchange for this Debenture shall in all other respects be in the
same form and have the same terms as this Debenture.
2. Senior; Subordination. The indebtedness evidenced by this Debenture and
the payment of the principal thereof will rank pari passu with all indebtedness
of the Company, now outstanding or hereinafter incurred,
<PAGE>
including, without limitation, the 8% Series B Convertible Note due October 31,
2000 in principal amount of $500,000 and the 8% Series C Convertible Note due
October 31, 2000 in principal amount of $1,600,000 and will rank junior to all
Senior Indebtedness (as hereinafter defined), for which this Debenture shall be
subordinated and junior in right of payment to. "Senior Indebtedness" means all
loans, advances, reimbursement obligations regarding letters of credit,
liabilities, guarantees now existing on or arising from time to time thereafter
of any such indebtedness, whether for principal, premium or interest or
otherwise of the Company, but only to, any bank or commercial financing
institution.
3. Conversion of Debenture.
3.1 The Holder shall have the right, at its option, at any time after
the date of this Debenture, up to and including the Maturity Date to
convert 100% of the principal amount of this Debenture at the time
outstanding, or any portion thereof, together with accrued but unpaid
interest thereon, subject to the terms and provisions of this Section 3,
into the number of shares of common stock, par value $.001 per share (the
"Common Stock"), of the Company obtained by dividing (i) the then
outstanding principal amount of the Debenture plus any accrued interest by
(ii) $ 17.65, or, in case an adjustment of such price has taken place
pursuant to the provisions of Section 3.4 hereof, then at the price as
last adjusted (the "Conversion Price"); upon surrender of the Debenture to
the Company at any time during normal business hours, together with
written notice (the "Conversion Notice") that the holder elects to convert
such Debenture, in whole or in part, into such Common Stock in accordance
with the provisions of this Section 3, and specifying the name or names in
which the shares of Common Stock issuable upon such conversion shall be
registered, together with the addresses of the persons so named, and, if
so required by the Company, accompanied by a written instrument or
instruments of transfer in form satisfactory to the Company duly executed
by the registered holder or its attorney duly authorized in writing.
3.2 As promptly as practicable after the surrender, as herein
provided, of any Debenture for conversion and the receipt of the
Conversion Notice relating thereto, the Company shall deliver to the
Holder, or upon the written order of the Holder of the Debenture so
surrendered, a certificate or certificates representing the number of
fully-paid and non-assessable shares of Common Stock of the Company into
which such Debenture shall be converted in accordance with the provisions
of this Section 3. Subject to the following provisions of this Section
3.2, such conversion shall be deemed to have been made at the close of
business on the date that such Debenture shall have been surrendered for
conversion together with the Conversion Notice, so that the rights of the
Holder as a holder of the Debenture shall cease at such time and the
person or persons entitled to receive the shares of Common Stock upon
conversion of such Debenture shall be treated for all purposes as having
become the record holder or holders of such shares of Common Stock at such
time and such conversion shall be at the Conversion Price in effect at
such time; provided, however, that no such surrender on any date when the
stock transfer books of the Company shall be closed shall be effective to
constitute the person or persons entitled to receive the shares of Common
Stock upon such conversion as the record holder or holders of such shares
of Common Stock on such date, but such surrender shall be effective to
constitute the person or persons entitled to receive such shares of Common
Stock as the record holder or holders thereof for all purposes at the
close of business on the next succeeding day on which such stock transfer
books of the Company are open and such conversion shall be at the
Conversion Price in effect at the close of business on such next
succeeding day.
If the last day for the exercise of the conversion right shall not be
a business day, then such conversion right may be exercised on the next
succeeding business day.
3.3 Upon full conversion, all principal and accrued interest due
under this Debenture shall be discharged and the Company released from all
obligations thereunder.
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3.4 The Conversion Price in effect from time to time shall be
proportionately decreased in the event that the Company shall at any time
(i) make a subdivision of shares of Common Stock outstanding or (ii) pay a
dividend in shares of Common Stock or make a distribution in shares of
Common Stock. The Conversion Price in effect from time to time shall be
proportionately increased in the event that the Company shall at any time
combine the shares of its Common Stock outstanding. An adjustment made
pursuant to this Section 3.4 shall, in the case of a subdivision or
combination, become effective retroactively immediately after the
effective date thereof and shall, in the case of a dividend or
distribution, become effective retroactively immediately after the record
date for the determination of stockholders entitled thereto.
3.5 Whenever the Conversion Price is adjusted pursuant to Section 3.4
hereof, the Company shall promptly cause a notice stating that such
adjustment has been effected and the adjusted Conversion Price to be given
to such holder of Debentures at its address appearing on the Debenture
registry books. Any calculation required to be made under this Section 3
shall be made to the nearest cent or the nearest one-hundredth of a share,
as the case may be.
3.6 No fractional shares or scrip representing fractional shares
shall be issued upon the conversion of any Debenture. If the conversion of
any Debenture results in a fraction, an amount equal to such fraction
multiplied by the Closing Price (as hereinafter defined) shall be paid to
the persons who would otherwise be entitled to receive such fractional
interests in cash by the Company.
