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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 14, 1998.
7TH LEVEL, INC.
(Exact name of registrant as specified in its charter)
Commission file number 0-24936
DELAWARE 75-2480669
(State of incorporation) (I.R.S. Employer Identification No.)
1201 RICHARDSON DRIVE
SUITE 277
RICHARDSON, TEXAS 75080
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 498-8100
NOT APPLICABLE
(Former name or former address, if changed since last report.)
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Item 5. Other Events.
On December 14, 1998, the Registrant entered into a Subscription
Agreement (the "Agreement") with Fletcher International Limited ("Fletcher").
Pursuant to the Agreement, which was consummated on December 15, 1998, Fletcher
has invested $5 million in equity into the Registrant and has agreed to provide
the Registrant with an equity line of credit under which the Registrant may sell
up to an additional $5 million of shares of common stock at the market prices at
the time the equity line is used subject to certain conditions. In exchange,
Fletcher has received 1,666,667 shares of common stock, a right to purchase
650,000 shares of common stock for $4.50 per share and a right to purchase
100,000 shares of common stock for $.01 per share. Subject to the Registrant's
right to repurchase shares of common stock from Fletcher, Fletcher may be
entitled to receive additional shares of common stock under certain conditions
relating to the market price of the common stock as described in the Agreement.
The Agreement is attached as Exhibit 10.44 and incorporated by reference herein.
Item 7. Financial Statements and Exhibits.
(c) Exhibits.
10.44 Subscription Agreement, dated as of December 14, 1998, by and
between 7th Level, Inc. and Fletcher International Limited.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned hereunto duly authorized.
7TH LEVEL, INC.
(Registrant)
Date: December 17, 1998 By: /s/ RICHARD S. MERRICK
------------------------------------
Richard S. Merrick
Chief Executive Officer and Director
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INDEX TO EXHIBITS
Exhibit No.
- -----------
10.44 Subscription Agreement, dated as of December 14, 1998, by and
between 7th Level, Inc. and Fletcher International Limited.
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EXHIBIT 10.44
SUBSCRIPTION AGREEMENT
BETWEEN 7TH LEVEL, INC.
AND FLETCHER INTERNATIONAL, LIMITED
DATED DECEMBER 14, 1998
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TABLE OF CONTENTS
PAGE
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1. Purchase and Sale 1
a. Initial Common Stock Investment 1
b. Secondary Right 1
c. Additional Right 2
d. 7th Level Notice 3
e. First Fletcher Investment Right 3
f. Second Fletcher Investment Right 3
g. Fletcher Investment Notice 4
h. Fletcher Share Limitation 4
2. Closing 5
3. Representations and Warranties of 7th Level 6
3.A Registration Provisions 10
4. Representations and Warranties of Fletcher 13
5. Adjustment Right 14
a. Initial Share Adjustment Right 14
b. Term 15
c. Adjustment Calculation 15
d. Adjustment Right Exercise 15
e. 7th Level Adjustment Buyback 16
f. Secondary Share Adjustment Right 16
g. Additional Share Adjustment Right 17
h. Definition 17
6. Consolidation, Merger, Etc. 17
7. Covenants of 7th Level 18
8. Covenants of Fletcher 22
8.A. Legend 23
8.B. Adjustments 23
9. Conditions Precedent to Fletcher's Obligations 24
10. Conditions Precedent to 7th Level's Obligations 24
11. Fees and Expenses 24
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12. Non-Performance 24
13. Indemnification 25
a. Indemnification of Fletcher 25
b. Indemnification of 7th Level 26
c. Conduct of Claims 26
14. Survival of the Representations, Warranties, Etc 27
15. Notices 27
16. Miscellaneous. 29
ANNEX A 32
ANNEX B 34
ANNEX C 35
ANNEX D 37
ANNEX E 39
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INDEX OF DEFINED TERMS
PAGE
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30-day Average Price 1
65 Day Notice Period 4
65 Day Notice 4
7th Level 1
7th Level Cancellation Event 14
7th Level Closing Date 3
7th Level Indemnified Party 26
7th Level Notice 3
7th Level Notice Date 3
7th Level Rights 3
Acquirer 17
Acquirer Common Stock 18
Additional Adjustment Shares 17
Additional Aggregate Price 2
Additional Measurement Period 17
Additional Purchase Price 2
Additional Right 2
Additional Shares 2
Adjustment Amount 15
Adjustment Buyback 16
Adjustment Payment 15
Adjustment Right 14
Adjustment Right Calculation Period 15
Adjustment Right Issue Date 14
Adjustment Right Price 15
Adjustment Shares 17
Agreement 1
Average Price 1
Bank Debt 21
Blackout Period 12
Bloomberg 1
Buyout 20
Closing Date 5
Combination 17
Combination Closing 17
Combination Notice 18
Common Stock 1
Covered Security 10
Excess Closing Price 21
Excess Note 21
Excess Notice 22
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Excess Notice Date 22
Exchange Act 8
Exercisable Number 4
First Fletcher Investment Right 3
First Fletcher Investment Right Shares 3
First Fletcher Right Aggregate Price 3
First Fletcher Right Purchase Price 3
Fletcher 1
Fletcher Indemnified Party 25
Fletcher Investment Closing Date 4
Fletcher Investment Notice 4
Fletcher Investment Rights 3
Fletcher Notice Date 4
Fletcher Response Time 20
Fletcher Rights 4
Fletcher Right Shares 4
Increase Notice 4
Increased Number 4
Indemnification Amount 13
Indemnified Party 26
Indemnifying Party 26
Initial Adjustment Shares 15
Initial Aggregate Price 1
Initial Closing 5
Initial Closing Date 5
Initial Measurement Period 14
Initial Number 1
Initial Purchase Price 1
Initial Shares 1
Interim Period 19
Investment Closing 3
Investment Closing Date 4
Investment Right Price 6
Investment Rights 4
Investment Shares 5
Issuance Blockage 21
Minimum Option Price 2
Obligation 21
Original Number 21
Permitted Placement 20
Preferred Stock 9
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Private Placement 19
Proceeding 25
Prospectus 10
Registration Statement 10
Related Proceeding 30
Required Consent 21
Required Registration Date 10
Restricted Period 19
Rights Condition 6
Rule 144 10
Sales Contract 12
SEC 8
SEC Filing 8
Second Fletcher Investment Right 3
Second Fletcher Investment Right Shares 3
Second Fletcher Right Aggregate Price 3
Second Fletcher Right Purchase Price 3
Secondary Adjustment Shares 16
Secondary Aggregate Price 2
Secondary Measurement Period 17
Secondary Purchase Price 1
Secondary Right 1
Secondary Shares 1
Securities Act 8
Share Limitation 4
Specified Additional Shares 16
Specified Initial Shares 15
Specified Secondary Shares 16
Termination Date 6
Trading Day 13
Unsold Securities 12
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SUBSCRIPTION AGREEMENT
This Subscription Agreement (this "Agreement") dated as of December 14,
1998 is entered into by and between 7th Level, Inc., a Delaware corporation
(together with its successors, "7th Level"), and Fletcher International Limited,
a company organized under the laws of the Cayman Islands (together with its
successors, "Fletcher").
The parties hereto agree as follows:
1. Purchase and Sale. In consideration of and upon the basis of the
representations, warranties and agreements and subject to the terms and
conditions set forth in this Agreement:
a. Initial Common Stock Investment. 7th Level agrees to issue and sell to
Fletcher, and Fletcher agrees to purchase from 7th Level, on the Initial Closing
Date specified in Section 2 hereof the Initial Number (as defined below) of
newly issued shares of 7th Level common stock, $.01 par value (the "Common
Stock") at a purchase price per share equal to three dollars ($3.00) (the
"Initial Purchase Price"), with the product of the Initial Number of shares and
the Initial Purchase Price defined as the "Initial Aggregate Price." The
"Initial Number" shall be the lesser of (i) $5,000,000 divided by the Initial
Purchase Price and (ii) that number of shares of Common Stock which represents
nine percent (9.0%) of 7th Level's outstanding Common Stock on the date
immediately prior to the Initial Closing Date. The shares of Common Stock
purchased pursuant to this Section 1.a are referred to herein as the "Initial
Shares."
b. Secondary Right. If, during the 90 day period immediately following the
Initial Closing Date, 7th Level increases the number of shares of Common Stock
outstanding, then 7th Level, at its sole option (the "Secondary Right"), can
issue to and cause Fletcher to purchase an additional number of shares of Common
Stock (the "Secondary Shares") up to the lesser of (1) the quotient of $5
million minus the Initial Aggregate Price divided by the Secondary Purchase
Price (as defined below) or (2) nine percent (9%) of the then outstanding number
of shares of Common Stock minus the number of Initial Shares, upon the same
terms and conditions as the Initial Shares, except as provided in this Section
1.b. Upon exercise of the Secondary Right on the 7th Level Closing Date (as
defined below), 7th Level shall issue and Fletcher shall purchase the Secondary
Shares at a purchase price per share equal to the lesser of (1) the last sales
price of the Common Stock as reported by Bloomberg on the Trading Day
immediately prior to the 7th Level Closing Date, or (2) the arithmetic average
of the daily volume-weighted average sale price per share (rounded to the
nearest 1/10,000th) as reported by Bloomberg, L.P. ("Bloomberg") on the NASDAQ
National Market of the Common Stock (the "Average Price") for the thirty (30)
day trading period ending (the "30-day Average Price") through the Trading Day
immediately prior to the 7th Level Closing Date (the "Secondary Purchase
Price"); and for
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an aggregate purchase price equal to the total number of Secondary Shares
multiplied by the Secondary Purchase Price (the "Secondary Aggregate Price").
c. Additional Right. At the option of 7th Level and upon 30 Trading Days
written notice, and subject to satisfaction of the conditions to exercisability
set forth below, 7th Level may exercise one right (the "Additional Right"),
beginning 270 days after the Initial Closing Date and ending on the second
anniversary of the Initial Closing Date, to require Fletcher to purchase a
number of newly issued Common Stock (the "Additional Shares") equal to the
lesser of the number (1) represented by $5 million divided by the Additional
Purchase Price (as defined below), (2) that, when added to all shares previously
issued to Fletcher under this Agreement, including Initial Shares, Secondary
Shares, and shares issuable or issued under the Fletcher Rights (as defined
below) up until the 7th Level Closing Date, would equal or exceed fifteen (15)
percent of the shares of Common Stock outstanding on the Initial Closing Date
until the end of the fifteenth month after the Initial Closing Date, at which
such time the limit shall be raised from 15 percent to 19.9 percent, or (3) that
equals four (4) multiplied by the arithmetic average of the daily trading volume
for the 60-day trading period ending the day immediately prior to the 7th Level
Notice Date (as defined below) as reported by Bloomberg. The Additional Right
shall not be exercisable, unless: (A) the Common Stock is listed by the NASDAQ
National market (or a national U.S. securities exchange) at the time of the 7th
Level Notice Date and at the 7th Level Closing Date, (B) a Registration
Statement (as defined in Section 3.A) is effective and the prospectus contained
therein is current at the 7th Level Notice Date and at the 7th Level Closing
Date, (C) there has been no Blackout Period (as defined in Section 3.A) or any
other period in which the Registration Statement is not effective or not able to
be used by Fletcher for resales within 30 Trading Days of the 7th Level Notice
Date and 7th Level Closing Date, and (D) the Average Price for each of the 30
Trading Days through but excluding the third Trading Day immediately prior to
the 7th Level Closing Date has continually exceeded three dollars ($3.00).
