<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-24936
7TH LEVEL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2480669
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
925 WESTCHESTER AVENUE 10604
WHITE PLAINS, NEW YORK
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (914) 682-4300
------------------------
Registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and
(2) has been subject to such filing requirements for the past 90 days. Yes
/X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK, $0.01 PAR VALUE 30,648,835
(Title of Each Class) Number of Shares Outstanding at
May 7, 1999
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<PAGE>
7TH LEVEL, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE NO.
-------------
<S> <C> <C>
Item 1 Condensed Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998...................................................... 3
Condensed Consolidated Statements of Operations for the three months
ended March 31, 1999 and 1998.......................................... 4
Condensed Consolidated Statements of Stockholders' Equity for the three
months ended March 31, 1999............................................ 5
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998.......................................... 6
Notes to Condensed Consolidated Financial Statements..................... 7
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 10
PART II OTHER INFORMATION
Item 1 Legal Proceedings........................................................ 15
Item 2 Changes in Securities.................................................... 15
Item 6 Exhibits and Reports on Form 8-K......................................... 16
SIGNATURE................................................................ 17
</TABLE>
2
<PAGE>
PART 1 -- FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7TH LEVEL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 10,635,068 $ 11,215,702
Accounts receivable, net.................................................... 1,295,872 42,317
Other current assets........................................................ 519,420 286,238
-------------- -----------------
Total current assets.................................................... 12,450,360 11,544,257
Fixed assets, net............................................................. 403,284 1,399,652
Capitalized software, net..................................................... 15,132,013 --
Intangible assets, net........................................................ 3,491,116 7,059
Goodwill...................................................................... 9,763,140 --
Other assets.................................................................. 107,138 65,421
-------------- -----------------
Total assets............................................................ $ 41,347,051 $ 13,016,389
-------------- -----------------
-------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................ $ 536,471 $ 197,962
Accrued expenses and other current liabilities.............................. 3,980,550 2,504,299
Current portion of deferred revenue......................................... 2,083,949 --
Notes payable............................................................... 27,027 485,135
-------------- -----------------
Total current liabilities............................................... 6,627,997 3,187,396
Deferred revenue.............................................................. 1,050,313 --
Other......................................................................... 31,994 45,916
-------------- -----------------
Total liabilities....................................................... 7,710,304 3,233,312
Commitments and contingencies
Stockholders' equity:
Series B convertible preferred stock, par value $0.01 per share, 15,000
shares authorized; 0 and 1,395 shares issued and outstanding in 1999 and
1998, respectively ($1,395,000 liquidation value)......................... -- 628,800
Series D convertible preferred stock, par value $0.01 per share, 35,000
shares authorized; 21,644 and 0 shares issued and outstanding in 1999 and
1998, respectively ($21,644,000 liquidation value)........................ 216 --
Common stock, par value $0.01 per share, 100,000,000 shares authorized;
31,090,042 and 23,763,622 shares issued and outstanding in 1999 and 1998,
respectively.............................................................. 310,900 237,636
Additional paid-in capital.................................................. 134,032,791 93,965,769
Notes and accounts receivable from directors (Note 5)....................... (1,934,000) --
Accumulated deficit......................................................... (98,773,160) (85,049,128)
-------------- -----------------
Total stockholders' equity.............................................. 33,636,747 9,783,077
-------------- -----------------
Total liabilities and stockholders' equity.............................. $ 41,347,051 $ 13,016,389
-------------- -----------------
-------------- -----------------
</TABLE>
The accompanying notes are an intregral part of these condensed consolidated
financial statements.
3
<PAGE>
7TH LEVEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
------------------- -------------------
<S> <C> <C>
Net revenues........................................................... $ 755,565 $ 461,753
Cost of revenues....................................................... 118,961 84,920
------------------- -------------------
Gross profit..................................................... 636,604 376,833
------------------- -------------------
Operating expenses:
Research and product development..................................... 558,633 817,362
Sales and marketing.................................................. 442,338 271,823
General and administrative........................................... 700,535 1,107,240
Depreciation and amortization........................................ 374,086 565,054
Restructuring charges................................................ 2,492,917 --
Acquired in-process technology....................................... 9,676,898 --
------------------- -------------------
Total operating expenses......................................... 14,245,407 2,761,479
------------------- -------------------
Operating loss................................................... (13,608,803) (2,384,646)
Interest and other, net................................................ (42,054) (156,829)
------------------- -------------------
Net loss available to common stockholders.............................. $ (13,650,857) $ (2,541,475)
------------------- -------------------
------------------- -------------------
Basic and diluted loss per common share................................ $ (0.50) $ (0.18)
------------------- -------------------
------------------- -------------------
Basic and diluted weighted average shares outstanding.................. 27,163,775 13,783,736
------------------- -------------------
------------------- -------------------
</TABLE>
The accompanying notes are an intregral part of these condensed consolidated
financial statements.
4
<PAGE>
7TH LEVEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
CONVERTIBLE CONVERTIBLE
COMMON STOCK PREFERRED SHARES B PREFERRED SERIES D ADDITIONAL
----------------------- ---------------------- ----------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ----------- ---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 23,763,622 $ 237,636 1,395 $ 628,800 -- $ -- $93,965,769
Common stock issued on conversion of
Series B Preferred Stock........... 697,500 6,975 (1,395) (628,800) -- -- 621,825
Stock issued in connection with
Street Technologies, Inc.
acquistion......................... 4,948,182 49,482 -- -- 21,644 216 36,438,818
Series B dividends paid in common
stock.............................. 24,356 243 -- -- -- -- 72,886
Common stock issued upon exercise of
warrants........................... 375,000 3,750 -- -- -- -- --
Common stock issued upon conversion
of notes payable................... 186,982 1,870 -- -- -- -- 570,856
Warrants and options issued to
non-employees -- -- -- -- -- -- 185,481
Notes and accounts receivable from
directors from the exercise of
stock options...................... -- -- -- -- -- -- --
Common stock issued under stock
option plan and stock purchase
plan............................... 1,094,400 10,944 -- -- -- -- 2,177,156
Net loss............................. -- -- -- -- -- -- --
---------- ----------- ---------- ---------- ---------- ----------- -----------
Balance at March 31, 1999.............. 31,090,042 $ 310,900 -- $ -- 21,644 $ 216 $134,032,791
---------- ----------- ---------- ---------- ---------- ----------- -----------
---------- ----------- ---------- ---------- ---------- ----------- -----------
<CAPTION>
NOTES AND
ACCOUNTS
RECEIVABLE
FROM TOTAL
DIRECTORS ACCUMULATED STOCKHOLDERS'
(NOTE 5) DEFICIT EQUITY
------------ ------------ ------------
<S> <C> <C> <C>
Balance at December 31, 1998 $ -- ($85,049,128) $9,783,077
Common stock issued on conversion of
Series B Preferred Stock........... -- -- --
Stock issued in connection with
Street Technologies, Inc.
acquistion......................... -- -- 36,488,516
Series B dividends paid in common
stock.............................. -- (73,175) (46)
Common stock issued upon exercise of
warrants........................... -- -- 3,750
Common stock issued upon conversion
of notes payable................... -- -- 572,726
Warrants and options issued to
non-employees -- -- 185,481
Notes and accounts receivable from
directors from the exercise of
stock options...................... (1,934,000) -- (1,934,000)
Common stock issued under stock
option plan and stock purchase
plan............................... -- -- 2,188,100
Net loss............................. -- (13,650,857) (13,650,857)
------------ ------------ ------------
Balance at March 31, 1999.............. $(1,934,000) ($98,773,160) $33,636,747
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an intregral part of these condensed consolidated
financial statements.
5
<PAGE>
7TH LEVEL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to present
fairly the financial position of 7th Level, Inc. and subsidiaries (the
"Company") as of March 31, 1999 and the results of operations and cash flows for
the three month periods ended March 31, 1999 and March 31, 1998. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements of the Company contained in the Company's
Annual Report on Form 10-K/A for the year ended December 31, 1998.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The results
of operations for any interim period are not necessarily indicative of the
results to be expected for the entire year ending December 31, 1999.
Certain amounts in the prior periods' condensed consolidated financial
statements have been reclassified for comparative purposes to conform to the
current year presentation.
2. STREET TECHNOLOGIES, INC. ACQUISITION
On February 16, 1999, the Company acquired all of the outstanding stock of
Street Technologies, Inc., a privately held company, and began doing business as
7th Street.com, Inc. The Company began marketing and developing training
solutions delivered over intranets and the Internet. To consummate the
transaction, the Company issued 4,948,182 shares of common stock, par value $.01
per share (the "Common Stock"), of the Company and 21,644 shares of Series D 8%
Preferred Stock (the "Series D Stock") with an aggregate liquidation preference
of $21,644,000. Upon the receipt of the common stockholders' approval, the
Series D Stock will automatically convert into 7,214,666 shares of Common Stock.
The Series D stockholders are entitled to participate with the common
stockholders in dividends and distributions and to vote on most matters on an
"as converted" basis with the common stockholders and as a separate class,
except for the vote on whether to convert the Series D Stock. The total value of
the transaction was approximately $40,331,000 including $3,133,000 of assumed
liabilities which consisted primarily of deferred revenue. The transaction was
accounted for using the purchase method of accounting. The results of Street
Technologies, Inc. subsequent to February 16, 1999 are included in the Company's
condensed consolidated statement of operations.
The aggregate purchase price of $40,331,000 consisted of the following:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- ------------------------------------------------------------------------------- -------------
<S> <C>
Common stock................................................................... $ 14,845,000
Preferred stock................................................................ 21,644,000
-------------
Subtotal................................................................. 36,489,000
Assumed liabilities............................................................ 3,133,000
Acquisition costs.............................................................. 709,000
-------------
Total.................................................................... $ 40,331,000
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-------------
</TABLE>
7
<PAGE>
7TH LEVEL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The purchase price was allocated to the net assets aequired based upon their
fair values. The fair values were determined by an independent appraisal. The
appraisal incorporated proven valuation procedures and techniques. The purchase
price has been allocated as follows:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- ------------------------------------------------------------------------------- -------------
<S> <C>
Current assets................................................................. $ 1,763,000
Fixed assets................................................................... 343,000
Other assets................................................................... 490,000
Capitalized software........................................................... 14,717,000
Intangible assets.............................................................. 3,519,000
Acquired in-process technology (written-off)................................... 9,677,000
Goodwill....................................................................... 9,822,000
-------------
Total.................................................................... $ 40,331,000
-------------
-------------
</TABLE>
The acquired in-process technology has been expensed as a charge against
operations and is included in the accompanying condensed consolidated statement
of operations for the three months ended March 31, 1999. The amount allocated to
acquired in-process technology relates to projects that had not yet reached
technological feasibility and that, until completion of development, had no
alternative future use. These projects require substantial development and
testing prior to reaching technological feasibility. However, there can be no
assurance that these projects will reach technological feasibility or develop
into products that may be sold by the Company. The acquired in-process
technology has required, and may require substantial development by the Company.
The intangible assets are being amortized over seven to twenty years. The
Company recorded approximately $204,000 amortization expense relating to these
intangible assets during the three months ended March 31, 1999.
The operations of 7th Street.com have been included in the Company's
condensed consolidated financial statements since the date of acquisition. The
accompanying condensed consolidated statement of operations for the three months
ended March 31, 1999 includes charges of approximately $9,677,000 associated
with the write-off of acquired in-process technology and approximately
$2,493,000 associated with a restructuring charge which includes the write-off
of redundant assets, excess office space and employee severance. The following
unaudited pro forma information has been prepared assuming that this acquisition
had taken place at the beginning of the period; it is not necessarily indicative
of results that may occur in the future.
<TABLE>
<CAPTION>
PRO FORMA
(UNAUDITED)
<S> <C> <C>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
------------------- -------------------
Revenue............................................. $ 1,000,000 $ 739,000
Loss from operations................................ (14,276,000) (3,153,000)
Net loss............................................ (14,240,000) (3,141,000)
Loss per share...................................... $ (0.48) $ (.17)
</TABLE>
3. LOSS PER COMMON SHARE
Basic and diluted loss per share was determined by dividing the net loss by
the weighted average common shares outstanding during the period. Common stock
equivalents are excluded from the loss per share calculation as their effect
would be antidilutive.
8
<PAGE>
7TH LEVEL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. CONVERSION OF 7% CONVERTIBLE NOTES PAYABLE
The 7% Convertible Notes Payable (the "Notes") were due and payable on
February 11, 1999. To induce the holders to convert the Notes into Common Stock,
the Company on February 10, 1999 agreed with the holders of the Notes to amend
the Notes to provide that the conversion price should be reduced to a price
equal to 80% of the then current market price of the Common Stock. During
February 1999, the Company issued 186,982 shares of Common Stock in exchange for
approximately $458,000 of the Notes. The difference between the stated
conversion price and the actual conversion price was approximately $115,000 and
is included as interest expense in the accompanying condensed consolidated
statement of operations. As of March 31, 1999, the remaining balance of $27,027
has not been paid to the one remaining holder.
5. STOCKHOLDERS' EQUITY
In the first quarter of 1999, three members of the Board of Directors
exercised their options to purchase an aggregate of 960,000 shares of Common
Stock for an aggregate exercise of $1,940,000. In connection with these
exercises, approximately $247,000 is currently due and the Company received
promissory notes from these directors in the approximate amount of $1,687,000.
The outstanding balance of $1,934,000 is included as notes and accounts
receivable from directors in the stockholders' equity section of the condensed
consolidated balance sheet. Under the terms of the promissory notes, interest
accrues at a rate of 6% payable quarterly, or at the option of the holders, will
accrue at a rate of 7% payable upon the maturity of the loan. The notes mature
at various dates in 2004.
As of March 31, 1999, all shares of the Company's Series B Convertible
Preferred Stock had been converted into shares of Common Stock.
6. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and lawsuits that are generally
incidental to its business. The Company is vigorously contesting all such
matters and believes that their ultimate resolution will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.
7. INDUSTRY SEGMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 superseded SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise". SFAS No.
131 establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
In the initial year of application, comparative information for earlier years
must be restated. Management has determined that it does not have any separately
reportable business segments.
9
<PAGE>
7TH LEVEL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. SUBSEQUENT EVENTS
In May of 1999, the Company acquired Panmedia Corporation. Panmedia is the
parent company of Learn2.com, a leading online consumer learning community. To
consummate the transaction, the Company issued 1,543,860 shares of Common Stock.
The total value of the transaction was approximately $9,649,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the financial
statements and the notes thereto and in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations in the Company's
Annual Report on Form 10-K/A for the year ended December 31, 1998. This analysis
is provided pursuant to applicable Securities and Exchange Commission
regulations and is not intended to serve as a basis for projections of future
events.
In order to keep our stockholders informed of the Company's future plans and
objectives, this Quarterly Report on Form 10-Q and other reports and statements
issued by the Company and our officers from time-to-time contain, among other
things, certain statements concerning the Company's future plans, objectives,
performance, intentions and expectations that are or may be deemed to be
"forward-looking statements". When we use the words "believe," "expect,"
"anticipate," "project" and similar expressions, this should alert you that this
is a forward-looking statement. Forward-looking statements speak only as of the
date the statement is made. The Company's ability to do this has been fostered
by the Private Securities Litigation Reform Act of 1995, which provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information so long as those statements are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those discussed in the statement. The
Company believes that it is in the best interests of its stockholders to take
advantage of the "safe harbor" provisions of that Act.
Although the Company believes that its expectations are based on reasonable
assumptions, these forward-looking statements are subject to a number of known
and unknown risks and uncertainties that could cause the Company's actual
results, performance and achievements to differ materially from those described
or implied in the forward-looking statements. These factors include among
others, the Company's ability to complete new products at planned costs and on
planned schedules, the Company's ability to attract and retain strategic
partners, the Company's ability to leverage intangible assets in its technology,
and the Company's ability to maintain a sufficient level of financing for its
business strategy. Additional factors which are beyond the Company's control and
could influence results include market acceptance of the Company's products and
services and adoption of the Internet as a medium of commerce and
communications. See the discussion of the Company's business and a description
of the various factors that could materially affect the ability of the Company
to achieve the anticipated results described in the forward looking statement
which is included in Item 1 of the Company's Annual Report on Form 10-K/A for
the year ended December 31, 1998.
10
<PAGE>
OVERVIEW
7th Level, Inc. was founded in 1993 with the goal of becoming a leading
developer and publisher of interactive entertainment and educational products as
well as a creator of state of the art tools and technologies. In 1998, our
research and development activities were focused primarily on developing and
enhancing our Agent7-TM- technology. We recognized that appropriate applications
of this technology were in the delivery of learning, education and enhanced
communications. To strengthen our position in the marketplace, we searched for a
viable and complementary partner with the appropriate technological assets,
distribution channel, management expertise and abandoned our interactive
entertainment business.
On February 16, 1999, the Company acquired all of the outstanding stock of
Street Technologies, Inc, a privately held company, and changed the name of
Street to 7th Street.com, Inc. 7th Street.com markets and develops technology
based training solutions delivered over intranets and the Internet. The Board of
Directors has approved the change of the name of the Company from 7th Level,
Inc. to 7th Street.com, Inc. and the renaming of the new subsidiary. The name
change will be effective if approved by the stockholders. To consummate the
transaction, the Company issued 4,948,182 shares of Common Stock and 21,644
shares of Series D 8% Preferred Stock (the "Series D Stock") with an aggregate
liquidation preference of $21,643,970. Upon the receipt of common stockholders'
approval the Series D Stock will automatically convert into 7,214,666 shares
Common Stock. The Series D 8% Preferred Stockholders are entitled to participate
with the Common Stockholders in dividends and distributions and to vote on most
matters on an "as converted" basis with the Common Stockholders and as a
separate class, except for the vote on whether to convert the Series D Stock.
The total value of the transaction was approximately $40,331,000 including
$3,133,000 of assumed liabilities (primarily deferred revenue) and is being
accounted for using the purchase method of accounting, and accordingly, the
assets and liabilities were recorded based upon their fair values at the date of
acquisition. In connection with the acquisition of Street Technologies, Inc.,
the Company recorded approximately $13,341,000 in goodwill and other intangible
assets, which are being amortized on a straight-line basis over periods of seven
to twenty years and wrote-off approximately $9,677,000 of acquired in-process
technology.
The Company continues to use cash and operate at a loss (See "Liquidity and
Capital Resources").
GENERAL
As set forth in Note 2 in the accompanying condensed consolidated financial
statements, the Company's reported results of operations for all periods prior
to February 16, 1999 reflect only the results of operations of 7th Level, Inc.
and, accordingly do not reflect the results of Street Technologies, Inc. The
results prior to February 16, 1999 and the Company's balance sheet at December
31, 1998 are not reflective of the operations and financial position of the
Company as presently constituted.
The Company plans to significantly increase its operating expenses to
increase its research and product development and sales and marketing
operations, to help attain the Company's goal of being the world's leading
provider of Internet and network delivered learning, education, and enhanced
communications. The Company may be unable to adjust spending quickly enough to
offset any unexpected revenue shortfall. If the Company has a shortfall in
revenues in relation to expenses, or if the Company's expenses exceed its
revenues, then the Company's business, results of operations and financial
condition would be materially and adversely affected. As a result of these
factors, there can be no assurance that the Company will not incur losses on a
quarterly and annual basis for the foreseeable future.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
Revenues increased $294,000 from $462,000 to $756,000 for the three months
ended March 31, 1999 primarily resulting from the integration of the two
businesses (thus adding 7th Street.com's revenues from the period subsequent to
the merger date to 7th Level's revenues). In 1999, approximately 69% of total
revenues were related to 7th Street.com and the remaining 31% was attributed to
the operations of 7th
11
<PAGE>
Level, Inc. The revenues in 1998 were primarily from royalties while the
revenues in 1999 were primarily from technology licenses and content sales.
Cost of revenues for the three months ended March 31, 1999 was $119,000 or
15.7% of net revenues compared to $85,000 or 18.4% of revenues for the three
months ended March 31, 1998. The decrease in 1999 as a percentage of net
revenues is primarily due to the change in the composition of revenues.
Research and product development expenses were $559,000 and $817,000 for the
three months ended March 31, 1999 and 1998, respectively. Research and product
development costs decreased 31.7% in 1999 due primarily to lower headcount and
related cost structure at 7th Level.
Sales and marketing expenses were $442,000 and $272,000 for the three months
ended March 31, 1999 and 1998, respectively. Sales and marketing expenses
increased $170,000 or 62.7% for the three months ended March 31, 1999 primarily
due to the addition of 7th Street.com sales and marketing staff.
General and administrative expenses were $701,000 and $1,107,000 for the
three months ended March 31, 1999 and 1998, respectively. General and
Administrative expenses decreased $407,000 or 36.7% for the three months ended
March 31, 1999 primarily due to lower headcount and related cost structure at
the newly merged company.
Restructuring charges related to the merger were $2,493,000 for the three
months ended March 31, 1999. The charges were comprised of the following:
$1,400,000 to the write-off of redundant assets, $493,000 excess office space
and other costs, and $600,000 in employee severance costs.
Depreciation and amortization expenses were $374,000 and $565,000 for the
three months ended March 31, 1999 and 1998, respectively. Depreciation and
amortization expenses decreased $191,000 or 33.8% for the three months ended
March 31, 1999 primarily due to lower fixed assets in 1999 as a result of the
write-off of approximately $1,400,000 of fixed assets. The 1999 expenses
included $135,000 of depreciation on fixed assets, $35,000 of amortization of
computer software and $204,000 of amortization on goodwill and intangible assets
related to the merger. The 1998 expenses related primarily to depreciation and
amortization on fixed assets.
In connection with the acquisition of Street Technologies, Inc., the Company
allocated $9,677,000 of the purchase price to acquired in-process technology.
Accordingly, these costs were expensed as of the acquisition date. The amount
allocated to acquired in-process technology relates to projects that had not yet
reached technological feasibility and that, until completion of development, had
no alternative future use. The technologies acquired in the acquisition of
Street Technologies, Inc. will continue to require substantial additional
development by the Company.
Interest and other expenses were $42,000 and $157,000 for the three months
ended March 31, 1999 and 1998, respectively. Interest and other expenses
decreased $115,000 or 73.2%. Interest expense for the three months ended March
31, 1999 consisted primarily of a $62,000 obligation due to Fletcher
International Limited and $115,000 of interest expense related to the conversion
of 7% Convertible Notes. This decrease was partially offset by interest income
of $141,000. For the three months ended March 31, 1998, interest and other
expenses included the sale of surplus equipment that resulted in a loss of
$160,000.
NET LOSS
The net loss for the three months ended March 31, 1999 was $13,651,000 or
$.50 per basic and diluted common share, compared to $2,541,000 or $.18 per
basic and diluted common share for the three months ended March 31, 1998. The
net loss was attributable to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $581,000 during the first three months
of the year to $10,635,000 at March 31,1999. Operating activities used $647,000
of cash in the first three months of 1999. The primary factor related to the use
of cash from operating activities was the net loss of $13,651,000. The net loss
was
12
<PAGE>
substantially offset by non-cash charges of $12,729,000 (principally $374,000 of
depreciation and amortization, $185,000 non-cash warrant expense, $2,493,000 of
restructuring charges, and $9,677,000 for the write-off of acquired in-process
technology).
The principal factors in the cash used in investing activities of $135,000
were the expenditures for fixed assets of $200,000 which was offset by the cash
acquired in the acquisition of Street Technologies, Inc. of $774,000 reduced by
acquisition costs of 709,000.
Financing activities provided $201,000 of cash. This was primarily due to
the issuances of common stock under the stock option and purchase plans, as well
as the excerise of common stock options and warrants totaling $252,000. This was
offset by repayments on existing capital leases totaling $51,000.
In the normal course of business, the Company evaluates potential
acquisitions, joint ventures and strategic alliances that may complement the
Company's business. While the Company has no present commitments or agreements
with respect to any material business combinations, the Company may in the
future consummate transactions which may require the Company to issue additional
capital and such issuances may be significant.
To date, the Company continues to use cash and operate at a loss. The
Company's ability to achieve positive cash flow depends upon a variety of
factors, including the timely introduction and market success of its products,
the costs of developing, producing and marketing such products, adoption of the
Internet as a medium of commerce and communications and various other factors,
some of which may be beyond the Company's control. If the Company requires
additional capital, it would seek such funding through additional public or
private financing, although there can be no assurance that the Company will be
able to obtain such financing.
YEAR 2000
Many currently installed computer systems may be coded to accept only
two-digit entries in the date code field and cannot distinguish 21st century
dates from 20th century dates. As a result, many software and computer systems
may need to be upgraded or replaced. We are in the process of assessing the Year
2000 issue and expect to complete the program in the second quarter of 1999. To
date we have not incurred material costs. We do not believe that the cost of
additional actions will have a material effect on our consolidated financial
position, results of operations or cash flows. Our current systems and products
may contain undetected errors or defects with Year 2000 date functions that may
result in material costs. In addition, we utilize third-party equipment,
software and content, including non-information technology systems that may not
be Year 2000 compliant. We are in the process of completing our activities
relative to assessing whether our internally developed software, third-party
systems and non-information technology systems are adequately addressing the
Year 2000 issue. Failure of third-party equipment, software or content to
operate properly with regard to the Year 2000 issue could require unanticipated
expenses, which could have a material adverse effect on our business. We are
assessing whether our suppliers are adequately addressing their Year 2000
compliance issues. We have initiated formal communications with our significant
suppliers and service providers to determine the extent to which their systems
or services may be vulnerable if they fail to address and correct their own Year
2000 issues. We cannot guarantee that the systems of suppliers or other
companies on which we rely will be Year 2000 compliant. We are in the process of
developing a contingency plan that will address situations that may result
should Year 2000 compliance for critical operations not be fully achieved in
1999.
RECENTLY ISSUED ACCOUNTING PRINCIPLES
Not applicable
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
13
<PAGE>
7TH LEVEL, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in certain claims and lawsuits that are generally
incidental to its business. The Company is vigorously contesting all such
matters and believes that their ultimate resolution will not have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
ITEM 2. CHANGES IN SECURITIES
In February of 1999, the Company acquired all of the outstanding stock of
Street Technologies, Inc. Pursuant to the Agreement and Plan of Merger, the
Company issued 4,948,182 shares of Common Stock and 21,644 shares of Series D
Preferred Stock which will be converted upon common stockholders' approval into
7,214,666 shares of Common Stock. Additionally, there were options and warrants
of Street Technologies, Inc. that were convertible into shares of common stock
of Street Technologies Inc. Pursuant to the merger agreement, these options and
warrants are excercisable into 5,007 shares of Series D Preferred Stock which
will be converted upon stockholder approval into 1,669,184 shares of Common
Stock.
In February of 1999, the Company entered into an Employment Agreement,
employing Stephen P. Gott as Chief Executive Officer of the Company. As an
inducement to enter into this agreement, the Board of Directors granted to Mr.
Gott an option to purchase 1,000,000 shares of Common Stock exercisable at a
price equal to $3.25 per share.
The Company believes that the issuance of the Common Stock and the Series D
Preferred Stock issued in connection with the acquisition of Street
Technologies, Inc. qualifies as a transaction by an issuer not involving a
public offering within the meaning of Section 4(2) of the Securities Act of
1933, as amended (the "Securities Act"), based on the manner of offering (a
negotiated sale to four "accredited investors" (as defined in Rule 501 of
Regulation D under the Securities Act) and four non-accredited investors without
general solicitation) and the purchasers' financial status, investment
experience and investment intent, as represented to the Company.