3.7 In case of any reclassification or change of outstanding shares
of Common Stock issuable upon conversion of the Debentures (other than a
change in par value, or from par value to no par value, or from no par
value to par value, or as a result of a subdivision or combination), or in
case of any consolidation or merger of the Company with or into another
corporation (other than a merger in which the Company is the surviving
corporation and which does not result in any reclassification or change of
outstanding shares of Common Stock, other than a change in number of the
shares issuable upon conversion of the Debentures) or in case of any sale
or conveyance to another entity of all or substantially all of the assets
of the Company, the holder of each Debenture then outstanding shall have
the right thereafter to convert such Debenture into the kind and amount of
shares of stock and other securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance by a
holder of the number of shares of Common Stock of the Company into which
such Debenture might have been converted immediately prior to such
reclassification, change, consolidation, merger, sale or conveyance. The
above provisions of this Section 3.7 shall similarly apply to successive
reclassifications and changes of shares of Common Stock and to successive
consolidations, mergers, sales or conveyances.
3.8 The Company covenants that it will at all times reserve and keep
available out of its authorized Common Stock, solely for the purpose of
issuance upon conversion of the Debentures as herein provided, such number
of shares of Common Stock as shall then be issuable upon the conversion of
all outstanding Debentures. The Company covenants that all shares of
Common Stock which shall be so issuable shall be duly and validly issued,
fully-paid and non-assessable.
3.9 Before taking any action which would cause an adjustment reducing
the Conversion Price below the then par value of the shares of Common
Stock issuable upon conversion of the Debentures, the Company will take
any corporate action which may, in the opinion of its counsel, be
necessary in order that the Company may validly and legally issue
fully-paid and non-assessable shares of such Common Stock at such adjusted
Conversion Price.
3.10 The issuance of certificates for shares of Common Stock upon the
conversion of Debentures shall be made without charge to the converting
Holders for any tax in respect of the issuance of such
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certificates, and such certificates shall be issued in the respective
names of, or in such names as may be directed by, the holders of the
Debentures converted; provided, however, that the Company shall not be
required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any such certificate in a name
other than that of the holder of the Debenture converted, and the Company
shall not be required to issue or deliver such certificates unless or
until the person or persons requesting the issuance thereof shall have
paid to the Company the amount of such tax or shall have established to
the satisfaction of the Company that such tax has been paid.
3.11 Upon conversion of this Debenture, but subject to Section 6
hereof, the registered holder may be required to execute and deliver to
the Company an instrument, in form reasonably satisfactory to the Company,
representing that the shares of the Common Stock issuable upon conversion
hereof are being acquired for investment and not with a view to
distribution within the meaning of the Securities Act of 1933, as amended
(the "Securities Act").
4. No Prepayment; Demand of Repayment. This Debenture may not be prepaid by
the Company prior to the Maturity Date unless the Holder is provided with prior
written notice of same and consents to such prepayment in writing.
Notwithstanding the foregoing, in the event that at any time prior to the
Maturity Date, (i) the Company receives no less than $25 million in gross
financings, from any source, whether through the sale of debt and/or equity
securities, or (ii) there occurs any consolidation or merger of the Company with
or into another corporation or entity in which the Company is not the surviving
or resulting company, or in case of any sale or conveyance to another company or
entity of all or substantially all of the assets of the Company (a "Change of
Control"), the Holder shall have the right, but not the obligation, to demand
immediate payment of all or any portion of the principal and interest
outstanding on this Debenture on such date.
5. Restrictions Upon Transferability. Neither this Debenture nor the shares
of Common Stock issuable upon conversion of this Debenture have been registered
under the Securities Act and may not be sold or transferred in whole or in part
unless the Holder shall have first given notice to the Company describing such
sale or transfer and furnished to the Company (a) a certification that such
proposed transferee is an "accredited investor" as such term is defined under
Regulation D promulgated under the Securities Act, and (b) an agreement by such
transferee to be bound by the terms of this Debenture; provided, however, that
the foregoing shall not apply if there is in effect a registration statement
with respect to this Debenture at the time of the proposed sale or transfer.