Upon the exercise of the Additional Right and subject to satisfaction or
waiver of the above-stated conditions on the 7th Level Closing Date, 7th Level
shall issue and sell to Fletcher, and Fletcher shall purchase from 7th Level,
the Additional Shares at a purchase price per share (the "Additional Purchase
Price") equal to the lesser of (1) the last sales price of the Common Stock as
reported by Bloomberg on the Trading Day immediately prior to the 7th Level
Closing Date, or (2) the 30-day Average Price through but excluding the third
Trading Day immediately prior to the 7th Level Closing Date; and for an
aggregate purchase price equal to the total number of Additional Shares
multiplied by the Additional Purchase Price (the "Additional Aggregate Price").
Notwithstanding the previous sentence, 7th Level shall be entitled (but not
obligated) to set a minimum price per share for the Additional Purchase Price
(the "Minimum Option Price") in its 7th Level Notice (as defined below);
provided, however, that such Minimum Option Price shall not exceed the Closing
Price for the trading day immediately prior to the 7th Level Notice Date. If a
Minimum Option Price is specified in such notice and is in excess of the
Additional Purchase Price that otherwise would be paid, then the 7th Level
Notice with respect to such
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Additional Right, and any transaction relating thereto, will be null and void
without further obligation of either party.
d. 7th Level Notice. To exercise the Secondary Right or the Additional
Right (the "7th Level Rights"), 7th Level shall deliver one or more written
notices in the form attached hereto as Annex A (a "7th Level Notice") to
Fletcher on any Trading Day prior to the respective expiration date. The date
upon which 7th Level causes a 7th Level Notice to be delivered to Fletcher, by
hand, facsimile, electronic transmission or otherwise before 5:00 p.m. New York
Time, shall be the "7th Level Notice Date" with respect to such exercise of the
7th Level Rights to which such notice relates. If a 7th Level Right is
exercised, the closing (the "Investment Closing") of the sale and delivery of
the Secondary Shares or Additional Shares shall take place in accordance with
Section 2 on the date that is three Trading Days following the 7th Level Notice
Date for the Secondary Shares, and that is three Trading Days following the
thirty (30) Trading Days period following the 7th Level Notice Date for the
Additional Shares, or as otherwise provided herein, or at such other date and
time as Fletcher and 7th Level shall mutually agree (each such date and time
being referred to herein as a "7th Level Closing Date").
e. First Fletcher Investment Right. 7th Level hereby grants Fletcher the
right to purchase (the "First Fletcher Investment Right") from time to time,
and agrees to sell to Fletcher for a period of five (5) years from the Initial
Closing Date, at Fletcher's sole option, up to 650,000 additional shares ("First
Fletcher Investment Right Shares") of Common Stock at a purchase price per share
equal to four dollars and fifty cents ($4.50) (the "First Fletcher Right
Purchase Price"); and for an aggregate purchase price equal to the total number
of First Fletcher Investment Right Shares being exercised multiplied by the
First Fletcher Right Purchase Price (the "First Fletcher Right Aggregate
Price"). 7th Level shall automatically become and be obligated to pay to
Fletcher as a demand debt obligation the First Fletcher Investment Right Shares
immediately upon receipt by 7th Level of the First Fletcher Right Purchase Price
and the Fletcher Investment Notice (as defined below), setting forth the number
of First Fletcher Investment Right Shares.
f. Second Fletcher Investment Right. 7th Level hereby grants Fletcher the
right to purchase (the "Second Fletcher Investment Right" and together with the
First Fletcher Investment Right, the "Fletcher Investment Rights") from time to
time, and agrees to sell to Fletcher for a period of five (5) years from the
Initial Closing Date, at Fletcher's sole option, 100,000 additional shares
("Second Fletcher Investment Right Shares") of Common Stock at a purchase price
per share equal to $0.01 (the "Second Fletcher Right Purchase Price"); and for
an aggregate purchase price equal to the total number of Second Fletcher
Investment Right Shares being exercised multiplied by the Second Fletcher Right
Purchase Price (the "Second Fletcher Right Aggregate Price"). 7th Level shall
automatically become and be obligated to pay to Fletcher as a demand debt
obligation the Second Fletcher Investment Right Shares immediately upon receipt
by 7th Level of the Second Fletcher Right Purchase Price and the Fletcher
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Investment Notice (as defined below), setting forth the number of Second
Fletcher Investment Right Shares.
g. Fletcher Investment Notice. To exercise the Fletcher Investment Rights
or the Adjustment Right (as defined in Section 5) (together, the "Fletcher
Rights"), Fletcher shall deliver one or more written notices in the form
attached hereto as Annex B (a "Fletcher Investment Notice") to 7th Level from
time to time prior to the respective expiration date. The date upon which
Fletcher causes a Fletcher Investment Notice to be delivered to 7th Level, by
hand, facsimile, electronic transmission or otherwise, shall be the "Fletcher
Notice Date" with respect to such exercise of the Fletcher Rights. If the
Fletcher Rights are exercised, the closing (the "Investment Closing") of the
sale and delivery of the First Fletcher Investment Right Shares, the Second
Fletcher Investment Right Shares or the Adjustment Shares (as defined in Section
5) (collectively, the "Fletcher Right Shares") shall take place in accordance
with Section 2 on the date that is three (3) Trading Days following the
applicable Fletcher Notice Date, or at such other date and time as Fletcher and
7th Level shall mutually agree (such date and time being referred to herein as a
"Fletcher Investment Closing Date" and together with a 7th Level Closing Date,
an "Investment Closing Date").
h. Fletcher Share Limitation. Notwithstanding anything else contained in
this Agreement, the aggregate number of Investment Shares (as defined below),
issuable upon exercise of the Fletcher Rights and/or the 7th Level Rights
(collectively, the "Investment Rights"), together with all Investment Shares
previously issued, shall be less than or equal to the lower of (i) the
Exercisable Number (as defined below) or (ii) the number of shares of Common
Stock otherwise issuable upon the exercise of the Investment Rights (the "Share
Limitation"); provided, however, that this Section 1(h) shall not limit the
exercise of the Additional Right by 7th Level. Any Investment Shares not issued
as a result of the previous sentence shall be issuable when and to the extent
the Exercisable Number is thereafter increased. If a Fletcher Right is
exercised within the same notice period as an exercised 7th Level Right and such
Investment Shares when issued would be greater than the Share Limitation, then
the Fletcher Right Shares shall be issued in full prior to the issuance of any
Secondary Shares or Additional Shares. The "Exercisable Number" is initially
zero and thereafter may be increased upon expiration of a sixty-five day period
(the "65 Day Notice Period") after either (i) Fletcher delivers a notice (a "65
Day Notice") to 7th Level designating an aggregate number of shares of Common
Stock in excess of the then existing Exercisable Number, or (ii) 7th Level
delivers a notice (an "Increase Notice") stating the increase, if any, in the
aggregate number (the "Increased Number") of shares of Common Stock outstanding
as of the last day of the preceding month over the number outstanding as of the
last day of the second preceding month, or in the case of the first day of the
month immediately following the Initial Closing Date, the number of shares
outstanding as of the Initial Closing Date, in which event the Exercisable
Number shall be increased by the number which is 9.75% of the Increased Number.
A 65 Day Notice may be given at any time. Unless expressly waived by Fletcher,
7th Level shall deliver an Increase Notice to Fletcher on or before the 10th day
of
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each calender month from and after the Initial Closing Date. One or more 65 Day
Notice(s) may be given from time to time at any time after the Initial Closing
Date, provided that any increase in the Exercisable Number designated by any 65
Day Notice shall be effective only upon expiration of the 65 Day Notice Period
with respect to such 65 Day Notice.
2. Closing. Upon satisfaction or, if applicable, waiver of the conditions
set forth in Sections 9 and 10 hereof, and of the Rights Condition (as defined
below), and the deliveries set forth below, (1) the "Initial Closing" shall take
place initially via facsimile at 1:00 p.m. (New York time) on or before the
Termination Date on the business day following satisfaction of all conditions to
the Initial Closing, or at such other date and time as Fletcher and 7th Level
may agree (such date and time being referred to herein as the "Initial Closing
Date" and together with an Investment Closing Date, a "Closing Date"), and (2)
any Investment Closing shall take place initially via facsimile on the
Investment Closing Date; provided, that 7th Level shall deliver the original
stock certificates representing the Initial Shares, Secondary Shares, Additional
Shares, or the Fletcher Right Shares (collectively, the "Investment Shares"), as
the case may be, to Fletcher via Federal Express at the address set forth in
Annex C hereof. Each original stock certificate delivered in accordance with
this Section 2 shall represent 100,000 shares of Common Stock (except that to
the extent that the number of Investment Shares to be delivered to Fletcher at
any given time are not evenly divisible by 100,000, one stock certificate shall
represent the remaining shares).
a. At the Initial Closing, the following deliveries shall be made:
(i). Initial Shares Certificate. 7th Level shall deliver the stock
certificates representing the Initial Shares, duly registered on the books of
7th Level in the name of Fletcher or its nominee.
(ii). Initial Closing Documents. The closing documents required by
Sections 9 and 10 shall be delivered to Fletcher and 7th Level, respectively,
and 7th Level shall deliver the documents required by the Rights Condition.
(iii). Initial Purchase Price. Fletcher shall cause to be wire
transferred to 7th Level, in accordance with instructions set forth in Section
15, the Initial Aggregate Price, in immediately available United States dollars.
(iv). Delivery Notice. An executed copy of the delivery notice in
the form attached hereto as Annex C shall be delivered in accordance therewith,
with a copy delivered to Fletcher.
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The foregoing deliveries shall be deemed to occur simultaneously as part of
a single transaction, and no delivery shall be deemed to have been made until
all such deliveries have been made.