In February of 1999, the Board of Directors approved the grant of a warrant
to purchase 250,000 shares of Common Stock to Ladenburg Thalmann & Co. Inc. in
connection with an engagement letter executed in February 1999 to act as a
financial advisor to the Company. Under the engagement letter, 150,000 shares of
Common Stock will be issued at $5.00 per share and 100,000 shares at $7.50 per
share.
In March of 1999, the Board of Directors granted an option to purchase
20,000 shares of Common Stock to Robert Alan Ezrin exercisable at a price equal
to $3.00 per share which was issued in consideration for the Company's
obligations regarding Mr. Ezrin's severance entitlement as a former President
and Chief Executive Officer of the Company.
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <S> <C>
2.2 -- Agreement and Plan of Merger, dated as of May 13, 1999, by and among the Company,
7th Level Acquisition Corporation, Panmedia Corporation, Jason Roberts and
Patricia Roberts.
10.46 -- Employment Agreement, dated as of May 13, 1999, by and between the Company and
Jason Roberts
10.47 -- Registration Rights Agreement, dated May 13, 1999, by and among the Company,
Jason and Patricia Roberts.
27 -- Financial data schedule
</TABLE>
(b) Reports on Form 8-K
Registrant filed a Current Report on Form 8-K, dated January 15, 1999. As of
January 15, 1999, the Registrant retained the services of Arthur Andersen LLP as
their principal accountant to audit the Registrant's financial statements. The
Registrant dismissed KPMG LLP as their principal accountant. The decision to
change accountants was recommended by the Board.
Registrant filed a Current Report on Form 8-K, dated February 16, 1999.
Pursuant to the terms of the Agreement and Plan of Merger, dated as of February
16, 1999, 7th Level Merger Corporation, a wholly owned subsidiary of the
Registrant merged with and into Street Technologies, Inc.
Registrant filed a Current Report on Form 8-K/A on April 16, 1999. This Form
8-K/A was filed as an amendment to the Current Report on Form 8-K filed by the
Company on February 25, 1999 in connection with the Company's acquisition of all
of the common stock and preferred stock of Street Technologies, Inc.
16
<PAGE>
7TH LEVEL, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
7TH LEVEL, INC.
Date: May 14, 1999 By: /s/ MARC E. LANDY
-----------------------------------------
Marc E. Landy
Vice President and Chief Financial Officer
(Principal Financial Officer)
</TABLE>
17
<PAGE>
Exhibit 2.2
AGREEMENT AND PLAN OF MERGER
DATED AS OF
MAY 13, 1999
BY AND AMONG
7TH LEVEL, INC.,
7TH LEVEL ACQUISITION CORPORATION,
PANMEDIA CORPORATION,
JASON ROBERTS
AND
PATRICIA ROBERTS
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE ITHE MERGER.................................................................2
SECTION 1.01. Filing of Certificates of Merger; Effective Time.................2
SECTION 1.02. Effects of the Merger............................................2
SECTION 1.03. Conversion of Securities........................................2
SECTION 1.04. Exchange of Certificates........................................3
SECTION 1.05. No Fractional Shares............................................3
SECTION 1.06. Transfers Following the Effective Time..........................4
SECTION 1.07. Lost, Stolen or Destroyed Certificates..........................4
ARTICLE IITHE CLOSING...............................................................4
SECTION 2.01. Closing..........................................................4
SECTION 2.02. Deliveries by 7thLevel to Panmedia and/or the Stockholders
on the Closing Date.................................4
SECTION 2.03. Deliveries by Panmedia and/or the Stockholders to 7thLevel
on the Closing Date.................................5
ARTICLE IIIREPRESENTATIONS AND WARRANTIES OF 7THLEVEL...............................6
SECTION 3.01. Organization of 7thLevel; Authority.............................6
SECTION 3.02. Capitalization..................................................7
SECTION 3.03. Subsidiaries....................................................8
SECTION 3.04. No Violation; Consents and Approvals............................8
SECTION 3.05. 7thLevel SEC Documents..........................................9
SECTION 3.06. Financial Statements............................................9
SECTION 3.07. Absence of Certain Changes or Events............................9
SECTION 3.08. Absence of Undisclosed Liabilities.............................11
SECTION 3.09. Personal Property..............................................11
SECTION 3.10. Real Property..................................................12
SECTION 3.11. Intellectual Property..........................................14
SECTION 3.12. Litigation.....................................................14
SECTION 3.13. Employee Benefit Plans.........................................14
SECTION 3.14. Taxes..........................................................17
SECTION 3.15. Contracts and Commitments......................................19
SECTION 3.16. Compliance with Laws...........................................21
SECTION 3.17. Insurance......................................................21
SECTION 3.18. Labor Matters..................................................21
SECTION 3.19. Environmental Matters..........................................22
SECTION 3.20. Transactions with Affiliates...................................23
SECTION 3.21. Brokers........................................................23
SECTION 3.22. Certain Agreements.............................................23
SECTION 3.23. Absence of Certain Commercial Practices........................24
SECTION 3.24. Year 2000 Issues...............................................24
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
SECTION 3.25. Books and Records..............................................24
ARTICLE IVREPRESENTATIONS AND WARRANTIES OF PANMEDIA...............................25
SECTION 4.01. Organization of Panmedia; Authority............................25
SECTION 4.02. Capitalization.................................................25
SECTION 4.03. Subsidiaries...................................................26
SECTION 4.04. No Violation; Consents and Approvals...........................27
SECTION 4.05. Panmedia Disclosure............................................27
SECTION 4.06. Financial Statements...........................................27
SECTION 4.07. Absence of Certain Changes or Events...........................28
SECTION 4.08. [Intentionally left blank.].....................................29
SECTION 4.09. Personal Property..............................................30
SECTION 4.10. Real Property..................................................30
SECTION 4.11. Intellectual Property..........................................32
SECTION 4.12. Litigation.....................................................32
SECTION 4.13. Employee Benefit Plans.........................................33
SECTION 4.14. Taxes..........................................................34
SECTION 4.15. Contracts and Commitments......................................37
SECTION 4.16. Compliance with Laws...........................................38
SECTION 4.17. Insurance......................................................38
SECTION 4.18. Labor Matters..................................................39
SECTION 4.19. Environmental Matters..........................................39
SECTION 4.20. Transactions with Affiliates...................................40
SECTION 4.21. Brokers........................................................40
SECTION 4.22. Certain Agreements.............................................41
SECTION 4.23. Absence of Certain Commercial Practices........................41
SECTION 4.24. Year 2000 Issues...............................................41
SECTION 4.25. Books and Records..............................................41
ARTICLE VREPRESENTATIONS AND WARRANTIES OFTHE STOCKHOLDERS.........................42
SECTION 5.01. Ownership of Panmedia Capital Stock............................42
SECTION 5.02. Authority Relative to this Agreement...........................42
SECTION 5.03. Restricted Securities..........................................43
ARTICLE VI COVENANTS...............................................................43
SECTION 6.01. Public Announcements and Filings...............................43
SECTION 6.02. Tax and Accounting Treatment...................................43
SECTION 6.03. Certain Employee Benefit Matters...............................44
SECTION 6.04. Appointment of Board of Directors..............................44
SECTION 6.07. Tax Status.....................................................45
SECTION 6.08. Further Assurances.............................................45
SECTION 6.09. Stock Options..................................................45
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
ARTICLE VIISURVIVAL OF REPRESENTATIONS AND WARRANTIES;INDEMNIFICATION..............45
SECTION 7.01. Survival; Knowledge............................................45
SECTION 7.02. Indemnification................................................46
ARTICLE VIIIMISCELLANEOUS..........................................................49
SECTION 8.01. Notices........................................................49
SECTION 8.02. Amendment; Waiver..............................................51
SECTION 8.03. Fees and Expenses..............................................51
SECTION 8.04. Successors and Assigns.........................................51
SECTION 8.05. Governing Law..................................................52
SECTION 8.06. Counterparts; Effectiveness....................................52
SECTION 8.07. Entire Agreement; No Third Party Beneficiaries;
Rights of Ownership................................52
SECTION 8.08. Headings.......................................................52
SECTION 8.09. Severability...................................................52
<CAPTION>
EXHIBITS
<S> <C>
Exhibit A California Certificates of Merger
Exhibit B Delaware Certificate of Merger
Exhibit C Employment Agreement between 7th Level and Jason Roberts
Exhibit D Registration Rights Agreement among 7th Level, Jason Roberts and Patricia Roberts
Exhibit E Form of Opinion of 7th Level Counsel
Exhibit F Form of Opinion of Panmedia Counsel
Exhibit G Form of Investment Letter
Exhibit H Web Site Information
Exhibit I Press Release
</TABLE>
iv
<PAGE>
SCHEDULES
7th Level Disclosure Schedule
Panmedia Disclosure Schedule
Schedule 2.02(e) - Stock Options
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of May 13, 1999 (this
"Agreement"), by and among 7th Level, Inc., a Delaware corporation ("7th
Level"), 7th Level Acquisition Corporation, a Delaware corporation and
wholly-owned subsidiary of 7th Level ("Acquisition Corporation"), Panmedia
Corporation, a California corporation ("Panmedia"), Jason Roberts and Patricia
Roberts (together, the "Stockholders").
WHEREAS, the boards of directors of 7th Level, Acquisition Corporation
and Panmedia, respectively, 7th Level as the sole stockholder of Acquisition
Corporation and the Stockholders, have each approved, as being in the best
interests of the respective corporations and their stockholders, the merger (the
"Merger") of Acquisition Corporation with and into Panmedia, in accordance with
the applicable provisions of the California General Corporation Law (the "CGCL")
and the Delaware General Corporation Law (the "DGCL");
WHEREAS, pursuant to the Merger, the outstanding shares of common
stock, no par value per share, of Panmedia ("Panmedia Common Stock") (except for
shares of Panmedia Common Stock held by Panmedia, 7th Level, Acquisition
Corporation and any other subsidiary of Panmedia or 7th Level), shall, in
accordance with the provisions of this Agreement, be converted into 1,543,860
shares of 7th Level's common stock, $.01 par value per share ("7th Level Common
Stock");
WHEREAS, it is intended that the Merger shall be accounted for under
the pooling method of accounting;
WHEREAS, for federal income tax purposes, it is intended that the
Merger shall qualify as a tax-free reorganization under the provisions of
Section 368 of the Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, 7th Level, Acquisition Corporation, Panmedia and the
Stockholders desire to make certain representations, warranties, covenants and
agreements in connection with the Merger; and
WHEREAS, this Agreement is intended to set forth the terms upon which
Acquisition Corporation will merge with and into Panmedia;
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, and for
other good and valuable consideration the receipt and adequacy of which is
hereby acknowledged, and intending to be legally bound hereby, the parties do
hereby agree as follows:
ARTICLE I
THE MERGER
<PAGE>
SECTION 1.01. FILING OF CERTIFICATES OF MERGER; EFFECTIVE TIME.
Subject to the provisions of this Agreement, an Agreement of Merger and
the certificates of approval of agreement of merger in the form attached as
EXHIBIT A hereto (the "California Certificates of Merger") and a certificate of
merger in the form attached as EXHIBIT B hereto (the "Delaware Certificate of
Merger") shall be duly prepared, executed and acknowledged as provided therein.
The California Certificates of Merger shall be delivered to the Secretary of
State of the State of California for filing as provided in the CGCL and the
Delaware Certificate of Merger shall be delivered to the Secretary of State of
the State of Delaware for filing as provided in the DGCL simultaneously with the
Closing (as defined in Section 2.01). The Merger shall become effective upon the
filing and recording of the California Certificates of Merger with the Secretary
of State of the State of California and the Delaware Certificate of Merger with
the Secretary of State of the State of Delaware (the "Effective Time").
SECTION 1.02. EFFECTS OF THE MERGER.
(a) In accordance with the CGCL and the DGCL, at the Effective
Time and by virtue of the Merger, (i) the separate corporate existence of
Acquisition Corporation shall cease and Acquisition Corporation shall be merged
with and into Panmedia, and Panmedia shall be the surviving corporation (the
"Surviving Corporation"); (ii) all of the issued and outstanding Panmedia Common
Stock shall be converted as provided in Section 1.03; (iii) the articles of
incorporation of Panmedia as in effect immediately prior to the Effective Time
shall be the articles of incorporation of the Surviving Corporation; and (iv)
the by-laws of Panmedia as in effect immediately prior to the Effective Time
shall be the by-laws of the Surviving Corporation.
(b) In accordance with the CGCL and the DGCL, at and after the
Effective Time, the corporate existence of Panmedia, with all its rights,
privileges, powers and franchises of a public as well as of a private nature,
shall continue unaffected and unimpaired by the Merger.
SECTION 1.03. CONVERSION OF SECURITIES.
As of the Effective Time, by virtue of the Merger and without any
action on the part of any holder thereof:
(a) each outstanding share of Panmedia Common Stock held by
Panmedia or any Panmedia Subsidiary (as defined in Section 4.03), or that is
owned by 7th Level or Acquisition Corporation or any other 7th Level Subsidiary
(as defined in Section 3.03), shall be canceled without payment of any
consideration therefor;
(b) the total outstanding shares of Panmedia Common Stock
shall be converted into 1,543,860 shares of 7th Level Common Stock, and all such
shares of Panmedia
2
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Common Stock shall no longer be outstanding and shall automatically be canceled
and retired and shall cease to exist, and each holder of a certificate
representing such shares of Panmedia Common Stock shall cease to have any rights
with respect thereto, except the right to receive the pro rata number of shares
of 7th Level Common Stock to be issued in consideration therefor upon surrender
of such certificate in accordance with Section 1.04, without interest; and
(c) each share of capital stock of Acquisition Corporation
that is issued and outstanding immediately prior to the Effective Time shall be
converted into and exchanged for one share of common stock of the Surviving
Corporation, and each certificate evidencing ownership of any such shares of
Acquisition Corporation shall thereupon evidence ownership of the same number of
shares of the Surviving Corporation.
SECTION 1.04. EXCHANGE OF CERTIFICATES.
At the Closing, each Stockholder shall deliver to 7th Level
certificates representing all shares of Panmedia Common Stock owned by the
Stockholders, and, in exchange therefor, 7th Level shall deliver to each
Stockholder certificates representing that number of shares of 7th Level Common
Stock which such Stockholder has the right to receive pursuant to Section
1.03(b) and the certificates for shares of Panmedia Common Stock so surrendered
shall forthwith be canceled. Until such shares of Panmedia Common Stock are so
delivered, certificates representing such shares of Panmedia Common Stock shall
be deemed at any time after the Effective Time to represent only the right to
receive upon such delivery one or more certificates representing shares of 7th
Level Common Stock as contemplated by this Section 1.04 and the holders thereof
shall have no rights whatsoever as stockholders of 7th Level or Panmedia other
than with respect to dividends or distributions made upon such shares of 7th
Level Common Stock.
SECTION 1.05. NO FRACTIONAL SHARES.
Notwithstanding any other term or provision hereof, no fractional
shares of 7th Level Common Stock and no certificates or scrip therefor, or any
other evidence of ownership thereof, shall be issued. In lieu of such fractional
shares, any holder of Panmedia Common Stock who would otherwise be entitled to a
fraction of a share of 7th Level Common Stock upon the conversion of all
Panmedia Common Stock held by such holder shall, upon surrender of his
certificate or certificates representing Panmedia Common Stock, be paid an
amount in cash (without interest) determined by multiplying (i) such fraction by
(ii) the per share closing price furnished by the National Association of
Securities Dealers, Inc. through the Nasdaq National Market ("Nasdaq") of 7th
Level Common Stock on the last date of trading of 7th Level Common Stock on
Nasdaq prior to the Effective Time. As soon as practicable after the
determination of the amount of cash, if any, to be paid to a former holder of
Panmedia Common Stock with respect to any fractional share interests of 7th
Level Common Stock, 7th Level shall pay such amounts to such former holder of
Panmedia Common Stock subject to, and in accordance with, the terms of this
Section 1.05.
3
<PAGE>
SECTION 1.06. TRANSFERS FOLLOWING THE EFFECTIVE TIME.
The stock transfer books of Panmedia shall be closed as of the
Effective Time, and thereafter there shall be no further registration of
transfers of shares of Panmedia Common Stock that were outstanding prior to the
Effective Time.
SECTION 1.07. LOST, STOLEN OR DESTROYED CERTIFICATES.
In the event any certificate(s) representing Panmedia Common Stock
shall have been lost, stolen or destroyed, 7th Level shall issue in exchange for
such lost, stolen or destroyed certificate(s), upon the making of an affidavit
of that fact by the holder thereof, and, if required by 7th Level, the posting
by such holder of a bond, in such reasonable amount as 7th Level may direct, as
indemnity against any claim that may be made against it with respect to such
certificate(s), such shares of the 7th Level Common Stock pursuant to Section
1.03(b).
ARTICLE II
THE CLOSING
SECTION 2.01. CLOSING.
The closing of the Merger (the "Closing") shall take place on May 13,
1999 at the offices of Swidler Berlin Shereff Friedman, LLP, located at 919
Third Avenue, New York, New York, or at such other time and place as may be
agreed to in writing by the parties hereto (the date of such Closing being
referred to herein as the "Closing Date").
SECTION 2.02. DELIVERIES BY 7TH LEVEL TO PANMEDIA AND/OR THE STOCKHOLDERS ON THE
CLOSING DATE.
At the Closing, 7th Level will deliver or cause to be delivered to
Panmedia and/or the Stockholders, as applicable, the following:
(a) EMPLOYMENT AGREEMENT. An employment agreement (the "Employment
Agreement") with Jason Roberts in the form attached as EXHIBIT C hereto, duly
executed by 7th Level.
(b) REGISTRATION RIGHTS AGREEMENT. A registration rights agreement
(the "Registration Rights Agreement") with Jason Roberts and Patricia Roberts in
the form attached as EXHIBIT D hereto, duly executed by 7th Level.
(c) CERTIFICATES. The certificates representing the 7th Level
Common Stock issued to the Stockholders pursuant to Section 1.02 in exchange for
Panmedia Common Stock; provided
4
<PAGE>
that such certificates shall bear a restrictive legend in substantially the form
set forth below:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE
SECURITIES LAWS OF ANY STATE. THESE SECURITIES MAY NOT BE SOLD, OFFERED
FOR SALE, ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS
REGISTERED PURSUANT TO THE PROVISIONS OF THE ACT AND THE LAWS OF SUCH
STATES UNDER WHOSE LAWS A TRANSFER OF SECURITIES WOULD BE SUBJECT TO A
REGISTRATION REQUIREMENT OR AN OPINION OF COUNSEL TO 7th LEVEL, INC. IS
DELIVERED STATING THAT SUCH DISPOSITION IS IN COMPLIANCE WITH AN
AVAILABLE EXEMPTION FROM SUCH REGISTRATION.
(d) OPINION OF 7TH LEVEL COUNSEL. An opinion of counsel to 7th
Level, dated the Closing Date, in the form attached hereto as EXHIBIT E.
(e) STOCK OPTIONS. Evidence that options to purchase shares of 7th
Level Common Stock have been granted to the individuals set forth on Schedule
2.02(e) for the amounts and the vesting schedule set forth opposite their names
at an exercise price equal to the closing market price of the 7th Level Common
Stock on Nasdaq (as reported in the Wall Street Journal) on the date hereof
under the terms of 7th Level's Amended and Restated Incentive Stock Option Plan
(the "Stock Option Plan"); provided that such options will be granted outside
the Stock Option Plan if there is not an adequate number of shares remaining
under the Stock Option Plan.
SECTION 2.03. DELIVERIES BY PANMEDIA AND/OR THE STOCKHOLDERS TO 7TH LEVEL ON THE
CLOSING DATE.
At the Closing, Panmedia and/or the Stockholders, as applicable, will
deliver or cause to be delivered to 7th Level the following:
(a) EMPLOYMENT AGREEMENT. The Employment Agreement, duly executed
by Jason Roberts.
(b) REGISTRATION RIGHTS AGREEMENT. The Registration Rights
Agreement, duly executed by Jason Roberts and Patricia Roberts.
(c) CERTIFICATES. The certificates representing all of the
Panmedia Common Stock, duly endorsed for transfer in blank or accompanied by a
stock power duly endorsed in blank by the Stockholders with any requisite
documentary or stock transfer taxes affixed thereto.
(d) OPINION OF PANMEDIA AND THE STOCKHOLDERS COUNSEL. An opinion
of counsel to Panmedia and the Stockholders, dated the Closing Date, in the form
attached hereto as EXHIBIT F.
5
<PAGE>
(e) INVESTMENT LETTERS. Letters (the "Investment Letters") in the
form attached hereto as EXHIBIT G from each Stockholder confirming (i) his, her
or its status as an "accredited investor" ("Accredited Investor") as that term
is defined in Rule 501 of Regulation D promulgated under the Securities Act of
1933, as amended (the "Securities Act"); (ii) that each Stockholder understands
that the shares of 7th Level Common Stock he or she is acquiring are
characterized as "restricted securities" under the federal securities laws
inasmuch as they are being acquired from 7th Level in a transaction not
involving a public offering and that under such laws and applicable regulations
such securities may be resold without registration under the Securities Act and
applicable state securities laws only in certain limited circumstances and that
any certificates representing 7th Level Common Stock delivered to the
Stockholders pursuant to Section 1.03 in exchange for Panmedia Common Stock
shall bear a restrictive legend in substantially the form set forth in Section
2.02(c); provided, however, that such restrictive legend shall be removed when
the Stockholders are eligible to sell such shares of 7th Level Common Stock
pursuant to Rule 144(k) under the Securities Act (subject to the Stockholders
agreement that the legend will be subsequently reinstated if the Stockholders
become affiliates of 7th Level) and (iii) that each Stockholder is acquiring the
shares of 7th Level Common Stock for investment and not for distribution except
in compliance with the Securities Act, is able to fend for himself, herself or
itself, can bear the economic risk of his, her or its investment and has such
knowledge and experience in financial or business matters that he, she or it is
capable of evaluating the merits and risks of the investment in the securities
to be acquired hereunder.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF 7TH LEVEL
Except as set forth in the disclosure schedule delivered by 7th Level
to Panmedia and the Stockholders prior to the execution of this Agreement (the
"7th Level Disclosure Schedule"), 7th Level represents and warrants to Panmedia
and the Stockholders as follows:
SECTION 3.01. ORGANIZATION OF 7TH LEVEL; AUTHORITY.
7th Level is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, and has all requisite
corporate power and corporate authority to enter into this Agreement, the
Registration Rights Agreement and the Employment Agreement (collectively, the
"Transaction Documents"), to consummate the transactions contemplated hereby and
thereby to own, lease and operate its properties and to conduct its business.
The execution, delivery and performance by 7th Level of the Transaction
Documents and the consummation of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate action on the part
of 7th Level. The Transaction Documents have been duly executed and delivered by
7th Level and, assuming that the Transaction Documents constitute a valid and
binding obligation of Panmedia and the Stockholders, constitutes a valid and
binding obligation of 7th Level, enforceable against 7th Level in accordance
with its terms,
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except as may be limited by (i) bankruptcy, reorganization, moratorium,
fraudulent conveyance and insolvency laws and by other laws affecting the rights
of creditors generally, (ii) the availability of equitable remedies and (iii)
with respect to enforcement of rights to indemnity and contribution hereunder,
federal or state securities laws or principles of public policy. 7th Level is
duly qualified or licensed to do business as a foreign corporation and is in
good standing in each jurisdiction in which the property owned, leased or
operated by it or the nature of the business conducted by it makes such
qualification necessary, except where the failure to obtain such qualification
or license would not, individually or in the aggregate, have a 7th Level
Material Adverse Effect (as defined in Section 3.07). 7th Level has heretofore
delivered or made available to Panmedia complete and correct copies of the
certificate of incorporation and by-laws of 7th Level, the minute books and
stock transfer records of 7th Level, as in effect as of the date of this
Agreement.
SECTION 3.02. CAPITALIZATION.
The authorized capital stock of 7th Level consists of 100,000,000
shares of 7th Level Common Stock and 100,000 shares of preferred stock, $.01 par
value per share (the "7th Level Preferred Stock," and together with the 7th
Level Common Stock, the "7th Level Capital Stock") of 7th Level, of which only
30,648,835 shares of 7th Level Common Stock (as reported by 7th Level's transfer
agent) and 21,661 shares of 7th Level Preferred Stock (as reported by 7th
Level's transfer agent) are outstanding on the date hereof. Except as set forth
in Section 3.02 of the 7th Level Disclosure Schedule, no other shares of any
other class or series of 7th Level Capital Stock or securities exercisable or
convertible into or exchangeable for 7th Level Capital Stock ("7th Level Capital
Stock Equivalents") are authorized, issued or outstanding. Except as
contemplated herein or set forth in Section 3.02 of the 7th Level Disclosure
Schedule, the outstanding shares of 7th Level Capital Stock have been duly
authorized and validly issued and are fully paid and nonassessable and were not
issued in violation of, and are not subject to, any preemptive, subscription or
similar rights. Except as set forth in Section 3.02 of the 7th Level Disclosure
Schedule, there are no outstanding warrants, options, subscriptions, calls,
rights, agreements, convertible or exchangeable securities or other commitments
or arrangements relating to the issuance, sale, purchase, return or redemption,
and, to 7th Level's knowledge, voting or transfer of any shares, whether issued
or unissued, of 7th Level Capital Stock, 7th Level Capital Stock Equivalents or
other securities of 7th Level. On the Closing Date, the shares of 7th Level
Common Stock for which shares of Panmedia Common Stock shall be exchanged in the
Merger will have been duly authorized and, when issued and delivered in
accordance with this Agreement, such shares of 7th Level Common Stock, will be
validly issued, fully paid and nonassessable. 7th Level has filed a Nasdaq
National Market Notification Form for listing of Additional Shares with respect
to all of the shares of 7th Level Common Stock issuable to the Stockholders in
the Merger.
SECTION 3.03. SUBSIDIARIES.
Section 3.03 of the 7th Level Disclosure Schedule contains a list of
the name of each
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subsidiary of 7th Level (each such corporation, partnership or other entity
being referred to herein as a "7th Level Subsidiary"). Section 3.03 of the 7th
Level Disclosure Schedule sets forth, with respect to each 7th Level Subsidiary,
its type of entity, the jurisdiction of its organization, its authorized and
outstanding capital stock, partnership interests or equivalent ownership
interests and 7th Level's current ownership of such shares or interests. Except
as set forth in Section 3.03 of the 7th Level Disclosure Schedule, each of the
outstanding shares of capital stock of each of the 7th Level Subsidiaries is
duly authorized, validly issued, fully paid and nonassessable and owned by 7th
Level or another 7th Level Subsidiary free and clear of all liens, claims,
encumbrances, options, pledges and security interests ("Liens") and were not
issued in violation of, nor subject to, any preemptive, subscription or similar
rights. Except as set forth in Section 3.03 of the 7th Level Disclosure
Schedule, there are no outstanding warrants, options, subscriptions, calls,
rights, agreements, convertible or exchangeable securities or other commitments
or arrangements relating to the issuance, sale, purchase, return or redemption,
to 7th Level's knowledge, voting or transfer of any shares, whether issued or
unissued, of 7th Level Capital Stock, 7th Level Capital Stock Equivalents or
other securities of any 7th Level Subsidiary. Except as set forth in Section
3.03 of the 7th Level Disclosure Schedule, 7th Level and the 7th Level
Subsidiaries do not own any equity interests in any person. Each 7th Level
Subsidiary is duly organized, validly existing and in good standing under the
laws of the jurisdiction of its organization and has all requisite power and
authority to own, lease and operate its properties and to conduct its business.
