Subscription Agreement Btwn. 7th Level & Fletcher Ltd.

EXHIBIT 10.44


SUBSCRIPTION AGREEMENT


BETWEEN 7TH LEVEL, INC.


AND FLETCHER INTERNATIONAL, LIMITED


DATED DECEMBER 14, 1998


TABLE OF CONTENTS


PAGE
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1. Purchase and Sale 1
a. Initial Common Stock Investment 1
b. Secondary Right 1
c. Additional Right 2
d. 7th Level Notice 3
e. First Fletcher Investment Right 3
f. Second Fletcher Investment Right 3
g. Fletcher Investment Notice 4
h. Fletcher Share Limitation 4


2. Closing 5


3. Representations and Warranties of 7th Level 6
3.A Registration Provisions 10


4. Representations and Warranties of Fletcher 13


5. Adjustment Right 14
a. Initial Share Adjustment Right 14
b. Term 15
c. Adjustment Calculation 15
d. Adjustment Right Exercise 15
e. 7th Level Adjustment Buyback 16
f. Secondary Share Adjustment Right 16
g. Additional Share Adjustment Right 17
h. Definition 17


6. Consolidation, Merger, Etc. 17


7. Covenants of 7th Level 18


8. Covenants of Fletcher 22
8.A. Legend 23
8.B. Adjustments 23


9. Conditions Precedent to Fletcher's Obligations 24


10. Conditions Precedent to 7th Level's Obligations 24


11. Fees and Expenses 24


12. Non-Performance 24


13. Indemnification 25
a. Indemnification of Fletcher 25
b. Indemnification of 7th Level 26
c. Conduct of Claims 26


14. Survival of the Representations, Warranties, Etc 27


15. Notices 27


16. Miscellaneous. 29


ANNEX A 32


ANNEX B 34


ANNEX C 35


ANNEX D 37


ANNEX E 39


INDEX OF DEFINED TERMS


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30-day Average Price 1 65 Day Notice Period 4 65 Day Notice 4 7th Level 1 7th Level Cancellation Event 14 7th Level Closing Date 3 7th Level Indemnified Party 26 7th Level Notice 3 7th Level Notice Date 3 7th Level Rights 3 Acquirer 17 Acquirer Common Stock 18 Additional Adjustment Shares 17 Additional Aggregate Price 2 Additional Measurement Period 17 Additional Purchase Price 2 Additional Right 2 Additional Shares 2 Adjustment Amount 15 Adjustment Buyback 16 Adjustment Payment 15 Adjustment Right 14 Adjustment Right Calculation Period 15 Adjustment Right Issue Date 14 Adjustment Right Price 15 Adjustment Shares 17 Agreement 1 Average Price 1 Bank Debt 21 Blackout Period 12 Bloomberg 1 Buyout 20 Closing Date 5 Combination 17 Combination Closing 17 Combination Notice 18 Common Stock 1 Covered Security 10 Excess Closing Price 21 Excess Note 21 Excess Notice 22


Excess Notice Date 22 Exchange Act 8 Exercisable Number 4 First Fletcher Investment Right 3 First Fletcher Investment Right Shares 3 First Fletcher Right Aggregate Price 3 First Fletcher Right Purchase Price 3 Fletcher 1 Fletcher Indemnified Party 25 Fletcher Investment Closing Date 4 Fletcher Investment Notice 4 Fletcher Investment Rights 3 Fletcher Notice Date 4 Fletcher Response Time 20 Fletcher Rights 4 Fletcher Right Shares 4 Increase Notice 4 Increased Number 4 Indemnification Amount 13 Indemnified Party 26 Indemnifying Party 26 Initial Adjustment Shares 15 Initial Aggregate Price 1 Initial Closing 5 Initial Closing Date 5 Initial Measurement Period 14 Initial Number 1 Initial Purchase Price 1 Initial Shares 1 Interim Period 19 Investment Closing 3 Investment Closing Date 4 Investment Right Price 6 Investment Rights 4 Investment Shares 5 Issuance Blockage 21 Minimum Option Price 2 Obligation 21 Original Number 21 Permitted Placement 20 Preferred Stock 9