6. Events of Default and Remedies.
6.1 An "Event of Default" shall occur if:
(a) There shall occur a Change of Control; or
(b) The Company defaults in the payment of a Debenture, when and as the
same shall become due and payable whether at maturity thereof, or by
acceleration or otherwise and such default shall continue for a period
of 5 days; or
(c) The Company breaches any of the representations or warranties set
forth in the Agreements or fails to comply with any of the covenants,
conditions or agreements contained therein, and such breach or failure
to comply, as the case may be, shall continue for a period of 15 days;
or
(d) The Company fails to comply with any of the covenants, conditions
or agreements set forth in the Debentures and such failure to comply
shall continue for a period of 15 days; or
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(e) The Company shall file or consent by answer or otherwise to the
entry of an order for relief or approving a petition for relief or
reorganization or arrangement or any other petition in bankruptcy, for
liquidation or to take advantage of any bankruptcy or insolvency law of
any jurisdiction, or shall make an assignment for the benefit of its
creditors, or shall consent to the appointment of a custodian,
receiver, trustee or other officer with similar powers of itself or of
any substantial part of this property, or shall be adjudicated a
bankrupt or insolvent, or shall take corporate action for the purpose
of any of the foregoing, or if a court or governmental authority of
competent jurisdiction shall enter an order appointing a custodian,
receiver, trustee or other officer with similar powers with respect to
the Company or any substantial part of its property, or constituting an
order for relief or approving a petition for relief or reorganization
or any other petition in bankruptcy or for liquidation or to take
advantage of any bankruptcy or insolvency law of any jurisdiction, or
ordering the dissolu tion, winding up or liquidation of the Company, or
if any such petition shall be filed against the Company and such
petition shall not be dismissed within 60 days; or
(f) A final judgment for the payment of money shall be rendered by a
court of competent jurisdiction against the Company or any of its
subsidiaries and the Company or such subsidiary, as the case may be,
shall not discharge the same, or procure a stay of execution thereof
within 30 days from the date of entry thereof and within such 30 day
period or such longer period during which execution of such judgment
shall have been stayed, appeal therefrom and cause the execution
thereof to be stayed during such appeal, and such judgment, together
with all other judgments against the Company and its subsidiaries,
shall exceed in the aggregate $250,000 in excess of any insurance as to
the subject matter of such judgments, as to which coverage has not been
declined or the underlying claim rejected by the applicable insurer; or
(g) The liquidation or dissolution of the Company or any of its
subsidiaries or any vote in favor thereof by the board of directors and
shareholders of the Company or such subsidiary, provided that any
subsidiary may be dissolved to the extent its assets are transferred
to, and its liabilities are assumed by, the Company or another
subsidiary of the Company; or
(h) An attachment or garnishment is levied against the assets of the
Company or any of its subsidiaries involving an amount in excess of
$250,000 and the lien created by such levy is not vacated, bonded or
stayed within 10 days after such lien has attached to such assets; or
(i) The Company or any of its subsidiaries defaults in the payment
(regardless of amount) when due of the principal of, interest on, or
any other liability on account of, any indebtedness of the Company or
any of its subsidiaries (other than the Debentures) or a default occurs
in the performance or observance by the Company or any of its
subsidiaries of any covenant or condition (other than for the payment
of money) contained in any note (other than this Debenture) or
agreement evidencing or pertaining to any such indebtedness, which
causes the maturity of such indebtedness to be accelerated or permits
the Holder or Holders of such indebtedness to declare the same to be
due prior to the stated maturity thereof.
6.2 In case an Event of Default or bankruptcy, insolvency or
reorganization shall occur and be continuing, the holders of at least a
majority in aggregate principal amount of Debentures then outstanding, or
their duly authorized agent, by notice in writing to the Company may
declare all unpaid principal and accrued interest on all of the Debentures
then outstanding, due and payable without any other act on the part of the
holders of the Debentures. Such acceleration may be annulled and past
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<PAGE>
defaults (except, unless theretofore cured, a default in payment of
principal or interest on the Debentures) may be waived by the holders of a
majority in aggregate principal amount of the Debentures then outstanding
or their duly authorized agent.
6.3 Should the indebtedness represented by this Debenture or any part
thereof be collected in any proceeding, or this Debenture be placed in the
hands of attorneys for collection after default, the Company agrees to pay
as an additional obligation under this Debenture, in addition to the
principal due and payable hereon, all reasonable costs of collecting this
Debenture, including reasonable attorneys' fees.
7. Covenants. The Company covenants and agrees that for so long as any
portion of the indebtedness evidenced by this Debenture, whether principal,
accrued and unpaid interest or any other amount at any time due hereunder,
remains unpaid:
7.1. The Company will not, and will not permit any of its subsidiaries
to, without the consent of the majority of the Holders:
(a) Purchase or otherwise redeem any Common Stock or other
equity securities of the Company or any of its subsidiaries,
or declare or pay any dividends in cash or other assets on any
of its Common Stock or other equity securities.
(b) (i) Amend the certificate or articles of incorporation or
by-laws of the Company or any of its subsidiaries in any
manner which would impair or reduce the rights of the Holders
of the Debentures; (ii) effect a merger or consolidation in
which neither the Company nor any of its subsidiaries is the
surviving entity or (iii) liquidate, wind up its affairs or
dissolve.
7.2. The Company will, and will cause its subsidiaries to:
(a) Pay and discharge all lawful taxes, assessments and
governmental charges or levies imposed upon it, upon its
income and profits or upon any of its assets, before the same
shall become in default, as well as all lawful claims for
labor, materials and supplies which, if unpaid, might become a
lien or charge upon such properties or any part thereof,
provided, however, that neither the Company nor any such
subsidiary will be required to pay and discharge any such tax,
assessment, charge, levy or claim so long as (i) the validity,
applicability and/or the amount thereof shall be contested in
good faith by appropriate proceedings, (ii) the Company or
such subsidiary, as the case may be, shall have set aside on
its books adequate reserves in accordance with GAAP with
respect to any such tax, assessment, charge, levy or claim so
contested, and (iii) enforcement of any lien on any assets of
the Company or such subsidiary associated with any such taxes,
assessments, charges, levies or claims shall have been
effectively stayed or fully bonded pending the final
determination of any such proceedings.