SECTION 3.04. NO VIOLATION; CONSENTS AND APPROVALS.
Except as set forth in Section 3.04 of the 7th Level Disclosure
Schedule, the execution and delivery by 7th Level of the Transaction Documents
does not, and the consummation of the transactions contemplated hereby and
thereby and compliance with the terms hereof and thereof will not, conflict
with, or result in any violation of or default (or an event which, with notice
or lapse of time or both, would constitute a default) under, (a) any provision
of the certificate of incorporation or by-laws of 7th Level, (b) any judgment,
order, injunction or decree (an "Order"), or statute, law, ordinance, rule or
regulation ("Applicable Law") applicable to 7th Level or any 7th Level
Subsidiary or the property or assets of 7th Level or any 7th Level Subsidiary,
or (c) give rise to any right of termination, cancellation or acceleration
under, or result in the creation of any Lien upon any of the properties of 7th
Level or any 7th Level Subsidiary under, any note, bond, mortgage, indenture,
license, agreement, lease or other instrument or obligation ("Contracts") to
which 7th Level or any 7th Level Subsidiary is a party or by which 7th Level or
any 7th Level Subsidiary or any assets of 7th Level or any 7th Level Subsidiary
may be bound, except in the case of clauses (b) and (c), for such conflicts,
violations or defaults as to which requisite waivers or consents will have been
obtained prior to the Closing or which, individually or in the aggregate, would
not have a 7th Level Material Adverse Effect. Except as set forth in Section
3.04 of the 7th Level Disclosure Schedule, no consent, approval, order or
authorization of, or registration, declaration or filing with ("Governmental
Approval"), any court, administrative agency or commission or other governmental
entity, authority or instrumentality, domestic or foreign ("Governmental
Authority"), is required to be obtained or made by or with respect to 7th Level
or
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any 7th Level Subsidiary in connection with the execution and delivery of this
Agreement or the consummation by 7th Level of the transactions contemplated
hereby, except where the failure to obtain such Governmental Approval would not,
individually or in the aggregate, have a 7th Level Material Adverse Effect.
SECTION 3.05. 7TH LEVEL SEC DOCUMENTS.
7th Level has filed with the Securities and Exchange Commission (the
"SEC"), and has heretofore made available to Panmedia, true and complete copies
of, each report, schedule, registration statement, definitive proxy statement
and other documents required to be filed by it since January 1, 1996 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or the
Securities Act (as such documents have been amended since the time of their
filing, collectively, the "7th Level SEC Documents"). As of their respective
dates, the 7th Level SEC Documents, (i) conformed, in all material respects,
with the applicable requirements of the Securities Act, the Exchange Act and the
rules and regulations thereunder and (ii) did not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
SECTION 3.06. FINANCIAL STATEMENTS.
Except as set forth in Section 3.06 of the 7th Level Disclosure
Schedule, the financial statements of 7th Level included or incorporated by
reference in the 7th Level SEC Documents (collectively, the "7th Level Financial
Statements"), (a) fairly present in all material respects (subject, in the case
of the unaudited statements, to normal recurring audit adjustments), the
consolidated financial condition and the results of operations and cash flows of
7th Level and the 7th Level Subsidiaries as of the dates and for the periods
indicated (subject, in the case of any unaudited interim financial statements,
to normal year-end adjustments and other adjustments described therein) and (b)
have been prepared in accordance with the rules and regulations of the SEC and
generally accepted accounting principles ("GAAP") applied consistently
throughout the periods involved, except as disclosed therein and in the notes
thereto and, in the case of unaudited statements, as permitted by Form 10-Q of
the SEC.
SECTION 3.07. ABSENCE OF CERTAIN CHANGES OR EVENTS.
Except as set forth in Section 3.07 of the 7th Level Disclosure
Schedule or for the transactions contemplated by this Agreement, during the
period from December 31, 1998 to the date of this Agreement, (i) 7th Level and
the 7th Level Subsidiaries have operated their businesses solely in the ordinary
course of business consistent with past practices, and (ii) without limiting the
generality of clause (i), neither 7th Level nor any 7th Level Subsidiary has:
(a) created, incurred, assumed or guaranteed any indebtedness for
borrowed money (including, without limitation, obligations in respect of capital
leases), other than borrowings and issuances of letters of credit in the
ordinary course of business and consistent with past practice;
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(b) issued, sold or delivered, redeemed or purchased, any shares
of 7th Level Capital Stock or any 7th Level Capital Stock Equivalents, or
granted or entered into any options, warrants, rights, agreements or commitments
with respect to the issuance of 7th Level Capital Stock or 7th Level Capital
Stock Equivalents, or amended any terms of any such securities or agreements;
(c) declared, set aside or paid any dividends or other
distributions in respect of 7th Level Capital Stock;
(d) increased the rate of compensation or benefits of, or paid or
agreed to pay any benefit to (including, but not limited to severance or
termination pay), present or former directors, officers or employees, except as
may be required by any existing 7th Level Plan (as defined in Section 3.13),
agreement or arrangement disclosed to Panmedia prior to the date hereof or to
employees who are not officers in accordance with 7th Level's ordinary course of
business consistent with past practice;
(e) entered into, adopted, terminated or amended any 7th Level
Plan, employment or severance agreement or any plan, agreement, program, policy,
trust, fund or other arrangement that would be a 7th Level Plan if it were in
existence as of the date of this Agreement, except as required by law;
(f) sold, leased, transferred, or otherwise disposed of any
properties or assets, real, personal or mixed, which have an aggregate book
value in excess of $25,000 or mortgaged or encumbered any properties or assets,
whether real or personal, which have an aggregate book value in excess of
$25,000;
(g) acquired or agreed to acquire by merging or consolidating
with, or by purchasing the stock or a substantial portion of the assets of, or
by any other manner, any business or any corporation, partnership, association
or other business organization or division thereof or otherwise acquired or
agreed to acquire any assets which are material, individually or in the
aggregate, to 7th Level and the 7th Level Subsidiaries;
(h) entered into, modified, amended or terminated any lease of 7th
Level Real Property (as defined in Section 3.10) (except modifications or
amendments in connection with renewals of leases in the ordinary course of
business) or any other 7th Level Material Contract (as defined in Section 3.15);
(i) waived or released any rights of material value, or canceled,
compromised, released or assigned any material indebtedness owed to it or any
material claims held by it;
(j) canceled or terminated any insurance policy naming it as a
beneficiary or a loss payable payee without obtaining comparable substitute
insurance coverage;
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(k) effectuated a "plant closing" or "mass layoff" (as those terms
are defined under the Worker Adjustment and Retraining Notification Act of 1988
(the "WARN Act")) affecting in whole or in part any site of employment,
facility, operating unit or employees of 7th Level or any 7th Level Subsidiary;
(l) amended its certificate of incorporation or by-laws;
(m) changed any of its accounting principles, methods or
practices; or
(n) agreed, whether in writing or otherwise, to do any of the
foregoing; and
(iii) there have occurred no changes or events which, individually or in the
aggregate, would have a 7th Level Material Adverse Effect. As used in this
Agreement, any reference to any event, change or effect having a "7th Level
Material Adverse Effect" means such event, change or effect, individually or in
the aggregate with other events, changes or effects, is materially adverse to
(a) the business, properties, financial condition or results of operations of
7th Level and the 7th Level Subsidiaries taken as a whole or (b) the ability of
7th Level and Panmedia to consummate the transactions contemplated hereby.
SECTION 3.08. ABSENCE OF UNDISCLOSED LIABILITIES.
Since December 31, 1998, neither 7th Level nor any of the 7th Level
Subsidiaries has incurred any liabilities or obligations of any nature, whether
or not accrued, absolute, contingent or otherwise that would be required to be
reflected on, or disclosed or reserved against in, a consolidated balance sheet
of 7th Level or in the notes thereto prepared in accordance with GAAP
consistently applied other than liabilities and obligations that were (i) so
reserved on, or disclosed or reflected in the consolidated balance sheet of 7th
Level as of December 31, 1998 and the notes thereto, included in the Annual
Report on Form 10-K/A for the year then ended, (ii) incurred in connection with
this Agreement, or (iii) incurred in the ordinary course of business.
SECTION 3.09. PERSONAL PROPERTY.
(a) Except as set forth in Section 3.09(a) of the 7th Level
Disclosure Schedule, 7th Level and the 7th Level Subsidiaries have good and
valid title to all of their personal property, whether tangible or intangible,
owned by them, and a valid and enforceable right to use all personal property
leased by or licensed to them (the "Personal Property"), in each case, free and
clear of all Liens, imperfections of title or encumbrances of any nature
whatsoever, other than (i) mechanics', carriers', workmen's, repairmen's or
similar Liens arising or incurred in the ordinary course of business, (ii) Liens
for taxes, assessments and other governmental charges which are not due and
payable or which may hereafter be paid without penalty or which are being
contested in good faith and (iii) other imperfections of title or encumbrances,
if any, which imperfections of title or other encumbrances, individually or in
the aggregate, do not materially impair the use
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or value of the property to which they relate (the Liens, imperfections of title
and encumbrances described in clauses (i), (ii) and (iii) above are hereinafter
referred to collectively as the "Permitted Liens").
(b) Except as set forth in Section 3.09(b) of the 7th Level
Disclosure Schedule, all material tangible items of Personal Property necessary
for the operation or conduct of the businesses of 7th Level and the 7th Level
Subsidiaries as currently conducted are in reasonably good maintenance,
operating condition and repair, normal wear and tear excepted, other than
machinery and equipment under repair or out of service in the ordinary course of
business.
(c) Except as set forth in Section 3.09(c) of the 7th Level
Disclosure Schedule, the accounts receivable reflected on the 7th Level
Financial Statements are valid receivables arising in the ordinary course of
business and not subject to any valid counterclaims or setoffs, except for
products returned or exchanged in 7th Level's ordinary course of business for
which there has been or will have been a reserve established consistently with
past practice.
SECTION 3.10. REAL PROPERTY.
(a) As used in this Agreement, the term "7th Level Real Property"
shall mean all real property and interests in real property leased or subleased
by 7th Level or any 7th Level Subsidiary. Section 3.10(a) of the 7th Level
Disclosure Schedule lists all 7th Level Real Property. 7th Level owns no real
property. Except as set forth in Section 3.10(a) of the 7th Level Disclosure
Schedule, the 7th Level Real Property constitutes all of the real property and
interests in real property used in the conduct of the businesses of 7th Level
and the 7th Level Subsidiaries.
(b) As used in this Agreement, the term "7th Level Real Estate
Permitted Liens" shall mean:
(i) All building codes and zoning ordinances and other
laws, ordinances, regulations, rules, orders or determinations of any federal,
state, county, municipal or other governmental authority heretofore, now or
hereafter enacted, made or issued by any such governmental authority affecting
the 7th Level Real Property;
(ii) All easements, rights-of-way, covenants, conditions,
restrictions, reservations, licenses, agreements and other similar matters which
do not impair the use of the 7th Level Real Property to which they relate;
(iii) All electric power, telephone, gas, sanitary sewer,
storm sewer, water, steam, compressed air and other utility lines, pipelines,
service lines and similar facilities now located on, over or under the 7th Level
Real Property, and all licenses, easements, flowage rights, rights-of-way and
other similar agreements relating thereto granted in the ordinary course of
business; and
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(iv) All existing public and private roads and streets
(whether dedicated or undedicated), and all railroad lines and rights-of-way
affecting the 7th Level Real Property.
(c) Except as set forth in Section 3.10(c) of the 7th Level
Disclosure Schedule, 7th Level and the 7th Level Subsidiaries have valid
leasehold interests in all 7th Level Real Property leased by them, in each case,
free and clear of all mortgages, Liens, security interests, easements,
covenants, rights-of-way and other encumbrances or restrictions of any nature
created by 7th Level, except for Permitted Liens and 7th Level Real Estate
Permitted Liens which, individually or in the aggregate, would not have a 7th
Level Material Adverse Effect.
(d) To 7th Level's knowledge and except as set forth in Section
3.10(d) of the 7th Level Disclosure Schedule, there are no pending or, to the
knowledge of 7th Level, threatened actions or proceedings (including
condemnation, eminent domain and foreclosure) which could affect any of the 7th
Level Real Property. 7th Level has not violated, and, to the knowledge of 7th
Level, there is no violation of, any Applicable Law affecting the 7th Level Real
Property.
(e) To 7th Level's knowledge and except as set forth in Section
3.10(e) of the 7th Level Disclosure Schedule, all of the 7th Level Real Property
is occupied under a valid and current certificate of occupancy or similar
permit, the transactions contemplated by this Agreement will not require the
issuance of any new or amended certificate of occupancy and there are no facts
which would prevent the 7th Level Real Property from being occupied after the
Closing Date in the same manner as before.
(f) To 7th Level's knowledge and except as set forth in Section
3.10(f) of the 7th Level Disclosure Schedule, the buildings, fixtures and all
improvements on the 7th Level Real Property were constructed in compliance with
all applicable federal, state, local or foreign statutes, laws, ordinances,
regulations, rules, codes, orders or requirements (including, but not limited
to, any building, zoning or environmental laws or codes) affecting such
property, except where the failure to be in compliance would not, individually
or in the aggregate, impair the value or interfere with the present use of such
7th Level Real Property or otherwise impair business operations.
(g) To 7th Level's knowledge and except as set forth in Section
3.10(g) of the 7th Level Disclosure Schedule, the buildings, fixtures and all
improvements on the 7th Level Real Property and the present use and conditions
thereof do not violate any applicable deed restrictions or other applicable
covenants, restrictions, agreements, existing site plan approvals, zoning or
subdivision regulations or urban redevelopment plans as modified by any duly
issued variances, and no permits, licenses or certificates pertaining to the
ownership or operation of all improvements on the 7th Level Real Property, other
than those which are transferable with the 7th Level Real Property, are required
by any governmental agency having jurisdiction over the 7th Level Real Property.
(h) To 7th Level's knowledge and except as set forth in Section
3.10(h) of the 7th Level
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Disclosure Schedule, the buildings, fixtures and all improvements on the 7th
Level Real Property are structurally sound in all material respects and in
reasonably good maintenance and repair, normal wear and tear excepted.
(i) Schedule 3.10(i) of the 7th Level Disclosure Schedule sets forth,
as of the date hereof, an accurate, correct and complete list (including the
name of the landlord, term, security deposit (if any) and annual rent) of each
lease, sublease or other arrangement pursuant to which 7th Level and the 7th
Level Subsidiaries leases or subleases 7th Level Real Property (the "7th Level
Leased Premises"), and 7th Level and the 7th Level Subsidiaries have heretofore
made available to Panmedia a complete and accurate copy of each such lease and
sublease. Unless otherwise noted in Schedule 3.10(i) of the 7th Level Disclosure
Schedule, 7th Level or the 7th Level Subsidiaries is the sole lessee or
sublessee under each of the leases and subleases listed in Schedule 3.10(i) of
the 7th Level Disclosure Schedule. To the knowledge of 7th Level, to the extent
that it would be responsible for repairing any structural defects to any 7th
Level Leased Premises under any 7th Level Lease (as defined below), such 7th
Level Leased Premises are structurally sound with no patent or latent defects
and are in good operating condition and repair adequate for current use; are
suitable for the purposes for which they are presently being used and are
adequate to meet all present and reasonably anticipated future requirements of
the business of 7th Level and the 7th Level Subsidiaries, as currently
conducted; and none of such 7th Level Leased Premises are in need of maintenance
or repairs except for ordinary, routine maintenance and repairs which are not
material in nature or cost. 7th Level and the 7th Level Subsidiaries are in
peaceable possession of the premises covered by the 7th Level Leased Premises.
(j) Each of the 7th Level Real Property leases and subleases (and
leases underlying such subleases) set forth in Schedule 3.10(i) of the 7th Level
Disclosure Schedule (the "7th Level Leases") is in full force and effect, has
not been further supplemented, amended or modified, and contains no terms other
than the terms contained in the copies heretofore delivered or made available to
Panmedia or made available to Panmedia at 7th Level's offices. 7th Level has
complied, in all material respects, with or provided for all material
commitments, liabilities and obligations on its part to be performed or observed
under each 7th Level Lease (including, without limitation, payment in full or
accrual of all amounts due thereunder). To the knowledge of 7th Level, each
party to each 7th Level Lease other than 7th Level has complied, in all material
respects, with or provided for all material commitments, liabilities and
obligations on its part to be performed or observed thereunder. 7th Level has
not received any written notice of a default, offset or counterclaim by or
against it under any 7th Level Lease that remains pending and to 7th Level's
knowledge, no event or condition (including, without limitation, the execution
and delivery of this Agreement and the transactions contemplated hereunder)
exists which constitutes or would constitute a default by it or, to its
knowledge, of any other person or, after notice or lapse of time or both, would
constitute a default under any 7th Level Lease. Except as set forth in Schedule
3.10(i) of the 7th Level Disclosure Schedule, the consummation of the
transactions contemplated hereby will not be considered an assignment of any of
the 7th Level Leases (requiring the consent or approval by another person) and
shall not constitute a default under any of the 7th Level Leases.
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(k) To the knowledge of 7th Level, there are no defaults by the
landlords under any of the 7th Level Leases and such landlords have performed
all of their obligations thereunder to the extent that such performance was to
be completed heretofore. 7th Level has not waived any obligation of any such
landlord or any right under any of the 7th Level Leases, except as set forth in
any written agreement disclosed to Panmedia together with the applicable leases
and subleases.
SECTION 3.11. INTELLECTUAL PROPERTY.
(a) Section 3.11(a) of the 7th Level Disclosure Schedule sets
forth a complete list of all material registered patents, trademarks, trade
names, service marks, assumed names, copyrights and all applications therefor
(collectively, the "Industrial Property") owned, filed or licensed by 7th Level
or any 7th Level Subsidiary and, with respect to registered trademarks, all
jurisdictions in which such trademarks are registered.
(b) As used in this Section 3.11(b), "Intellectual Property" shall
mean Industrial Property and inventions, invention studies (whether patentable
or unpatentable), designs, copyrights, mask works, trade dress, secret formulae,
trade secrets, secret processes, computer programs and know-how. Except as set
forth in Section 3.11(b) of the 7th Level Disclosure Schedule, (i) the
consummation of the transactions contemplated by this Agreement will not
materially impair any right to use any of its Intellectual Property, (ii) except
as would not have a 7th Level Material Adverse Effect, all Intellectual Property
owned by 7th Level or any 7th Level Subsidiary is owned by 7th Level or such 7th
Level Subsidiary free and clear of all Liens, (iii) except as would not have a
7th Level Material Adverse Effect, 7th Level and the 7th Level Subsidiaries own
or have the right to use all of the Intellectual Property used in the conduct of
their businesses, and (iv) no claims have been asserted of which 7th Level or
any 7th Level Subsidiary has been given written notice by any person with
respect to the ownership or use by 7th Level or any 7th Level Subsidiary of the
Intellectual Property, except those claims (if any) which, if adversely
determined, would not have a 7th Level Material Adverse Effect.
SECTION 3.12. LITIGATION.
Except as set forth in Section 3.12 of the 7th Level Disclosure
Schedule, there are no claims, actions, suits, investigations or proceedings
pending, or, to the knowledge of 7th Level, threatened in writing against or
affecting 7th Level, any 7th Level Subsidiary or their respective assets, at law
or in equity, by or before any Governmental Authority, or by or on behalf of any
third party, which, if adversely determined, would have a 7th Level Material
Adverse Effect. Except as set forth in Section 3.12 of the 7th Level Disclosure
Schedule, 7th Level has not received any notice that 7th Level, any 7th Level
Subsidiary or any of their respective assets is subject to any material decree,
order or judgment.
SECTION 3.13. EMPLOYEE BENEFIT PLANS.
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(a) Section 3.13(a) of the 7th Level Disclosure Schedule sets
forth an accurate and complete list of each bonus, incentive compensation,
deferred compensation, excess benefit, pension, retirement, profit sharing,
stock bonus, thrift, stock option, stock ownership, stock appreciation right,
stock purchase, foreign employee benefit, cafeteria, life insurance, survivor or
death benefit, sickness or accident, business travel accident, health, medical,
dental, vision, hospitalization, savings, holiday, vacation, salary
continuation, severance pay, change of control payments, sick pay, leave of
absence, disability, tuition reimbursement, service award, dependent care
assistance, legal assistance, fringe benefit (cash and non-cash) or any other
employee or executive benefit plan, contract, agreement, practice, policy or
arrangement, including, without limitation, any such plan, contract, agreement,
practice, policy or arrangement which is an "employee benefit plan" as defined
in Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), which benefits, covers or relates to any current or former
employee, director, consultant, independent contractor, or officer of 7th Level
or any 7th Level Subsidiary (each such plan, contract, agreement, practice,
policy or arrangement is hereinafter referred to individually as a "7th Level
Plan" and collectively as the "7th Level Plans").
(b) With respect to each 7th Level Plan, 7th Level has delivered
to Panmedia a current, accurate and complete copy of such plan (or, to the
extent no such copy exists, an accurate description) thereof and, to the extent
applicable to each such plan, a copy of: (i) any trust agreement or other
funding instrument; (ii) the most recent determination letter; (iii) any summary
plan description and other written communications (or a description of any oral
communications) by 7th Level or the applicable 7th Level Subsidiary to its
employees concerning the extent of the benefits provided under such plan; and
(iv) for the most recent plan year of such plan (or, in the case of clause (A),
the most recent plan year of such plan for which a Form 5500 is available) (A)
the Form 5500 and attached schedules, (B) audited financial statements and (C)
actuarial valuation reports. No 7th Level Plan is in violation of its
requirements to timely file any annual return in the Form 5500 series.
(c) Neither 7th Level nor any 7th Level Subsidiary is
contributing, or has in the past contributed to, nor has incurred any liability
in respect of, any multiemployer plan within the meaning of Section 4001(a)(3)
of ERISA. No 7th Level Plan is a multiple employer plan described in Section
413(c) of the Code or a multiple employer welfare plan within the meaning of
Section 3(40) of ERISA.
(d) Except as set forth in Section 3.13(d) of the 7th Level
Disclosure Schedule, (i) for each 7th Level Plan that is intended to be
qualified within the meaning of Section 401(a) of the Code, (A) the plan is so
qualified, (B) 7th Level, or the applicable 7th Level Subsidiary, has obtained a
favorable determination letter from the Internal Revenue Service (the "IRS") to
such effect, and such plan has been timely amended to reflect any provisions
which the IRS required to be included in such plan as a condition to issuing
such determination letter, (C) nothing has occurred, whether by action or
inaction, that could reasonably be expected to cause the loss of such
qualification, and (D) to the knowledge of 7th Level, or the applicable 7th
Level Subsidiary,
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such determination letter has not been revoked by the IRS nor has the IRS given
any written notice to 7th Level, or the applicable 7th Level Subsidiary, that it
intends to revoke such determination letter, (ii) each 7th Level Plan is in
compliance in all material respects with the applicable requirements prescribed
by all statues, orders or governmental rules or regulations currently in effect
with respect to such plan, including, but not limited to, ERISA and the Code,
(iii) all contributions to each 7th Level Plan (including both employee and
employer contributions) which are required to have been made, whether by virtue
of the terms of the particular plan or by operation of law, have been made by
the due date thereof (including all applicable extensions), and all
contributions to the 7th Level Plans which are not yet due but which relate to
periods which began prior to the Closing Date have either been paid or have been
appropriately reflected by 7th Level as an accrued liability in its financial
statements, (iv) no 7th Level Plan that is a funded pension plan and no trust
established thereunder has any accumulated funding deficiency within the meaning
of Section 302(a) of ERISA and Section 412 of the Code, (v) no reportable event
within the meaning of Section 4043 of ERISA or "prohibited transaction" within
the meaning of Section 406 of ERISA or Section 4975 of the Code has occurred,
and no material tax has been imposed pursuant to Section 4975 or Section 4976 of
the Code, with respect to any 7th Level Plan, (vi) no governmental agency,
including the IRS, the Department of Labor or the Pension Benefit Guaranty
Corporation (the "PBGC"), has initiated an examination or audit, or, to the
knowledge of 7th Level or any 7th Level Subsidiary, an investigation of a 7th
Level Plan which has not been completed, (vii) neither 7th Level nor any 7th
Level Subsidiary has incurred any liability to the PBGC, or has had any penalty
or Lien imposed on it in favor of the PBGC, with respect to any 7th Level Plan
which is subject to Title IV of ERISA other than liability for routine premiums
for which adequate provision has been made in the 7th Level Financial Statements
in accordance with GAAP and (viii) neither 7th Level or any 7th Level Subsidiary
has any knowledge as to the existence of any state of facts, or as to the
occurrence of any event or transaction, pertaining to or involving such plan
that might reasonably be anticipated to result in any liability, or the
imposition of a penalty or Lien, of or on 7th Level or any 7th Level Subsidiary
to the PBGC under any provision of Title IV of ERISA.
(e) Except as set forth in Section 3.13(e) of the 7th Level
Disclosure Schedule, there are no claims, suits or actions pending or, to the
knowledge of 7th Level or any 7th Level Subsidiary, threatened by or on behalf
of any of the 7th Level Plans, by any employee or beneficiary covered under any
such 7th Level Plan, or otherwise involving any such 7th Level Plan (other than
routine claims for benefits).
(f) With respect to each 7th Level Plan that is subject to Title
IV of ERISA, as of the Closing Date, the assets of each such 7th Level Plan are
at least equal in value to the present value of the accrued benefits (vested and
unvested) of the participants in such 7th Level Plan on a termination basis,
based on the actuarial methods and assumptions indicated in the most recent
actuarial valuation reports.
(g) Except as disclosed in Section 3.13(g) of the 7th Level
Disclosure Schedule, the execution and delivery of the Transaction Documents and
the consummation of the transactions
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contemplated hereby and thereby will not cause any payment (whether of severance
pay or otherwise) not otherwise due from becoming due from any of the 7th Level
Plans, or from 7th Level or any 7th Level Subsidiary with respect to any of the
7th Level Plans, to any individual, or cause the vesting, acceleration or
payment, or in the increase in the amount of, any benefit payable under any of
the 7th Level Plans to any individual.
(h) Except as disclosed in Section 3.13(h) of the 7th Level
Disclosure Schedule, any hospital, medical, dental, vision, sickness or
accident, survivor or death benefit, disability or similar benefit coverage
provided under any 7th Level Plan is provided solely through insurance policies,
and in addition (i) no 7th Level Plan provides for hospital, medical, death,
survivor or any other welfare benefit for retired or former employees, officers,
directors, consultants or independent contractors, except as required by Section
4980B of the Code, and (ii) no 7th Level Plan is an unfunded plan of deferred
compensation.
(i) No entity (other than 7th Level or any 7th Level Subsidiary),
which is treated as a single employer with 7th Level or any 7th Level Subsidiary
under Section 414(b), (c), (m), or (o) of the Code, sponsors, maintains or
contributes to any employee benefit plan with respect to which any material
liability (other than for routine contributions or benefit payments), penalty or
tax has been incurred, or with respect to which any Lien has been imposed.
SECTION 3.14. TAXES.