Private Placement 19 Proceeding 25 Prospectus 10 Registration Statement 10 Related Proceeding 30 Required Consent 21 Required Registration Date 10 Restricted Period 19 Rights Condition 6 Rule 144 10 Sales Contract 12 SEC 8 SEC Filing 8 Second Fletcher Investment Right 3 Second Fletcher Investment Right Shares 3 Second Fletcher Right Aggregate Price 3 Second Fletcher Right Purchase Price 3 Secondary Adjustment Shares 16 Secondary Aggregate Price 2 Secondary Measurement Period 17 Secondary Purchase Price 1 Secondary Right 1 Secondary Shares 1 Securities Act 8 Share Limitation 4 Specified Additional Shares 16 Specified Initial Shares 15 Specified Secondary Shares 16 Termination Date 6 Trading Day 13 Unsold Securities 12


SUBSCRIPTION AGREEMENT


This Subscription Agreement (this "Agreement") dated as of December 14, 1998 is entered into by and between 7th Level, Inc., a Delaware corporation (together with its successors, "7th Level"), and Fletcher International Limited, a company organized under the laws of the Cayman Islands (together with its successors, "Fletcher").


The parties hereto agree as follows:


1. Purchase and Sale. In consideration of and upon the basis of the representations, warranties and agreements and subject to the terms and conditions set forth in this Agreement:


a. Initial Common Stock Investment. 7th Level agrees to issue and sell to Fletcher, and Fletcher agrees to purchase from 7th Level, on the Initial Closing Date specified in Section 2 hereof the Initial Number (as defined below) of newly issued shares of 7th Level common stock, $.01 par value (the "Common Stock") at a purchase price per share equal to three dollars ($3.00) (the "Initial Purchase Price"), with the product of the Initial Number of shares and the Initial Purchase Price defined as the "Initial Aggregate Price." The "Initial Number" shall be the lesser of (i) $5,000,000 divided by the Initial Purchase Price and (ii) that number of shares of Common Stock which represents nine percent (9.0%) of 7th Level's outstanding Common Stock on the date immediately prior to the Initial Closing Date. The shares of Common Stock purchased pursuant to this Section 1.a are referred to herein as the "Initial Shares."


b. Secondary Right. If, during the 90 day period immediately following the Initial Closing Date, 7th Level increases the number of shares of Common Stock outstanding, then 7th Level, at its sole option (the "Secondary Right"), can issue to and cause Fletcher to purchase an additional number of shares of Common Stock (the "Secondary Shares") up to the lesser of (1) the quotient of $5 million minus the Initial Aggregate Price divided by the Secondary Purchase Price (as defined below) or (2) nine percent (9%) of the then outstanding number of shares of Common Stock minus the number of Initial Shares, upon the same terms and conditions as the Initial Shares, except as provided in this Section 1.b. Upon exercise of the Secondary Right on the 7th Level Closing Date (as defined below), 7th Level shall issue and Fletcher shall purchase the Secondary Shares at a purchase price per share equal to the lesser of (1) the last sales price of the Common Stock as reported by Bloomberg on the Trading Day immediately prior to the 7th Level Closing Date, or (2) the arithmetic average of the daily volume-weighted average sale price per share (rounded to the nearest 1/10,000th) as reported by Bloomberg, L.P. ("Bloomberg") on the NASDAQ National Market of the Common Stock (the "Average Price") for the thirty (30) day trading period ending (the "30-day Average Price") through the Trading Day immediately prior to the 7th Level Closing Date (the "Secondary Purchase Price"); and for


an aggregate purchase price equal to the total number of Secondary Shares multiplied by the Secondary Purchase Price (the "Secondary Aggregate Price").