(b) Do or cause to be done all things necessary to preserve
and keep in full force and effect its corporate existence,
rights and franchises and to comply in all material respects
with all laws, regulations and orders of each governmental
authority having jurisdiction over the Company and/or its
subsidiaries.
(c) At all times maintain true and complete records and books
of account in which all of the financial transactions of the
Company and its subsidiaries are duly recorded in conformance
with GAAP.
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<PAGE>
(d) Take all action which may be necessary or expedient
(including, without limitation, reserving sufficient shares of
Common Stock for the issuance upon conversion of this
Debenture) to assure that, upon conversion of any of the
Debentures, all shares of Common Stock issuable upon such
conversion will be duly and validly issued, fully paid, non-
assessable and not subject to the preemptive rights of any
shareholder.
(e) Comply in all material respects with (i) the applicable
laws and regulations wherever its business is conducted, (ii)
the provisions of its charter documents and by-laws, (iii) all
agreements and instruments by which it or any of its
properties may be bound and (iv) all applicable decrees,
orders and judgements.
8. Amendments. This Debenture may be amended, modified, superseded, canceled,
renewed or extended, and the terms hereof may be waived, only by a written
instrument signed by the Company and holders of at least a majority in aggregate
principal amount of the Debentures at the time outstanding, or their duly
authorized agent; provided, however, that consent by all of the Holders shall be
required to modify the terms of this Debenture affecting the payment of
principal of, or interest on, the Holder's Debenture.
9. No Waiver. No delay on the part of any party in exercising any right,
power or privilege hereunder shall operate as a waiver hereof, nor shall any
waiver on the part of any party of any right, power or privilege hereunder, nor
any single or partial exercise of any right, power or privilege hereunder
preclude any other or further exercise hereof or the exercise of any other
right, power or privilege hereunder. The rights and remedies provided herein are
cumulative and are not exclusive of any rights or remedies which any party may
otherwise have at law or in equity.
10. Loss, Theft, Destruction or Mutilation of Debenture. Upon receipt by the
Company of evidence reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of this Debenture, and of indemnity or security
reasonably satisfactory to the Company, and upon reimbursement to the Company of
all reasonable expenses incidental thereto, and upon surrender and cancellation
of this Debenture, if mutilated, the Company will make and deliver a new
Debenture of like tenor and of the same series, in lieu of this Debenture. Any
Debenture made and delivered in accordance with the provisions of this Section
shall be dated as of the date hereof.
11. Notice. Any notice or other communication required or permitted hereunder
shall be in writing and shall be delivered personally, by facsimile or sent by
certified, registered, or express mail, postage prepaid, and shall be deemed
given when so delivered personally telegraphed or, if mailed, five days after
the date of deposit in the United States, as follows (i) if to the Company, to
CONSTELLATION 3D, INC., 230 Park Avenue, Suite 453, New York, NY 10169 Attn:
President and (ii) if to the holder of this Debenture, at such addresses as set
forth in the Subscription Agreement of the holder of this Debenture.
12. Corporate Obligation. It is expressly understood that this Debenture is
solely a corporate obligation of the Company, and that any and all personal
liability, either at common law or in equity or by constitution or statute, of,
and any and all such rights and claims against, every promoter, subscriber,
incorporator, shareholder, officer, or director, as such, are hereby expressly
waived and released by the holder hereof by the acceptance of this Debenture and
as a part of the consideration for the issue hereof.
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<PAGE>
13. Governing Law. This Debenture shall be governed by a construed in
accordance with the laws of the State of New York, without giving effect to
conflict of law principles. The Company (l) agrees that any legal suit, action
or proceeding arising out of or relating to this Debenture shall be instituted
exclusively in New York State Supreme Court, County of New York, or in the
United States District Court for the Southern District of New York, (2) waives
any objection which the Company may have now or hereafter to the venue of any
such suit, action or proceeding, and (3) irrevocably consents to the
jurisdiction of the New York State Supreme Court, County of New York, and the
United States District Court for the Southern District of New York in any such
suit, action or proceeding. The Company further agrees to accept and acknowledge
service of any and all process which may be served in any such suit, action or
proceeding in the New York State Supreme Court, County of New York, or in the
United States District Court for the Southern District of New York and agrees
that service of process upon the Company mailed by certified mail to the
Company's address shall be deemed in every respect effective service of process
upon the Company, in any such suit, action or proceeding. THE PARTIES HERETO
AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF
ACTION BASED UPON OR ARISING OUT OF THIS PLACEMENT AGENCY AGREEMENT OR ANY
DOCUMENT OR AGREEMENT CONTEMPLATED HEREBY.
14. Successors and Assigns. All the covenants, stipulations, promises and
agreements in this Debenture contained by or on behalf of the Company shall bind
its successors and assigns, whether or not so expressed.