(a) Except as set forth in Section 3.14 of the 7th Level
Disclosure Schedule:
(i) 7th Level or one of its affiliates has accurately
prepared and timely filed (after giving effect to applicable extensions) with
the appropriate taxing authorities all material Tax Returns (as hereinafter
defined) required to be filed by or with respect to 7th Level under all
applicable laws and the 7th Level Subsidiaries and such Tax Returns are true,
correct and complete in all material respects;
(ii) 7th Level or one of its affiliates has properly and
fully paid or made adequate provision in the 7th Level Financial Statements in
accordance with GAAP for the payment of all Taxes (as hereinafter defined) of
7th Level and the 7th Level Subsidiaries shown to be due on such Tax Returns or
that are otherwise required to be paid by 7th Level or any 7th Level Subsidiary
in the case of Taxes payable or anticipated to be payable on account of the
operations, acts or omissions of 7th Level and all 7th Level Subsidiaries for
any and all periods through the date of reference;
(iii) no waivers of statutes of limitation have been given
or requested with respect to 7th Level or any 7th Level Subsidiary in connection
with any Tax Returns covering 7th Level or any 7th Level Subsidiary with respect
to any Taxes payable by them;
(iv) 7th Level has or has caused to be duly and timely
withheld and has paid over in a proper manner to the appropriate taxing
authorities all Taxes required to be so withheld
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and paid over for all periods under all Applicable Laws;
(v) neither 7th Level nor any 7th Level Subsidiary is a
party to any tax sharing or similar agreement or arrangement pursuant to which
it will have any obligation to make any payments after the Closing other than to
7th Level or any 7th Level Subsidiary and neither 7th Level nor any 7th Level
Subsidiary could be liable for the Taxes of any other person (other than 7th
Level or a 7th Level Subsidiary) as a "transferee" within the meaning of Section
6901 of the Code, by reason of Treasury Regulation Section 1.1502-6 or any
provision of state, local or foreign law, as a successor, by contract or
otherwise;
(vi) there are no Liens with respect to Taxes (except for
Liens for Taxes which are not yet delinquent) upon any assets of 7th Level or
any 7th Level Subsidiary;
(vii) all material Tax Returns filed by or on behalf of 7th
Level or any 7th Level Subsidiary have been examined by the relevant taxing
authorities or the statute of limitations with respect to such Tax Returns has
expired and all deficiencies asserted or assessments made as a result of any
examination by the IRS or any other taxing authority of the Tax Returns of or
covering 7th Level or any 7th Level Subsidiary have been fully paid, and there
are no unpaid deficiencies asserted or assessments made by any taxing authority
for which 7th Level or any 7th Level Subsidiary may be liable;
(viii) neither 7th Level nor any 7th Level Subsidiary has
received any written notice of deficiency or assessment or has any actual
knowledge of any proposed deficiency or assessment from any federal, state,
local or other taxing authority with respect to liabilities for which 7th Level
or any 7th Level Subsidiary may be liable nor is any examination of any Tax
Return of 7th Level or any 7th Level subsidiary being conducted by any such
taxing authority and no notification of intention to examine any Tax Return has
been received from any such tax authority;
(ix) neither 7th Level, any 7th Level Subsidiary nor any
person on their respective behalf has (A) executed or entered into a closing
agreement pursuant to Section 7121 of the Code or any predecessor provision
thereof or any similar provision of state, local or foreign law, or (B) agreed
to or is required to make any adjustment pursuant to Section 481(a) of the Code
or any similar provision of state, local or foreign law by reason of a change in
accounting method initiated by 7th Level or any 7th Level Subsidiary or has any
actual knowledge that the IRS has proposed any such adjustment or change in
accounting method, or has an application pending with any taxing authority
requesting permission for any changes in accounting methods that relate to the
subject business or operations of 7th Level or any 7th Level Subsidiary; and
(x) no claim has been made by any taxing jurisdiction
where 7th Level does not file Tax Returns that 7th Level or any 7th Level
Subsidiary is or may be subject to taxation by that jurisdiction.
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(b) 7th Level has provided Panmedia with copies of: (i) all Tax
Returns of 7th Level and the 7th Level Subsidiaries for all periods (including
periods for which 7th Level or any 7th Level Subsidiary is or may have been a
member of another consolidated, combined or unitary group) with respect to which
the statute of limitations on assessment has not expired; (ii) any notices,
protests or closing agreements relating to issues arising, or potentially
arising, in any audit, litigation or similar proceeding with respect to the
liability for Taxes of 7th Level or any 7th Level Subsidiary; (iii) any
elections or disclosure of any controversial position filed by or on behalf of
7th Level or any 7th Level Subsidiary with any taxing authority (whether or not
filed with any Tax Return); (iv) any letter rulings, determination letters or
similar documents issued by any taxing authority with respect to 7th Level or
any 7th Level Subsidiary; and (v) any Tax sharing or similar agreement or
arrangement (whether or not written) to which 7th Level or any 7th Level
Subsidiary is or has been a party.
(c) As used in this Agreement:
(i) "Taxes" means all taxes, levies or other like
assessments, charges or fees (including estimated taxes, charges and fees),
including, without limitation, net income, gross income, corporation, advance
corporation, gross receipts, premium, estimated, customs, duties, transfer,
excise, property, sales, use, value-added, license, payroll, pay as you earn,
withholding, social security and franchise or other governmental taxes or
charges, imposed by the United States or any state, county, local or foreign
government or subdivision or agency thereof and any interest, penalties or
additions to tax with respect thereto.
(ii) "Tax Return" means any report, return, statement,
estimate, informational return, declaration or other written information
required to be supplied to a taxing authority in connection with Taxes.
SECTION 3.15. CONTRACTS AND COMMITMENTS.
Section 3.15 of the 7th Level Disclosure Schedule sets forth a list of
all material agreements, Contracts and commitments to which 7th Level or any 7th
Level Subsidiary is a party or by which 7th Level, any 7th Level Subsidiary or
their respective assets are bound (each, a "7th Level Material Contract"),
including, without limitation:
(a) employment agreements or severance agreements or employee
termination arrangements that are not terminable at will by 7th Level or a 7th
Level Subsidiary without penalty;
(b) any change of control agreements with employees of 7th Level
or any 7th Level Subsidiary;
(c) agreements, contracts, commitments or arrangements containing
any covenant
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limiting the ability of 7th Level or any 7th Level Subsidiary to engage in any
line of business or to compete with any business or person;
(d) agreements or contracts with or any officer, director or
employee of 7th Level, any 7th Level Subsidiary, (other than employment,
severance and change of control agreements covered by clause (a) or (b) above);
(e) agreements or contracts under which 7th Level or any 7th Level
Subsidiary has borrowed or loaned money, or any note, bond, indenture, mortgage,
installment obligation or other evidence of indebtedness for borrowed or loaned
money or any guarantee of such indebtedness, in each case, relating to amounts
in excess of $25,000;
(f) joint venture agreements or other agreements involving the
sharing of profits;
(g) leases pursuant to which personal or real property is leased
to or from 7th Level or any 7th Level Subsidiary;
(h) powers of attorney from 7th Level or any 7th Level Subsidiary;
(i) guaranties, suretyships or other contingent agreements of 7th
Level or any 7th Level Subsidiary;
(j) any agreement, contract, commitment or arrangement relating to
capital expenditures with respect to 7th Level or any 7th Level Subsidiary and
involving future payments which exceed $25,000 in any 12-month period;
(k) any agreement, contract, commitment or arrangement relating to
the acquisition of assets (other than in the ordinary course of business
consistent with past practice) or any capital stock of any business enterprise;
(l) contracts (other than those covered by clause (a) through (k)
above) pursuant to which 7th Level and the 7th Level Subsidiaries will receive
or pay in excess of $25,000 over the life of the contract; and
(m) any other material agreements, Contracts and commitments
whether or not entered into in the ordinary course of business.
Except as set forth in Section 3.15 of the 7th Level Disclosure Schedule,
neither 7th Level, any 7th Level Subsidiary nor, to the knowledge of 7th Level,
any other party thereto, is in material breach of or in material default under
any 7th Level Material Contract. Each such 7th Level Material Contract is in
full force and effect, and is a legal, valid and binding obligation of 7th Level
and/or the applicable 7th Level Subsidiaries and, to the knowledge of 7th Level,
each of the other parties thereto, enforceable in accordance with its terms.
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SECTION 3.16. COMPLIANCE WITH LAWS.
Except as set forth in Section 3.16 of the 7th Level Disclosure
Schedule, 7th Level and the 7th Level Subsidiaries are in compliance with all
Applicable Laws and all Orders of, and agreements with, any Governmental
Authority applicable to 7th Level, any 7th Level Subsidiary or any of their
respective assets, except for laws the violation of which, individually or in
the aggregate, would not have a 7th Level Material Adverse Effect. Except as set
forth in Section 3.16 of the 7th Level Disclosure Schedule, 7th Level and the
7th Level Subsidiaries have all permits, certificates, licenses, approvals and
other authorizations required under Applicable Laws or necessary in connection
with the conduct of their businesses, except where the failure to hold such
permit, certificate, license, approval or authorization would not, individually
or in aggregate, have a 7th Level Material Adverse Effect.
SECTION 3.17. INSURANCE.
Except as set forth in Section 3.17 of the 7th Level Disclosure
Schedule, 7th Level and the 7th Level Subsidiaries maintain policies of fire and
casualty, liability and other forms of insurance in such amounts, with such
deductibles and retained amounts, and against such risks and losses, as are, in
the reasonable judgment of 7th Level, reasonable for the conduct of their
businesses and their assets. Section 3.17 of the 7th Level Disclosure Schedule
sets forth a list of such insurance policies, to 7th Level's knowledge, based on
a report by 7th Level's insurance broker, as are in full force and effect as of
the date of this Agreement, which policies 7th Level shall maintain in full
force and effect during the period from the date of this Agreement through the
Closing Date.
SECTION 3.18. LABOR MATTERS.
Except as set forth in Section 3.18 of the 7th Level Disclosure
Schedule, (a) 7th Level and the 7th Level Subsidiaries are in substantial
compliance with all Applicable Laws regarding employment and employment
practices, (b) there is no unfair labor practice charge or complaint against 7th
Level nor any 7th Level Subsidiary pending before the National Labor Relations
Board nor is there any material grievance nor any material arbitration
proceeding arising out of or under collective bargaining agreements pending or,
to 7th Level's knowledge, threatened with respect to the businesses of 7th Level
and the 7th Level Subsidiaries, (c) there is no labor strike, slowdown, work
stoppage or lockout in effect, or, to the knowledge of 7th Level, threatened
against or otherwise affecting 7th Level or any 7th Level Subsidiary, and 7th
Level and the 7th Level Subsidiaries have not experienced any such labor
controversy within the past five years, (d) there is no material charge or
complaint pending or, to 7th Level's knowledge, threatened against 7th Level or
any 7th Level Subsidiary before the Equal Employment Opportunity Commission, the
Office of Federal Contract Compliance Programs or any similar state, local or
foreign agency responsible for the prevention of unlawful employment practices,
(e) neither 7th Level nor any 7th Level Subsidiary is a party to, or otherwise
bound by, any consent decree with, or citation by, any Governmental Authority
relating to employees or employment practices, (f) 7th Level and the
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7th Level Subsidiaries will not have any material liability under any benefit or
severance policy, practice, agreement, plan, or program which exists or arises,
or may be deemed to exist or arise, under any Applicable Law or otherwise, as a
result of the transactions contemplated hereunder, (g) neither 7th Level nor any
7th Level Subsidiary is a party to any collective bargaining agreement, and (h)
7th Level and the 7th Level Subsidiaries are in compliance with its obligations
pursuant to the WARN Act, and, except as would not have a 7th Level Material
Adverse Effect, all other notification and bargaining obligations arising under
any collective bargaining agreement, statute or otherwise. To the knowledge of
7th Level, neither 7th Level nor any 7th Level Subsidiary has received written
notice of the intent of any federal, state, local or foreign agency responsible
for the enforcement of employment laws to conduct an investigation of or
relating to 7th Level or any 7th Level Subsidiary, and no such investigation is
in progress.
SECTION 3.19. ENVIRONMENTAL MATTERS.
Except as set forth in Section 3.19 of the 7th Level Disclosure
Schedule, (i) neither 7th Level nor any 7th Level Subsidiary has, as of the date
hereof, received any written notice alleging the material violation of, or any
material actual or potential liability relating to, any applicable federal,
state or local statutes, laws, regulations, rules, decrees, orders, judgments,
ordinances, or common law related to the protection of human health or the
environment, including, without limitation, the Comprehensive Environmental
Response, Compensation and Liability Act, the Emergency Planning and Community
Right-To-Know Act, the Solid Waste Disposal Act, the Resource Conservation and
Recovery Act, the Clean Air Act, the Water Pollution Control Act, the Toxic
Substances Control Act, the Hazardous Materials Transportation Act, and the
Occupational Safety and Health Act, each as amended and supplemented, and any
regulations promulgated pursuant to such laws, and any similar state or local
statutes or regulations (collectively, the "Environmental Laws"), which
violation has not been resolved and, to the knowledge of 7th Level, no such
notice is threatened or otherwise expected; (ii) 7th Level and the 7th Level
Subsidiaries are and have been in material compliance with all applicable
Environmental Laws and, to the knowledge of 7th Level, there is no condition
that would likely prevent or materially interfere with such compliance in the
future; (iii) 7th Level and the 7th Level Subsidiaries have obtained and are and
have been in material compliance with all required governmental environmental
permits, registrations and authorizations with respect to the businesses of 7th
Level and the 7th Level Subsidiaries; (iv) no hazardous waste, substance,
material, or chemical, including, without limitation, petroleum and petroleum
products, asbestos and any other material regulated under, or that can result in
liability under, applicable Environmental Laws ("Hazardous Substances"), has
been transported, stored, treated or disposed of by 7th Level or any 7th Level
Subsidiary on the real estate owned, operated or otherwise used by 7th Level or
any 7th Level Subsidiary or at any other location, except as would not result in
material liability under any applicable Environmental Laws; (v) neither 7th
Level nor any 7th Level Subsidiary has assumed, contractually or by operation of
law, any liabilities, potential liabilities or obligations of any other person
or entity under any applicable Environmental Laws; (vi) neither 7th Level nor
any 7th Level Subsidiary has entered into, agreed to, or is subject to any
judgment, decree, order or other similar requirement of any governmental
authority under any
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Environmental Laws; (vii) to 7th Level's knowledge, there are no (w) underground
or aboveground storage tanks, (x) surface impoundments, (y) landfills or (z)
sewer or septic systems currently present at or about any of the properties or
facilities currently or formerly owned, operated or otherwise used by 7th Level
or any 7th Level Subsidiary that would be reasonably likely to result in
material liability to 7th Level or any 7th Level Subsidiary under any applicable
Environmental Laws; and (viii) to 7th Level's knowledge, there are no actions,
activities, events, conditions or circumstances occurring or, existing during
the time of 7th Level's or any 7th Level Subsidiary's operations and ownership
of its properties or prior to such time, including without limitation the
release, threatened release, emission, discharge, generation, treatment, storage
or disposal of Hazardous Substances, that would be reasonably likely to result
in any material liability or obligation of 7th Level or any 7th Level Subsidiary
under or relating to any Environmental Laws, except, in each case, which would
not be reasonably likely to have a 7th Level Material Adverse Effect.
SECTION 3.20. TRANSACTIONS WITH AFFILIATES.
Except as disclosed in Section 3.15 or 3.20 of the 7th Level Disclosure
Schedule there are no Contracts, agreements or arrangements between 7th Level
(or the 7th Level Subsidiaries) and any officer, director or affiliate of 7th
Level (or the 7th Level Subsidiaries) or beneficial owner of 10% or more of the
7th Level Common Stock.
SECTION 3.21. BROKERS.
No broker, finder or financial advisor or other person is entitled to
any brokerage fees, commissions, finders' fees or financial advisory fees in
connection with the transactions contemplated hereby by reason of any action
taken by 7th Level or any of their respective directors, officers, employees,
representatives or agents, except for the fees and expenses set forth in Section
3.21 of the 7th Level Disclosure Schedule.
SECTION 3.22. CERTAIN AGREEMENTS.
Neither 7th Level nor any 7th Level Subsidiary is a party to any: (i)
agreement with any director, officer or other employee of 7th Level or any 7th
Level Subsidiary, the benefits of which are contingent, or the terms of which
are materially altered, upon the occurrence of a transaction involving 7th Level
of the nature contemplated by this Agreement; or (ii) agreement or plan
(including 7th Level Plans), any of the benefits of or rights under which will
be increased, or the vesting or payment of the benefits of or rights under which
will be accelerated, by the occurrence of any of the transactions contemplated
by this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement.
SECTION 3.23. ABSENCE OF CERTAIN COMMERCIAL PRACTICES.
Neither 7th Level nor any of 7th Level Subsidiary, nor, to the
knowledge of 7th Level, any
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director, officer, agent, employee or other person acting on behalf of 7th Level
or any 7th Level Subsidiary, has: (i) given or agreed to give any gift or
similar benefit of more than nominal value to any customer, supplier, or
governmental employee or official or any other person who is or may be in a
position to help or hinder 7th Level or any 7th Level Subsidiary or assist 7th
Level or any 7th Level Subsidiary in connection with any proposed transaction,
which gift or similar benefit, if not given in the past, might have materially
and adversely affected the business or prospects of 7th Level or any 7th Level
Subsidiary, or which, if not continued in the future, might materially and
adversely affect the business or prospects of 7th Level or any 7th Level
Subsidiary; or (ii) used any corporate or other funds for unlawful
contributions, payments, gifts, or entertainment, or made any unlawful
contributions, payments, gifts, or entertainment, or made any unlawful
expenditures relating to political activity to government officials or others or
established or maintained any unlawful or unrecorded funds in violation of
Section 30A of the Exchange Act. Neither 7th Level nor any 7th Level Subsidiary,
nor, to the knowledge of 7th Level, any director, officer, agent, employee or
other person acting on behalf of 7th Level or any 7th Level Subsidiary, has
accepted or received any unlawful contributions, payments, gifts or
expenditures.
SECTION 3.24. YEAR 2000 ISSUES.
(a) Any failure of any of the software, computers, network
equipment, technical infrastructure, production equipment and other equipment
and systems that are material to the operation of 7th Level or any 7th Level
Subsidiary and that rely on, utilize or perform date or time processing
("System") to be Year 2000 Compliant will not cause a 7th Level Material Adverse
Effect except as set forth in Section 3.24 of the 7th Level Disclosure Schedule.
(b) "Year 2000 Compliant" means a System will at all times: (i)
consistently and accurately handle and process date and time information and
data values before, during and after January 1, 2000, including but not limited
to accepting date input, providing date output, and performing calculations on
or utilizing dates or portions of dates; (ii) function accurately and in
accordance with its specifications without interruption, abnormal endings,
degradation, change in operation or other impact, or disruption of other
Systems, resulting from processing date or time data with values, before, during
and after January 1, 2000; (iii) respond to and process two-digit input in a way
that resolves any ambiguity as to century; and (iv) store and provide output of
the date information in ways that are unambiguous as to century.
SECTION 3.25. BOOKS AND RECORDS.
The books of account, minute books, stock record books and other
records of 7th Level and the 7th Level Subsidiaries, all of which have been made
available to Panmedia, are complete and correct in all material respects and
have been maintained in accordance with sound business practices in all material
respects.
ARTICLE IV
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REPRESENTATIONS AND WARRANTIES OF PANMEDIA
Except as set forth in the disclosure schedule delivered by Panmedia
and the Stockholders to 7th Level prior to the execution of this Agreement (the
"Panmedia Disclosure Schedule"), Panmedia and the Stockholders, jointly and
severally, represent and warrant to 7th Level as follows:
SECTION 4.01. ORGANIZATION OF PANMEDIA; AUTHORITY.
Panmedia is a corporation duly organized, validly existing and in good
standing under the laws of the State of California and has all requisite
corporate power and corporate authority to enter into this Agreement, to
consummate the transactions contemplated hereby, to own, lease and operate its
properties and to conduct its business. The execution, delivery and performance
by Panmedia of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
on the part of Panmedia. This Agreement has been duly executed and delivered by
Panmedia and, assuming that this Agreement constitutes a valid and binding
obligation of 7th Level and Acquisition Corporation, constitutes a valid and
binding obligation of Panmedia, enforceable against Panmedia in accordance with
its terms, except as may be limited by (i) bankruptcy, reorganization,
moratorium, fraudulent conveyance and insolvency laws and by other laws
affecting the rights of creditors generally, (ii) the availability of equitable
remedies and (iii) with respect to enforcement of rights to indemnity and
contribution hereunder, federal or state securities laws or principles of public
policy. Except as set forth in Section 4.01 of the Panmedia Disclosure Schedule,
Panmedia is duly qualified or licensed to do business as a foreign corporation
and is in good standing in each jurisdiction in which the property owned, leased
or operated by it or the nature of the business conducted by it makes such
qualification necessary, except where the failure to obtain such qualification
or license would not, individually or in the aggregate, have a Panmedia Material
Adverse Effect (as defined in Section 4.07). Panmedia has heretofore delivered
or made available to 7th Level complete and correct copies of the articles of
incorporation and by-laws of Panmedia, the minute books and stock transfer
records of Panmedia, as in effect as of the date of this Agreement.
SECTION 4.02. CAPITALIZATION.
(a) The authorized capital stock of Panmedia consists of 2,000,000
shares of Panmedia Common Stock (the "Panmedia Capital Stock"), of which only
1,000 shares of Panmedia Common Stock are outstanding on the date hereof. No
other shares of any other class or series of Panmedia Capital Stock or
securities exercisable or convertible into or exchangeable for Panmedia Capital
Stock ("Panmedia Capital Stock Equivalents") are authorized, issued or
outstanding. The outstanding shares of Panmedia Capital Stock have been duly
authorized and validly issued and are fully paid and nonassessable and were not
issued in violation of, and are not subject to, any preemptive, subscription or
similar rights. Except as set forth in Section 4.02(a) of the Panmedia
Disclosure Schedule, there are no outstanding warrants, options,
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subscriptions, calls, rights, agreements, convertible or exchangeable securities
or other commitments or arrangements relating to the issuance, sale, purchase,
return or redemption, and, to Panmedia's knowledge, voting or transfer of any
shares, whether issued or unissued, of Panmedia Capital Stock, Panmedia Capital
Stock Equivalents or other securities of Panmedia.
(b) The Stockholders are the only record and beneficial owners
("Owners") of Panmedia Capital Stock. Their respective ownership amounts are
disclosed in Section 4.02(b) of the Panmedia Disclosure Schedule. The
Stockholders are each Accredited Investors. The residence address of each
Stockholder is as set forth opposite such Stockholder's name in Section 4.02(b)
of the Panmedia Disclosure Schedule.
SECTION 4.03. SUBSIDIARIES.
Section 4.03 of the Panmedia Disclosure Schedule contains a list of the
name of each subsidiary of Panmedia (each such corporation, partnership or other
entity being referred to herein as a "Panmedia Subsidiary"). Section 4.03 of the
Panmedia Disclosure Schedule sets forth, with respect to each Panmedia
Subsidiary, its type of entity, the jurisdiction of its organization, its
authorized and outstanding capital stock, partnership interests or equivalent
ownership interests and Panmedia's current ownership of such shares or
interests. Except as set forth in Section 4.03 of the Panmedia Disclosure
Schedule, each of the outstanding shares of capital stock of each of the
Panmedia Subsidiaries is duly authorized, validly issued, fully paid and
nonassessable and owned by Panmedia or another Panmedia Subsidiary free and
clear of all Liens and were not issued in violation of, nor subject to, any
preemptive, subscription or similar rights. Except as set forth in Section 4.03
of the Panmedia Disclosure Schedule, there are no outstanding warrants, options,
subscriptions, calls, rights, agreements, convertible or exchangeable securities
or other commitments or arrangements relating to the issuance, sale, purchase,
return or redemption, voting or transfer of any shares, whether issued or
unissued, of Panmedia Capital Stock, Panmedia Capital Stock Equivalents or other
securities of any Panmedia Subsidiary. Except as set forth in Section 4.03 of
the Panmedia Disclosure Schedule, Panmedia and the Panmedia Subsidiaries do not
own any equity interests in any person. Each Panmedia Subsidiary is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization and has all requisite power and authority to
own, lease and operate its properties and to conduct its business.
SECTION 4.04. NO VIOLATION; CONSENTS AND APPROVALS.
Except as set forth in Section 4.04 of the Panmedia Disclosure
Schedule, the execution and delivery by Panmedia of this Agreement does not, and
the consummation of the transactions contemplated hereby and compliance with the
terms hereof conflict with, or result in any violation of or default (or an
event which, with notice or lapse of time or both, would constitute a default)
under, (a) any provision of the articles of incorporation or by-laws of
Panmedia, (b) any Order or Applicable Law applicable to Panmedia or any Panmedia
Subsidiary or the property or assets of Panmedia or any Panmedia Subsidiary, or
(c) give rise to any right of termination,
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cancellation or acceleration under, or result in the creation of any Lien upon
any of the properties of Panmedia or any Panmedia Subsidiary under, any
Contracts to which Panmedia or any Panmedia Subsidiary is a party or by which
Panmedia or any Panmedia Subsidiary or any assets of Panmedia or any Panmedia
Subsidiary may be bound, except in the case of clauses (b) and (c), for such
conflicts, violations or defaults as to which requisite waivers or consents will
have been obtained prior to the Closing or which, individually or in the
aggregate, would not have a Panmedia Material Adverse Effect. Except as set
forth in Section 4.04 of the Panmedia Disclosure Schedule, no Governmental
Approval of any Governmental Authority is required to be obtained or made by or
with respect to Panmedia or any Panmedia Subsidiary in connection with the
execution and delivery of this Agreement or the consummation by Panmedia of the
transactions contemplated hereby, except where the failure to obtain such
Governmental Approval would not, individually or in the aggregate, have a
Panmedia Material Adverse Effect.
SECTION 4.05. PANMEDIA DISCLOSURE.
No representations or warranties made by Panmedia in the Transaction
Documents, the Panmedia Disclosure Schedule or the information related to
Panmedia's web site attached hereto as EXHIBIT H contains or will contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading.
SECTION 4.06. FINANCIAL STATEMENTS.
Except as set forth in Section 4.06 of the Panmedia Disclosure
Schedule, (i) the information supplied by the Stockholders to their accountants
to prepare their 1996, 1997 and 1998 Schedule C on Form 1040 (the "Schedule
C's") was accurate in all material respects and, to Panmedia's and the
Stockholders' knowledge, the Schedule C's are accurate in all material respects
for Tax purposes, (ii) Panmedia's cash accounts consist solely of the Charles
Schwab account (No. SR 6899-4844) and West America account (No. 506-36662-4),
(iii) as of April 23, 1999, Panmedia had project commitments of approximately
$350,000 (the "Project Commitments"), and, to Panmedia's knowledge, there are no
material defaults by third parties under the Project Commitments, and (iv) as of
the date hereof, to Panmedia's knowledge, Panmedia does not have an obligation
to make payments to third parties exceeding $100,000 in the aggregate, which
amount shall exclude any current payroll expense, accrued vacation expense,
legal fees related to this Agreement and the transaction contemplated hereby,
real property lease payments related to the 350 Gate Five Road, Sausalito,
California property, and capital lease payments related to the leases set forth
in the Panmedia Disclosure Schedule.
SECTION 4.07. ABSENCE OF CERTAIN CHANGES OR EVENTS.