c. Additional Right. At the option of 7th Level and upon 30 Trading Days written notice, and subject to satisfaction of the conditions to exercisability set forth below, 7th Level may exercise one right (the "Additional Right"), beginning 270 days after the Initial Closing Date and ending on the second anniversary of the Initial Closing Date, to require Fletcher to purchase a number of newly issued Common Stock (the "Additional Shares") equal to the lesser of the number (1) represented by $5 million divided by the Additional Purchase Price (as defined below), (2) that, when added to all shares previously issued to Fletcher under this Agreement, including Initial Shares, Secondary Shares, and shares issuable or issued under the Fletcher Rights (as defined below) up until the 7th Level Closing Date, would equal or exceed fifteen (15) percent of the shares of Common Stock outstanding on the Initial Closing Date until the end of the fifteenth month after the Initial Closing Date, at which such time the limit shall be raised from 15 percent to 19.9 percent, or (3) that equals four (4) multiplied by the arithmetic average of the daily trading volume for the 60-day trading period ending the day immediately prior to the 7th Level Notice Date (as defined below) as reported by Bloomberg. The Additional Right shall not be exercisable, unless: (A) the Common Stock is listed by the NASDAQ National market (or a national U.S. securities exchange) at the time of the 7th Level Notice Date and at the 7th Level Closing Date, (B) a Registration Statement (as defined in Section 3.A) is effective and the prospectus contained therein is current at the 7th Level Notice Date and at the 7th Level Closing Date, (C) there has been no Blackout Period (as defined in Section 3.A) or any other period in which the Registration Statement is not effective or not able to be used by Fletcher for resales within 30 Trading Days of the 7th Level Notice Date and 7th Level Closing Date, and (D) the Average Price for each of the 30 Trading Days through but excluding the third Trading Day immediately prior to the 7th Level Closing Date has continually exceeded three dollars ($3.00).


Upon the exercise of the Additional Right and subject to satisfaction or waiver of the above-stated conditions on the 7th Level Closing Date, 7th Level shall issue and sell to Fletcher, and Fletcher shall purchase from 7th Level, the Additional Shares at a purchase price per share (the "Additional Purchase Price") equal to the lesser of (1) the last sales price of the Common Stock as reported by Bloomberg on the Trading Day immediately prior to the 7th Level Closing Date, or (2) the 30-day Average Price through but excluding the third Trading Day immediately prior to the 7th Level Closing Date; and for an aggregate purchase price equal to the total number of Additional Shares multiplied by the Additional Purchase Price (the "Additional Aggregate Price"). Notwithstanding the previous sentence, 7th Level shall be entitled (but not obligated) to set a minimum price per share for the Additional Purchase Price (the "Minimum Option Price") in its 7th Level Notice (as defined below); provided, however, that such Minimum Option Price shall not exceed the Closing Price for the trading day immediately prior to the 7th Level Notice Date. If a Minimum Option Price is specified in such notice and is in excess of the Additional Purchase Price that otherwise would be paid, then the 7th Level Notice with respect to such


Additional Right, and any transaction relating thereto, will be null and void without further obligation of either party.


d. 7th Level Notice. To exercise the Secondary Right or the Additional Right (the "7th Level Rights"), 7th Level shall deliver one or more written notices in the form attached hereto as Annex A (a "7th Level Notice") to Fletcher on any Trading Day prior to the respective expiration date. The date upon which 7th Level causes a 7th Level Notice to be delivered to Fletcher, by hand, facsimile, electronic transmission or otherwise before 5:00 p.m. New York Time, shall be the "7th Level Notice Date" with respect to such exercise of the 7th Level Rights to which such notice relates. If a 7th Level Right is exercised, the closing (the "Investment Closing") of the sale and delivery of the Secondary Shares or Additional Shares shall take place in accordance with Section 2 on the date that is three Trading Days following the 7th Level Notice Date for the Secondary Shares, and that is three Trading Days following the thirty (30) Trading Days period following the 7th Level Notice Date for the Additional Shares, or as otherwise provided herein, or at such other date and time as Fletcher and 7th Level shall mutually agree (each such date and time being referred to herein as a "7th Level Closing Date").