The Initial Closing is subject to delivery by 7th Level of written waivers,
in form and substance reasonably satisfactory to Fletcher, of any pre-emptive or
similar rights of any person in connection with the issuance of securities to
Fletcher pursuant to this Agreement (the "Rights Condition"). If the Initial
Closing has not occurred on or before December 18, 1998 (the "Termination
Date"), then this Agreement shall terminate and be of no further effect, except
for the parties' rights to indemnification which shall survive. Fletcher agrees
from the date hereof until the earlier of the date of the Initial Closing and
the Termination Date that it shall escrow funds necessary in a commercial bank
and in a separate account for the Initial Closing. Fletcher shall provide
confirmation of such escrow event within 48 hours of the date hereof to 7th
Level as provided in Section 15.
b. At any Investment Closing, the following deliveries shall be made:
(i). Investment Shares. 7th Level shall deliver the certificate(s)
representing the applicable Investment Shares duly registered on the books of
7th Level in the name of Fletcher or its nominee, against payment by Fletcher of
the Secondary Aggregate Price, the Additional Aggregate Price, the First
Fletcher Right Aggregate Price, the Second Fletcher Right Aggregate Price or the
Adjustment Payment (as defined in Section 5), as the case may be (collectively,
the "Investment Right Price"), by wire transfer in immediately available funds,
to the account identified in the 7th Level Notice or the Fletcher Investment
Notice, as the case may be.
(ii). Investment Closing Documents. The closing documents required
by Sections 9 and 10 shall be delivered to Fletcher and 7th Level, respectively.
(iii). Delivery Notice. An executed copy of the delivery notice in
the form attached hereto as Annex D shall be delivered in accordance therewith,
with a copy delivered to Fletcher.
The foregoing deliveries shall be deemed to occur simultaneously as part of
a single transaction, and no delivery shall be deemed to have been made until
all such deliveries have been made. The original certificates representing the
applicable Investment Shares shall be delivered via Federal Express to Fletcher
at the address set forth in Section 15 hereof, unless Fletcher shall have
delivered to 7th Level a written notice specifying a different address.
3. Representations and Warranties of 7th Level. 7th Level hereby represents
and warrants to Fletcher on the date hereof and on any Closing Date, as follows:
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a. 7th Level has been duly incorporated and is validly existing in
good standing under the laws of Delaware, or after the date hereof, if
another entity has succeeded 7th Level in accordance with the terms
hereof, under the laws of one of the United States.
b. The execution, delivery and performance of this Agreement
(including the issuance of all Investment Shares) by 7th Level have
been duly authorized by all requisite corporate action and no further
consent or authorization of 7th Level, its Board of Directors or its
shareholders (other than the Required Consent (as defined below), if
applicable) is required. This Agreement has been duly executed and
delivered by 7th Level and, when this Agreement is duly authorized,
executed and delivered by Fletcher, will be a valid and binding
agreement enforceable against 7th Level in accordance with its terms,
subject to bankruptcy, insolvency, reorganization, moratorium and
similar laws of general applicability relating to or affecting
creditors' rights generally and to general principles of equity.
c. 7th Level has full corporate power and authority necessary to
execute and deliver this Agreement and to perform its obligations
hereunder (including the issuance of the Investment Shares).
d. Neither the execution and delivery by 7th Level of this Agreement
nor the performance by 7th Level of any of its obligations hereunder:
(1) violates, conflicts with, results in a breach of, or constitutes
a default (or an event which with the giving of notice or the
lapse of time or both would be reasonably likely to constitute a
default) under (A) the Articles of Incorporation or by-laws of
7th Level or any of its subsidiaries, (B) any decree, judgment,
order, law, treaty, rule, regulation or determination of any
court, governmental agency or body, or arbitrator having
jurisdiction over 7th Level or any of its subsidiaries or any of
their respective properties or assets, (C) the terms of any bond,
debenture, note or any other evidence of indebtedness, or any
agreement, stock option or other similar plan, indenture, lease,
mortgage, deed of trust or other instrument to which 7th Level or
any of its subsidiaries is a party, by which 7th Level or any of
its subsidiaries is bound, or to which any of the properties or
assets of 7th Level or any of its subsidiaries is subject, (D)
the terms of any "lock-up" or similar provision of any
underwriting or similar agreement to which 7th Level or any of
its subsidiaries is a party or (E) any rules of the
<PAGE>
National Association of Securities Dealers, Inc. or the NASDAQ
National Market applicable to 7th Level or the transactions
contemplated hereby; or
(2) results in the creation or imposition of any lien, charge or
encumbrance upon (A) any Investment Share or (B) any of the
properties or assets of 7th Level or any of its subsidiaries.
e. 7th Level has validly reserved for issuance to Fletcher (i) the
Initial Number of shares of Common Stock for issuance at the Initial
Closing; (ii) the maximum number of shares of Common Stock that may be
issuable within 90 days of the Initial Closing as Secondary Shares; (iii)
the 650,000 shares of Common Stock that may be issuable from time to time
as First Fletcher Investment Right Shares; (iv) the 100,000 shares of
Common Stock that may be issuable from time to time as Second Fletcher
Investment Right Shares; and (v) any additional shares of Common Stock,
including Adjustment Right Shares, as required under this Agreement. When
issued to Fletcher against payment therefor in accordance with the terms of
this Agreement, each Investment Share (when, and if, applicable):
(1) will have been duly and validly authorized, duly and validly
issued, fully paid and non-assessable;
(2) will be free and clear of any security interests, liens, claims
or other encumbrances (other than encumbrances that may be
imposed under federal securities laws); and
(3) will not have been issued or sold in violation of any preemptive
or other similar rights of the holders of any securities of 7th
Level.
f. 7th Level satisfies all quantitative maintenance criteria of the
NASDAQ National Market or, after any Closing Date, has a valid exemption
from such criteria. Following the Initial Closing, the Initial Shares are,
and any other Investment Shares (when and if authorized and issued) will
be, duly listed and admitted for trading on the principal exchange or
market for the Common Stock.
g. There is no pending or, to the best knowledge of 7th Level, threatened
action, suit, proceeding or investigation before any court, governmental
agency or body, or arbitrator having jurisdiction over 7th Level or any of
its affiliates that would materially affect the execution by 7th Level of,
or the performance by 7th Level of its obligations under, this Agreement.
h. None of 7th Level's filings with the United States Securities and
Exchange Commission (the "SEC") under the Securities Act of 1933, as
amended (the "Securities Act"), or under Section 13(a) or 15(d) of
Securities Exchange Act of 1934, as amended (the "Exchange Act"), (each an
"SEC Filing") contained any untrue statement of a
<PAGE>
material fact or omitted to state any material fact necessary in order to
make the statements, in the light of the circumstances under which they
were made, not misleading.
i. Since the date of 7th Level's most recent SEC Filing, there has not
been any development that is reasonably likely to result in any material
adverse change in the condition, financial or otherwise, or in the business
affairs of 7th Level, whether or not arising in the ordinary course of
business.
j. The offer and sale of the Investment Shares to Fletcher pursuant to
this Agreement will, subject to compliance by Fletcher with the applicable
representations and warranties contained in Section 4 hereof and with the
applicable covenants and agreements contained in Section 8 hereof, be made
in accordance with the provisions and requirements of Regulation D
promulgated under the Securities Act and any applicable state law.
<PAGE>
k. As of the date hereof, the authorized capital stock of 7th Level
consists of 100,000,000 shares of Common Stock and 100,000 shares of
Preferred Stock, $0.01 par value, of 7th Level ("Preferred Stock"). As of
December 4, 1998, (i) 20,228,485 shares of Common Stock (including the
treasury shares described in clause (iii) below) and 4,975 shares of
Preferred Stock were issued and outstanding, (ii) less than 9,193,781
shares of Common Stock were reserved for issuance upon exercise of
outstanding stock options, warrants or other convertible rights, (iii) less
than 7,285,532 shares of Common Stock were currently subject to issuance
upon the exercise of outstanding stock options, warrants or other
convertible rights and (iv) no shares of Common Stock were held in the
treasury of 7th Level. All of the outstanding shares of Common Stock are,
and all shares which may be issued pursuant to stock options, warrants or
other convertible rights will be, when issued and paid for in accordance
with the respective terms thereof, duly authorized, validly issued, fully
paid and non-assessable and free of any preemptive rights in respect
thereof. As of the date hereof, except as set forth above, and except for
shares of Common Stock or other securities issued upon conversion,
exchange, exercise or purchase associated with the securities, options,
warrants, rights and other instruments referenced above, (i) no shares of
capital stock or other voting securities of 7th Level were outstanding,
(ii) no equity equivalents, interests in the ownership or earnings of 7th
Level or other similar rights were outstanding and (iii) there were no
existing options, warrants, calls, subscriptions or other rights or
agreements or commitments relating to the capital stock of 7th Level or any
of its subsidiaries or obligating 7th Level or any of its subsidiaries to
issue, transfer, sell or redeem any shares of capital stock, or other
equity interest in, 7th Level or any of its subsidiaries or obligating 7th
Level or any of its subsidiaries to grant, extend or enter into any such
option, warrant, call, subscription or other right, agreement or
commitment. No provision of this Section 3(k) is intended to relate to any
transaction, including but not limited to options traded by third parties
on the Chicago Board of Exchange, in which 7th Level is not a party and by
which neither 7th Level nor any of its properties are bound.
3.A Registration Provisions.
a. If, on the Initial Closing Date, 7th Level does not have an
effective Registration Statement for all of the Investment Shares issuable
under this Agreement, 7th Level shall, within 30 days of the Initial
Closing Date and at its own expense, file a registration statement (the
"Registration Statement") under the Securities Act covering the resale of
all of the Investment Shares under this Agreement (each, a "Covered
Security"), shall use its reasonable best efforts to cause such
Registration Statement to be declared effective not later than 90 calendar
days (the "Required Registration Date") after the Initial Closing Date and
shall promptly amend such Registration Statement or file a new Registration
Statement covering the increased number of shares, whichever is required by
applicable regulations, from time to time if the maximum number of
<PAGE>
Investment Shares is greater than the number of shares of Common Stock
registered pursuant to such Registration Statement. If the Registration
Statement has not been declared effective by the Required Registration
Date, then Fletcher shall be entitled to receive from 7th Level an amount
of Common Stock or cash, or any combination thereof, at the sole option of
Fletcher, equal to 2.5% of the Initial Aggregate Price and the Secondary
Aggregate Price, if applicable, for each month (or portion thereof)
following the Required Registration Date that such Registration Statement
shall not have been declared effective. 7th Level shall automatically
become and be obligated to pay each month to Fletcher as a demand debt
obligation the amount of cash designated by Fletcher immediately upon
receipt by 7th Level of a notice setting forth the cash amount.