Except as set forth in Section 4.07 of the Panmedia Disclosure Schedule
or for the transactions contemplated by this Agreement, during the period from
December 31, 1998 to the date of this Agreement, (i) Panmedia and the Panmedia
Subsidiaries have operated their
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businesses solely in the ordinary course of business consistent with past
practices, and (ii) without limiting the generality of clause (i), neither
Panmedia nor any Panmedia Subsidiary has:
(a) created, incurred, assumed or guaranteed any indebtedness for
borrowed money (including, without limitation, obligations in respect of capital
leases), other than borrowings and issuances of letters of credit in the
ordinary course of business and consistent with past practice;
(b) issued, sold or delivered, redeemed or purchased, any shares
of Panmedia Capital Stock or any Panmedia Capital Stock Equivalents, or granted
or entered into any options, warrants, rights, agreements or commitments with
respect to the issuance of Panmedia Capital Stock or Panmedia Capital Stock
Equivalents, or amended any terms of any such securities or agreements;
(c) declared, set aside or paid any dividends or other
distributions in respect of Panmedia Capital Stock;
(d) increased the rate of compensation or benefits of, or paid or
agreed to pay any benefit to (including, but not limited to severance or
termination pay), present or former directors, officers or employees, except as
may be required by any existing Panmedia Plan (as defined in Section 4.13),
agreement or arrangement disclosed to 7th Level prior to the date hereof or to
employees who are not officers in accordance with Panmedia's ordinary course of
business consistent with past practice;
(e) entered into, adopted, terminated or amended any Panmedia
Plan, employment or severance agreement or any plan, agreement, program, policy,
trust, fund or other arrangement that would be a Panmedia Plan if it were in
existence as of the date of this Agreement, except as required by law;
(f) sold, leased, transferred, or otherwise disposed of any
properties or assets, real, personal or mixed, which have an aggregate book
value in excess of $25,000 or mortgaged or encumbered any properties or assets,
whether real or personal, which have an aggregate book value in excess of
$25,000;
(g) acquired or agreed to acquire by merging or consolidating
with, or by purchasing the stock or a substantial portion of the assets of, or
by any other manner, any business or any corporation, partnership, association
or other business organization or division thereof or otherwise acquired or
agreed to acquire any assets which are material, individually or in the
aggregate, to Panmedia and the Panmedia Subsidiaries;
(h) entered into, modified, amended or terminated any lease of
Panmedia Real Property (as defined in Section 4.10) (except modifications or
amendments in connection with renewals of leases in the ordinary course of
business) or any other Panmedia Material Contract
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(as defined in Section 4.15);
(i) waived or released any rights of material value, or canceled,
compromised, released or assigned any material indebtedness owed to it or any
material claims held by it;
(j) canceled or terminated any insurance policy naming it as a
beneficiary or a loss payable payee without obtaining comparable substitute
insurance coverage;
(k) effectuated a "plant closing" or "mass layoff" (as those terms
are defined under the WARN Act) affecting in whole or in part any site of
employment, facility, operating unit or employees of Panmedia or any Panmedia
Subsidiary;
(l) amended its articles of incorporation or by-laws;
(m) changed any of its accounting principles, methods or
practices; or
(n) agreed, whether in writing or otherwise, to do any of the
foregoing; and
(iii) there have occurred no changes or events which, individually or in the
aggregate, would have a Panmedia Material Adverse Effect. As used in this
Agreement, any reference to any event, change or effect having a "Panmedia
Material Adverse Effect" means such event, change or effect, individually or in
the aggregate with other events, changes or effects, is materially adverse to
(a) the business, properties, financial condition or results of operations of
Panmedia and the Panmedia Subsidiaries taken as a whole or (b) the ability of
Panmedia and 7th Level to consummate the transactions contemplated hereby.
SECTION 4.08. [Intentionally left blank.]
SECTION 4.09. PERSONAL PROPERTY.
(a) Except as set forth in Section 4.09(a) of the Panmedia
Disclosure Schedule, Panmedia and the Panmedia Subsidiaries have good and valid
title to all of their Personal Property, in each case, free and clear of all
Liens, imperfections of title or encumbrances of any nature whatsoever, other
than Permitted Liens.
(b) Except as set forth in Section 4.09(b) of the Panmedia
Disclosure Schedule, all material tangible items of Personal Property necessary
for the operation or conduct of the businesses of Panmedia and the Panmedia
Subsidiaries as currently conducted are in reasonably good maintenance,
operating condition and repair, normal wear and tear excepted, other than
machinery and equipment under repair or out of service in the ordinary course of
business.
SECTION 4.10. REAL PROPERTY.
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(a) As used in this Agreement, the term "Panmedia Real Property"
shall mean all real property and interests in real property leased or subleased
by Panmedia or any Panmedia Subsidiary. Section 4.10(a) of the Panmedia
Disclosure Schedule lists all Panmedia Real Property. Panmedia owns no real
property. Except as set forth in Section 4.10(a) of the Panmedia Disclosure
Schedule, the Panmedia Real Property constitutes all of the real property and
interests in real property used in the conduct of the businesses of Panmedia and
the Panmedia Subsidiaries.
(b) As used in this Agreement, the term "Panmedia Real Estate
Permitted Liens" shall mean:
(i) All building codes and zoning ordinances and other
laws, ordinances, regulations, rules, orders or determinations of any federal,
state, county, municipal or other governmental authority heretofore, now or
hereafter enacted, made or issued by any such governmental authority affecting
the Panmedia Real Property;
(ii) All easements, rights-of-way, covenants, conditions,
restrictions, reservations, licenses, agreements and other similar matters which
do not impair the use of the Panmedia Real Property to which they relate;
(iii) All electric power, telephone, gas, sanitary sewer,
storm sewer, water, steam, compressed air and other utility lines, pipelines,
service lines and similar facilities now located on, over or under the Panmedia
Real Property, and all licenses, easements, flowage rights, rights-of-way and
other similar agreements relating thereto granted in the ordinary course of
business; and
(iv) All existing public and private roads and the streets
(whether dedicated or undedicated), and all railroad lines and rights-of-way
affecting the Panmedia Real Property.
(c) Except as set forth in Section 4.10(c) of the Panmedia
Disclosure Schedule, Panmedia and the Panmedia Subsidiaries have valid leasehold
interests in all Panmedia Real Property leased by them, in each case, free and
clear of all mortgages, Liens, security interests, easements, covenants,
rights-of-way and other encumbrances or restrictions of any nature created by
Panmedia, except for Permitted Liens and Panmedia Real Estate Permitted Liens
which, individually or in the aggregate, would not have a Panmedia Material
Adverse Effect.
(d) To Panmedia's knowledge and except as set forth in Section
4.10(d) of the Panmedia Disclosure Schedule, there are no pending or, to the
knowledge of Panmedia, threatened actions or proceedings (including
condemnation, eminent domain and foreclosure) which could affect any of the
Panmedia Real Property. Panmedia has not violated, and, to the knowledge of
Panmedia, there is no violation of, any Applicable Law affecting the Panmedia
Real Property.
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(e) To Panmedia's knowledge and except as set forth in Section
4.10(e) of the Panmedia Disclosure Schedule, all of the Panmedia Real Property
is occupied under a valid and current certificate of occupancy or similar
permit, the transactions contemplated by this Agreement will not require the
issuance of any new or amended certificate of occupancy and there are no facts
which would prevent the Panmedia Real Property from being occupied after the
Closing Date in the same manner as before.
(f) To Panmedia's knowledge and except as set forth in Section
4.10(f) of the Panmedia Disclosure Schedule, the buildings, fixtures and all
improvements on the Panmedia Real Property were constructed in compliance with
all applicable federal, state, local or foreign statutes, laws, ordinances,
regulations, rules, codes, orders or requirements (including, but not limited
to, any building, zoning or environmental laws or codes) affecting such
property, except where the failure to be in compliance would not, individually
or in the aggregate, impair the value or interfere with the present use of such
Panmedia Real Property or otherwise impair business operations.
(g) To Panmedia's knowledge and except as set forth in Section
4.10(g) of the Panmedia Disclosure Schedule, the buildings, fixtures and all
improvements on the Panmedia Real Property and the present use and conditions
thereof do not violate any applicable deed restrictions or other applicable
covenants, restrictions, agreements, existing site plan approvals, zoning or
subdivision regulations or urban redevelopment plans as modified by any duly
issued variances, and no permits, licenses or certificates pertaining to the
ownership or operation of all improvements on the Panmedia Real Property, other
than those which are transferable with the Panmedia Real Property, are required
by any governmental agency having jurisdiction over the Panmedia Real Property.
(h) To Panmedia's knowledge and except as set forth in Section
4.10(h) of the Panmedia Disclosure Schedule, the buildings, fixtures and all
improvements on the Panmedia Real Property are structurally sound in all
material respects and in reasonably good maintenance and repair, normal wear and
tear excepted.
(i) Schedule 4.10(i) of the Panmedia Disclosure Schedule sets
forth, as of the date hereof, an accurate, correct and complete list (including
the name of the landlord, term, security deposit (if any) and annual rent) of
each lease, sublease or other arrangement pursuant to which Panmedia leases or
subleases Panmedia Real Property (the "Panmedia Leased Premises"), and Panmedia
have heretofore made available to 7th Level a complete and accurate copy of each
such lease and sublease. Unless otherwise noted in Schedule 4.10(i) of the
Panmedia Disclosure Schedule, Panmedia is the sole lessee or sublessee under
each of the leases and subleases listed in Schedule 4.10(i) of the Panmedia
Disclosure Schedule. To the knowledge of Panmedia, to the extent that it would
be responsible for repairing any structural defects to any Panmedia Leased
Premises under any Panmedia Lease (as defined below), such Panmedia Leased
Premises are structurally sound with no patent or latent defects and are in good
operating condition and repair
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adequate for current use; are suitable for the purposes for which they are
presently being used and are adequate to meet all present and reasonably
anticipated future requirements of the business of Panmedia, as currently
conducted; and none of such Panmedia Leased Premises are in need of maintenance
or repairs except for ordinary, routine maintenance and repairs which are not
material in nature or cost. Panmedia is in peaceable possession of the premises
covered by the Panmedia Leased Premises.
(j) Each of the Panmedia Real Property leases and subleases (and
leases underlying such subleases) set forth in Schedule 4.10(i) of the Panmedia
Disclosure Schedule (the "Panmedia Leases") is in full force and effect, has not
been further supplemented, amended or modified, and contains no terms other than
the terms contained in the copies heretofore delivered or made available to 7th
Level or made available to 7th Level at Panmedia's offices. Panmedia has
complied, in all material respects, with or provided for all material
commitments, liabilities and obligations on its part to be performed or observed
under each Panmedia Lease (including, without limitation, payment in full or
accrual of all amounts due thereunder). To the knowledge of Panmedia, each party
to each Panmedia Lease other than Panmedia has complied, in all material
respects with or provided for all material commitments, liabilities and
obligations on its part to be performed or observed thereunder. Panmedia has not
received any written notice of a default, offset or counterclaim by or against
it under any Panmedia Lease that remains pending and to Panmedia's knowledge, no
event or condition (including, without limitation, the execution and delivery of
this Agreement and the transactions contemplated hereunder) exists which
constitutes or would constitute a default by it or, to its knowledge, of any
other person or, after notice or lapse of time or both, would constitute a
default under any Panmedia Lease. Except as set forth in Schedule 4.10(i) of the
Panmedia Disclosure Schedule, the consummation of the transactions contemplated
hereby will not be considered an assignment of any of the Panmedia Leases
(requiring the consent or approval by another person) and shall not constitute a
default under any of the Panmedia Leases.
(k) To the knowledge of Panmedia, there are no defaults by the
landlords under any of the Panmedia Leases and such landlords have performed all
of their obligations thereunder to the extent that such performance was to be
completed heretofore. Panmedia has not waived any obligation of any such
landlord or any right under any of the Panmedia Leases, except as set forth in
any written agreement disclosed to 7th Level together with the applicable leases
and subleases.
SECTION 4.11. INTELLECTUAL PROPERTY.
(a) Section 4.11(a) of the Panmedia Disclosure Schedule sets forth
a complete list of all Industrial Property owned, filed or licensed by Panmedia
or any Panmedia Subsidiary and, with respect to registered trademarks, all
jurisdictions in which such trademarks are registered.
(b) Except as set forth in Section 4.11(b) of the Panmedia
Disclosure Schedule, (i) the consummation of the transactions contemplated by
this Agreement will not materially impair any right to use any of its
Intellectual Property, (ii) except as would not have a Panmedia Material
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Adverse Effect, all Intellectual Property owned by Panmedia or any Panmedia
Subsidiary is owned by Panmedia or such Panmedia Subsidiary free and clear of
all Liens, (iii) except as would not have a Panmedia Material Adverse Effect,
Panmedia and the Panmedia Subsidiaries own or have the right to use all of the
Intellectual Property used in the conduct of their businesses, and (iv) no
claims have been asserted of which Panmedia or any Panmedia Subsidiary has been
given written notice by any person with respect to the ownership or use by
Panmedia or any Panmedia Subsidiary of the Intellectual Property, except those
claims (if any) which, if adversely determined, would not have a Panmedia
Material Adverse Effect.
SECTION 4.12. LITIGATION.
Except as set forth in Section 4.12 of the Panmedia Disclosure
Schedule, there are no claims, actions, suits, investigations or proceedings
pending, or, to the knowledge of Panmedia, threatened in writing against or
affecting Panmedia, any Panmedia Subsidiary or their respective assets, at law
or in equity, by or before any Governmental Authority, or by or on behalf of any
third party, which, if adversely determined, would have a Panmedia Material
Adverse Effect. Except as set forth in Section 4.12 of the Panmedia Disclosure
Schedule, Panmedia has not received any notice that Panmedia, any Panmedia
Subsidiary or any of their respective assets is subject to any material decree,
order or judgment.
SECTION 4.13. EMPLOYEE BENEFIT PLANS.
(a) Section 4.13(a) of the Panmedia Disclosure Schedule sets forth
an accurate and complete list of each bonus, incentive compensation, deferred
compensation, excess benefit, pension, retirement, profit sharing, stock bonus,
thrift, stock option, stock ownership, stock appreciation right, stock purchase,
foreign employee benefit, cafeteria, life insurance, survivor or death benefit,
sickness or accident, business travel accident, health, medical, dental, vision,
hospitalization, savings, holiday, vacation, salary continuation, severance pay,
change of control payments, sick pay, leave of absence, disability, tuition
reimbursement, service award, dependent care assistance, legal assistance,
fringe benefit (cash and non-cash) or any other employee or executive benefit
plan, contract, agreement, practice, policy or arrangement, including, without
limitation, any such plan, contract, agreement, practice, policy or arrangement
which is an "employee benefit plan" as defined in Section 3(3) of ERISA, which
benefits, covers or relates to any current or former employee, director,
consultant, independent contractor, or officer of Panmedia or any Panmedia
Subsidiary (each such plan, contract, agreement, practice, policy or arrangement
is hereinafter referred to individually as a "Panmedia Plan" and collectively as
the "Panmedia Plans").
(b) With respect to each Panmedia Plan, Panmedia has delivered to
7th Level a current, accurate and complete copy of such plan (or, to the extent
no such copy exists, an accurate description) thereof and, to the extent
applicable to each such plan, a copy of: (i) the plan document and (ii) any
summary plan description and other written communications (or a description of
any oral communications) by Panmedia or the applicable Panmedia Subsidiary to
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its employees concerning the extent of the benefits provided under such plan. No
Panmedia Plan is in violation of its requirements to timely file any annual
return in the Form 5500 series.
(c) No Panmedia Plan is an "employee pension benefit plan" within
the meaning of Section 3(2) of ERISA.
(d) Neither Panmedia nor any Panmedia Subsidiary is contributing,
or has in the past contributed to, nor incurred any liability in respect of, any
multiemployer plan within the meaning of Section 3(37) of ERISA, multiple
employer plan described in Section 413(c) of the Code or multiple employer
welfare arrangement within the meaning of Section 3(40) of ERISA.
(e) Except as set forth in Section 4.13(d) of the Panmedia
Disclosure Schedule, (i) each Panmedia Plan is in compliance in all material
respects with the applicable requirements prescribed by all statues, orders or
governmental rules or regulations currently in effect with respect to such plan,
including, but not limited to, ERISA and the Code, (ii) all contributions to
each Panmedia Plan (including both employee and employer contributions) which
are required to have been made, whether by virtue of the terms of the particular
plan or by operation of law, have been made by the due date thereof (including
all applicable extensions), and all contributions to the Panmedia Plans which
are not yet due but which relate to periods which began prior to the Closing
Date have either been paid or have been appropriately reflected by Panmedia as
an accrued liability in its financial statements, (iii) no material Taxes (as
hereinafter defined) have been imposed under Section 4975 or 4976 of the Code
with respect to any Panmedia Plan, and (iv) no governmental agency, including
the IRS or the Department of Labor, has initiated an examination or audit, or,
to the knowledge of Panmedia or any Panmedia Subsidiary, an investigation of a
Panmedia Plan which has not been completed.
(f) There are no claims, suits or actions pending or, to the
knowledge of Panmedia or any Panmedia Subsidiary, threatened by or on behalf of
any of the Panmedia Plans, by any employee or beneficiary covered under any such
Panmedia Plan, or otherwise involving any such Panmedia Plan (other than routine
claims for benefits).
(g) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not cause any payment
(whether of severance pay or otherwise) not otherwise due from becoming due from
any of the Panmedia Plans, or from Panmedia or any Panmedia Subsidiary with
respect to any of the Panmedia Plans, to any individual, or cause the vesting,
acceleration or payment, or in the increase in the amount of, any benefit
payable under any of the Panmedia Plans to any individual.
(h) Any hospital, medical, dental, vision, sickness or accident,
survivor or death benefit, disability or similar benefit coverage provided under
any Panmedia Plan is provided solely through insurance policies, and in addition
(i) no Panmedia Plan provides for hospital, medical, death, survivor or any
other welfare benefit for retired or former employees, officers, directors,
consultants or independent contractors, except as required by applicable law,
and
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(ii) no Panmedia Plan is an unfunded plan of deferred compensation.
(i) No entity (other than Panmedia or any Panmedia Subsidiary),
which is treated as a single employer with Panmedia or any Panmedia Subsidiary
under Section 414(b),(c),(m), or (o) of the Code, sponsors, maintains or
contributes to any employee benefit plan with respect to which any material
liability (other than for routine contributions or benefit payments), penalty or
tax has been incurred, or with respect to which any Lien has been imposed.
SECTION 4.14. TAXES.
(a) Except as set forth in Section 4.14 of the Panmedia Disclosure
Schedule:
(i) Panmedia or one of its affiliates has accurately
prepared and timely filed (after giving effect to applicable extensions) with
the appropriate taxing authorities all material Tax Returns required to be filed
by or with respect to Panmedia under all applicable laws and the Panmedia
Subsidiaries and such Tax Returns are true, correct and complete in all material
respects;
(ii) Panmedia or one of its affiliates has properly and
fully paid or made adequate provision in the Panmedia Financial Statements in
accordance with GAAP for the payment of all Taxes of Panmedia and the Panmedia
Subsidiaries shown to be due on such Tax Returns or that are otherwise required
to be paid by Panmedia or any Panmedia Subsidiary in the case of Taxes payable
or anticipated to be payable on account of the operations, acts or omissions of
Panmedia and all Panmedia Subsidiaries for any and all periods through the date
of reference;
(iii) no waivers of statutes of limitation have been given
or requested with respect to Panmedia or any Panmedia Subsidiary in connection
with any Tax Returns covering Panmedia or any Panmedia Subsidiary with respect
to any Taxes payable by them;
(iv) Panmedia has or has caused to be duly and timely
withheld and has paid over in a proper manner to the appropriate taxing
authorities all Taxes required to be so withheld and paid over for all periods
under all Applicable Laws;
(v) neither Panmedia nor any Panmedia Subsidiary is a
party to any tax sharing or similar agreement or arrangement pursuant to which
it will have any obligation to make any payments after the Closing other than to
Panmedia or any Panmedia Subsidiary and neither Panmedia nor any Panmedia
Subsidiary could be liable for the Taxes of any other person (other than
Panmedia or a Panmedia Subsidiary) as a "transferee" within the meaning of
Section 6901 of the Code, by reason of Treasury Regulation Section 1.1502-6 or
any provision of state, local or foreign law, as a successor, by contract or
otherwise;
(vi) there are no Liens with respect to Taxes (except for
Liens for Taxes which are not yet delinquent) upon any assets of Panmedia or any
Panmedia Subsidiary;
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(vii) all material Tax Returns filed by or on behalf of
Panmedia or any Panmedia Subsidiary have been examined by the relevant taxing
authorities or the statute of limitations with respect to such Tax Returns has
expired and all deficiencies asserted or assessments made as a result of any
examination by the IRS or any other taxing authority of the Tax Returns of or
covering Panmedia or any Panmedia Subsidiary have been fully paid, and there are
no unpaid deficiencies asserted or assessments made by any taxing authority for
which Panmedia or any Panmedia Subsidiary may be liable;
(viii) neither Panmedia nor any Panmedia Subsidiary has
received any written notice of deficiency or assessment or has any actual
knowledge of any proposed deficiency or assessment from any federal, state,
local or other taxing authority with respect to liabilities for which Panmedia
or any Panmedia Subsidiary may be liable nor is any examination of any Tax
Return of Panmedia or any Panmedia subsidiary being conducted by any such taxing
authority and no notification of intention to examine any Tax Return has been
received from any such tax authority;
(ix) neither Panmedia, any Panmedia Subsidiary nor any
person on their respective behalf has (A) executed or entered into a closing
agreement pursuant to Section 7121 of the Code or any predecessor provision
thereof or any similar provision of state, local or foreign law, or (B) agreed
to or is required to make any adjustment pursuant to Section 481(a) of the Code
or any similar provision of state, local or foreign law by reason of a change in
accounting method initiated by Panmedia or any Panmedia Subsidiary or has any
actual knowledge that the IRS has proposed any such adjustment or change in
accounting method, or has an application pending with any taxing authority
requesting permission for any changes in accounting methods that relate to the
subject business or operations of Panmedia or any Panmedia Subsidiary;
(x) no claim has been made by any taxing jurisdiction
where Panmedia does not file Tax Returns that Panmedia or any Panmedia
Subsidiary is or may be subject to taxation by that jurisdiction; and
(xi) Panmedia has qualified as an "S corporation" within
the meaning of Section 1361(a) of the Code or the equivalent under applicable
state and local law in each jurisdiction in which it conducts its business or is
otherwise taxable for each of its taxable years with respect to which the
Internal Revenue Service or any state or local tax authority is not barred from
making an assessment or levy of Taxes by operation of the relevant statue of
limitation.
(b) Panmedia has provided 7th Level with copies of: (i) all Tax
Returns of Panmedia and the Panmedia Subsidiaries for all periods (including
periods for which Panmedia or any Panmedia Subsidiary is or may have been a
member of another consolidated, combined or unitary group) with respect to which
the statute of limitations on assessment has not expired; (ii)
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any notices, protests or closing agreements relating to issues arising, or
potentially arising, in any audit, litigation or similar proceeding with respect
to the liability for Taxes of Panmedia or any Panmedia Subsidiary; (iii) any
elections or disclosure of any controversial position filed by or on behalf of
Panmedia or any Panmedia Subsidiary with any taxing authority (whether or not
filed with any Tax Return); (iv) any letter rulings, determination letters or
similar documents issued by any taxing authority with respect to Panmedia or any
Panmedia Subsidiary; and (v) any Tax sharing or similar agreement or arrangement
(whether or not written) to which Panmedia or any Panmedia Subsidiary is or has
been a party.
SECTION 4.15. CONTRACTS AND COMMITMENTS.
Section 4.15 of the Panmedia Disclosure Schedule sets forth a list of
all material agreements, Contracts and commitments to which Panmedia or any
Panmedia Subsidiary is a party or by which Panmedia, any Panmedia Subsidiary or
their respective assets are bound (each, a "Panmedia Material Contract"),
including, without limitation:
(a) agreements, contracts, commitments or arrangements involving
Panmedia's Intellectual Property;
(b) employment agreements or severance agreements or employee
termination arrangements that are not terminable at will by Panmedia or a
Panmedia Subsidiary without penalty;
(c) any change of control agreements with employees of Panmedia or
any Panmedia Subsidiary;
(d) agreements, contracts, commitments or arrangements containing
any covenant limiting the ability of Panmedia or any Panmedia Subsidiary to
engage in any line of business or to compete with any business or person;
(e) agreements or contracts with any officer, director or employee
of (i) Panmedia or (ii) any Panmedia Subsidiary (other than employment,
severance and change of control agreements covered by clause (b) or (c) above);
(f) agreements or contracts under which Panmedia or any Panmedia
Subsidiary has borrowed or loaned money, or any note, bond, indenture, mortgage,
installment obligation or other evidence of indebtedness for borrowed or loaned
money or any guarantee of such indebtedness, in each case, relating to amounts
in excess of $25,000;
(g) joint venture agreements or other agreements involving the
sharing of profits;
(h) leases pursuant to which personal or real property is leased
to or from Panmedia or any Panmedia Subsidiary;
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(i) powers of attorney from Panmedia or any Panmedia Subsidiary;
(j) guaranties, suretyships or other contingent agreements of
Panmedia or any Panmedia Subsidiary;
(k) any agreement, contract, commitment or arrangement relating to
capital expenditures with respect to Panmedia or any Panmedia Subsidiary and
involving future payments which exceed $25,000 in any 12-month period;
(l) any agreement, contract, commitment or arrangement relating to
the acquisition of assets (other than in the ordinary course of business
consistent with past practice) or any capital stock of any business enterprise;
(m) contracts (other than those covered by clause (a) through (l)
above) pursuant to which Panmedia and the Panmedia Subsidiaries will receive or
pay in excess of $25,000 over the life of the contract; and
(n) any other material agreements, Contracts and commitments
whether or not entered into in the ordinary course of business.
Except as set forth in Section 4.15 of the Panmedia Disclosure Schedule, neither
Panmedia, any Panmedia Subsidiary nor, to the knowledge of Panmedia, any other
party thereto, is in material breach of or in material default under any
Panmedia Material Contract. Each such Panmedia Material Contract is in full
force and effect, and is a legal, valid and binding obligation of Panmedia
and/or the applicable Panmedia Subsidiaries and, to the knowledge of Panmedia,
each of the other parties thereto, enforceable in accordance with its terms.
SECTION 4.16. COMPLIANCE WITH LAWS.
Except as set forth in Section 4.16 of the Panmedia Disclosure
Schedule, Panmedia and the Panmedia Subsidiaries are in compliance with all
Applicable Laws and all Orders of, and agreements with, any Governmental
Authority applicable to Panmedia, any Panmedia Subsidiary or any of their
respective assets, except for laws the violation of which, individually or in
the aggregate, would not have a Panmedia Material Adverse Effect. Except as set
forth in Section 4.16 of the Panmedia Disclosure Schedule, Panmedia and the
Panmedia Subsidiaries have all permits, certificates, licenses, approvals and
other authorizations required under Applicable Laws or necessary in connection
with the conduct of their businesses, except where the failure to hold such
permit, certificate, license, approval or authorization would not, individually
or in aggregate, have a Panmedia Material Adverse Effect.
SECTION 4.17. INSURANCE.