e. First Fletcher Investment Right. 7th Level hereby grants Fletcher the right to purchase (the "First Fletcher Investment Right") from time to time, and agrees to sell to Fletcher for a period of five (5) years from the Initial Closing Date, at Fletcher's sole option, up to 650,000 additional shares ("First Fletcher Investment Right Shares") of Common Stock at a purchase price per share equal to four dollars and fifty cents ($4.50) (the "First Fletcher Right Purchase Price"); and for an aggregate purchase price equal to the total number of First Fletcher Investment Right Shares being exercised multiplied by the First Fletcher Right Purchase Price (the "First Fletcher Right Aggregate Price"). 7th Level shall automatically become and be obligated to pay to Fletcher as a demand debt obligation the First Fletcher Investment Right Shares immediately upon receipt by 7th Level of the First Fletcher Right Purchase Price and the Fletcher Investment Notice (as defined below), setting forth the number of First Fletcher Investment Right Shares.


f. Second Fletcher Investment Right. 7th Level hereby grants Fletcher the right to purchase (the "Second Fletcher Investment Right" and together with the First Fletcher Investment Right, the "Fletcher Investment Rights") from time to time, and agrees to sell to Fletcher for a period of five (5) years from the Initial Closing Date, at Fletcher's sole option, 100,000 additional shares ("Second Fletcher Investment Right Shares") of Common Stock at a purchase price per share equal to $0.01 (the "Second Fletcher Right Purchase Price"); and for an aggregate purchase price equal to the total number of Second Fletcher Investment Right Shares being exercised multiplied by the Second Fletcher Right Purchase Price (the "Second Fletcher Right Aggregate Price"). 7th Level shall automatically become and be obligated to pay to Fletcher as a demand debt obligation the Second Fletcher Investment Right Shares immediately upon receipt by 7th Level of the Second Fletcher Right Purchase Price and the Fletcher


Investment Notice (as defined below), setting forth the number of Second Fletcher Investment Right Shares.


g. Fletcher Investment Notice. To exercise the Fletcher Investment Rights or the Adjustment Right (as defined in Section 5) (together, the "Fletcher Rights"), Fletcher shall deliver one or more written notices in the form attached hereto as Annex B (a "Fletcher Investment Notice") to 7th Level from time to time prior to the respective expiration date. The date upon which Fletcher causes a Fletcher Investment Notice to be delivered to 7th Level, by hand, facsimile, electronic transmission or otherwise, shall be the "Fletcher Notice Date" with respect to such exercise of the Fletcher Rights. If the Fletcher Rights are exercised, the closing (the "Investment Closing") of the sale and delivery of the First Fletcher Investment Right Shares, the Second Fletcher Investment Right Shares or the Adjustment Shares (as defined in Section 5) (collectively, the "Fletcher Right Shares") shall take place in accordance with Section 2 on the date that is three (3) Trading Days following the applicable Fletcher Notice Date, or at such other date and time as Fletcher and 7th Level shall mutually agree (such date and time being referred to herein as a "Fletcher Investment Closing Date" and together with a 7th Level Closing Date, an "Investment Closing Date").


h. Fletcher Share Limitation. Notwithstanding anything else contained in this Agreement, the aggregate number of Investment Shares (as defined below), issuable upon exercise of the Fletcher Rights and/or the 7th Level Rights (collectively, the "Investment Rights"), together with all Investment Shares previously issued, shall be less than or equal to the lower of (i) the Exercisable Number (as defined below) or (ii) the number of shares of Common Stock otherwise issuable upon the exercise of the Investment Rights (the "Share Limitation"); provided, however, that this Section 1(h) shall not limit the exercise of the Additional Right by 7th Level. Any Investment Shares not issued as a result of the previous sentence shall be issuable when and to the extent the Exercisable Number is thereafter increased. If a Fletcher Right is exercised within the same notice period as an exercised 7th Level Right and such Investment Shares when issued would be greater than the Share Limitation, then the Fletcher Right Shares shall be issued in full prior to the issuance of any Secondary Shares or Additional Shares. The "Exercisable Number" is initially zero and thereafter may be increased upon expiration of a sixty-five day period (the "65 Day Notice Period") after either (i) Fletcher delivers a notice (a "65 Day Notice") to 7th Level designating an aggregate number of shares of Common Stock in excess of the then existing Exercisable Number, or (ii) 7th Level delivers a notice (an "Increase Notice") stating the increase, if any, in the aggregate number (the "Increased Number") of shares of Common Stock outstanding as of the last day of the preceding month over the number outstanding as of the last day of the second preceding month, or in the case of the first day of the month immediately following the Initial Closing Date, the number of shares outstanding as of the Initial Closing Date, in which event the Exercisable Number shall be increased by the number which is 9.75% of the Increased Number. A 65 Day Notice may be given at any time. Unless expressly waived by Fletcher, 7th Level shall deliver an Increase Notice to Fletcher on or before the 10th day of