b. 7th Level will use its reasonable best efforts to: (i) keep
such registration effective until the earlier of (A) the second anniversary
of the issuance of each Covered Security (provided that, Fletcher may
freely resell such Covered Securities), (B) the later of the date all of
the Covered Securities shall have been sold by Fletcher and the date the
Investment Rights expire and (C) such time as all of the Covered Securities
held by Fletcher can be sold by Fletcher or any of its affiliates within a
three-month period without compliance with the registration requirements of
the Securities Act pursuant to Rule 144 under the Securities Act ("Rule
144"); (ii) prepare and file with the SEC such amendments and supplements
to the Registration Statement and the prospectus used in connection with
the Registration Statement (as so amended and supplemented from time to
time, the "Prospectus") as may be necessary to comply with the provisions
of the Securities Act with respect to the disposition of all Covered
Securities by Fletcher or any of its affiliates; (iii) furnish such number
of Prospectuses and other documents incident thereto, including any
amendment of or supplement to the Prospectus, as Fletcher from time to time
may reasonably request; (iv) cause all Covered Securities to be listed on
each securities exchange and quoted on each quotation service on which
similar securities issued by 7th Level are then listed or quoted; (v)
provide a transfer agent and registrar for all Covered Securities and a
CUSIP number for all Covered Securities; (vi) otherwise use its reasonable
best efforts to comply with all applicable rules and regulations of the
SEC; and (vii) file the documents required of 7th Level and otherwise use
its reasonable best efforts to obtain and maintain requisite blue sky
clearance in (A) New York, Texas, California and all other jurisdictions in
which any of the shares of Common Stock were originally sold and (B) all
other states specified in writing by Fletcher, provided, however, that as
to this clause (B), 7th Level shall not be required to qualify to do
business or consent to service of process in any state in which it is not
now so qualified or has not so consented.
c. 7th Level shall furnish to Fletcher upon request a reasonable
number of copies of a supplement to or an amendment of such Prospectus as
may be necessary in order to facilitate the public sale or other
disposition of all or any of the
<PAGE>
Covered Securities by Fletcher or any of its affiliates pursuant to the
Registration Statement.
d. With a view to making available to Fletcher and its
affiliates the benefits of Rule 144 and Form S-3 under the Securities Act,
7th Level covenants and agrees to: (i) make and keep available adequate
current public information (within the meaning of Rule 144(c)) concerning
7th Level, until the earlier of (A) the second anniversary of the issuance
of each Covered Security (provided that, Fletcher may freely resell such
Covered Securities) and (B) such date as all of the Covered Securities
shall have been resold by Fletcher or any of its affiliates; and (ii)
furnish to Fletcher upon request, as long as Fletcher owns any Covered
Securities, (A) a written statement by 7th Level that it has complied with
the reporting requirements of the Securities Act and the Exchange Act, (B)
a copy of the most recent annual or quarterly report of 7th Level, and (C)
such other information as may be reasonably requested in order to avail
Fletcher and its affiliates of Rule 144 or Form S-3 with respect to such
Covered Securities.
e. Notwithstanding anything else in this Section 3.A, if, at any
time during which a Prospectus is required to be delivered in connection
with the sale of any Covered Securities, 7th Level determines in good faith
that a development has occurred or a condition exists as a result of which
the Registration Statement or the Prospectus contains a material
misstatement or omission, 7th Level will immediately notify Fletcher
thereof by telephone and in writing. Upon receipt of such notification,
Fletcher and its affiliates will immediately suspend all offers and sales
of any Covered Securities pursuant to the Registration Statement. In such
event, 7th Level will amend or supplement the Registration Statement as
promptly as practicable and will take such other steps as may be required
to permit sales of the Covered Securities thereunder by Fletcher and its
affiliates in accordance with applicable federal and state securities laws.
7th Level will promptly notify Fletcher after it has determined in good
faith that such sales have become permissible in such manner and will
promptly deliver copies of the Registration Statement and the Prospectus
(as so amended or supplemented) to Fletcher in accordance with paragraph
(b) of this Section 3.A. Notwithstanding the foregoing, (A) under no
circumstances shall 7th Level be entitled to exercise its right to suspend
sales of any Covered Securities pursuant to the Registration Statement more
than two times in any twelve-month period, (B) the period during which such
sales may be suspended (each a "Blackout Period") shall not exceed thirty
days and (C) no Blackout Period may commence less than 30 days after the
end of the preceding Blackout Period. Notwithstanding anything else in this
Section 3.A, 7th Level has a right once every 30 days to inquire whether
Fletcher has any open sales contract in excess of $1.5 million.
Upon the commencement of a Blackout Period pursuant to this Section
3.A, Fletcher will notify 7th Level of any contracts to sell any Covered
Securities (each a
<PAGE>
"Sales Contract") that Fletcher or any of its affiliates has entered into
prior to the commencement of such Blackout Period and that would require
delivery of such Covered Securities during such Blackout Period, which
notice will contain the aggregate sale price and volume of Covered
Securities pursuant to such Sales Contract. Upon receipt of such notice,
7th Level will immediately notify Fletcher of its election either (i) to
terminate the Blackout Period and, as promptly as practicable, amend or
supplement the Registration Statement or the Prospectus in order to correct
the material misstatement or omission and deliver to Fletcher copies of
such amended or supplemented Registration Statement and Prospectus in
accordance with paragraph (b) of this Section 3.A or (ii) to continue the
Blackout Period in accordance with this paragraph. If 7th Level elects to
continue the Blackout Period, and Fletcher or any of its affiliates is
therefore unable to consummate the sale of Covered Securities pursuant to
the Sales Contract (such unsold Covered Securities being hereinafter
referred to herein as the "Unsold Securities"), 7th Level will promptly
indemnify each Fletcher Indemnified Party (as such term is defined in
Section 13 below) against any Proceeding (as such term is defined in
Section 13 below) that each Fletcher Indemnified Party may incur arising
out of or in connection with Fletcher's breach or alleged breach of any
such Sales Contract, and 7th Level shall reimburse each Fletcher
Indemnified Party for any reasonable costs or expenses (including
reasonable legal fees) incurred by such party in investigating or defending
any such Proceeding (collectively, the "Indemnification Amount"); provided,
however, that each Fletcher Indemnified Party shall take all actions
reasonably necessary or appropriate to mitigate such Indemnification
Amount; and provided further, however, that the Indemnification Amount
shall be reduced by an amount equal to the number of Unsold Securities
multiplied by the difference between (x) the actual per share price
received by Fletcher or any of its affiliates upon the sale of the Unsold
Securities (if such sale occurs within three Trading Days of the end of the
Blackout Period) or the closing sale price of the Common Stock on the
NASDAQ National Market or other national securities exchange on which the
Common Stock is then listed on the third Trading Day after the end of the
Blackout Period (if the Unsold Securities are not sold by Fletcher or any
of its affiliates within three Trading Days of the end of the Blackout
Period), and (y) the per share sale price for the Unsold Securities
provided in the Sales Contract. As used herein, the term "Trading Day"
means any day on which 7th Level's Common Stock is quoted on the NASDAQ
National Market or, if applicable, other national securities exchange.
f. Fletcher shall furnish to 7th Level information about itself
or its ownership of 7th Level Common Stock required by SEC rules and
regulations to be included in the Registration Statement. In addition,
Fletcher will notify 7th Level when it no longer requires an effective
Registration Statement.
4. Representations and Warranties of Fletcher. Fletcher hereby represents
and warrants to 7th Level on the date hereof, and on any Closing Date, as
follows:
<PAGE>
a. Fletcher has been duly incorporated and is validly existing in good
standing under the laws of the Cayman Islands, or after the date hereof,
under the laws of the jurisdiction of its organization.
b. The execution, delivery and performance of this Agreement by Fletcher
have been duly authorized by all requisite corporate action and no further
consent or authorization of Fletcher, its Board of Directors or its
stockholders is required. This Agreement has been duly executed and
delivered by Fletcher and, when duly authorized, executed and delivered by
7th Level, will be a valid and binding agreement enforceable against
Fletcher in accordance with its terms, subject to bankruptcy, insolvency,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights generally and to general
principles of equity.
c. Fletcher understands that no United States federal or state agency has
passed on, reviewed or made any recommendation or endorsement of the
Investment Shares.
d. Subject to Section 3.A hereof, Fletcher understands that the
Investment Shares have not been registered under the Securities Act and may
not be re-offered or resold other than pursuant to registration thereunder
or an available exemption therefrom.
e. Fletcher is an "accredited investor" as such term is defined in
Regulation D promulgated under the Securities Act.
f. Fletcher is purchasing the Investment Shares for its own account for
investment only and not with a view to, or for resale in connection with,
the public sale or distribution thereof, except pursuant to sales
registered under the Securities Act.
<PAGE>
g. Fletcher understands that the Investment Shares are being or will be
offered and sold to it in reliance on specific exemptions from the
registration requirements of United States federal securities laws and that
7th Level is relying on the truth and accuracy of, and Fletcher's
compliance with, the representations, warranties, agreements,
acknowledgments and understandings of Fletcher set forth herein in order to
determine the availability of such exemptions and the eligibility of
Fletcher to acquire the Investment Shares.
5. Adjustment Right.
a. Initial Share Adjustment Right. If, during the period (the
"Initial Measurement Period") beginning on the Trading Day following the
effectiveness of the Registration Statement and ending on the earlier of
(i) one year from the Initial Closing Date, or (ii) the day on which a
Combination Notice (as defined in Section 6) is given to Fletcher in
accordance with Section 6, the Average Price for twenty (20) consecutive
Trading Days (excluding any days during a Blackout Period) has not exceeded
150% of the Initial Purchase Price (the 60th Trading Day after the Initial
Measurement Period ends being the "Adjustment Right Issue Date"), Fletcher
will receive rights to receive additional shares of Common Stock (the
"Adjustment Right") on the terms provided below; provided, however, that if
a Combination Notice is given prior to the Registration Statement becoming
effective, then Fletcher automatically receives the Adjustment Right the
day after the Combination Notice is given. Notwithstanding anything else in
this Section 5, if at any time during the Initial Measurement Period, the
Average Price for each of twenty (20) consecutive Trading Days (excluding
any days during a Blackout Period) exceeds 150% of the Initial Purchase
Price (the day after such event being the "7th Level Cancellation Event"),
then on the 7th Level Cancellation Event, the right to receive the
Adjustment Right for the Initial Shares shall terminate. Notwithstanding
anything else in this Section 5, 7th Level shall automatically become and
be obligated to pay to Fletcher as a demand debt obligation the applicable
Adjustment Shares immediately upon the end of the Initial Measurement
Period (despite the fact that the calculation for the Adjustment Right will
not be determined until the 60th Trading Day after the Initial Measurement
Period ends), whether or not 7th Level has received the Fletcher Investment
Notice pertaining to the applicable Adjustment Shares.
b. Term. The Adjustment Right will be automatically available to
Fletcher for exercise from time to time beginning on the Adjustment Right
Issue Date and for a period of one (1) year thereafter.