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Except as set forth in Section 4.17 of the Panmedia Disclosure
Schedule, Panmedia and the Panmedia Subsidiaries maintain policies of fire and
casualty, liability and other forms of insurance in such amounts, with such
deductibles and retained amounts, and against such risks and losses, as are, in
the reasonable judgment of Panmedia, reasonable for the conduct of their
businesses and their assets. Section 4.17 of the Panmedia Disclosure Schedule
sets forth a list of such insurance policies, to Panmedia's knowledge, based on
a report by Panmedia's insurance broker, as are in full force and effect as of
the date of this Agreement, which policies Panmedia shall maintain in full force
and effect during the period from the date of this Agreement through the Closing
Date.
SECTION 4.18. LABOR MATTERS.
Except as set forth in Section 4.18 of the Panmedia Disclosure
Schedule, (a) Panmedia and the Panmedia Subsidiaries are in substantial
compliance with all Applicable Laws regarding employment and employment
practices, (b) there is no unfair labor practice charge or complaint against
Panmedia nor any Panmedia Subsidiary pending before the National Labor Relations
Board nor is there any material grievance nor any material arbitration
proceeding arising out of or under collective bargaining agreements pending or,
to Panmedia's knowledge, threatened with respect to the businesses of Panmedia
and the Panmedia Subsidiaries, (c) there is no labor strike, slowdown, work
stoppage or lockout in effect, or, to the knowledge of Panmedia, threatened
against or otherwise affecting Panmedia or any Panmedia Subsidiary, and Panmedia
and the Panmedia Subsidiaries have not experienced any such labor controversy
within the past five years, (d) there is no material charge or complaint pending
or, to Panmedia's knowledge, threatened against Panmedia or any Panmedia
Subsidiary before the Equal Employment Opportunity Commission, the Office of
Federal Contract Compliance Programs or any similar state, local or foreign
agency responsible for the prevention of unlawful employment practices, (e)
neither Panmedia nor any Panmedia Subsidiary is a party to, or otherwise bound
by, any consent decree with, or citation by, any Governmental Authority relating
to employees or employment practices, (f) Panmedia and the Panmedia Subsidiaries
will not have any material liability under any benefit or severance policy,
practice, agreement, plan, or program which exists or arises, or may be deemed
to exist or arise, under any Applicable Law or otherwise, as a result of the
transactions contemplated hereunder, (g) neither Panmedia nor any Panmedia
Subsidiary is a party to any collective bargaining agreement, and (h) Panmedia
and the Panmedia Subsidiaries are in compliance with its obligations pursuant to
the WARN Act, and, except as would not have a Panmedia Material Adverse Effect,
all other notification and bargaining obligations arising under any collective
bargaining agreement, statute or otherwise. To the knowledge of Panmedia,
neither Panmedia nor any Panmedia Subsidiary has received written notice of the
intent of any federal, state, local or foreign agency responsible for the
enforcement of employment laws to conduct an investigation of or relating to
Panmedia or any Panmedia Subsidiary, and no such investigation is in progress.
SECTION 4.019. ENVIRONMENTAL MATTERS.
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Except as set forth in Section 4.19 of the Panmedia Disclosure
Schedule, (i) neither Panmedia nor any Panmedia Subsidiary has, as of the date
hereof, received any written notice alleging the material violation of, or any
material actual or potential liability relating to, any Environmental Laws,
which violation has not been resolved and, to the knowledge of Panmedia, no such
notice is threatened or otherwise expected; (ii) Panmedia and the Panmedia
Subsidiaries are and have been in material compliance with all applicable
Environmental Laws and, to the knowledge of Panmedia, there is no condition that
would likely prevent or materially interfere with such compliance in the future;
(iii) Panmedia and the Panmedia Subsidiaries have obtained and are and have been
in material compliance with all required governmental environmental permits,
registrations and authorizations with respect to the businesses of Panmedia and
the Panmedia Subsidiaries; (iv) no Hazardous Substance has been transported,
stored, treated or disposed of by Panmedia or any Panmedia Subsidiary on the
real estate owned, operated or otherwise used by Panmedia or any Panmedia
Subsidiary or at any other location, except as would not result in material
liability under any applicable Environmental Laws; (v) neither Panmedia nor any
Panmedia Subsidiary has assumed, contractually or by operation of law, any
liabilities, potential liabilities or obligations of any other person or entity
under any applicable Environmental Laws; (vi) neither Panmedia nor any Panmedia
Subsidiary has entered into, agreed to, or is subject to any judgment, decree,
order or other similar requirement of any governmental authority under any
Environmental Laws; (vii) to Panmedia's knowledge, there are no (w) underground
or aboveground storage tanks, (x) surface impoundments, (y) landfills or (z)
sewer or septic systems currently present at or about any of the properties or
facilities currently or, to the knowledge of Panmedia, formerly owned, operated
or otherwise used by Panmedia or any Panmedia Subsidiary that would be
reasonably likely to result in material liability to Panmedia or any Panmedia
Subsidiary under any applicable Environmental Laws; and (viii) to Panmedia's
knowledge, there are no actions, activities, events, conditions or circumstances
occurring or, to the knowledge of Panmedia, existing during the time of
Panmedia's or any Panmedia Subsidiary's operations and ownership of its
properties or, to the knowledge of Panmedia, prior to such time, including
without limitation the release, threatened release, emission, discharge,
generation, treatment, storage or disposal of Hazardous Substances, that would
be reasonably likely to result in any material liability or obligation of
Panmedia or any Panmedia Subsidiary under or relating to any Environmental Laws
except, in each case, which would not be reasonably likely to have a Panmedia
Material Adverse Effect.
SECTION 4.20. TRANSACTIONS WITH AFFILIATES.
Except as disclosed in Section 4.15 or 4.20 of the Panmedia Disclosure
Schedule there are no Contracts, agreements or arrangements between Panmedia (or
the Panmedia Subsidiaries) and any officer, director or affiliate of Panmedia
(or the Panmedia Subsidiaries) or beneficial owner of 10% or more of the
Panmedia Common Stock.
SECTION 4.21. BROKERS.
No broker, finder or financial advisor or other person is entitled to
any brokerage fees,
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commissions, finders' fees or financial advisory fees in connection with the
transactions contemplated hereby by reason of any action taken by Panmedia or
any of their respective directors, officers, employees, representatives or
agents, except for the fees and expenses set forth in Section 4.21 of the
Panmedia Disclosure Schedule.
SECTION 4.22. CERTAIN AGREEMENTS.
Neither Panmedia nor any Panmedia Subsidiary is a party to any: (i)
agreement with any director, officer or other employee of Panmedia or any
Panmedia Subsidiary, the benefits of which are contingent, or the terms of which
are materially altered, upon the occurrence of a transaction involving Panmedia
of the nature contemplated by this Agreement; or (ii) agreement or plan
(including Panmedia Plans), any of the benefits of or rights under which will be
increased, or the vesting or payment of the benefits of or rights under which
will be accelerated, by the occurrence of any of the transactions contemplated
by this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement. Except as set forth in Section 4.22 of the Panmedia Disclosure
Schedule, no holder of any option to purchase shares of Panmedia Common Stock or
shares of Panmedia Common Stock granted in connection with the performance of
services for Panmedia is or will be entitled to receive cash from Panmedia in
lieu of or in exchange for such option or shares solely as a result of the
transactions contemplated by this Agreement, other than the receipt of cash in
lieu of fractional shares.
SECTION 4.23. ABSENCE OF CERTAIN COMMERCIAL PRACTICES.
Neither Panmedia nor any of Panmedia Subsidiary, nor, to the knowledge
of Panmedia, any director, officer, agent, employee or other person acting on
behalf of Panmedia or any Panmedia Subsidiary, has: (i) given or agreed to give
any gift or similar benefit of more than nominal value to any customer,
supplier, or governmental employee or official or any other person who is or may
be in a position to help or hinder Panmedia or any Panmedia Subsidiary or assist
Panmedia or any Panmedia Subsidiary in connection with any proposed transaction,
which gift or similar benefit, if not given in the past, might have materially
and adversely affected the business or prospects of Panmedia or any Panmedia
Subsidiary, or which, if not continued in the future, might materially and
adversely affect the business or prospects of Panmedia or any Panmedia
Subsidiary; or (ii) used any corporate or other funds for unlawful
contributions, payments, gifts, or entertainment, or made any unlawful
contributions, payments, gifts, or entertainment, or made any unlawful
expenditures relating to political activity to government officials or others or
established or maintained any unlawful or unrecorded funds in violation of
Section 30A of the Exchange Act. Neither Panmedia nor any Panmedia Subsidiary,
nor, to the knowledge of Panmedia, any director, officer, agent, employee or
other person acting on behalf of Panmedia or any Panmedia Subsidiary, has
accepted or received any unlawful contributions, payments, gifts or
expenditures.
SECTION 4.24. YEAR 2000 ISSUES.
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Any failure of any System to be Year 2000 Compliant will not cause a
Panmedia Material Adverse Effect except as set forth in Section 4.24 of the
Panmedia Disclosure Schedule.
SECTION 4.25. BOOKS AND RECORDS.
The books of account, minute books, stock record books and other
records of Panmedia and the Panmedia Subsidiaries, all of which have been made
available to Panmedia, are complete and correct in all material respects and
have been maintained in accordance with sound business practices in all material
respects.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF
THE STOCKHOLDERS
Each Stockholder hereby represents and warrants, jointly and severally,
to 7th Level as follows:
SECTION 5.01. OWNERSHIP OF PANMEDIA CAPITAL STOCK.
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Such Stockholder is the lawful owner of the shares of Panmedia Capital
Stock set forth opposite his or her name in Section 4.02(b) of the Panmedia
Disclosure Schedule, free and clear of all Liens and options of any nature,
except for the transactions contemplated by the Joint Venture (as defined in the
Panmedia Disclosure Schedule) and such shares of Panmedia Capital Stock are not
subject to preemptive rights pursuant to an agreement to which such Stockholder
is a party.
SECTION 5.02. AUTHORITY RELATIVE TO THIS AGREEMENT.
(a) (i) Such Stockholder has all necessary power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby. Such Stockholder has executed a unanimous written consent
pursuant to which such Stockholder has approved this Agreement and the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary action on the part of such Stockholder.
(ii) This Agreement has been duly executed and delivered by
such Stockholder and, assuming this Agreement constitutes the valid and binding
agreement of 7th Level, Acquisition Corporation and Panmedia, constitutes the
valid and binding obligation of such Stockholder, enforceable against such
Stockholder in accordance with its terms, except as may be limited by (i)
bankruptcy, reorganization, moratorium, fraudulent conveyance and insolvency
laws and by other laws affecting the rights of creditors generally, (ii) the
availability
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of equitable remedies and (iii) with respect to enforcement of rights to
indemnity and contribution hereunder, federal or state securities laws or
principles of public policy.
(b) The execution and delivery of this Agreement by such Stockholder
does not, and the consummation of the transactions contemplated hereby by such
Stockholder will not, result in any violation of any law applicable to such
Stockholder or its properties or assets, except for such violations that,
individually or in the aggregate, would not have a Panmedia Material Adverse
Effect.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, or permit from any Governmental Authority or any
other person is required by or with respect to such Stockholder to validly
execute and deliver this Agreement or to effect the Merger.
SECTION 5.03. RESTRICTED SECURITIES.
Such Stockholder understands that the shares of 7th Level Common Stock
he or she is acquiring are characterized as "restricted securities" under the
federal securities laws inasmuch as they are being acquired from 7th Level in a
transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Securities Act and applicable state securities laws only in certain limited
circumstances. Each Stockholder acknowledges that he or she is acquiring such
securities for investment and not for distribution except in compliance with the
Securities Act, is able to fend for himself or herself, can bear the economic
risk of his or her investment and has such knowledge and experience in financial
or business matters that he or she is capable of evaluating the merits and risks
of the investment in the securities to be acquired hereunder. Each Stockholder
further acknowledges that he or she is an Accredited Investor and has received
all requested documents from 7th Level and has had an opportunity to ask
questions of and receive answers from 7th Level officers. The residence address
of such Stockholder is set forth in Section 4.02(b) of the Panmedia Disclosure
Schedule.
ARTICLE VI
COVENANTS
SECTION 6.01. PUBLIC ANNOUNCEMENTS AND FILINGS.
As soon as practicable after the Closing Date, 7th Level shall issue a
press release with respect to this Agreement and the transactions contemplated
hereby in substantially the form attached as EXHIBIT I hereto.
SECTION 6.02. TAX AND ACCOUNTING TREATMENT.
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7th Level and Panmedia shall each report the Merger as a tax-free
reorganization and shall not take, and shall use commercially reasonable efforts
to prevent any of their respective subsidiaries or affiliates from taking, any
actions that could prevent the Merger from qualifying (i) as a tax free
reorganization under the provisions of Section 368(a) of the Code or (ii) for
"pooling of interests" accounting treatment under GAAP.
SECTION 6.03. CERTAIN EMPLOYEE BENEFIT MATTERS.
From and after the Closing Date, employees of Panmedia at the Closing
Date will be provided with employee benefits by 7th Level which in the aggregate
are no less favorable to such employees than those provided from time to time by
7th Level to similarly situated employees. If any employee of Panmedia becomes a
participant in any employee benefit plan, program, policy or arrangement of 7th
Level, 7th Level shall (i) cause any pre-existing condition or limitation and
any eligibility waiting period (to the extent such condition, limitation or
waiting period was satisfied by the applicable employee of Panmedia under the
Panmedia Plans) under any group health plans of 7th Level to be waived with
respect to employees of Panmedia and their dependents, and (ii) give each
employee of Panmedia credit under the 7th Level plans towards all out-of-pocket
limits and deductibles incurred by such employee under the Panmedia Plans for
the 1999 calendar year. For all 7th Level Plans, all service with Panmedia shall
be treated as service with 7th Level for eligibility and vesting purposes, and
for benefit accruals for purposes of providing severance and vacation pay,
except to the extent such treatment would result in duplication of benefits.
SECTION 6.04. APPOINTMENT OF BOARD OF DIRECTORS.
On the Closing Date, Jason Roberts shall be appointed to the board of
directors of 7th Level. 7th Level acting through its board of directors, subject
to its fiduciary duty and in accordance with its charter and by-laws and
applicable law, shall (i) (A) if there is no vacancy, increase the size of its
board of directors by one (1), (B) elect Jason Roberts to the board of directors
to the newly created directorship to hold office until his successor is elected
at a special or annual meeting of the stockholders, and (C) in connection with
any such subsequent election of directors, nominate, recommend and do all other
acts and things to cause (including, without limitation, voting all shares for
which 7th Level's management or board of directors holds proxies (including
undesignated proxies) unless otherwise provided by the stockholders submitting
such proxies) to be elected to the board of directors. Notwithstanding any
provision hereof, the rights of Jason Roberts set forth in this Section 6.04
shall only apply so long as he serves as an Executive Vice President of 7th
Level.
SECTION 6.05. PANMEDIA'S ARTICLES OF INCORPORATION AND BY-LAWS.
For a period of six (6) years after the Closing, 7th Level agrees that
it shall not permit any amendment to the articles of incorporation or by-laws of
Panmedia which would in any way limit the indemnification provisions for the
Panmedia officers and directors as in effect on the Closing;
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provided that nothing contained in this Section 6.05 shall prohibit 7th Level
from merging Panmedia with and into 7th Level or any 7th Level Subsidiary,
except for the specific purpose of limiting such indemnification provisions.
SECTION 6.06. TAX RETURNS.
Panmedia shall prepare and file on a timely basis all Tax Returns which
are due to be filed (giving effect to any extension of time) on or prior to the
Closing Date. 7th Level shall be responsible for the preparation and filing of
all Tax Returns which are due to be filed (giving effect to any extension of
time) after the Closing Date, but Panmedia shall use its reasonable best efforts
to conduct its affairs such that any Tax Returns due after the Closing Date can
be filed on a timely basis. All such income Tax Returns shall be submitted to
the Stockholders prior to the filing thereof for their review and approval, and
if the Stockholders shall object to the treatment of any item on such income Tax
Returns submitted to them, the Stockholders shall have the right to require 7th
Level to change the treatment of such item to a treatment as proposed by the
Stockholders; provided that (i) such treatment is consistent with the treatment
of such item on a prior income Tax Return of Panmedia (including the use of
the cash receipts and disbursements method of accounting) and (ii) there is
"substantial authority" (within the meaning of Section 6662(d)(2)(B)(i)of the
Code) for the treatment of such item.
SECTION 6.07. TAX STATUS.
Neither Panmedia nor the Stockholders will take, or permit Panmedia to
take, any action to cause Panmedia to cease to be an S corporation prior to the
Effective Time.
SECTION 6.08. FURTHER ASSURANCES.
Each of the parties hereto will take all such reasonable lawful action
as may be necessary or appropriate in order to effect the Merger in accordance
with this Agreement as promptly as practicable. If, at any time after the
Effective Time, any such further action is necessary or desirable to carry out
the purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all the property, rights, privileges, power and
franchises of Panmedia and Acquisition Corporation, the officers and directors
of Panmedia and Acquisition Corporation immediately prior to the Effective Time
are fully authorized in the name of their respective corporations or otherwise
to take, and will take, all such lawful and necessary action.
SECTION 6.09. STOCK OPTIONS.
7th Level shall grant options to purchase shares of 7th Level Common
Stock to the individuals set forth on Schedule 2.02(e) for the amounts and the
vesting schedule set forth opposite their names at an exercise price equal to
the closing market price of the 7th Level Common Stock on Nasdaq (as reported in
the Wall Street Journal) on the date hereof under the terms of the Stock Option
Plan; provided that such options will be granted outside the Stock Option Plan
if there is not an adequate number of shares remaining under the Stock Option
Plan.
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7th Level shall use commercially reasonable efforts to register such options on
a Registration Statement on Form S-8 no later than November 15, 1999.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNIFICATION
SECTION 7.01. SURVIVAL; KNOWLEDGE.
The representations and warranties of the parties set forth in this
Agreement shall survive until the Closing Date and thereafter shall be of no
further force or effect, provided that the representations and warranties made
by 7th Level contained in Sections 3.02, 3.03, 3.08, 3.11, 3.12, 3.13, 3.14,
3.19 and 3.21 and the representations and warranties made by Panmedia contained
in Sections 4.02, 4.03, 4.08, 4.11, 4.12, 4.13, 4.14, 4.19, 4.21 and 5.01 shall
survive until May 31, 2000. For purposes of this Article VII, such
representations and warranties shall be deemed to have been given and made on
the Closing Date. Following the expiration of the periods set forth above with
respect to any particular representation or warranty, no party hereto shall have
any further liability with respect to such representation or warranty. Except as
set forth herein, all of the covenants, agreements and obligations of the
parties hereto shall survive the Closing indefinitely (or if indefinite survival
is not permitted by law, then for the maximum period permitted by applicable
law), except if the survival for more than one year would be inconsistent with
the "pooling of interests" accounting treatment under GAAP then such covenant,
agreement and obligation shall survive until May 31, 2000. Anything herein to
the contrary notwithstanding, any claim for indemnification that is asserted by
written notice which notice specifies in reasonable detail the facts upon which
such claim is made as provided in this Article VII within the survival period
shall survive until resolved pursuant to a final non-appealable judicial
determination or otherwise in accordance with this Agreement.
SECTION 7.02. INDEMNIFICATION.
(a) AGREEMENT TO INDEMNIFY.
(i) Subject to the terms of this Article VII, the
Stockholders, jointly and severally, hereby covenant and agree to indemnify 7th
Level, its stockholders, directors, officers, employees, affiliates, and agents
and their respective successors and assigns and to hold them harmless from and
against any and all losses, claims, liabilities, obligations, fines, penalties,
damages and expenses, including reasonable attorneys' fees, but excluding
consequential, punitive or special damages (collectively, "Losses") incurred by
any of them resulting from or arising out of any breach of any of the
representations or warranties made by Panmedia and the Stockholders in this
Agreement or the failure of the Stockholders to perform any of the agreements or
covenants contained herein. The Stockholders may satisfy the payment of the
Losses by surrendering the shares of 7th Level Common Stock which they received
pursuant to
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this Agreement which shall be valued at $7.125.
(ii) Subject to the terms of this Article VII, 7th Level
hereby covenants and agrees to indemnify the Stockholders and their affiliates
and agents and their respective successors and assigns and to hold them harmless
from and against any Losses incurred by any of them resulting from or arising
out of any breach of any of the representations or warranties made by 7th Level
in this Agreement or the failure of 7th Level to perform any of the agreements
or covenants contained herein.
(b) INDEMNIFICATION PROCEDURE.
(i) A party entitled to indemnification pursuant to this
Article VII (an "Indemnified Party") shall provide written notice to each party
obligated to provide indemnification pursuant to this Article VII (an
"Indemnifying Party") of any claim of such Indemnified Party for indemnification
under this Agreement within ten (10) days after the date on which such
Indemnified Party has actual knowledge of the existence of such claim. Such
notice shall specify the nature of such claim in reasonable detail and the
Indemnifying Parties shall be given reasonable access to any documents or
properties within the control of the Indemnified Parties as may be useful or
necessary in the investigation of the basis for such claim. The failure to so
notify the Indemnifying Parties shall not constitute a waiver of such claim but
an Indemnified Party shall not be entitled to receive any indemnification with
respect to any Losses that occurred directly as a result of the failure of such
Indemnified Party to give such notice.
(ii) In the event any Indemnified Party seeks
indemnification hereunder based upon a claim asserted by a third party, the
Indemnifying Parties shall have the right (without prejudice to the right of any
Indemnified Party to participate at its expense through counsel of its own
choosing) to defend or prosecute such claim at its expense and through counsel
of its own choosing if it gives written notice of its intention to do so no
later than twenty (20) days following notice thereof by an Indemnified Party or
such shorter time period as required so that the interests of the Indemnified
Party would not be materially prejudiced as a result of its failure to have
received such notice; provided, however, that, if the Indemnified Party shall
have reasonably concluded that separate counsel is required because a conflict
of interest would otherwise exist, the Indemnified Party shall have the right to
select separate counsel to participate in the defense of such action on its
behalf, at the expense of the Indemnifying Party. If the Indemnifying Party does
not so choose to defend or prosecute any such claim asserted by a third party
for which any Indemnified Party would be entitled to indemnification hereunder,
then the Indemnified Party shall be entitled to recover from the Indemnifying
Party on a monthly basis all of the reasonable attorney's fees and other
reasonable costs and expenses of litigation of any nature whatsoever incurred in
the defense of such claim. Notwithstanding the assumption of the defense of any
claim by an Indemnifying Party pursuant to this paragraph, the Indemnified Party
shall have the right to approve the terms of any settlement of a claim (which
approval shall not be unreasonably delayed or withheld).
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(iii) The Indemnifying Party and the Indemnified Party
shall cooperate in furnishing evidence and testimony and in any other manner
which the other may reasonably request pursuant to this Article VII, and shall
in all other respects have an obligation of good faith dealing, one to the
other, so as not to unreasonably expose the other to undue risk of loss.
(c) LIMITATIONS ON INDEMNIFICATION. The provisions for indemnity
under Section 7.02(a) shall be effective only when the aggregate amount of all
Losses for which indemnification is sought from 7th Level or Panmedia, as the
case may be, under Section 7.02(a) exceeds $100,000 (the "Threshold Amount"), in
which case the Indemnified Party shall be entitled to indemnification of its
Losses in an amount in excess of the Threshold Amount. The aggregate
indemnification obligations of Indemnified Party's Losses pursuant to Section
7.02(a) shall not exceed $2,200,000 (with any payment made in the form of 7th
Level Common Stock valued at $7.125). Notwithstanding the immediately preceding
sentence, the representations and warranties made by 7th Level contained in
Sections 3.02, 3.03 and 3.21 and the representations and warranties made by
Panmedia contained in Sections 4.02, 4.03, 4.14, 4.21 and 5.01 shall not exceed
$11,000,000 (with any payment made in the form of 7th Level Common Stock valued
at $7.125).
(d) EXCLUSIVITY OF REPRESENTATIONS AND WARRANTIES AND
INDEMNIFICATION PROVISION; RELATIONSHIP BETWEEN THE PARTIES. It is the explicit
intent and understanding of each of the parties hereto that neither party nor
any of its representatives or agents is making any representation or warranty
whatsoever, oral or written, express or implied, other than those set forth in
this Agreement and neither party is relying on any statement, representation or
warranty, oral or written, express or implied, made by the other party or such
other party's representatives or agents, except for the representations and
warranties set forth in this Agreement. The indemnity provided for in Section
7.02 of this Agreement shall be the sole and exclusive remedy of the parties
after the Closing for any inaccuracy of any representation or warranty of the
respective party or any failure or breach of any covenant, obligation, condition
or agreement to be performed or fulfilled by the respective party in this
Agreement. The representations, warranties and agreements of each party hereto
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any other party hereto, any person
controlling any such party or any of their officers or directors, whether prior
to or after the execution of this Agreement.
(e) ADJUSTMENT TO INDEMNIFICATION. The rights to indemnification
under this Agreement shall be adjusted as follows:
(i) The amount of any Losses incurred by the Indemnified
Party shall be (A) increased to take account of any additional Tax incurred
(grossed up for any additional Tax on the Taxes incurred) by the Indemnified
Party arising from the receipt of indemnity payments hereunder (a) "Tax Cost")
and (B) reduced to take account of the amount of any savings in Tax actually
realized by the Indemnified Party arising from the incurrence or payment of any
Losses
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(or the increase in any net operating loss attributable to the incurrence or
payment of any Losses) or the assessment or adjustment giving rise to such
Losses (a "Tax Savings"); provided, however, that if (1) such Indemnified Party
is a member of an affiliated group filing a consolidated or combined income Tax
Return, any increase or decrease in Tax shall be computed with respect to the
Tax due on such consolidated or combined income Tax Return and (2) the
Indemnified Party (or the affiliated group of which the Indemnified Party is a
member) has a net operating loss carryforward or carryback to the taxable year
in which the Losses were incurred or paid, the Tax Savings shall be treated as
realized when the net operating loss carried to that taxable year would have
otherwise been used in the absence of the incurrence or payment of any Losses.
The amount of the Tax Cost or Tax Savings, as the case may be, shall be computed
for any taxable year using the Indemnified Party's actual tax liability with and
without (x) the incurrence or payment of any Losses for which indemnification is
provided under this Agreement or (y) the payment of any indemnification payments
made pursuant to this Agreement in such year. The Indemnified Party shall pay
such amount only at the time and to the extent that the Indemnified Party
actually utilizes such Tax Savings and the Indemnifying Party shall promptly
(and in any event no later than 10 days following a request to do so) return any
amounts paid to the Indemnifying Party by the Indemnified Party hereunder in
respect of any Tax Savings (or portion thereof) that is subsequently disallowed
by the relevant taxing authority or to the extent that the Tax liability of the
Indemnified Party is otherwise redetermined. If the Tax Savings or Tax Cost is
realized in any taxable year ending after the Closing Date, then the amount of
the Losses indemnified shall not be increased or reduced, as the case may be,
but the Indemnified Party shall pay to the Indemnifying Party the Tax Savings,
or the Indemnifying Party shall pay to the Indemnified Party the Tax Cost, as
the case may be, when such Tax Savings are actually realized or Tax Cost
incurred in any post-Closing taxable year. The Indemnifying Party or the
Indemnified Party, as the case may be, shall make such payment promptly and, in
any event, no later than 10 business days after the Indemnified Party files its
income Tax Return for the relevant taxable year on which such Tax Savings or Tax
Cost was reflected, or to the extent any Tax Savings (or portion thereof) is
subsequently disallowed by the relevant taxing authority or to the extent that
the Tax liability of the Indemnified Party is otherwise redetermined, the
Indemnifying Party shall pay the Indemnified Party the amount due within 10
business days following a settlement or compromise of an assessment of a Tax by
a taxing authority or a "determination" as defined in Section 1313(a) of the
Code. Upon request, the appropriate party shall provide in reasonable detail its
calculation pursuant to this Section 7.02(e)(i) and shall afford the other party
the right to review and confirm such calculation.