15. Enforceability. If any provision of this Debenture shall be held to be
invalid, illegal or unenforceable, such invalidity, illegality or
unenforceability shall not affect any other provisions of this Debenture, and
this Debenture shall be construed as if any invalid, illegal or unenforceable
provisions had not been contained herein; provided however, that default in the
performance or observance by the Company of any provision of this Debenture
which has been held to be invalid, illegal or unenforceable shall,
notwithstanding such invalidity, illegality or unenforceability, constitute an
Event of Default hereunder, if such default would have constituted an Event of
Default without regard to such invalidity, illegality or unenforceability.
8
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Debenture to be signed in its
corporate name by a duly authorized officer and to be dated as of the date first
above written.
CONSTELLATION 3D, INC.
By /s/ Eugene Levich
-------------------------------
Authorized Officer
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<PAGE>
WARRANT CERTIFICATE
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE
EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT
RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF
SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, DECEMBER 1, 2004
No. SB-1 1,050,000 Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that SANDS BROTHERS & CO.,
LTD., ON BEHALF OF ITSELF AND AS NOMINEE FOR OTHERS, or registered assigns, is
the registered holder of 1,050,000 Warrants to purchase initially, at any time
from December 1, 1999 until 5:30 p.m. New York time on December 1, 2004
("Expiration Date"), up to 1,050,000 fully-paid and non-assessable shares of
common stock, $.001 par value per share ("Common Stock") of Constellation 3D
Inc., a Florida corporation (the "Company"), at an initial exercise price,
subject to adjustment in certain events (the "Exercise Price"), of $3.67 per
share of Common Stock, upon surrender of this Warrant Certificate and payment of
the Exercise Price at an office or agency of the Company, or by surrender of
this Warrant Certificate in lieu of cash payment, but subject to the conditions
set forth herein and in the warrant agreement dated as of December 1, 1999
between the Company and Sands Brothers & Co., Ltd. (the "Warrant Agreement").
Payment of the Exercise Price shall be made by certified or official bank check
in New York Clearing House funds payable to the order of the Company.
No Warrant may be exercised after 5:30 p.m., New York time, on
the Expiration Date, at which time all Warrants evidenced hereby, unless
exercised prior thereto, hereby shall thereafter be void.
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<PAGE>
The Warrants evidenced by this Warrant Certificate are part of
a duly authorized issue of Warrants issued pursuant to the Warrant Agreement,
which Warrant Agreement is hereby incorporated by reference in and made a part
of this instrument and is hereby referred to for a description of the rights,
obligations, duties and immunities thereunder of the Company and the holders
(the words "holders" or "holder" meaning the registered holders or registered
holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of
certain events the Exercise Price and the type and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair, the rights
of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Warrant Agreement, without any charge except for any tax in
other governmental charge imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced
by this Certificate, the Company shall forthwith issue to the holder hereof a
new Warrant Certificate representing such numbered unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof
as the absolute owner(s) of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, and of any distribution to the holder(s) hereof, and for
all other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined
in the Warrant Agreement shall have the meanings to them in the Warrant
Agreement.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated as of March 24, 2000
Constellation 3D Inc.
By: /s/ Eugene Levich
------------------------------
Title: Chief Executive Officer
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<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1]
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase ______ shares of
Common Stock at an exercise price of $_______ per share and herewith tenders in
payment for such Securities a certified or official bank check payable in New
York Clearing House Funds to the order of ______________ in the amount of $____,
all in accordance with the terms hereof. The undersigned requests that a
certificate for such Securities be registered in the name of _____________ whose
address is _____________ and that such Certificate be delivered to _____________
whose address is _____________.
Signature
___________________________________
(Signature must conform in all respects to
name of holder as specified on the face of the
Warrant Certificate.)
___________________________________
(Insert Social Security or Other Identifying
Number of Holder)
-4-
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.2]
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase shares of Common
Stock in accordance with the terms of Section 3.2 of that certain Warrant
Agreement dated as of December 1, 1999 between Constellation 3D INC. and SANDS
BROTHERS & CO., LTD. The Undersigned requests that a certificate for such
Securities be registered in the name of _____________ whose address is
_____________ and that such Certificate be delivered to _____________ whose
address is _____________.
Signature___________________________
(Signature must conform in all respects to
name of holder as specified on the face of the
Warrant Certificate.)
____________________________________
(Insert Social Security or Other Identifying
Number of Holder)
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<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED ________________ here sells, assigns and transfers
unto
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ________________ Attorney, to
transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated:____________ Signature:____________________
(Signature must conform in all respects to
name of holder as specified on the face of the
Warrant Certificate.)