c. Adjustment Calculation. The amount of the Adjustment Right shall
be equal to the number of Specified Initial Shares (as defined below)
multiplied by the amount by which (x) the Initial Purchase Price exceeds
(y) the Average Price for the
<PAGE>
sixty (60) Trading Days beginning on the Trading Day after the Initial
Measurement Period ends, or if a Combination (as defined in Section 6), the
closing price on the Trading Day immediately prior to the day a Combination
Notice is given (the "Adjustment Amount"). The number of "Specified Initial
Shares" shall mean that number of Initial Shares as specified in a notice
from Fletcher, for which Fletcher is long or has continuously had an
economically long position (through one or more positions in options,
swaps, or other instruments) since the Initial Closing Date as of the date
Fletcher receives the Adjustment Right. Fletcher agrees upon request to
provide 7th Level with reasonable documentation to support its calculations
of the Specified Initial Shares; it being understood that this sentence
shall not obligate Fletcher to disclose information Fletcher deems
proprietary to it or its business practices. If 7th Level reasonably
believes that the documentation provided by Fletcher for the calculation of
the Specified Initial Shares is insufficient to support such calculation,
then 7th Level and Fletcher will jointly approve an unaffiliated
independent appraiser to review the necessary documentation in order to
support the calculation of the Specified Initial Shares, and such
independent appraiser's determination shall be final as to the Specified
Initial Shares.
d. Adjustment Right Exercise. If Fletcher exercises its Adjustment
Right, then 7th Level shall issue to Fletcher a number of shares of Common
Stock (the "Initial Adjustment Shares"), at no additional cost to Fletcher
other than payment of $.01 par value amount (such payment being the par
value multiplied by the number of applicable Adjustment Shares (the
"Adjustment Payment")), equal to (1) the Adjustment Amount being exercised,
divided by (2) the Average Price (the "Adjustment Right Price") for the
sixty (60) Trading Days ending five (5) Trading Days prior to the
applicable Fletcher Notice Date (the "Adjustment Right Calculation
Period"), but in no event shall the Adjustment Right Price be greater than
105% of the Average Price for the first five (5) Trading Days of the
Adjustment Right Calculation Period.
e. 7th Level Adjustment Buyback. For a period beginning on the
Trading Day following an effective Registration Statement and ending on the
earlier of (i) one year from the Initial Closing Date, (ii) the day after
the 7th Level Cancellation Event (iii) the termination of the Adjustment
Right for the Initial Shares and Secondary Shares, if applicable, or (iv)
the day of a Combination Notice, 7th Level, at its option, may offer (so
long as such offer is bona fide and is accompanied by a written financing
commitment subject only to customary conditions from an entity with the
financial ability to provide the funds necessary to purchase all Initial
Shares and Secondary Shares, if applicable) in writing to repurchase all of
the Initial Shares and Secondary Shares, if any, at the Initial Aggregate
Price, plus the Secondary Aggregate Price, if applicable (the "Adjustment
Buyback"). If 7th Level offers to repurchase the Initial Shares and
Secondary Shares, if any, pursuant to the Adjustment Buyback, Fletcher has
the option, by delivery of a notice within twenty (20) Trading Days (with
an additional Trading Day for each day during a
<PAGE>
Blackout Period if the Blackout Period occurs during the twenty (20)
Trading Day response time) from the date the Adjustment Buyback offer by
7th Level is received by Fletcher, to (i) sell all or a partial amount of
the Initial Shares and Secondary Shares, if applicable, in which case, upon
such offer by 7th Level, the right to receive the Adjustment Right for the
Initial Shares and Secondary Shares shall terminate, or (ii) waive the
right to receive the Adjustment Right for the Initial Shares and Secondary
Shares and decline to sell any of the applicable shares, in which case both
the Adjustment Buyback and the right to receive the Adjustment Right (in
full) for the Initial Shares and Secondary Shares, if applicable, shall
terminate. Notwithstanding anything else in this section (e), Fletcher
shall have the sole option to accept or reject the Adjustment Buyback, but
in either event, the right to receive the Adjustment Right terminates.
Notwithstanding the above, if 7th Level fails to purchase all of the shares
designated by Fletcher in its notice, the right to receive the Adjustment
Right for the Initial Shares and Secondary Shares shall not terminate.
f. Secondary Share Adjustment Right. If any Secondary Shares are
purchased by Fletcher pursuant to Section 1.b, then all such Secondary
Shares are subject to the same Adjustment Right in this Section 5 as the
Initial Shares, upon the same terms and conditions (the "Secondary
Adjustment Shares"); provided, however, that any reference to the Initial
Shares, Initial Adjustment Shares, Initial Purchase Price, Initial
Aggregate Price, Initial Measurement Period or Specified Initial Shares
shall mean the Secondary Shares, Secondary Adjustment Shares, Secondary
Purchase Price, Secondary Aggregate Price, Secondary Measurement Period (as
defined below) or Specified Secondary Shares, respectively.
Notwithstanding anything else in this subsection (f), the issuance of an
Adjustment Right for the Secondary Shares will be measured in identical
terms to the Initial Measurement Period, including the use of the Initial
Closing Date in Section 5(a)(1) as a measurement basis (the "Secondary
Measurement Period").
g. Additional Share Adjustment Right. If any Additional Shares are
purchased by Fletcher pursuant to Section 1.c, then all such Additional
Shares are subject to the same Adjustment Right in this Section 5 as the
Initial Shares, upon the same terms and conditions (the "Additional
Adjustment Shares"); provided, however, that (1) the issuance of an
Adjustment Right for the Additional Shares will be measured from the 7th
Level Closing Date and ending on the earlier of (1) one year from the 7th
Level Closing Date, or (2) the day on which a Combination Notice is given
to Fletcher in accordance with Section 6 (the "Additional Measurement
Period"), and (2) any reference to the Initial Closing Date, Initial
Shares, Initial Adjustment Shares, Initial Purchase Price, Initial
Aggregate Price, Initial Measurement Period or Specified Initial Shares
shall mean the Investment Closing Date, Additional Shares, Additional
Adjustment Shares, Additional Purchase Price, Additional Aggregate Price,
Additional Measurement Period or Specified Additional Shares, respectively.
<PAGE>
h. Definition. The "Adjustment Shares" are the combination of the
Initial Adjustment Shares, the Secondary Adjustment Shares and the
Additional Adjustment Shares, if any.
6. Consolidation, Merger, Etc. In case 7th Level shall be a party to
any transaction providing for (i) any acquisition of 7th Level by means of
merger or other form of corporate reorganization in which outstanding shares of
7th Level are exchanged for securities or other consideration issued, or caused
to be issued, by the acquiring corporation (the "Acquirer") or its subsidiary or
(ii) a sale of all or substantially all of the assets of 7th Level (on a
consolidated basis) or (iii) any other transaction or series of related
transactions by 7th Level in which in excess of 50% of 7th Level's voting power
is transferred to a single entity or group acting in concert (each of the
foregoing being referred to as a "Combination"), Fletcher, at its sole option
may choose to (1) exercise the Fletcher Rights (in whole or in part) before the
Combination is closed (the "Combination Closing"); (2) as part of the
Combination Closing, cause each Fletcher Right (or any then unexercised portion
thereof, in whole or in part) to be converted into a right of the Acquirer on
the same terms and conditions as the Fletcher Right so converted, except that
the Acquirer right shall be exercisable for that number of shares of Acquirer
Common Stock (or other consideration) that would have been obtained by Fletcher
for such right in the Combination if it had fully exercised such Fletcher Right
immediately prior to the Combination Closing; or (3) receive cash, for any
Fletcher Right or portion which has not been exercised or converted pursuant to
(1) and (2) above, in an amount equal to (A) in the case of the Adjustment
Rights, the unexercised Adjustment Amount and (B) in the case of any Fletcher
Rights, other than the Adjustment Rights, the Black-Scholes value of the
Fletcher Rights based on the 260-day volatility as reported by Bloomberg and the
full term of the Fletcher Rights. 7th Level agrees that it shall be a condition
to any Combination Closing that as of the Combination Closing, all shares of the
Acquirer Common Stock to be issued to Fletcher shall have been registered under
the Securities Act. The "Acquirer Common Stock" shall mean the class of
publicly traded common stock of the Acquirer having the largest market
capitalization as of the Combination Closing Date. 7th Level shall provide
Fletcher with written notice of any proposed Combination as soon as the
existence of a proposed Combination is made public by any person (the
"Combination Notice"). Any Combination Notice shall cause any unexercised 7th
Level Right to be terminated.
7. Covenants of 7th Level. 7th Level covenants and agrees with Fletcher
as follows:
a. For so long as Fletcher owns any Investment Shares or any Investment
Rights exist, and in any case for a period of 90 days thereafter, 7th Level will
use its reasonable best efforts to (i) maintain the eligibility of the Common
Stock for quotation on the NASDAQ National Market or listing on a national
securities exchange (as defined in the Exchange Act) and
<PAGE>
(ii) regain the eligibility of the Common Stock for quotation on the NASDAQ
National Market in the event that the Common Stock is delisted by the NASDAQ
National Market.
b. 7th Level will provide Fletcher with an opportunity to review and
comment on any public disclosure by 7th Level of information regarding this
Agreement and the transactions contemplated hereby. Beginning on the date
hereof and for so long as any Investment Rights exist, and in any case for a
period of 90 days thereafter, 7th Level will (i) promptly notify Fletcher if
there is any public disclosure by 7th Level of material information regarding
7th Level or its financial condition, prospects or results of operation and (ii)
provide Fletcher with copies of all SEC Filings.
c. As soon as such information is available (but in no event later than
December 18, 1998), 7th Level shall deliver to Fletcher a written notice stating
the number of outstanding shares of Common Stock as of the Initial Closing Date.
d. 7th Level will make all filings required by law with respect to the
transactions contemplated hereby.
e. 7th Level will cause the Investment Shares (not already listed), as
soon as such shares are issued, to be duly listed and admitted for trading on
the NASDAQ National Market or, if the NASDAQ National Market is not then the
principal trading market for the Common Stock, on a national securities exchange
(as defined in the Exchange Act) or the principal exchange or market for the
Common Stock.
f. On the Initial Closing Date, 7th Level will make the appropriate
filing for the Initial Shares to become duly listed and admitted for trading on
the NASDAQ National Market and thereafter 7th Level shall use its reasonable
best efforts to ensure that the Initial Shares become listed and admitted for
trading as soon as practicable. Moreover, 7th Level will immediately notify
Fletcher in writing, pursuant to Section 15, once the shares are duly listed.