(ii) The amount of any Losses incurred by the Indemnified
Party shall be reduced by the net amount (after giving effect to Section
7.02(e)(i)) the Indemnified Party recovers (after deducting all attorneys' fees,
expenses and other costs of recovery) from any insurer or other party liable for
such Losses, and the Indemnified Party shall use reasonable efforts to effect
any such recovery.
ARTICLE VIII
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MISCELLANEOUS
SECTION 8.01. NOTICES.
All notices, requests and other communications to any party hereunder
shall be in writing (including telecopy, telex or similar writing) and shall be
deemed given or made as of the date delivered, if delivered personally or by
telecopy (provided that delivery by telecopy shall be followed by delivery of an
additional copy personally, by mail or overnight courier), one day after being
delivered by overnight courier or three days after being mailed by registered or
certified mail (postage prepaid, return receipt requested), to the parties at
the following addresses:
if to 7th Level or Acquisition Corporation, to:
7th Level, Inc.
925 Westchester Avenue
White Plains, New York 10604
Attention: Chief Executive Officer
Fax: 914-682-4440
with a copy to:
The Schupak Group
730 Fifth Avenue, Suite 1901
New York, New York 10019
Attention: Donald Schupak
Fax: 212-262-1031
with a copy to:
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, New York 10022
Attention: Gerald Adler, Esq.
Fax: 212-758-9526
if to Panmedia, to:
Panmedia Corporation
350 Gate Five Road
Sausalito, California 94965
Attention: Chief Executive Officer
Fax: 415-332-8503
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with a copy to:
Latham & Watkins
135 Commonwealth Drive
Menlo Park, California 94025
Attention: Peter Kerman, Esq.
Fax: 650-463-2600
if to the Stockholders, to:
Jason Roberts
c/o Panmedia Corporation
350 Gate Five Road
Sausalito, California 94965
Fax: 415-332-8503
with a copy to:
Latham & Watkins
135 Commonwealth Drive
Menlo Park, California 94025
Attention: Peter Kerman, Esq.
Fax: 650-463-2600
or such other address or telex or telecopy number as such party may hereafter
specify for the purpose by notice to the other party hereto.
SECTION 8.02. AMENDMENT; WAIVER.
This Agreement may be amended, modified or supplemented, and waivers or
consents to departures from the provisions hereof may be given, provided that
the same are in writing and signed by or on behalf of the parties hereto.
SECTION 8.03. FEES AND EXPENSES.
All costs and expenses incurred in connection with this Agreement shall
be paid by the party incurring such costs or expenses, except that 7th Level
shall pay the legal costs and expenses incurred by Panmedia and the
Stockholders.
SECTION 8.04. SUCCESSORS AND ASSIGNS.
The provisions of this Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns,
provided that no party shall assign,
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delegate or otherwise transfer any of its rights or obligations under this
Agreement without the written consent of the other party hereto.
SECTION 8.05. GOVERNING LAW.
This Agreement shall be construed in accordance with and governed by
the law of the State of New York without regard to principles of conflict of
laws.
SECTION 8.06. COUNTERPARTS; EFFECTIVENESS.
This Agreement may be signed in any number of counterparts, each of
which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument.
SECTION 8.07. ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES; RIGHTS OF
OWNERSHIP.
Except as expressly provided herein, this Agreement (including the
documents and the instruments referred to herein), the Employment Agreement, the
Registration Rights Agreement and the Confidentiality Agreement, dated as of
March 1, 1999, by and between 7th Level and Panmedia constitute the entire
agreement and supersedes all prior agreements and understandings, both written
and oral, among the parties with respect to the subject matter hereof. Except as
expressly provided herein, this Agreement is not intended to confer upon any
person other than the parties hereto any rights or remedies hereunder. The
parties hereby acknowledge that no person shall have the right to acquire or
shall be deemed to have acquired shares of common stock of the other party
pursuant to the Merger until consummation thereof.
SECTION 8.08. HEADINGS.
The headings contained in this Agreement are for reference purposes
only and shall not in any way affect the meaning or interpretation of this
Agreement.
SECTION 8.09. SEVERABILITY.
If any term or other provision of this Agreement is invalid, illegal or
unenforceable, all other provisions of this Agreement shall remain in full force
and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in a manner that is materially adverse to
any party.
[Remainder of page intentionally left blank.]
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IN WITNESS WHEREOF, the parties hereto have caused this Merger
Agreement to be duly executed as of the day and year first above written.
7TH LEVEL, INC.
By: /s/ Stephen Gott
-------------------------------------------------
Name: Stephen Gott
Title: President and Chief Financial Officer
By: /s/ Marc E. Landy
-------------------------------------------------
Name: Marc E. Landy
Title: Vice President and Chief Financial Officer
7TH LEVEL ACQUISITION CORPORATION
By: /s/ Stephen Gott
-------------------------------------------------
Name: Stephen Gott
Title: President and Chief Financial Officer
By: /s/ Marc E. Landy
-------------------------------------------------
Name: Marc E. Landy
Title: Vice President and Chief Financial Officer
PANMEDIA CORPORATION
By: /s/ Jason Roberts
-------------------------------------------------
Name: Jason Roberts
Title: Chief Executive Officer and President
By: /s/ Patricia Roberts
-------------------------------------------------
Name: Patricia Roberts
Title: Secretary and Treasurer
/s/ Jason Roberts
----------------------------------------------------
JASON ROBERTS
/s/ Patricia Roberts
----------------------------------------------------
PATRICIA ROBERTS
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EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of May 13, 1999 (this "Agreement"), by
and between 7TH LEVEL, INC., a Delaware corporation (the "Company"), and JASON
ROBERTS ("Executive").
RECITALS
WHEREAS, the Company is simultaneously entering into an Agreement and
Plan of Merger by and among the Company, 7th Level Acquisition Corporation, a
Delaware corporation and wholly-owned subsidiary of the Company ("Acquisition
Corporation"), Panmedia Corporation, a California corporation ("Panmedia"),
Executive and Patricia Roberts (the "Merger Agreement") pursuant to which
Acquisition will merge with and into Panmedia;
WHEREAS, Executive is the current President and Chief Executive
Officer of Panmedia; and
WHEREAS, the Company desires to employ Executive as an Executive Vice
President of the Company on the terms and conditions hereinafter set forth and
Executive desires to accept such employment.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, and for other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties agree as follows:
1. EMPLOYMENT.
1.1 Subject to the terms and conditions of this Agreement, the
Company agrees to employ Executive during the Term (as defined in Section 2) as
an Executive Vice President of the Company. Executive shall report to the Chief
Executive Officer of the Company. As Executive Vice President of the Company,
Executive shall be primarily responsible for managing the Company's consumer
internet business and shall perform such other duties and responsibilities as
are customarily performed by an Executive Vice President of a company the size
and nature of the Company, and such other managerial duties and responsibilities
with the Company which are appropriate for his position at the Company as, from
time to time, may be assigned to him by the Chief Executive Officer of the
Company.
1.2 Subject to the terms and conditions of this Agreement,
Executive hereby accepts employment as an Executive Vice President of the
Company and agrees to devote his full working time and efforts to the
performance of services, duties and responsibilities in connection therewith
(other than during periods of illness, disability or vacation). Nothing in this
Agreement shall preclude Executive, so long as, in the reasonable determination
of the Board of Directors of the Company (the "Board"), such activities do not
materially interfere with his
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duties and responsibilities hereunder, from engaging in charitable and community
affairs, from managing any passive investment made by him in real estate or
other property (provided that no such investment may exceed 2% of the equity
securities of any entity, without the prior approval of the Board, which
approval shall not be unreasonably withheld), or from serving, subject to the
prior approval of the Board, which approval shall not be unreasonably withheld,
as a member of boards of directors or as a trustee of any other company,
association or entity.
1.3 So long as the Executive shall serve as an Executive Vice
President of the Company, the Company shall cause Executive to be a member of
the Board as more fully described in Section 6.04 of the Merger Agreement.
2. TERM OF EMPLOYMENT. The term of this Agreement (the "Term") shall be
for a period commencing on the date hereof and continuing through the second
anniversary of the date hereof; subject to earlier termination in accordance
with the terms and conditions contained in Section 7 hereof.
3. PLACE OF EMPLOYMENT. During the Term, Executive shall perform his
services at 350 Gate Five Road, Sausalito, California 94965 or another location
within twenty (20) miles of 350 Gate Five Road unless such location is chosen or
agreed to by Executive. Executive shall be furnished with office facilities and
services suitable to his position and suitable for the performance of his
duties. Executive acknowledges and agrees that in connection with his
employment, he may be required to travel on behalf of the Company.
4. COMPENSATION.
4.1 SALARY. During the Term, the Company shall pay Executive a
base salary ("Base Salary") at the rate of One Hundred Twenty Five Thousand
Dollars ($125,000) per annum (pro rated for the balance of fiscal 1999 ending
December 31, 1999, and for any partial year during the Term). The Base Salary
shall be payable in accordance with the ordinary payroll practices of the
Company for its executive officers but in no event less frequently than
semi-monthly. The Base Salary shall be reviewed annually by the Board on or
before the last day of each fiscal year, and may be increased in the sole
discretion of the Board taking into account corporate and individual
performance, any increase in Executive's responsibilities on account of
acquisitions by, or the general growth of, the consumer internet business of the
Company and general business conditions.
4.2 PERFORMANCE BONUS. Executive shall be entitled to receive
an annual performance bonus (each, a "Performance Bonus") for the fiscal year in
which such bonus is earned; provided that the Performance Bonus for the first
fiscal year in which such bonus is earned shall be not less than $15,000.
Subject to the immediately preceding sentence, the amount of any such
Performance Bonus shall be determined by the Board, in its sole discretion, and
shall be based on such quantitative and qualitative initiatives as identified by
the Board upon consultation with the Chief Executive Officer and upon approval
of the budget for the respective
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fiscal year. Any such Performance Bonus shall be paid to Executive within 120
days of the end of the fiscal year to which it relates.
4.3 STOCK OPTIONS.
(a) As an inducement to Executive to enter into this
Agreement, the Company has on the date hereof (the "Grant Date") granted to
Executive options (the "Options") to purchase 300,000 shares of common stock,
par value $.01 per share, of the Company ("Common Stock") exercisable at the
closing market price of the Common Stock on the Nasdaq Stock Market (as reported
by the Wall Street Journal) at the Effective Time (as defined in the Merger
Agreement). Pursuant to the terms of the grant, vesting of such Options shall
occur as follows, provided the Executive is still then employed by the Company
(except as set forth in Sections 8.1 and 8.2 hereof):
150,000 Options shall vest on the second anniversary of the
Grant Date;
150,000 Options shall vest on the third anniversary of the
Grant Date.
(b) If Executive's employment is terminated by the
Company without Cause (as hereinafter defined) or if Executive terminates his
employment with the Company for Good Reason (as hereinafter defined), all
Options shall fully and immediately vest.
5. EMPLOYEE BENEFITS.
5.1 EMPLOYEE BENEFIT PROGRAMS, PLANS AND PRACTICES. The
Company shall provide Executive during the Term, with coverage under all
employee benefit programs, plans and practices which the Company makes available
from time to time to its senior executives, with at least the same opportunity
to participate as the other senior executives of the Company including, without
limitation, retirement, pension, profit sharing, medical, dental,
hospitalization, life insurance, short and long term disability, accidental
death and dismemberment and travel accident coverage. Executive shall be given
credit under such programs, plans and practices for all service with Panmedia
for purposes of eligibility and vesting to the extent permissible and applicable
under such programs, plans and practices and by law as set forth in Section 6.03
of the Merger Agreement.
5.2 VACATION AND FRINGE BENEFITS.
(a) Executive shall be entitled to four (4) weeks
paid vacation in each year (pro rated as necessary for partial calendar years
during the Term). Executive may take his allotted vacation days at such times as
are mutually convenient for the Company and Executive, consistent with the
Company's vacation policy in effect from time to time with respect to its
executive officers.
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(b) Executive shall be entitled to the perquisites
and fringe benefits normally made available to other senior executives of the
Company, commensurate with his position with the Company.
5.3 EXPENSES. Executive is authorized to incur reasonable
expenses in carrying out his duties and responsibilities under this Agreement,
(in accordance with the policies and procedures established from time to time by
the Company) including, without limitation, entertainment and travel expenses
(and the cost of living while away from home on business or at the request of,
and in the service of the Company), and similar items related to such duties and
responsibilities. The Company will reimburse Executive in full for all such
out-of-pocket expenses upon presentation by Executive from time to time of a
proper account of such expenditures in accordance with the policies and
procedures established by the Board and applicable to executive officers of the
Company.
5.4 INDEMNIFICATION. Executive shall be entitled, at all times
(including after the termination of this Agreement for any reason), to the
benefit of the maximum indemnification and advancement of expenses available
from time to time under the Company's Restated Certificate of Incorporation and
By-laws, and if not set forth therein, to the maximum extent available under the
laws of the Company's state of incorporation.
6. KEY-PERSON INSURANCE. Executive agrees that the Company may at any
time and from time to time, and for the Company's own benefit, apply for and
take out term life, health, accident, and/or other insurance covering Executive
("Key-Person Insurance") in an amount to be determined in the sole discretion of
the Board in consultation with Executive. The Company shall own all rights in
any such Key-Person Insurance policies and proceeds thereof and Executive shall
not have any right, title or interest therein; except that if Executive is no
longer employed by the Company (other than as a result of his death or
Disability (as herein defined in Section 7.2)) then the Company shall terminate
such Key-Person Insurance policies or, at the option of Executive, arrange for
such Key-Person Insurance policies to be assigned to Executive; provided,
however, that said policies permit such assignment and Executive is solely
responsible for the payment of any premiums after such assignment. Executive
agrees to assist the Company at the Company's expense in obtaining any such
Key-Person Insurance by among other things, submitting to the customary
examinations and correctly preparing, signing and delivering such applications
and other documents as may be required by insurers.
7. TERMINATION OF EMPLOYMENT.
7.1 GOOD REASON. Executive shall be entitled to terminate his
employment for "Good Reason." For purposes of this Agreement, "Good Reason"
shall mean (without Executive's express prior written consent as a stockholder
or otherwise) (i) failure by the Company to pay any compensation when due
hereunder, (ii) any significant reduction by the Company of Executive's
authorities, powers, functions, duties or responsibilities in managing the
consumer internet business of the Company or the assignment of duties to
Executive by the Chief
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Executive Officer of the Company inconsistent with Executive's position (except
in connection with termination of Executive's employment for Cause (as defined
in section 7.4), as a result of Disability, as a result of Executive's death or
by Executive other than for Good Reason) or (iii) any material breach by the
Company of any other material provision of this Agreement including, without
limitation, Section 3. If Executive desires to terminate his employment with the
Company for Good Reason, he shall first give written notice of the facts and
circumstances providing Good Reason to the Company, and shall allow the Company
no less than twenty (20) days to remedy, cure or rectify the situation giving
rise to Good Reason. If the Company does not remedy, cure or rectify such
situation giving rise to Good Reason to the reasonable satisfaction of
Executive, Executive shall be entitled to terminate his employment for Good
Reason as of the expiration of such twenty day period.
7.2 DISABILITY. If Executive shall fail during the Term,
because of illness, physical or mental disability or other incapacity, for a
period of 90 consecutive days or any 120 days in any 365 consecutive days, to
render the services to be rendered under this Agreement or be adjudged an
incompetent by a court of competent jurisdiction ("Disability"); provided that
the date on which the Disability will be deemed to occur shall be such 90th or
120th day, respectively, or the date on which Executive is adjudged an
incompetent, as the case may be, the Company may terminate Executive's
employment on not less than two (2) weeks written notice thereof, setting forth
the facts and circumstances claimed to provide a basis for termination of
Executive's employment under this Section 7.2.
7.3 DEATH. Executive's employment hereunder will terminate
automatically if he should die.
7.4 TERMINATION FOR CAUSE. The Company shall have the right to
terminate the employment of Executive with or without Cause (as hereinafter
defined). The term "Cause," as used herein, shall mean (i) Executive's
continuing, repeated and willful refusal and failure (other than during periods
of illness, Disability or vacation) to perform his duties hereunder or under any
lawful directive of the Board (consistent with the terms of this Agreement),
(ii) Executive's willful misconduct or gross neglect in the performance of his
duties hereunder, (iii) the willful material breach of this Agreement by
Executive, (iv) the conviction, plea of guilty or nolo contendre of Executive in
respect of any felony, other than motor vehicle offenses, or for any misdemeanor
constituting theft or embezzlement from the Company; provided that an indictment
of Executive in such matters shall cause the Company to suspend Executive with
pay until such matters are, to the Company's reasonable satisfaction, clarified
or finalized, (v) other fraudulent action against the Company or (vi) any
violation by Executive, or conduct by Executive that poses a substantial threat
of causing the Company to violate, any statute, law, ordinance or regulation
promulgated or enforced by any entity with jurisdiction over the Company or
Executive, concerning employment discrimination or other employment-related
wrongs. For purposes of this Section 7.4, no act, or failure to act, on
Executive's part, will be considered "willful" unless done or omitted to be done
by him not in good faith or without a reasonable belief that his action or
omission was in furtherance of and in the best interests of the Company's
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business. Termination by the Company for Cause may be effected by written notice
of the Company to Executive; provided, however, that if the Company determines
to terminate the Executive's employment pursuant to clause (i) or (iii) hereof,
the Company shall give the Executive written notice of the facts and
circumstances providing Cause and shall allow Executive no less than twenty (20)
days in the case of a proposed termination pursuant to clause (i) or (iii) above
to remedy, cure or rectify the situation giving rise to Cause.
7.5 TERMINATION UPON A CHANGE OF CONTROL. In the event of a
"Change of Control", Executive shall become immediately and fully vested in all
Options held by Executive. For purposes of this Agreement, a "Change of Control"
shall mean that (i) any "person" (as such term is defined within the meaning of
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "1934
Act")), other than any person who as of the date hereof beneficially owns (as
defined in Rule 13d-3 of the 1934 Act) directly or indirectly 15% or more of the
Company's outstanding Common Stock or as of the date hereof is on, or has
designated a member of, the Board, becomes a beneficial owner directly or
indirectly of securities of the Company representing in excess of fifty percent
(50%) of the Company's then outstanding securities having the right to vote for
the election of directors, (ii) the Company shall have consummated the sale of
all or substantially all of the assets of the Company, (iii) the stockholders of
the Company approve a merger or consolidation of the Company with any other
corporation (or other entity), other than a merger or consolidation which would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more than 50% of the
voting power of the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation; (iv) the
stockholders of the Company approve a plan of complete liquidation of the
Company; or (v) the following individuals cease for any reason to constitute a
majority of the number of directors then serving: individuals who, on the date
hereof, constitute the Board and any new director (other than a director whose
initial assumption of office is in connection with an actual or threatened
election contest, including but not limited to a consent solicitation, relating
to the election of directors of the Company) whose appointment or election by
the Board or nomination for election by the Company's stockholders was approved
or recommended by a vote of at least two-thirds (2/3) of the directors then
still in office who either were directors on the date hereof or whose
appointment, election or nomination for election was previously so approved or
recommended.
8. COMPENSATION UPON TERMINATION.
8.1 CONSTRUCTIVE TERMINATION; TERMINATION BY THE COMPANY
WITHOUT CAUSE; TERMINATION BY EXECUTIVE FOR GOOD REASON. (i) If Executive
terminates his employment for Good Reason pursuant to Section 7.1, or (ii) if
Executive's employment is terminated by the Company without Cause, or (iii) if
the Company determines not to extend the Term of this Agreement for an
additional one year period, Executive shall be entitled to (A) receive
Executive's Base Salary and benefits as set forth in Section 5 to which
Executive is entitled up to and including the effective date of Executive's
termination of employment hereunder, (B) receive
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Executive's Base Salary paid consistent with the Company's payroll practices for
nine (9) months after the termination of Executive's employment hereunder and
(C) become immediately and fully vested in all Options held by Executive.
Executive also shall be entitled to receive, during the period he is being paid
Base Salary under this Agreement, the benefits provided under Section 5.1;
except to the extent that such continued participation is not permitted under
the plan, program or practice or would cause the plan, program or practice to
cease to be qualified under any applicable law or regulation. Continuation of
such benefits shall be in addition to any right Executive may have under
applicable law. Notwithstanding the foregoing, nothing herein shall cause the
Company to maintain Executive's status as an employee of the Company after
termination.
8.2 TERMINATION BY EXECUTIVE OTHER THAN FOR GOOD REASON;
TERMINATION BY THE COMPANY FOR CAUSE. If Executive's employment is terminated by
the Company for Cause or by Executive other than for Good Reason pursuant to
Section 7.1, Executive shall be entitled to receive Executive's Base Salary and
benefits as set forth in Section 5 to which Executive is entitled up to and
including the effective date of Executive's termination of employment hereunder.
After such termination of employment, the obligations of the Company under this
Agreement to make any further payments, or to provide any benefits specified
herein, to Executive shall thereupon cease and terminate.
8.3 NO SUBSTITUTION. Nothing contained in Section 8.1 shall be
construed to represent a substitution for compensation already paid to or earned
by Executive. In addition, Executive shall be entitled to receive all amounts in
respect of the period prior to the date of termination otherwise payable herein
(without double counting), including such payments provided for in Sections 4
and 5.
9. NONDISCLOSURE; NON-COMPETITION AND NON-SOLICITATION.
9.1 NONDISCLOSURE. Executive shall not during the Term and
thereafter, without the prior written consent of the Company, divulge, disclose
or make accessible to any other person, firm, partnership, corporation or other
entity any Confidential Information (as herein defined) pertaining to the
business of the Company, except (i) while employed by the Company, in the
business of and for the benefit of the Company or (ii) when required to do so by
a court of competent jurisdiction, by any governmental agency having supervisory
authority over the business of the Company, or by any administrative body or
legislative body (including a committee thereof) with purported or apparent
jurisdiction to order Executive to divulge, disclose or make accessible such
information. For purposes of this Agreement, "Confidential Information" shall
mean non-public information concerning the Company's financial data, strategic
business plans, product development (or other proprietary product data),
customer information, discoveries, practices, processes, methods, marketing
plans and other material non-public, proprietary and confidential information of
the Company, that, in any case, is not otherwise generally available to the
public. In the event Executive's employment is terminated hereunder, he shall
immediately return to the Company all Confidential Information in his
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possession other than information which Executive is entitled to receive in his
capacity as a shareholder of the Company. "Confidential Information" shall not
include information which becomes available to Executive on a non-confidential
basis from a source other than the Company or was available to Executive on a
non-confidential basis prior to its disclosure to Executive by the Company.
9.2 PROHIBITION ON COMPETITION. During the period of his
employment with the Company (other than on behalf of the Company) and for twenty
four (24) months after the date of termination of his employment with the
Company (the "Non-Competition Period"), Executive agrees that, without the prior
written consent of the Company: (i) he will not, directly or indirectly, either
as principal, manager, agent, consultant, officer, stockholder, partner,
investor, lender or employee, or in any other capacity (and whether or not for
compensation) carry on, be engaged in or employed by or be a consultant to or
have any financial interest in, any business which is "in competition with the
business of the Company" (as defined in Section 9.5).
9.3 NON-SOLICITATION OF EMPLOYEES. During the Non-Competition
Period (other than on behalf of the Company), Executive will not:
(a) solicit or request any employee of or consultant
to the Company or its affiliates to (a) leave the employ or
cease consulting for the Company or its affiliates or (b) join
the employ of or begin consulting for any individual or entity
that is in competition with the business of the Company;
(b) solicit or request or suggest or otherwise abet any
individual or entity that is in competition with the business
of the Company to employ any employee of or consultant to the
Company or its affiliates; or
(c) employ, assist in employing or otherwise associate with
any employee, officer or agent of or consultant to the Company
or its affiliates in any business or venture which is in
competition with the business of the Company.
9.4 NON-SOLICITATION OF CUSTOMERS. During the Non-Competition
Period (other than on behalf of the Company), Executive will not, directly or
indirectly, through brokers or otherwise, solicit or attempt to solicit, or sell
services or attempt to sell services which are in competition with the business
of the Company to any "Customer"; for purposes hereof, "Customer" shall mean
(A) all customers of the Company (i) during the term of this Agreement, (ii) as
of the date hereof and (iii) within the two (2) year period preceding the date
hereof and (B) all potential customers of the Company who are being actively
solicited by the Company at the time of the termination of Executive's
employment.
9.5 For purposes of this Section 9, a person or entity which
is "in competition with the business of the Company" shall mean an entity
engaged in the business of animation preparation and production software as
presently conducted or proposed to be conducted and any
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other business actually engaged in during the term hereof, directly or
indirectly, by the Company or its subsidiaries including, but not limited to,
web based education, learning and training. Nothing in this Section 9 shall be
construed so as to preclude Executive from (i) investing in any publicly held
company provided Executive's beneficial ownership of any class of such company's
securities does not exceed 2% of the outstanding securities of such class, (ii)
owning memberships, or other similar rights or interests therein, of any United
States or foreign securities, commodities, options or similar exchange, board of
trade, contract market or terminal association (collectively "Exchanges") and
exercising the rights and privileges attendant to such ownership for his own
personal account or for the account of any spouse, child, parent or sibling or
any trust created for the benefit of Executive or any of the foregoing or for
the account of any entity wholly owned by Executive or any of the foregoing
relatives or trusts or (iii) trading or dealing on any Exchanges for Executive's
own personal account or for the account of any relative or any trust created for
the benefit of any relative of Executive.
9.6 Executive and the Company agree that the covenants of
non-competition and non-solicitation are reasonable covenants under the
circumstances, and further agree that if in the opinion of any court of
competent jurisdiction such covenants are not reasonable in any respect, such
court shall have the right, power and authority to excise or modify such
provision or provisions of these covenants as to the court shall appear not
reasonable and to enforce the remainder of these covenants as so amended.
Executive agrees that any breach of the covenants contained herein would
irreparably injure the Company. Accordingly, Executive hereby agrees that, in
such event, the Company shall be entitled, without the necessity of proving
damages or posting a bond or security, and notwithstanding any election by the
Company to claim damages, to obtain a temporary and/or permanent injunction to
restrain any such breach or threatened breach or to obtain specific performance
of any such provisions, all without prejudice to any and all other remedies
which the Company may have at law or in equity.
10. MITIGATION OF DAMAGES. Executive shall not be required to mitigate
damages or the amount of any payment provided for under this Agreement by
seeking other employment (which may include self-employment) or otherwise, and,
after his termination of employment hereunder, any payments made by the Company
hereunder shall not be reduced by any amount Executive receives from any other
such employment.
11. NOTICES. Any notice, request, demand or other communication
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given when delivered by hand, electronic transmission (with a copy
following by hand or by overnight courier), by registered or certified mail,
postage prepaid, return receipt requested or by overnight courier addressed to
the other party. All notices shall be addressed as follows, or to such other
address or addresses as may be substituted by notice in writing:
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To the Company:
7th Level, Inc.
925 Westchester Avenue
White Plains, New York 10604
Attention: Chairman of the Board
Fax No.: (914) 682-4440
with a copy to:
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, New York 10022
Attention: Gerald Adler, Esq.