______________________________
(Insert Social Security or other Identifying
Number of Assignee)
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<PAGE>
EXHIBIT 4.13
WARRANT CERTIFICATE
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE
EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT
RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF
SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, DECEMBER 1, 2004
No. SB-2 2,400,000 Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that SANDS BROTHERS & CO.,
LTD., ON BEHALF OF ITSELF AND AS NOMINEE FOR OTHERS, or registered assigns, is
the registered holder of 2,400,000 Warrants to purchase initially, at any time
from December 1, 1999 until 5:30 p.m. New York time on December 1, 2004
("Expiration Date"), up to 2,400,000 fully-paid and non-assessable shares of
common stock, $.001 par value per share ("Common Stock") of Constellation 3D
Inc., a Florida corporation (the "Company"), at an initial exercise price,
subject to adjustment in certain events (the "Exercise Price"), of $15.13 per
share of Common Stock, upon surrender of this Warrant Certificate and payment of
the Exercise Price at an office or agency of the Company, or by surrender of
this Warrant Certificate in lieu of cash payment, but subject to the conditions
set forth herein and in the warrant agreement dated as of December 1, 1999
between the Company and Sands Brothers & Co., Ltd. (the "Warrant Agreement").
Payment of the Exercise Price shall be made by certified or official bank check
in New York Clearing House funds payable to the order of the Company.
No Warrant may be exercised after 5:30 p.m., New York time, on
the Expiration Date, at which time all Warrants evidenced hereby, unless
exercised prior thereto, hereby shall thereafter be void.
-1-
<PAGE>
The Warrants evidenced by this Warrant Certificate are part of
a duly authorized issue of Warrants issued pursuant to the Warrant Agreement,
which Warrant Agreement is hereby incorporated by reference in and made a part
of this instrument and is hereby referred to for a description of the rights,
obligations, duties and immunities thereunder of the Company and the holders
(the words "holders" or "holder" meaning the registered holders or registered
holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of
certain events the Exercise Price and the type and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair, the rights
of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Warrant Agreement, without any charge except for any tax in
other governmental charge imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced
by this Certificate, the Company shall forthwith issue to the holder hereof a
new Warrant Certificate representing such numbered unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof
as the absolute owner(s) of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, and of any distribution to the holder(s) hereof, and for
all other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined
in the Warrant Agreement shall have the meanings to them in the Warrant
Agreement.
-2-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated as of March 24, 2000
Constellation 3D Inc.
By: /s/ Eugene Levich
----------------------------
Title: Chief Executive Officer
-3-
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1]
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase ______ shares of
Common Stock at an exercise price of $_______ per share and herewith tenders in
payment for such Securities a certified or official bank check payable in New
York Clearing House Funds to the order of ______________ in the amount of $____,
all in accordance with the terms hereof. The undersigned requests that a
certificate for such Securities be registered in the name of _____________ whose
address is _____________ and that such Certificate be delivered to _____________
whose address is _____________.
Signature
------------------------------------
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
------------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
-4-
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.2]
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase shares of Common
Stock in accordance with the terms of Section 3.2 of that certain Warrant
Agreement dated as of December 1, 1999 between Constellation 3D INC. and SANDS
BROTHERS & CO., LTD. The Undersigned requests that a certificate for such
Securities be registered in the name of _____________ whose address is
_____________ and that such Certificate be delivered to _____________ whose
address is _____________.
Signature
------------------------------------
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
------------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
-5-
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED ________________ here sells, assigns and transfers
unto
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ________________ Attorney, to
transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated: Signature:
-------------------- -------------------------
(Signature must conform in
all respects to name of
holder as specified on the
face of the Warrant
Certificate.)
--------------------------
(Insert Social Security or
other Identifying Number
of Assignee)
-6-
<PAGE>
March 7, 2000
Constellation 3D, Inc.
230 Park Avenue, Suite 453
New York, NY 10169
Attn: Eugene Levich
President and CEO
Re: Amendment No. 2 to Placement Agency Agreement
---------------------------------------------
Dear Dr. Levich:
The parties hereto, Constellation 3D, Inc. (f/k/a C3D Inc.), a Florida
corporation (the "Company") and Sands Brothers & Co., Ltd., a Delaware
corporation ("Sands Brothers") have entered into that certain placement agency
agreement (hereinafter the "Agency Agreement") dated as of December 1, 1999, as
amended December 22, 1999.
In connection therewith, the parties hereto agree that the Agency
Agreement is hereby amended as follows:
1. The introductory paragraph of the Agency Agreement is hereby deleted
in its entirety and in its place and stead the following is inserted:
"The undersigned, Constellation 3D, Inc. (f/k/a/ C3D Inc.), a
corporation organized under the laws of the state of Florida (together
with any of its subsidiaries, affiliates, successors or assigns the
"Company"), proposes to offer for sale to certain "accredited
investors, through Sands Brothers & Co., Ltd., in accordance with the
terms and conditions specified in the letter agreement dated October
25, 1999 between the parties hereto (the "Letter Agreement"), as
exclusive placement agent ("Sands Brothers" or the "Placement Agent")
on a best efforts basis, a minimum of $4,000,000 (the "Minimum Amount")
and a maximum of $120,000,000 (the "Maximum Amount") of (a) the
Company's capital stock (whether Common Stock or Preferred Stock
convertible into Common Stock) (collectively, the "Capital
<PAGE>
Constellation 3D, Inc.