each calender month from and after the Initial Closing Date. One or more 65 Day Notice(s) may be given from time to time at any time after the Initial Closing Date, provided that any increase in the Exercisable Number designated by any 65 Day Notice shall be effective only upon expiration of the 65 Day Notice Period with respect to such 65 Day Notice.


2. Closing. Upon satisfaction or, if applicable, waiver of the conditions set forth in Sections 9 and 10 hereof, and of the Rights Condition (as defined below), and the deliveries set forth below, (1) the "Initial Closing" shall take place initially via facsimile at 1:00 p.m. (New York time) on or before the Termination Date on the business day following satisfaction of all conditions to the Initial Closing, or at such other date and time as Fletcher and 7th Level may agree (such date and time being referred to herein as the "Initial Closing Date" and together with an Investment Closing Date, a "Closing Date"), and (2) any Investment Closing shall take place initially via facsimile on the Investment Closing Date; provided, that 7th Level shall deliver the original stock certificates representing the Initial Shares, Secondary Shares, Additional Shares, or the Fletcher Right Shares (collectively, the "Investment Shares"), as the case may be, to Fletcher via Federal Express at the address set forth in Annex C hereof. Each original stock certificate delivered in accordance with this Section 2 shall represent 100,000 shares of Common Stock (except that to the extent that the number of Investment Shares to be delivered to Fletcher at any given time are not evenly divisible by 100,000, one stock certificate shall represent the remaining shares).


a. At the Initial Closing, the following deliveries shall be made:


(i). Initial Shares Certificate. 7th Level shall deliver the stock certificates representing the Initial Shares, duly registered on the books of 7th Level in the name of Fletcher or its nominee.


(ii). Initial Closing Documents. The closing documents required by Sections 9 and 10 shall be delivered to Fletcher and 7th Level, respectively, and 7th Level shall deliver the documents required by the Rights Condition.


(iii). Initial Purchase Price. Fletcher shall cause to be wire transferred to 7th Level, in accordance with instructions set forth in Section 15, the Initial Aggregate Price, in immediately available United States dollars.


(iv). Delivery Notice. An executed copy of the delivery notice in the form attached hereto as Annex C shall be delivered in accordance therewith, with a copy delivered to Fletcher.


The foregoing deliveries shall be deemed to occur simultaneously as part of a single transaction, and no delivery shall be deemed to have been made until all such deliveries have been made.


The Initial Closing is subject to delivery by 7th Level of written waivers, in form and substance reasonably satisfactory to Fletcher, of any pre-emptive or similar rights of any person in connection with the issuance of securities to Fletcher pursuant to this Agreement (the "Rights Condition"). If the Initial Closing has not occurred on or before December 18, 1998 (the "Termination Date"), then this Agreement shall terminate and be of no further effect, except for the parties' rights to indemnification which shall survive. Fletcher agrees from the date hereof until the earlier of the date of the Initial Closing and the Termination Date that it shall escrow funds necessary in a commercial bank and in a separate account for the Initial Closing. Fletcher shall provide confirmation of such escrow event within 48 hours of the date hereof to 7th Level as provided in Section 15.


b. At any Investment Closing, the following deliveries shall be made:


(i). Investment Shares. 7th Level shall deliver the certificate(s) ...