g. Until nine (9) months following the Initial Closing Date (the
"Restricted Period"), 7th Level agrees that it will not offer, issue or sell in
a private transaction (excluding any strategic partnership or arrangement or
joint venture or other similar transactions entered into by 7th Level or any of
its subsidiaries not for purposes of raising capital) in reliance on Section
4(2) of the Securities Act, Regulation D or S thereunder, or any other execution
not requiring the initial issuance of the securities by 7th Level to be
registered under the Securities Act, any shares of its or its subsidiaries
capital stock or any securities convertible into its capital stock (a "Private
Placement") without first obtaining the prior written consent of Fletcher; and
for the period beginning at the end of the Restricted Period and ending fifteen
(15) months from the Initial Closing Date (the "Interim Period"), 7th Level will
not engage in any Private Placement or Permitted Placement (as defined below)
unless 7th Level has given Fletcher at least eight (8)
<PAGE>
business days prior written notice of its intention to engage in such Private
Placement or Permitted Placement in advance of soliciting or negotiating with
any prospective investor and has negotiated exclusively and in good faith with
Fletcher regarding Fletcher's participation in such proposed Private Placement
or Permitted Placement for such eight (8) business day period; provided,
however, that 7th Level reserves the right to speak to third parties to
ascertain prevailing market terms and conditions on similar transactions, but
that such action shall not include a right to negotiate with or solicit an offer
from third parties prior to the expiration of the eight (8) Trading Days. In the
event 7th Level shall give Fletcher notice of its intention to engage in a
Private Placement or Permitted Placement in the Interim Period, 7th Level's
ability to exercise the Additional Right shall be suspended until 7th Level (i)
notifies Fletcher in writing that it has abandoned its intention to consummate
the Private Placement or Permitted Placement, in which case the ability to
exercise the Additional Right will be reinstated and an additional written
notice to Fletcher in compliance with this subparagraph will be required to
engage in a Private Placement or Permitted Placement, or (ii) issues securities
or executes an agreement to issue securities (including to Fletcher) in a
Private Placement or Permitted Placement, in which case the Additional Right
will immediately terminate without further obligation to Fletcher thereunder.
Nothing in this subparagraph (g) shall limit 7th Level's ability to issue
options under or to enter into, adopt or amend any employee or director stock
option, bonus, incentive, deferred compensation, hospitalization, medical
insurance, severance or other plan, fund, program or policy providing director,
officer, employee or similar person benefits maintained or contributed to by 7th
Level in the ordinary course of business consistent with past practice.
Notwithstanding anything else in this subparagraph (g), during the
Restricted Period, 7th Level can consummate a Permitted Placement if there is an
effective Registration Statement with a current Prospectus and either (i) the
7th Level Cancellation Event has occurred, or (ii) 7th Level offers to
repurchase the Initial Shares and Secondary Shares, if any, at the Initial
Aggregate Price, plus the Secondary Aggregate Price, if applicable (the
"Buyout") and negotiate in good faith with Fletcher for an eight (8) Trading Day
period as specified below. If 7th Level elects to offer the Buyout, Fletcher
shall have 20 Trading Days following the notice by 7th Level (the "Fletcher
Response Time") of its intentions to accept or decline the Buyout; provided,
however, if a Blackout Period is declared during the Fletcher Response Time,
then the number of days that occur during the Blackout Period will be added to
the Fletcher Response Time. Fletcher, at its sole option, may accept the Buyout
(in whole or in part); provided, however, that whether or not Fletcher refuses
the Buyout or accepts the Buyout (in whole or in part), both the Additional
Right and any Adjustment Right for the Initial Shares and Secondary Shares, if
applicable, terminate. Notwithstanding the previous sentence, if 7th Level
intends to engage in a Permitted Placement during the Restricted Period, then
7th Level agrees to negotiate in good faith with Fletcher for eight (8) Trading
Days before 7th Level commits to another financing source; provided, however,
that 7th Level reserves the right to speak to third parties to ascertain
prevailing market terms and conditions on similar transactions, but that such
action shall not include a right to negotiate with or solicit an offer from
third parties prior to the expiration of the
<PAGE>
eight (8) Trading Days. The term "Permitted Placement" shall mean a private
placement involving the issuance of an equity or equity linked security that
does not have any of the following: (i) an income component that pays more than
200 basis points more than publicly-traded C minus rated securities of similar
maturity and structure prevailing in the market at that time, (ii) a pricing
feature that floats, (iii) a pricing feature that resets on more than one
occasion at one stated interval, or any reset provision that permits a reset
price lower than the then prevailing market price at the time of the reset, or
(iv) a pricing feature that will result, under any condition, in the purchase
price (whether at the first closing or any future closing) below the public
market price of the stock on the first closing date of the agreement; provided,
however, that the purchase price may be reset to a price below the public market
price of the stock on the first closing day of the agreement whereby the
securities are initially issued if it results from a reset as stated in (iii)
above, or from standard anti-dilution protections.
h. If on any Fletcher Notice Date, the aggregate number of Investment
Shares issuable pursuant to the Investment Rights (without regard to any notice
periods), when added to the aggregate number of (i) any Investment Shares
previously issued and (ii) any other shares of Common Stock required to be
included by NASDAQ, would exceed the number of shares equal to 20% of the total
number of shares of Common Stock outstanding (adjusted to reflect any split,
subdivision, combination or consolidation of the Common Stock, whether by
reclassification, distribution of a dividend with respect to the outstanding
Common Stock payable in shares of Common Stock, or otherwise, or any
recapitalization of the Common Stock) on the Initial Closing Date (the "Original
Number") and such circumstance would require the approval (the "Required
Consent") of the holders of the Common Stock pursuant to the listing
requirements or rules of the NASDAQ National Market (or such other national
securities exchange on which the Common Stock is then listed), 7th Level (A)
shall not issue shares of Common Stock (the "Issuance Blockage") to the extent
that the total number of shares of Common Stock issued hereunder would exceed
19.9% of the Original Number, and (B) shall use its reasonable best efforts to
obtain, within 90 days from the Fletcher Notice Date, which ever is applicable,
the Required Consent approval for the issuance of 20% or more of 7th Level's
Common Stock under this Agreement. In the event the Required Consent is not
obtained within 90 days in accordance with the preceding sentence, or 7th Level
otherwise does not have sufficient authorized shares to fulfill its obligation,
Fletcher shall have the right to exercise up to that amount of the Investment
Rights, the exercise of which would result in the total number of shares issued
hereunder to exceed 19.9% of the Original Number or that number which is
unavailable for issuance, as the case may be, into a debt obligation of 7th
Level (the "Obligation"), which Obligation shall be evidenced by a note (an
"Excess Note"). Such Obligation shall come into existence upon delivery of an
Excess Notice (as defined below) to 7th Level regardless of when the Excess Note
actually is issued or delivered. Fletcher shall exercise such right to convert
by delivery to 7th Level the Excess Notice and the amount of the Obligation (and
the principal amount of the Excess Note) shall be in an amount equal to the sum
of up to (A) the product of (x) the positive excess of the closing price (the
"Excess Closing Price") as reported by Bloomberg of the
<PAGE>
Common Stock on the NASDAQ National Market (or such other national securities
exchange on which the Common Stock is then listed) on the Excess Notice Date (as
defined below) over the applicable Investment Right Price and (y) the number of
shares of Common Stock that would be issuable in respect of the complete
exercise of the applicable Investment Rights but for the Issuance Blockage, and
(B) the Adjustment Amount. All computations in the preceding sentence with
respect to the Investment Right Price and the number of shares of Common Stock
issuable shall be determined as if the Excess Notice Date were the Fletcher
Notice Date. In addition, in the event the Required Consent is not obtained and
any Excess Note is outstanding, 7th Level shall not issue any securities or
incur any indebtedness for borrowed money (other than indebtedness incurred
pursuant to a revolving bank credit agreement which may be entered into either
before or after the Closing Date ("Bank Debt") or in the ordinary course of 7th
Level's business), except in connection with the repurchase of Excess Notes. The
Excess Note(s) shall be subordinated in right of payment to the Bank Debt,
provided that such subordination shall not affect 7th Level's obligation to pay
such Excess Note(s) when due.
To convert Investment Rights into an Excess Note, Fletcher shall deliver
one or more written notices in the form attached hereto as Annex E (an "Excess
Notice") to 7th Level from time to time. The date upon which Fletcher causes an
Excess Notice to be delivered to 7th Level, by hand, facsimile, electronic
transmission or otherwise, shall be the "Excess Notice Date" with respect to
such exercise of the Investment Rights, which date shall be deemed to be an
Investment Closing Date for purposes of Section 3 hereof. Each Obligation
(whether or not yet evidenced by an Excess Note) shall be due and payable 180
days after the date of issuance and bear interest at an interest rate of 15% per
annum. Notwithstanding anything else in this section 7(h), if at any time
Fletcher delivers a Fletcher Investment Notice and 7th Level is unable to issue
all or any portion of the shares identified therein as a result of the Issuance
Blockage, 7th Level shall automatically be liable to Fletcher in amount equal
to, and shall issue an Excess Note reflecting as a principal Obligation, the sum
of (A) the product of (x) the positive excess of the closing price as reported
by Bloomberg of the Common Stock on the NASDAQ National Market (or such other
national securities exchange on which the Common Stock is then listed) on the
Excess Notice Date over the applicable Investment Right Price and (y) the number
of shares of Common Stock that would be issuable in respect of such exercise of
the applicable Investment Rights but for the Issuance Blockage, and (B) the
Adjustment Amount identified in such Fletcher Investment Notice, as the case may
be, for which shares of Common Stock are not issued as a result of the Issuance
Blockage; provided that, for such purpose the shares issuable upon the exercise
of the Adjustment Right shall be issued in full prior to the issuance of any
shares issuable with respect to the exercise of the applicable Investment
Rights.
i. 7th Level will cause the surviving party (including, at Fletcher's
request, such party who acquires all or substantially all of the assets of 7th
Level (on a consolidated basis) or who acquires in excess of 50% of 7th Level's
voting power), in a Combination to assume in writing, prior to or simultaneously
with the closing of the Combination, all of the obligations of
<PAGE>
7th Level pursuant to this Agreement. This obligation will be binding on any
acquirer of such surviving party in any subsequent Combination.
8. Covenants of Fletcher. Fletcher hereby covenants and agrees with 7th
Level as follows:
a. Neither Fletcher nor any of its affiliates nor any person acting
on its or their behalf will at any time offer or sell any Investment Shares
other than pursuant to registration under the Securities Act or pursuant to
an available exemption therefrom.
b. Fletcher will provide 7th Level with an opportunity to review and
comment on its filings pursuant to Regulation 13D-G under the Exchange Act
regarding this Agreement and the transactions contemplated hereby.