March 7, 2000
Page 2
Stock"), at a price equal to a 30% discount to the average of the bid
price for the 30 day period prior to the Closing (the "Minimum Offering
Price") with respect to the Minimum Amount, and with respect to an
amount in excess of the Minimum Amount and up to the Maximum Amount, at
the Minimum Offering Price but in no event less than $12.00 per share
and/or (b) any other similar form of debt financing transactions
(hereinafter, collectively "Other Financing"). The Capital Stock and
Other Financing instruments (the "Securities") to be offered pursuant
to the Offering Documents (as hereinafter defined) and Other Financing
transactions to be consummated are sometimes hereinafter referred to
collectively as the "Financing" or the "Offering."
2. Paragraph 4(e) of the Agency Agreement is hereby deleted in its
entirety and in its place and stead the following is inserted:
"(e) Issuance of Placement Agent Warrants. At each Closing as provided
in paragraph 4(a) above, the Company shall issue to the Placement Agent
or its designee(s), subject to the ratable adjustment of the shares
underlying the Placement Agent Warrants (hereinafter defined) and the
exercise price thereof in the event of any Company dividend, stock
split or reclassification declared after the date hereof, (i) with
respect to the sale of the Minimum Amount, warrants to purchase 350,000
shares of the Company's Common Stock ("Initial Placement Agent
Warrants") and (ii) 200,000 warrants for each $1,000,000 of all
Securities sold in the Financing up to an aggregate of $25,000,000
("the Additional Placement Agent Warrants") (collectively referred to
as the "Placement Agent Warrants"). The Initial Placement Agent
Warrants shall be exercisable for five (5) years, commencing upon the
date of their issuance, at a price of $11.00 per share of Common Stock.
The Additional Placement Agent Warrants shall be exercisable for five
(5) years, commencing upon the date of their issuance, at a price equal
to a 40% discount to the average of the bid price of the Common Stock
for the 60 day period prior to any Closing, but in no event less than
of $15.00 per share. The Placement Agent Warrants shall be in the form
attached hereto as Exhibit B, and will be governed by the terms of the
Warrant Agreement attached hereto as Exhibit C. The certificates
representing the Placement Agent Warrants will be in such denominations
and such names as the Placement Agent may request prior to each
closing. The Placement Agent Warrants may not be assigned by Sands
Brothers, except to Sands Brothers' employees, without the written
consent of the Company. All issuance of Placement agent warrants will
be done in full compliance with applicable law."
3. Except as set forth herein, the Agency Agreement shall remain in
full force and effect.
<PAGE>
Constellation 3D, Inc.
March 7, 2000
Page 3
IN WITNESS WHEREOF, the Company and Sands Brothers have caused
this Agreement to be executed by its duly authorized representative.
CONSTELLATION 3D, INC. SANDS BROTHERS & CO., LTD.
By: /s/ Eugene Levich By: /s/ Mark Hollo
----------------------------- --------------------------------
Name: Eugene Levich Name: Mark Hollo
Title: President Title: Managing Director
Date: March 7, 2000 Date: March 7, 2000
---------------------------- -------------------------------
<PAGE>
March 23, 2000
Constellation 3D, Inc.
230 Park Avenue, Suite 453
New York, NY 10169
Attn: Eugene Levich
President and CEO
Re: Amendment No. 3 to Placement Agency Agreement; Amendment No. 1 to
Warrant Agreement
-----------------------------------------------------------------------
Dear Dr. Levich:
The parties hereto, Constellation 3D, Inc. (f/k/a C3D Inc.), a Florida
corporation (the "Company") and Sands Brothers & Co., Ltd., a Delaware
corporation ("Sands Brothers") have entered into (A) that certain placement
agency agreement (hereinafter the "Agency Agreement") dated as of December 1,
1999, as amended December 22, 1999 and March 7, 2000, and as supplemented by
that certain letter agreement dated February 8, 2000 (hereinafter the "Agency
Agreement") and (B) that certain Warrant Agreement dated as of December 1, 1999
(the "Warrant Agreement") .
In connection therewith, the parties hereto agree that the Agency
Agreement and Warrant Agreement are hereby amended as follows (which, among
other things, gives effect to the 3 for 1 stock split of the Company effectuated
in December 1999):
1. The introductory paragraph of the Agency Agreement is hereby deleted
in its entirety and in its place and stead the following is inserted:
"The undersigned, Constellation 3D, Inc. (f/k/a/ C3D Inc.), a
corporation organized under the laws of the state of Florida (together
with any of its subsidiaries, affiliates,
<PAGE>
Constellation 3D, Inc.