Fax No.: (212) 758-9526
To Executive:
Jason Roberts
350 Gate Five Road
Sausalito, California 94965
with a copy to:
Latham & Watkins
135 Commonwealth Drive
Menlo Park, California 94025
Attention: Peter Kerman, Esq.
Fax No.: (650) 463-2600
Communications delivered by hand or by overnight courier shall be deemed
received on the date of delivery; communications sent by electronic means shall
be deemed received one (1) business day after the sending thereof, and
communications sent by registered or certified mail shall be deemed received
three (3) business days after the sending thereof.
12. SEPARABILITY; LEGAL FEES. If any provision of this Agreement shall
be declared to be invalid or unenforceable, in whole or in part, such invalidity
or unenforceability shall not affect the remaining provisions hereof which shall
remain in full force and effect. The prevailing party shall be entitled to
recover its reasonable costs of any legal fees and other fees and expenses which
may be incurred in respect of enforcing its rights under this Agreement from the
other party.
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13. ASSIGNMENT. This contract shall be binding upon and inure to the
benefit of the heirs and representatives of Executive and the assigns and
successors of the Company. Neither this Agreement nor any rights hereunder shall
be assignable or otherwise subject to hypothecation by Executive (except by will
or by operation of the laws of intestate succession) or by the Company, except
that the Company may assign this Agreement to any successor (whether by merger,
acquisition of stock, purchase or otherwise) to all or substantially all of the
assets or business of the Company, if such successor expressly agrees in writing
to assume the obligations of the Company hereunder.
14. AMENDMENT; WAIVER. This Agreement may only be amended by written
agreement signed by the parties hereto. A waiver by the Company or Executive of
a breach of any provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach by the other party.
15. BENEFICIARIES. Executive shall be entitled to select (and change,
to the extent permitted under any applicable law) a beneficiary or beneficiaries
to receive any compensation or benefit payable hereunder following Executive's
death, and may change such election, in either case by giving the Company
written notice thereof. In the event of Executive's death or a judicial
determination of his incompetence, reference in this Agreement to Executive
shall be deemed, where appropriate, to refer to his beneficiary, estate or other
legal representative.
16. SURVIVORSHIP. The respective rights and obligations of the parties
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations. The
provisions of this Section 16 are in addition to the survivorship provisions of
any other section of this Agreement.
17. GOVERNING LAW. This Agreement shall be construed, interpreted and
governed in accordance with the laws of the State of New York, without reference
to rules relating to conflicts of law.
18. ENTIRE AGREEMENT. This Agreement, the Merger Agreement and the
Registration Rights Agreement of even date herewith by and among the Company,
Executive and Patricia Roberts, contain the entire understanding between
Executive and the Company and supersede in all respects any prior or other
agreement or understanding between the Company and Executive as to the matters
set forth herein and therein. Except for the obligations specifically set forth
herein and therein, the Company does not owe any obligations to Executive and
Executive does not owe any obligations to the Company with respect to the
matters set forth herein and therein.
19. WITHHOLDING. The Company shall withhold from any payments due to
Executive hereunder, all taxes, FICA or other amounts required to be withheld
pursuant to any applicable law.
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20. HEADINGS. The section headings contained in this Agreement are for
the convenience of reference only and shall not affect the construction of any
provision of this Agreement.
21. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original but all of which together
this shall constitute one and the same instrument.
[Remainder of page intentionally left blank.]
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IN WITNESS WHEREOF, the parties hereto have caused this Employment
Agreement to be signed on the date and year first above written.
7TH LEVEL, INC.
By: /s/ Marc E. Landy
-----------------------------------------------
Name: Marc E. Landy
Title: Vice President and Chief Financial Officer
EXECUTIVE
/s/ Jason Roberts
-----------------------------------------
Jason Roberts
<PAGE>
Exhibit 10.47
REGISTRATION RIGHTS AGREEMENT
DATED AS OF
MAY 13, 1999
BY AND AMONG
7TH LEVEL, INC.,
JASON ROBERTS,
AND
PATRICIA ROBERTS
<PAGE>
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT, dated as of May 13, 1999 (this
"Agreement"), by and among 7TH LEVEL, INC., a Delaware corporation (the
"Company"), JASON ROBERTS and PATRICIA ROBERTS (together, the "Roberts").
WHEREAS, the Company, 7th Level Acquisition Corporation, a
Delaware corporation and wholly-owned subsidiary of the Company ("Acquisition
Corporation"), Panmedia Corporation, a California corporation ("Panmedia"), and
the Roberts have simultaneously entered into an Agreement and Plan of Merger
(the "Merger Agreement") pursuant to which Acquisition Corporation will merge
with and into Panmedia; and
WHEREAS, the Company and Jason Roberts have simultaneously
entered into an Employment Agreement (the "Employment Agreement") pursuant to
which Jason Roberts will be employed as an Executive Vice President of the
Company and elected to the Company's Board of Directors; and
WHEREAS, it is a condition precedent to the consummation of
the transactions contemplated by the Merger Agreement that the Company provide
for the rights set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and
for other good and valuable consideration, the adequacy and receipt of which are
hereby acknowledged, and intending to be legally bound, the parties hereto
hereby agree as follows:
ARTICLE I.
DEFINITIONS
SECTION 1.1. DEFINITIONS. The following terms shall have the meanings
ascribed to them below:
"Acquisition Corporation" has the meaning ascribed thereto in
the introduction hereof.
"Agreement" means this Agreement, as amended, modified or
supplemented from time to time, in accordance with the terms hereof, together
with any exhibits, schedules or other attachments thereto.
"Commission" means the United States Securities and Exchange
Commission or any other federal agency at the time administering the Securities
Act.
"Common Stock" means the common stock, par value $.01 per
share, of the Company.
<PAGE>
"Company" has the meaning ascribed thereto in the introduction
hereof.
"Employment Agreement" means the employment agreement, dated
as of the date hereof, by and between the Company and Jason Roberts.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission promulgated thereunder.
"Indemnified Party" means an Indemnified Party as defined in
Section 2.1(d)(iii).
"Indemnifying Party" means an Indemnifying Party as defined in
Section 2.1(d)(iii).
"Merger Agreement" has the meaning ascribed thereto in the
introduction hereof.
"Panmedia" has the meaning ascribed thereto in the
introduction hereof.
"Prospectus" shall mean the Prospectus included in any
Registration Statement, as amended or supplemented by any Prospectus supplement
with respect to the terms of the offering of any portion of the Registrable
Shares covered by such Registration Statement and by all other amendments and
supplements to the Prospectus, including post-effective amendments and all
material incorporated by reference in such Prospectus.
"Registrable Shares" means the 1,543,860 shares of Common
Stock issued to the Roberts pursuant to the Stock Purchase Agreement and any
securities of the Company which may be issued or distributed with respect to, or
in exchange or substitution for, or conversion of, such Common Stock and such
other securities pursuant to a stock dividend, stock split or other
distribution, merger, consolidation, recapitalization or reclassification or
otherwise.
"Registration Effective Period" means the Registration
Effective Period as defined in Section 2.1(b)(i).
"Registration Statement" means a Registration Statement as
defined in Section 2.1(a).
"Required Shares" has the meaning ascribed thereto in
Section 2.1(a).
"Roberts" has the meaning ascribed thereto in the introduction
hereof.
"Rule 144 Shares" has the meaning ascribed thereto in
Section 2.4.
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations of the Commission promulgated thereunder.
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"Violation" means a Violation as defined in Section 2.1(d)(i).
ARTICLE II.
REGISTRATION RIGHTS
SECTION 2.1. REQUIRED REGISTRATION.
(a) REQUIRED REGISTRATION. The Company shall use its reasonable
best efforts to include 85,000 shares (the "Required Shares") of the Registrable
Shares in the first registration statement on Form S-3 (or such successor or
other appropriate form if necessary) under the Securities Act (the "Registration
Statement") that it files after the date hereof with respect to an offering by
the Company for the account of Stephen Gott, Scott Near or Safa Alai (but in no
event more than seventy-five (75) days after the date hereof) and to effect all
such registrations, qualifications and compliances (including, without
limitation, obtaining appropriate qualifications under applicable state
securities or "blue sky" laws and compliance with any other applicable
governmental requirements or regulations) as the Roberts may reasonably request
and that would permit or facilitate the sale of such Registrable Shares in the
open market (provided, however, that the Company shall not be required in
connection therewith to qualify to do business or to file a general consent to
service of process in any such state or jurisdiction), in each case the Company
shall use reasonable efforts to cause such Registration Statement and all other
such registrations, qualifications and compliances to become effective.
Notwithstanding the foregoing, the Company shall not be obligated to effect a
registration statement with respect to an underwritten offering. Prior to the
effectiveness of the Registration Statement, at the option of the Roberts, the
Company will assist the Roberts in obtaining a loan of $500,000 secured by the
Registrable Shares.
(b) EFFECTIVENESS; SUSPENSION RIGHT.
(i) The Company will use its reasonable best efforts to maintain
the effectiveness of the Registration Statement and other applicable
registrations, qualifications and compliances for two (2) years after the date
hereof (the "Registration Effective Period"), and from time to time will amend
or supplement the Registration Statement and the Prospectus contained therein as
and to the extent necessary to comply with the Securities Act, the Exchange Act
and any applicable state securities statute or regulation, subject to the
following limitations and qualifications.
(ii) Following the date on which the Registration Statement is
first declared effective, the Roberts will be permitted (subject in all cases to
Section 2.2 below) to offer and sell Registrable Shares during the Registration
Effective Period in the manner described in the Registration Statement provided
that the Registration Statement remains effective and has not been suspended.
(iii) The Company shall:
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(A) promptly notify the Roberts when the Company becomes aware of
the happening of any event as a result of which the Prospectus included in such
Registration Statement (as then in effect) contains any untrue statement of a
material fact or omits to state a material fact necessary to make the statements
therein (in the case of the Prospectus and any preliminary Prospectus, in light
of the circumstances under which they were made) when such Prospectus was
delivered not misleading or, if for any other reason it shall be necessary
during such time period to amend or supplement the Prospectus in order to comply
with the Securities Act and, in either case as promptly as practicable
thereafter, prepare and file with the Commission, and furnish without charge to
the Roberts a supplement or amendment to such Prospectus which will correct such
statement or omission or effect such compliance;
(B) make commercially reasonable efforts to obtain the withdrawal
of any stop order or other order suspending the use of any preliminary
Prospectus or Prospectus or suspending any qualification of the Registrable
Shares;
(C) furnish to the Roberts, without charge, one executed copy and
as many conformed copies as they may reasonably request, of the Registration
Statement and any post-effective amendment thereto, including financial
statements and schedules, all documents incorporated therein by reference and
all exhibits (including those incorporated by reference);
(D) deliver to the Roberts, without charge, as many copies of the
Prospectus (including each preliminary Prospectus) and any amendment or
supplement thereto as may be reasonably requested (it being understood that the
Company consents to the use of the Prospectus or any amendment or supplement
thereto by the Roberts in connection with the offering and sale of the
Registrable Shares covered by the Prospectus or any amendment or supplement
thereto) and such other documents as the Roberts may reasonably request in order
to facilitate the disposition of the Registrable Shares;
(E) cooperate with the Roberts to facilitate the timely
preparation and delivery of certificates representing Registrable Shares to be
sold and not bearing any restrictive legends; and
(F) use commercially reasonable best efforts to list (if the
Registrable Shares are not already listed) all Registrable Shares covered by the
Registration Statement on the New York Stock Exchange, the American Stock
Exchange or the Nasdaq National Market, whichever is the principal exchange or
automated quotation trading system on which the Common Stock is listed or
traded, as the case may be.
(iv) The Roberts agree by acquisition of such Registrable
Shares that, upon receipt of a written notice from the Company of the happening
of any event of the kind described in Section 2.1(b)(iii)(A) hereof, the Roberts
will forthwith discontinue disposition of Registrable Shares pursuant to the
Registration Statement until the Roberts' receipt of the copies of the
supplemented or amended Prospectus contemplated by Section 2.1(b)(iii)(A)
hereof, or until it is
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advised in writing by the Company that the use of the Prospectus may be resumed,
and has received copies of any additional or supplemental filings which are
incorporated by reference in the Prospectus. The period of time the Company is
obligated to keep a Registration Statement effective pursuant to this Agreement
shall be extended accordingly for the period of time the Roberts have
discontinued disposition of Registrable Shares pursuant to this Section
2.1(b)(iv).
(c) EXPENSES. All costs and expenses incident to the Company's
performance of or compliance with this Agreement shall be borne by the Company
and for purposes of this Section 2.1 shall include, without limitation, printing
expenses (including a reasonable number of Prospectuses for circulation by the
Roberts), legal fees and disbursements of counsel for the Company, "blue sky"
expenses, accounting fees and filing fees, and legal fees and disbursements of
one counsel for the Roberts; provided, however, that the Company shall have no
obligation to pay any underwriting fees, discounts or commissions attributable
to the sale of Registrable Shares and any of the expenses incurred by the
Roberts which are not payable by the Company, such costs to be borne by the
Roberts.
(d) INDEMNIFICATION.
(i) To the extent permitted by law, the Company will indemnify and
hold harmless the Roberts against any losses, claims, damages or liabilities
(joint or several) to which they may become subject under the Securities Act,
the Exchange Act or other federal or state law, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereof) arise out of or are
based upon any of the following statements, omissions or violations
(collectively a "Violation"): (A) any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement, including
any preliminary Prospectus or final Prospectus contained therein or any
amendments or supplements thereto, (B) the omission or alleged omission to state
therein a material fact required to be stated therein, or necessary to make the
statements therein not misleading, or (C) any Violation or alleged Violation by
the Company of the Securities Act, the Exchange Act, any state securities law or
any rule or regulation promulgated under the Securities Act, the Exchange Act or
any state securities law; and the Company will pay to the Roberts any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability, or action; provided, however,
that the indemnity agreement contained in this Section 2.1(d)(i) shall not apply
to amounts paid in settlement of any such loss, claim, damage, liability, or
action if such settlement is effected without the consent of the Company which
consent shall not be unreasonably withheld, nor shall the Company be liable in
any such case for any such loss, claim, damage, liability, or action to the
extent that it arises out of or is based upon (a) a Violation which occurs in
reliance upon and in conformity with written information furnished expressly for
use in the Registration Statement by the Roberts, or (b) a Violation that would
not have occurred if the Roberts had delivered to the purchaser the version of
the Prospectus most recently provided by the Company to the Roberts as of the
date of such sale.
(ii) To the extent permitted by law, the Roberts will indemnify and
hold
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harmless the Company, each of its directors, each of its officers who has signed
the Registration Statement and each person, if any, who controls the Company
within the meaning of the Securities Act, against any losses, claims, damages,
or liabilities (joint or several) to which any of the foregoing persons may
become subject under the Securities Act, the Exchange Act or other federal or
state law, insofar as such losses, claims, damages, or liabilities (or actions
in respect thereto) arise out of or are based upon any Violation (which includes
without limitation the failure of the Roberts to comply with the Prospectus
delivery requirements under the Securities Act, and the failure of the Roberts
to deliver the most current Prospectus provided by the Company prior to such
sale), in each case to the extent (and only to the extent) that such Violation
occurs in reliance upon and in conformity with written information furnished by
the Roberts expressly for use in the Registration Statement or such Violation is
caused by the Roberts' failure to deliver to the purchaser of the Registrable
Shares a Prospectus (or amendment or supplement thereto) that had been provided
to the Roberts by the Company; and the Roberts will pay any legal or other
expenses reasonably incurred by any person intended to be indemnified pursuant
to this Section 2.1(d)(ii) in connection with investigating or defending any
such loss, claim, damage, liability, or action; provided, however, that the
indemnity agreement contained in this Section 2.1(d)(ii) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Roberts, which consent
shall not be unreasonably withheld. In no event shall the liability of the
Roberts hereunder be greater in amount than the dollar amount of the proceeds
received by them upon the sale of the Registrable Shares giving rise to such
indemnification obligation.
(iii) Each person entitled to indemnification under this Section
2.1(d) (the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly, but no later than
fifteen (15) days, after such Indemnified Party has actual knowledge of any
claim as to which indemnity may be sought and shall permit the Indemnifying
Party to assume the defense of any such claim and any litigation resulting
therefrom, provided that counsel for the Indemnifying Party who conducts the
defense of such claim or any litigation resulting therefrom shall be approved by
the Indemnified Party (whose approval shall not be unreasonably withheld), and
the Indemnified Party may participate in such defense at such party's expense,
and provided further that the failure of any Indemnified Party to give notice as
provided herein shall not relieve the Indemnifying Party of its obligations
under this Section 2.1 unless the Indemnifying Party is materially prejudiced
thereby. The Indemnified Party may participate in defense of a claim (which has
been assumed by the Indemnifying Party) through the Indemnified Party's own
counsel, but at its own expense unless (i) the employment of such counsel has
been specifically authorized in writing by the Indemnifying Party or (ii) such
Indemnified Party has been advised in writing by its counsel that there may be
conflicting interests between the Indemnified Party and the Indemnifying Party
in the legal defense of such claim. No Indemnifying Party, in the defense of any
such claim or litigation, shall (except with the consent of each Indemnified
Party which shall not be unreasonably withheld) consent to entry of any judgment
or enter into any settlement that does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such Indemnified Party of a
release from all liability in respect to such claim or litigation. Each
Indemnified Party shall furnish such
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information regarding itself or the claim in question as an Indemnifying Party
may reasonably request in writing and as shall be reasonably required in
connection with the defense of such claim and litigation resulting therefrom.
(iv) To the extent that the indemnification provided for in this
Section 2.1(d) is held by a court of competent jurisdiction to be unavailable to
an Indemnified Party with respect to any loss, liability, claim, damage or
expense referred to herein, then the Indemnifying Party, in lieu of indemnifying
such Indemnified Party hereunder, shall contribute to the amount paid or payable
by such Indemnified Party as a result of such loss, liability, claim, damage or
expense in such proportion as is appropriate to reflect the relative fault of
the Indemnifying Party on the one hand and of the Indemnified Party on the other
hand in connection with the statements or omissions which resulted in such loss,
liability, claim, damage or expense, as well as any other relevant equitable
considerations. The relative fault of the Indemnifying Party and of the
Indemnified Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Indemnifying Party or by the Indemnified Party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. In no event shall the liability of the
Roberts hereunder be greater in amount than the dollar amount of the proceeds
received by them upon the sale of the Registrable Shares giving rise to such
obligation.
SECTION 2.2. PROCEDURES FOR SALE OF SHARES UNDER REGISTRATION STATEMENT.
(a) NOTICE AND APPROVAL. If the Roberts shall propose to sell any
Registrable Shares pursuant to the Registration Statement, they shall notify the
Company of their intent to do so (including the proposed manner and timing of
all sales) at least two (2) full trading days prior to such sale, and the
provision of such notice to the Company shall conclusively be deemed to
reestablish and reconfirm an agreement by the Roberts to comply with the
registration provisions set forth in this Agreement. Unless otherwise specified
in such notice, such notice shall be deemed to constitute a representation that
any information previously supplied by the Roberts expressly for inclusion in
the Registration Statement (as the same may have been superseded by subsequently
provided information) is accurate as of the date of such notice. At any time
within such two (2) trading-day period, the Company may refuse to permit the
Roberts to sell any Registrable Shares pursuant to the Registration Statement;
provided, however, that in order to exercise this right, the Company must
deliver a certificate in writing to the Roberts to the effect that a delay in
such sale is necessary because a sale pursuant to the Registration Statement in
its then-current form without the addition of material, non-public information
about the Company, could constitute a Violation of the federal securities laws.
Notwithstanding the foregoing, the Company will ensure that in any event the
Roberts shall have at least twenty-five (25) trading days (prorated for partial
quarters) available to sell Registrable Shares during each calendar quarter (or
portion thereof) from the date the Registration Statement is declared effective
until the expiration of the Registration Effective Period.
(b) DELIVERY OF PROSPECTUS. For any offer or sale of any of the
Registrable
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Shares by the Roberts in a transaction that is not exempt under the Securities
Act, the Roberts, in addition to complying with any other federal securities
laws, shall deliver a copy of the final Prospectus (or amendment of or
supplement to such Prospectus) of the Company covering the Registrable Shares in
the form furnished to the Roberts by the Company to the purchaser of any of the
Registrable Shares on or before the settlement date for the purchase of such
Registrable Shares.
(c) COPIES OF PROSPECTUSES. Subject to the provisions of this
Section 2.2, when the Roberts are entitled to sell and give notice of their
intent to sell Registrable Shares pursuant to the Registration Statement, the
Company shall, within two (2) trading days following the request, furnish to the
Roberts a reasonable number of copies of a supplement to or an amendment of such
Prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such Registrable Shares, such Prospectus shall not as of the date
of delivery to the Roberts include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading or incomplete in the light of the
circumstances then existing.
SECTION 2.3. DEMAND REGISTRATION. To the extent the Roberts may not
sell their remaining Registrable Shares because of the volume limitations set
forth in Rule 144(e) of the Securities Act, the Company shall use its reasonable
best efforts to prepare and file as soon as practicable after the first
anniversary of the date hereof (but in no event more than seventy-five (75) days
after the first anniversary of the date hereof) with the Commission a
Registration Statement on Form S-3 (or such successor or other appropriate form
if necessary) under the Securities Act with respect to the remaining Registrable
Shares less any shares which may be sold pursuant to Rule 144 of the Securities
Act on the day after the first anniversary of the date hereof; provided,
however, that such number of shares (the "Rule 144 Shares") shall be determined
in accordance with the limitation regarding one percent (1%) of the outstanding
shares of Common Stock set forth in Rule 144(e)(i) and not the average weekly
reported volume of trading set forth in Rule 144(e)(ii); provided further,
however, that if the number of shares of outstanding Common Stock as of the
first anniversary of the date hereof is subsequently reduced by more than ten
percent (10%), then all of the remaining Registrable Shares shall be registered.
The Company will use its reasonable best efforts to maintain the effectiveness
of the Registration Statement until the earlier of (i) the date the Roberts have
sold all of the Registrable Shares or (ii) the date the Roberts may sell the
Registrable Shares pursuant to Rule 144(k) of the Securities Act. All other
applicable provisions in this Article II shall govern this Section 2.3.
SECTION 2.4. PIGGY-BACK REGISTRATION. If at any time after the first
anniversary of the date hereof the Company proposes to file a Registration
Statement on Form S-3 (or such successor or other appropriate form if necessary)
under the Securities Act with respect to an offering by the Company for the
account of Stephen Gott pursuant to Mr. Gott's demand registration rights, then
the Company shall give written notice of such proposed filing to the Roberts as
soon as practicable (but in no event less than five (5) days before the
anticipated filing date), and such notice shall offer the Roberts the
opportunity to register such number of
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Registrable Shares on such Registration Statement as the Roberts may request
less the Required Shares and the Rule 144 Shares. No registration effected under
this Section 2.4 shall be deemed to have been effected pursuant to Section 2.3
or shall relieve the Company of its obligation to effect any registration upon
request under Section 2.3.
ARTICLE III.
MISCELLANEOUS
SECTION 3.1. NOTICES. All notices, requests and other communications
to any party hereunder shall be in writing (including telecopy, telex or similar
writing) and shall be deemed given or made as of the date delivered, if
delivered personally or by telecopy (provided that delivery by telecopy shall be
followed by delivery of an additional copy personally, by mail or overnight
courier), one day after being delivered by overnight courier or three days after
being mailed by registered or certified mail (postage prepaid, return receipt
requested), to the parties at the following addresses:
if to 7th Level, to:
7th Level, Inc.
925 Westchester Avenue
White Plains, New York 10604
Attention: Chief Executive Officer
Fax: 914-682-4440
with a copy to:
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, New York 10022
Attention: Gerald Adler, Esq.
Fax: 212-758-9526
if to the Roberts, to:
Jason Roberts
c/o Panmedia Corporation
350 Gate Five Road
Sausalito, California 94965
Fax: 415-332-8503
with a copy to:
Latham & Watkins
9
<PAGE>
135 Commonwealth Drive
Menlo Park, California 94025
Attention: Peter Kerman, Esq.
Fax: 650-463-2600
or such other address or telex or telecopy number as such party may hereafter
specify for the purpose by notice to the other party hereto.
SECTION 3.2. AMENDMENT; WAIVER. This Agreement may be amended,
modified or supplemented, and waivers or consents to departures from the
provisions hereof may be given, provided that the same are in writing and signed
by or on behalf of the parties hereto.
SECTION 3.3. SUCCESSORS AND ASSIGNS. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, provided that no party shall assign, delegate
or otherwise transfer any of its rights or obligations under this Agreement
without the written consent of the other party hereto. The rights to cause the
Company to register the Registrable Shares may be assigned by the Roberts to the
following persons, to the extent they acquire Registrable Shares which require
registration under the Securities Act: (i) a member of their immediate family
(as defined in Regulation S-K 404(a) under the Securities Act); (ii) their
estate, executors, administrators and personal representatives, and then to the
applicable heirs, successors, legatees or distributees, whether or not such
recipients are members of their immediate family; (iii) a charitable trust or to
a trust created for the benefit of the Roberts or their immediate family
members; provided that such assignees and transferees agree in writing to be
bound to the indemnification provisions set forth in Section 2.1(d) hereof; and
(iv) Brian Shefts and/or an entity formed by Mr. Shefts and the Roberts.
SECTION 3.4. GOVERNING LAW. This Agreement shall be construed in
accordance with and governed by the law of the State of New York without regard
to principles of conflict of laws.
SECTION 3.5. COUNTERPARTS; EFFECTIVENESS. This Agreement may be
signed in any number of counterparts, each of which shall be an original, with
the same effect as if the signatures thereto and hereto were upon the same
instrument.
SECTION 3.6. ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES. Except
as expressly provided herein, this Agreement, the Stock Purchase Agreement and
the Employment Agreement constitute the entire agreement and supersedes all
prior agreements and understandings, both written and oral, among the parties
with respect to the subject matter hereof. Except as expressly provided herein,
this Agreement is not intended to confer upon any person other than the parties
hereto any rights or remedies hereunder.
SECTION 3.7. HEADINGS. The headings contained in this Agreement are for
10
<PAGE>
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
SECTION 3.8. SEVERABILITY. If any term or other provision of this
Agreement is invalid, illegal or unenforceable, all other provisions of this
Agreement shall remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in a manner
that is materially adverse to any party.
[Remainder of page intentionally left blank.]
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Registration Rights Agreement as of the date first above written.
7TH LEVEL, INC.
By: /s/ Marc E. Landy
-------------------------------------
Name: Marc E. Landy
Title: Vice President and
Chief Financial Officer
/s/ Jason Roberts
----------------------------------------
JASON ROBERTS
/s/ Patricia Roberts
----------------------------------------
PATRICIA ROBERTS
12
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<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 10,605,068 780,308
<SECURITIES> 0 0
<RECEIVABLES> 1,295,872 149,112
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 12,450,360 619,078
<PP&E> 403,284 4,218,528
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 41,347,051 6,011,512
<CURRENT-LIABILITIES> 6,627,997 5,302,787
<BONDS> 0 0
0 0
216 0
<COMMON> 310,900 137,837
<OTHER-SE> 33,325,631 (219,857)
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<CGS> 118,961 84,920
<TOTAL-COSTS> 14,245,407 2,761,479
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<CHANGES> 0 0
<NET-INCOME> (13,650,857) (2,541,475)
<EPS-PRIMARY> (.50) (.18)
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