8.A. Legend. Subject to Section 3.A., Fletcher understands that the
certificates or other instruments representing the Investment Shares shall bear
a restrictive legend in the following form (and a stop transfer order may be
placed against transfer of such certificates or other instruments):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR APPLICABLE
STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY
NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT AND
APPLICABLE STATE SECURITIES LAWS, OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID
ACT.
The legend set forth above shall be removed and 7th Level shall issue a
certificate without such legend to any holder of Investment Shares if, unless
otherwise required by state securities laws, (a) such shares are sold pursuant
to an effective registration statement under the Securities Act, or (b) such
holder provides 7th Level with assurances reasonably satisfactory to 7th Level
that such shares may be publicly sold pursuant to Rule 144 (or similar
regulation hereinafter adopted) without restriction.
8.B. Adjustments. In the event that 7th Level shall declare a dividend
or make a distribution on or with respect to the outstanding shares of its
Common Stock in shares of its Common Stock, subdivide its outstanding shares of
Common Stock into a greater number of shares, or combine its outstanding shares
of Common Stock into a smaller number of shares, then, in each such event, the
number of shares issuable and the per share price stated in this Agreement
(including without limitation the calculation of the Adjusted Price) in effect
at the
<PAGE>
time of the record date for such dividend or distribution or the effective date
of such subdivision or combination shall be proportionately adjusted, if
necessary, as determined in good faith by the Board of Directors of 7th Level,
so that Fletcher shall be entitled to receive the aggregate number of shares of
Common Stock that Fletcher would have received immediately following such action
if Fletcher had exercised its rights immediately prior to such action. Such
adjustment shall be made successively whenever any event specified above shall
occur.
9. Conditions Precedent to Fletcher's Obligations. The obligations of
Fletcher hereunder are subject to the performance by 7th Level of its
obligations hereunder and to the satisfaction of the following additional
conditions precedent, unless expressly waived in writing by Fletcher:
a. On any Closing Date, (i) to the extent provided in Section 3
hereof, the representations and warranties made by 7th Level in this
Agreement shall be true and correct, and (ii) 7th Level shall have complied
fully with all the covenants and agreements in this Agreement; and Fletcher
shall have received on each such date a certificate of the Chief Executive
Officer or the Chief Financial Officer of 7th Level dated such date and to
such effect.
b. On any Closing Date, 7th Level shall have delivered to Fletcher
an opinion of counsel reasonably satisfactory to Fletcher, dated the date
of delivery, confirming in substance the matters covered in paragraphs (a),
(b), (c), (d), (e) and (g) of Section 3 hereof, and to the effect that the
offer and sale of the Initial Shares, or any other Instrument Shares on an
Investment Closing Date, hereunder do not require registration under the
Securities Act.
10. Conditions Precedent to 7th Level's Obligations. The obligations of
7th Level hereunder are subject to the performance by Fletcher of its
obligations hereunder and to the satisfaction of the following additional
conditions precedent, unless expressly waived in writing by 7th Level:
a. On any Closing Date, (i) the representations and warranties made
by Fletcher in this Agreement shall be true and correct, and (ii) Fletcher
shall have complied fully with all the covenants and agreements in this
Agreement; and 7th Level shall have received on each such date a
certificate of an appropriate officer of Fletcher dated such date and to
such effect.
11. Fees and Expenses. Each of Fletcher and 7th Level agrees to pay its
own expenses incident to the performance of its obligations hereunder,
including, but not limited to the fees, expenses and disbursements of such
party's counsel, except as is otherwise expressly provided in this Agreement.
<PAGE>
12. Non-Performance.
If, on the date hereof, or on any Closing Date, 7th Level shall fail
to deliver the applicable Investment Shares to Fletcher required to be delivered
pursuant to this Agreement for any reason other than the failure of any
condition precedent to 7th Level's obligations hereunder or the failure by
Fletcher to comply with its obligations hereunder, then 7th Level shall:
a. hold Fletcher harmless against any loss, claim or damage
(including without limitation, incidental and consequential damages)
arising from or as a result of such failure by 7th Level; and
b. reimburse Fletcher for all of its reasonable out-of-pocket
expenses, including fees and disbursements of its counsel, incurred by
Fletcher in connection with this Agreement and the transactions
contemplated herein and therein;
provided, however, that 7th Level shall then be under no further liability to
Fletcher except as provided in this Section 12 and Section 13 hereof.
13. Indemnification.
a. Indemnification of Fletcher. 7th Level hereby agrees to indemnify
Fletcher and each of its officers, directors, employees, agents and
affiliates and each person that controls (within the meaning of Section 20
of the Exchange Act) any of the foregoing persons (each a "Fletcher
Indemnified Party") against any claim, demand, action, liability, damages,
loss, cost or expense (including, without limitation, reasonable legal
fees) (a "Proceeding"), that it may incur in connection with any of the
transactions contemplated hereby arising out of or based upon:
(1) any untrue or alleged untrue statement of a material fact in an
SEC filing or this Agreement by 7th Level or any of its affiliates or any
person acting on its or their behalf or omission or alleged omission to
state therein or herein any material fact necessary in order to make the
statements, in the light of the circumstances under which they were made,
not misleading by 7th Level or any of its affiliates or any person acting
on its or their behalf;
(2) any of the representations or warranties made by 7th Level herein
being untrue or incorrect at the time such representation or warranty was
made; and
(3) any breach or non-performance by 7th Level of any of its
covenants, agreements or obligations under this Agreement; and
<PAGE>
(4) any violation or breach of or noncompliance with, or alleged
violation or breach of or noncompliance with, the pre-emptive or similar
rights of any person;
and 7th Level hereby agrees to reimburse each Fletcher Indemnified Party
for any reasonable legal or other expenses incurred by such Fletcher
Indemnified Party in investigating or defending any such Proceeding;
provided, however, that the foregoing indemnity shall not apply to any
Proceeding (other than a Proceeding under clause (4) above) to the extent
that it arises out of or is based upon the gross negligence or wilful
misconduct of Fletcher in connection therewith.
b. Indemnification of 7th Level. Fletcher hereby agrees to
indemnify 7th Level and each of its officers, directors, employees, agents
and affiliates and each person that controls (within the meaning of Section
20 of the Exchange Act) any of the foregoing persons (each a "7th Level
Indemnified Party") against any Proceeding, that it may incur in connection
with any of the transactions contemplated hereby arising out of or based
upon:
(1) any untrue or alleged untrue statement of a material fact by
Fletcher or any of its affiliates or any person acting on its or their
behalf or omission or alleged omission to state any material fact necessary
in order to make the statements, in the light of the circumstances under
which they were made, not misleading by Fletcher or any of its affiliates
or any person acting on its or their behalf;
(2) any of the representations or warranties made by Fletcher herein
being untrue or incorrect; and
(3) any breach or non-performance by Fletcher of any of its
covenants, agreements or obligations under this Agreement;
and Fletcher hereby agrees to reimburse each 7th Level Indemnified Party
for any reasonable legal or other expenses incurred by such 7th Level
Indemnified Party in investigating or defending any such Proceeding;
provided, however, that the foregoing indemnity shall not apply to any
Proceeding to the extent that it arises out of or is based upon the gross
negligence or wilful misconduct of 7th Level in connection therewith.
c. Conduct of Claims.
<PAGE>
(1) Whenever a claim for indemnification shall arise under this
Section, the party seeking indemnification (the "Indemnified Party"), shall
notify the party from whom such indemnification is sought (the
"Indemnifying Party") in writing of the Proceeding and the facts
constituting the basis for such claim in reasonable detail;
(2) Upon delivery of such notice, such Indemnified Party shall have a
duty to take all reasonable steps to mitigate any losses, liabilities,
costs, charges and expenses relating to any such Proceeding;
(3) Such Indemnifying Party shall have the right to retain the
counsel of its choice in connection with such Proceeding and to participate
at its own expense in the defense of any such Proceeding; provided,
however, that counsel to the Indemnifying Party shall not (except with the
consent of the relevant Indemnified Party) also be counsel to such
Indemnified Party. In no event shall the Indemnifying Party be liable for
fees and expenses of more than one counsel (in addition to any local
counsel) separate from its own counsel for all Indemnified Parties in
connection with any one action or separate but similar or related actions
in the same jurisdiction arising out of the same general allegations or
circumstances; and
(4) No Indemnifying Party shall, without the prior written consent of
the Indemnified Parties (which consent shall not be unreasonably withheld),
settle or compromise or consent to the entry of any judgment with respect
to any litigation, or any investigation or proceeding by any governmental
agency or body, commenced or threatened, or any claim whatsoever in respect
of which indemnification could be sought under this Section unless such
settlement, compromise or consent (A) includes an unconditional release of
each Indemnified Party from all liability arising out of such litigation,
investigation, proceeding or claim and (B) does not include a statement as
to or an admission of fault, culpability or a failure to act by or on
behalf of any Indemnified Party.
14. Survival of the Representations, Warranties, Etc. The respective
representations, warranties, and agreements made herein by or on behalf of the
parties hereto shall remain in full force and effect, regardless of any
investigation made by or on behalf of the other party to this Agreement or any
officer, director or employee of, or person controlling or under common control
with, such party and will survive delivery of and payment for any Investment
Shares issuable hereunder.
15. Notices. All communications hereunder shall be in writing, and
<PAGE>
a. if sent to Fletcher, shall be delivered by hand, sent by
registered mail or transmitted and confirmed by facsimile to Fletcher,
unless otherwise notified in writing of a substitute address, at:
Original Copy:
Fletcher International Limited
c/o Midland Bank Trust Corporation (Cayman) Limited
P.O. Box 1109
Mary Street
Grand Cayman, Cayman Islands, B.W.I.
Attn: Pamela Clements
Telephone: (345) 914-7515
Facsimile: (345) 949-7634
with a copy to:
Fletcher Asset Management
22 East 67th Street
New York, NY 10021
Attn: Peter Zayfert
Telephone: (212) 284-4800
Facsimile: (212) 284-4801
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
1440 New York Avenue, N.W.
Washington, D.C. 20005
Attention: Stephen W. Hamilton
Telephone: (202) 371-7010
Facsimile: (212) 393-5760
b. if sent to 7th Level, shall be delivered by hand, sent by
registered mail or transmitted and confirmed by facsimile to 7th Level,
unless otherwise notified in writing of a substitute address, at:
7th Level, Inc.
1201 Richardson Drive, Suite 277
Richardson, Texas 75080
Attention: Richard S. Merrick
<PAGE>
Telephone: (972) 498-8100
Facsimile: (972) 498-0111
with a copy to:
Schupak Group
730 Fifth Ave., Suite 1901
New York, NY 10019
Attention: Donald Schupak
Telephone: (212) 582-4210
Facsimile: (212) 262-1031
with a copy to:
Swidler Berlin Shereff Friedman, LLP
919 3rd Avenue
New York, NY 10020
Attention: Gerald Adler
Telephone: (212) 891-9440
Facsimile: (212) 758-9526
To the extent that any funds shall be delivered to 7th Level by wire
transfer, unless otherwise instructed by 7th Level, such funds should be
delivered in accordance with the following wire instructions:
Beneficiary Acct. Name: 7th Level, Inc.