March 23, 2000
Page 2
successors or assigns the "Company"), proposes to offer for sale to certain
"accredited investors, through Sands Brothers & Co., Ltd., in accordance with
the terms and conditions specified in the letter agreement dated October 25,
1999 between the parties hereto (the "Letter Agreement"), as exclusive placement
agent ("Sands Brothers" or the "Placement Agent") on a best efforts basis, a
minimum of $4,000,000 (the "Minimum Amount") and a maximum of $120,000,000 (the
"Maximum Amount") of (a) the Company's capital stock (whether Common Stock or
Preferred Stock convertible into Common Stock) (collectively, the "Capital
Stock"), at a price equal to a 30% discount to the average of the bid price for
the 120 day period prior to the Closing (the "Minimum Offering Price") with
respect to the Minimum Amount, and with respect to an amount in excess of the
Minimum Amount and up to the Maximum Amount, at the Minimum Offering Price but
in no event less than $4.00 per share and/or (b) any other similar form of debt
financing transactions (hereinafter, collectively "Other Financing"). The
Capital Stock and Other Financing instruments (the "Securities") to be offered
pursuant to the Offering Documents (as hereinafter defined) and Other Financing
transactions to be consummated are sometimes hereinafter referred to
collectively as the "Financing" or the "Offering."
2. Paragraph 4(e) of the Agency Agreement is hereby deleted in
its entirety and in its place and stead the following is inserted:
"(e) Issuance of Placement Agent Warrants. At each Closing as provided
in paragraph 4(a) above, the Company shall issue to the Placement Agent
or its designee(s), subject to the ratable adjustment of the shares
underlying the Placement Agent Warrants (hereinafter defined) and the
exercise price thereof in the event of any Company dividend, stock
split or reclassification declared after the date hereof, (i) with
respect to the sale of the Minimum Amount, warrants to purchase
1,050,000 shares of the Company's Common Stock ("Initial Placement
Agent Warrants") and (ii) 600,000 warrants for each $1,000,000 of all
Securities sold in the Financing up to an aggregate of $25,000,000
("the Additional Placement Agent Warrants") (collectively referred to
as the "Placement Agent Warrants"). The Initial Placement Agent
Warrants shall be exercisable for five (5) years, commencing upon the
date of their issuance, at a price of $3.67 per share of Common Stock.
The Additional Placement Agent Warrants shall be exercisable for five
(5) years, commencing upon the date of their issuance, at a price equal
to a 40% discount to the average of the bid price of the Common Stock
for the 120 day period prior to any Closing, but in no event less than
of $5.00 per share. The Placement Agent Warrants shall be in the form
attached hereto as Exhibit B, and will be governed by the terms of the
Warrant Agreement attached hereto as Exhibit C. The certificates
representing the Placement Agent Warrants will be in such denominations
and such names as the Placement Agent may request prior to each
closing. The Placement Agent Warrants may not be assigned by Sands
Brothers, except to Sands Brothers' officers, employees or other
designees, without the written consent of the Company. All issuance of
Placement agent warrants will be done in full compliance with
applicable law."
<PAGE>
Constellation 3D, Inc.
March 23, 2000
Page 3
3. Paragraph 1 of the Warrant Agreement is hereby deleted in its
entirety and in its place and stead the following is inserted:
1. Grant. The Holder and its designees is hereby granted the right to
purchase, at any time from December 1, 1999, until 5:30 p.m., New York
time, on December 1, 2004, up to an aggregate of 16,050,000 Warrant
Shares (subject to adjustment as provided in Section 8 hereof) at the
initial exercise price per share as provided in Section 6 hereof,
vesting as follows:
(i) 1,050,000 Warrant Shares shall vest upon the sale
of the Minimum Amount (the "Initial Warrant Shares");
(ii) 600,000 Warrant Shares for each $1,000,000 of
all Securities sold in the Financing ("the Additional
Warrant Shares").
4. Paragraph 6.1 of the Warrant Agreement is hereby deleted in its
entirety and in its place and stead the following is inserted:
ss.6.1 Initial and Adjusted Exercise Price. Except as otherwise
provided in Section 8 hereof, the initial exercise price with respect
to the Initial Warrant Shares shall be $3.67 per share of Common Stock,
and the initial exercise price with respect to the Additional Warrant
Shares shall be equal to a 40% discount to the average of the bid price
of the Common Stock for the 120 day period prior to any Closing, but in
no event less than of $5.00 per share of Common Stock. The adjusted
exercise price shall be the price which shall result from time to time
from any and all adjustments of the initial exercise price in
accordance with the provisions of Section 8 hereof.
5. Except as set forth herein, the Agency Agreement and the Warrant
Agreement shall remain in full force and effect.
<PAGE>
Constellation 3D, Inc.
March 23, 2000
Page 4
IN WITNESS WHEREOF, the Company and Sands Brothers have caused
this Agreement to be executed by its duly authorized representative.
CONSTELLATION 3D, INC. SANDS BROTHERS & CO., LTD.
By: /s/ Eugene Levich By: /s/ Mark Hollo
----------------------------- --------------------------------
Name: Eugene Levich Name: Mark Hollo
Title: President Title: Managing Director
Date: March 23, 2000 Date: March 23, 2000
---------------------------- -------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,030,139
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,181,128
<PP&E> 291,236
<DEPRECIATION> 50,136
<TOTAL-ASSETS> 2,422,228
<CURRENT-LIABILITIES> 3,596,404
<BONDS> 0
0
0
<COMMON> 41,001
<OTHER-SE> (3,360,626)
<TOTAL-LIABILITY-AND-EQUITY> 2,422,228
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,497,266
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,866,687)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,866,687)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,866,687)
<EPS-BASIC> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