Beneficiary Acct. #: 8334000910
Acct#: 611816752 (Liquidity Management)
ABA#: 044 000 037
Bank: Bank One Columbus
Contact at Bank One: Mary Hettinger 1-800-932-4207
<PAGE>
Contact at 7th Level: Mary K. Fischer 1-972-498-8123
16. Miscellaneous.
a. This Agreement may be executed in one or more counterparts and it
is not necessary that signatures of all parties appear on the same
counterpart, but such counterparts together shall constitute but one and
the same agreement.
b. This Agreement shall inure to the benefit of and be binding upon
the parties hereto, their respective successors and assigns and, with
respect to Section 13 hereof, their respective officers, directors,
employees, agents, affiliates and controlling persons, and no other person
shall have any right or obligation hereunder. 7th Level may not assign this
Agreement. Fletcher may assign any of its rights, in whole or in part, at
its sole discretion (including, without limitation, the Investment Rights).
c. This Agreement shall be governed by, and construed in accordance
with, the internal laws of the State of New York, and each of the parties
hereto hereby submits to the non-exclusive jurisdiction of any State or
Federal court in the State of New York and any court hearing any appeal
therefrom, over any suit, action or proceeding against it arising out of or
based upon this Agreement (a "Related Proceeding"). Each of the parties
hereto hereby waives any objection to any Related Proceeding in such courts
whether on the grounds of venue, residence or domicile or on the ground
that the Related Proceeding has been brought in an inconvenient forum.
d. 7th Level shall not take any actions inconsistent with the rights
of Fletcher Parties as of the date hereof, nor it will it take any actions
inconsistent with the rights of the Fletcher Parties as of the Initial
Closing Date.
e. The headings of the sections of this document have been inserted
for convenience of reference only and shall not be deemed to be a part of
this Agreement. This Agreement constitutes the entire agreement and
supersedes all prior agreements and understandings, both written and oral,
between the parties hereto with respect to the subject matter of this
Agreement. This Agreement is not intended to confer upon any person other
than the parties hereto any rights or remedies hereunder or under the terms
of the term sheets between such parties.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement, all as of the day and year first above written.
7th LEVEL, INC.
By /s/ DONALD SCHUPAK
---------------------
Name: Donald Schupak
Title: Chairman of the Board
of Directors
FLETCHER INTERNATIONAL LIMITED
By its Investment Advisor
Fletcher Asset Management, Inc.
By: /s/ JONATHAN B. SCHINDEL
-------------------------
Name: Jonathan B. Schindel
Title: Executive Vice President
By:
---------------------------
Name:
Title:
<PAGE>
ANNEX A
[FORM OF 7TH LEVEL NOTICE]
_____________, __
Fletcher International Limited
c/o Fletcher Asset Management
22 East 67th Street
New York, NY 10021
Attn: Peter Zayfert
Telephone: (212) 284-4800
Facsimile: (212) 284-4801
Ladies and Gentlemen:
7th Level, Inc. ("7th Level") hereby elects to exercise the _________ Right
(as defined in the Subscription Agreement, the "Agreement") dated as of December
14, 1998 by and between 7th Level and Fletcher International Limited
("Fletcher") and requests that Fletcher herewith tenders $_________ by check or
wire transfer to the account of 7th Level as payment for __________ Secondary
Shares or Additional Shares, as the case may be, in accordance with the terms of
the Agreement. Capitalized terms not otherwise defined herein shall have the
meanings ascribed thereto in the Agreement.
7th Level has validly reserved for issuance to Fletcher the maximum number
of shares of Common Stock that may be issuable as Secondary Shares as of the
date hereof. [In addition, if elected by 7th Level, the Minimum Option Price
for the Additional Shares shall be $___________.]
In accordance with the terms of the Agreement, the Investment Closing Date
shall be ___________, and the total number of Secondary Shares or Additional
Shares, as the case may be, issuable in respect of this exercise is
________________.
7th LEVEL, INC.
By:
-----------------------------
Name:
Title:
[continued]
<PAGE>
AGREED AND ACKNOWLEDGED:
FLETCHER INTERNATIONAL LIMITED
By:
------------------------
Name:
Title:
By:
------------------------
Name:
Title:
<PAGE>
ANNEX B
[FORM OF FLETCHER INVESTMENT NOTICE]
_____________, __
7th Level, Inc.
1201 Richardson Drive, Suite 277
Richardson, Texas 75080
Ladies and Gentlemen:
Fletcher International Limited ("Fletcher") hereby elects to exercise the
_________ Right (as defined in the Subscription Agreement (the "Agreement")
dated as of December 14, 1998 by and between 7th Level, Inc. ("7th Level") and
Fletcher and, if applicable, herewith tenders $_________ by check or wire
transfer to the account of 7th Level as payment for __________ First Fletcher
Investment Right Shares, Second Fletcher Investment Right Shares or the
Adjustment Shares, as the case may be, in accordance with the terms of the
Agreement. Capitalized terms not otherwise defined herein shall have the
meanings ascribed thereto in the Agreement.
In accordance with the terms of the Agreement, the Investment Closing Date
shall be ___________, and the total number of First Fletcher Investment Right
Shares, Second Fletcher Investment Right Shares or the Adjustment Shares, as the
case may be, issuable in respect of this exercise is ________________. Fletcher
requests that stock certificates representing the Additional Shares purchased
hereby be registered in the name of Fletcher and delivered to the following
address in accordance with the terms of the Agreement: [To Come]
FLETCHER INTERNATIONAL LIMITED
By:
-------------------------
Name:
Title:
By:
-------------------------
Name:
Title:
AGREED AND ACKNOWLEDGED:
7th LEVEL, INC.
By:
-------------------------
Name:
Title:
<PAGE>
ANNEX C
[FORM OF INITIAL SHARE DELIVERY NOTICE]
Fletcher International Limited
c/o Fletcher Asset Management
22 East 67th Street
New York, NY 10021
Attn: Peter Zayfert
Telephone: (212) 284-4800
Facsimile: (212) 284-4801
RE: Subscription Agreement (the "Agreement") dated December 14, 1998 by and
between Fletcher International Limited ("Fletcher") and 7th Level, Inc.
("7th Level").
Ladies and Gentlemen:
Attached are copies of each of the original stock certificates representing
the __________ Initial Shares (as defined in the Agreement) purchased by
Fletcher, together with a copy of the overnight courier air bill which will be
used to ship the certificates. We have the executed originals of the stock
certificates and other documents required to be delivered in connection with the
Closing. Upon our confirmation of the payment of the $_____________ Initial
Aggregate Price by Fletcher to 7th Level, for the Initial Shares on the Initial
Closing Date, we will send the original stock certificates by overnight courier
to the following address:
Lehman Brothers, Inc.
3 World Financial Center, 6th Floor
New York, New York 10285
Attention: Lou Amedeo, Prime Broker Services
Telephone: (212) 526-9040
and we will send the other original documents by overnight courier to the
following address:
Fletcher International Limited
c/o Midland Bank Trust Corporation (Cayman) Limited
P.O. Box 1109
Mary Street
Grand Cayman, Cayman Islands, B.W.I.
Attn: Pamela Clements
<PAGE>
Telephone: (345) 914-7515
Facsimile: (345) 949-7634
with a copy to:
Fletcher International Limited
c/o Fletcher Asset Management
22 East 67th Street
New York, NY 10021-5805
Attn: Peter Zayfert
Telephone: (212) 284-4800
Facsimile: (212) 284-4801
Capitalized terms not otherwise defined in this letter have the meanings
set forth in the Agreement.
Very truly yours,
7th LEVEL, INC.
<PAGE>
ANNEX D
[FORM OF INVESTMENT SHARE DELIVERY NOTICE]
Fletcher International Limited
c/o Fletcher Asset Management
22 East 67th Street
New York, NY 10021
Attn: Peter Zayfert
Telephone: (212) 284-4800
Facsimile: (212) 284-4801
RE: Subscription Agreement (the "Agreement") dated December 14, 1998 by and
between Fletcher International Limited ("Fletcher") and 7th Level, Inc.
("7th Level").
Ladies and Gentlemen:
Attached are copies of the original stock certificates representing the
__________ applicable Investment Shares (as defined in the Agreement) purchased
by Fletcher, together with a copy of the overnight courier air bill which will
be used to ship the certificates. We have the executed originals of the stock
certificates and other documents required to be delivered in connection with the
Investment Closing. Upon our confirmation of the payment of the $_____________
applicable Investment Right Price by Fletcher to 7th Level for the Investment
Shares, we will send the stock certificates by overnight courier to the
following address:
[To Come]
and we will send the other original documents by overnight courier to the
following address:
Fletcher International Limited
c/o Midland Bank Trust Corporation (Cayman) Limited
P.O. Box 1109
Mary Street
Grand Cayman, Cayman Islands, B.W.I.
Attn: Pamela Clements
Telephone: (345) 914-7515
Facsimile: (345) 949-7634
<PAGE>
with a copy to:
Fletcher International Limited
c/o Fletcher Asset Management
22 East 67th Street
New York, NY 10021
Attn: Peter Zayfert
Telephone: (212) 284-4800
Facsimile: (212) 284-4801
Capitalized terms not otherwise defined in this letter have the meanings
set forth in the Agreement.
Very truly yours,
7th LEVEL, INC.
<PAGE>
ANNEX E
[FORM OF EXCESS NOTES NOTICE]
_____________, __
7th Level, Inc.
1201 Richardson Drive, Suite 277
Richardson, Texas 75080
Ladies and Gentlemen:
Fletcher International Limited ("Fletcher") hereby elects to exercise
its right to convert some or all of its Investment Rights (as defined in the
Subscription Agreement (the "Agreement") dated as of December 14, 1998 by and
between 7th Level, Inc. ("7th Level") and Fletcher) and, in lieu of receipt of
________ shares of Common Stock, hereby requests issuance of an Excess Note in
the amount of $________ in accordance with the terms of the Agreement.
Capitalized terms not otherwise defined herein shall have the meanings ascribed
thereto in the Agreement.
Fletcher requests that the Excess Notes be
registered in the name of Fletcher and delivered
to the following address in accordance with the
terms of the Agreement: [To Come]
FLETCHER INTERNATIONAL LIMITED
By:
---------------------------
Name:
Title:
By:
---------------------------
Name:
Title:
AGREED AND ACKNOWLEDGED:
7th LEVEL, INC.
By:
---------------------------
Name:
Title:
