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As filed with the Securities and Exchange Commission on May 22, 1996.
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
____________________
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
____________________
7TH LEVEL, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 1110 EAST COLLINS BOULEVARD, SUITE 122 75-2480669
(State or other jurisdiction of RICHARDSON, TEXAS 75081 (I.R.S. Employer
incorporation or organization) (214) 498-8100 Identification No.)
(Address, including ZIP code, and telephone
number, including area code of
registrant's principal executive offices)
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____________________
GEORGE D. GRAYSON
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD
1110 EAST COLLINS BOULEVARD, SUITE 122
RICHARDSON, TEXAS 75081
(214) 498-8100
(Name, address, including ZIP code, and telephone number, including area code,
of agent for service)
____________________
Copies to:
DEREK R. MCCLAIN
JAMES A. KRAUSE
VINSON & ELKINS L.L.P.
3700 TRAMMELL CROW CENTER
2001 ROSS AVENUE
DALLAS, TEXAS 75201
(214) 220-7700
____________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement as determined in
light of market conditions and other factors.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement of
the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
OF SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE (1) FEE
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Common Stock, $0.01 par value .. 80,000 shares $12 1/8 $970,000 $334.48
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c), using the average of the high and low prices on
May 20, 1996, as reported on the Nasdaq National Market.
____________________
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED MAY 22, 1996
PROSPECTUS
7TH LEVEL, INC.
80,000 SHARES OF COMMON STOCK
This Prospectus relates to the periodic offer and sale by each of the
Selling Stockholders named herein (collectively, the "Selling Stockholders") of
up to an aggregate of 80,000 shares (collectively, the "Shares") of the common
stock, par value $.01 per share ("Common Stock"), of 7th Level, Inc., a Delaware
corporation (the "Company"), which were acquired in a private transaction.
The Selling Stockholders may offer the Shares from time to time to
purchasers directly or through underwriters, dealers or agents. The Shares may
be sold at market prices prevailing at the time of sale or at negotiated prices.
The Common Stock, including the Shares, is listed on the Nasdaq National
Market ("NASDAQ"). The Company will not receive any of the proceeds from the
sale of the Shares by the Selling Stockholders. The address of the principal
executive offices of the Company is 1110 East Collins Boulevard, Suite 122,
Richardson, Texas 75081, and its telephone number at that address is (214) 498-
8100.
____________________
SEE "RISK FACTORS" BEGINNING ON PAGE 3 FOR A DISCUSSION OF CERTAIN RISK
FACTORS THAT SHOULD BE CONSIDERED PRIOR TO PURCHASING ANY OF THE SHARES.
____________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Prospectus is May 22, 1996.
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No person is authorized to give any information or to make any
representation other than those contained or incorporated by reference in this
Prospectus, and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any
securities other than the Shares offered by this Prospectus or an offer to sell
or a solicitation of an offer to buy any of the Shares in any jurisdiction
where, or to any person to whom, it is unlawful to make such offer or
solicitation. Neither the delivery of this Prospectus nor any sale or
distribution of securities made hereunder shall, under any circumstances, create
any implication that there has been no change in the affairs of the Company
since the date hereof or that the information herein is correct as of any time
subsequent to its date.
AVAILABLE INFORMATION
Pursuant to the Securities Act of 1933, as amended (the "Securities Act"),
the Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3 (together with all amendments
and exhibits thereto, the "Registration Statement") of which this Prospectus is
a part. This Prospectus does not contain all the information set forth in the
Registration Statement, to which reference is hereby made for further
information. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is hereby made to the exhibit
for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference.
The Company is subject to the informational and reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files periodic reports, proxy and information statements
and other information with the Commission. The Registration Statement, as well
as such reports, proxy and information statements and other information filed by
the Company with the Commission, may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of
the Commission located at 7 World Trade Center, 13th Floor, New York, New York
10048, and at CitiCorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material, when filed, may also be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed with the Commission, and the information
included therein, are hereby incorporated by reference in this Prospectus:
(i) Annual Report on Form 10-K for the year ended December 31, 1995; and
(ii) Quarterly Report on Form 10-Q for the quarterly period ended March
31, 1996; and
(iii) The description of the Company's Common Stock contained in Item 1 of
the Registration Statement on Form 8-A (File No. 0-24936) filed with
the Commission on October 12, 1994.
All documents subsequently filed by the Company pursuant to Sections 13(a),
13(c), 14 and 15(d) of the Exchange Act prior to the termination of the offering
of the shares made hereby shall also be deemed to be incorporated by reference
herein and to be part hereof from the date of filing such documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus. Upon the written or oral request of any
person to whom a copy of this Prospectus has been delivered, the Company will
provide without charge to such person a copy of any and all documents (excluding
exhibits thereto unless
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such exhibits are specifically incorporated by reference into such documents)
that have been incorporated by reference into this Prospectus but not delivered
herewith. Requests for such documents should be addressed to:
7th Level, Inc.
Attention: Chairman
1110 East Collins Boulevard
Suite 122
Richardson, Texas 75081
(214) 498-8100
RISK FACTORS
Prospective investors should consider carefully the following factors
relating to the Company and the offering, together with the information and
financial data set forth elsewhere in this Prospectus, prior to purchasing any
shares of Common Stock offered hereby.
HISTORICAL OPERATING LOSSES
The Company has yet to achieve profitability. As of March 31, 1996, the
Company had an accumulated deficit of approximately $26,545,134. Since its
acquisition of the assets of a sole proprietorship owned by George D. Grayson
(the "7th Level Sole Proprietorship") in February 1994, the Company has been
engaged in the development of its proprietary production technologies and the
development, production and distribution of its products. The Company is
currently developing more than ten new titles; however, through March 31, 1996,
the Company had generated revenues from only eight titles. Accordingly, the
Company has experienced operating losses and expects such losses to continue in
1996. There can be no assurance that the Company will be able to achieve
profitability and, if achieved, to sustain such profitability.
QUARTERLY FLUCTUATIONS; SEASONALITY
The Company anticipates that its quarterly operating results will fluctuate
as a result of changes in the composition of the Company's revenues, the number
and timing of new product introductions, product shipments, product returns,
marketing expenditures, research and development expenditures and promotional
programs. Orders are generally shipped promptly upon receipt, and the Company
does not currently have any significant backlog. In addition, the Company
expects its business to be seasonal in that net revenues and operating income in
the consumer software industry are typically highest in the fourth quarter as a
result of the increased demand for products during the year-end holiday selling
season. If product introductions planned for the peak holiday season are delayed
beyond such season, the Company's operating results could be materially
adversely affected.
STOCK PRICE VOLATILITY
The trading price of the Common Stock has been and may continue to be
subject to wide fluctuations in response to quarter-to-quarter variations in
operating results, changes in earnings estimates by analysts, announcements
concerning new products, strategic relationships or technological innovations by
the Company or its competitors, general conditions in the software, computer and
entertainment industries and other events or facts. In recent years the stock
market in general, and the shares of technology companies in particular, have
experienced extreme price fluctuations. This volatility has had a substantial
effect on the market prices of securities issued by many companies for reasons
unrelated to their operating performance. These broad market fluctuations may
adversely affect the market price of the Common Stock.
DEPENDENCE ON MARKET ACCEPTANCE; DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS;
PRODUCT DELAYS
Consumer preferences for interactive software products are difficult to
predict, and only a small percentage of such software products enjoy sustained
market acceptance. The Company's success depends upon its ability to develop
new, commercially-successful products and to replace revenues from products at
the later stages of their life
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cycles. In addition, the Company's success will depend upon its ability to
develop popular characters and to license recognized characters and properties
from third parties for its software titles. If the Company is unable to develop
popular characters or if the cost of licensing characters and properties from
third parties becomes prohibitive, the Company's operating results could be
adversely affected. In addition, the Company has in the past and may in the
future prepay royalties to third parties. There can be no assurance that the
sales of products associated with such royalties will be sufficient to cover the
amount of such prepayment. The Company currently has various agreements to
license properties that generally include royalty percentages ranging from 10%
to 15% of revenues less returns and allowances and, in certain cases, less cost
of goods sold or production expenses, or both. The introduction of new products
is subject to the inherent risks of development delays. The Company has in the
past and may in the future experience delays in introducing its products.
Although such delays have not had a material adverse effect on the Company, any
future delays could cause the Company to miss an important selling season or
other opportunities with a corresponding negative impact on revenues and
operations.
RAPID TECHNOLOGICAL CHANGE
The consumer software market and the personal computer industry in general
are characterized by rapidly changing technology, resulting in short product
life cycles and rapid price declines. The Company's success is dependent upon,
among other things, the ability of the Company to achieve and maintain
technological and quality leadership by anticipating and developing new
technologies and to remain competitive in terms of price and performance. If the
Company were unable, due to resource constraints or technological or other
reasons, to develop new technologies in a timely manner, this inability could
have a material adverse effect on the Company's results of operations. To date,
the Company's products have been produced for, and most of its product
development efforts are directed toward, multimedia personal computers
("Multimedia PCS"). While the Company anticipates developing products for
additional platforms that achieve market acceptance, a leveling off or decline
in the sales rate of Multimedia PCS could have a material adverse effect on the
Company's results of operations. In addition, although the Company believes
certain elements of its production process are portable to additional platforms,
there can be no assurance that the Company will be able to adapt its products or
technologies to emerging hardware platforms or to successfully create software
titles for such platforms.
COMPETITION
The consumer entertainment software, educational software and multimedia
development tools industries are highly competitive. The Company's competitors
range from small companies with limited resources to large companies with
greater financial, technical and marketing resources than those of the Company.
The Company considers its competitors to include Broderbund Software, Inc.,
Electronic Arts, Inc., LucasArts Entertainment Company, Virgin Interactive
Entertainment Inc., Davidson & Associates, The Learning Company, Edmark
Corporation, Macromedia, Inc. and Microsoft Corporation, among others. Because
the markets for interactive software products are still emerging and the cost
barriers to entry into these markets are relatively low, the Company expects the
number of competitors to increase. Companies with greater financial resources
than the Company may be able to make greater investments in research and
development, carry larger inventories, undertake more extensive marketing
campaigns, adopt more aggressive pricing policies and make higher offers or
guarantees to licensors for commercially desirable characters and motion picture
and television properties than the Company. In addition, the Company believes
that potential new competitors, including large software companies, media
companies and film studios, are increasing their focus on the interactive
entertainment and educational software markets. Competition for the Company's
products is influenced by the timing of competitive product releases and the
similarity of such products to those of the Company, which may result in
significant price competition, reduced profit margins, loss of shelf space or a
reduction in sell-through of the Company's products at retail stores. In the
school market for educational software, the Company will compete not only
against other companies offering curriculum based software, but also with
companies offering textbooks and other educational products. There can be no
assurance that the Company will be able to compete successfully with current or
future competitors or that competitive pressures faced by the Company will not
materially and adversely affect its business, operating results and financial
condition.
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EMERGING INTERACTIVE SOFTWARE MARKET
The market for interactive software titles is emerging and is dependent
upon a number of variables, including consumer preferences, shipments of new
Multimedia PCS, the installed base of Multimedia PCS and the number of other
developers creating interactive software titles to stimulate market development.
Any competitive, technological or other factor materially adversely affecting
the introduction or sale of Multimedia PCS or interactive software titles would
have a material adverse effect on the Company. Because the market for
interactive software is relatively small in comparison with the overall market
for consumer software products, it is impossible to predict with any degree of
certainty the future rate of growth, if any, and the size of the market for the
Company's products.
ENTRY INTO NEW MARKETS
The Company intends to devote substantial resources to the development of
interactive software products directed to the core curriculum education market.
While the Company believes that its experience in the entertainment and
edutainment markets will translate well to the development of products for use
in schools and homes as part of the core curriculum, there can be no assurance
that the market for core curriculum based interactive software products will
develop or as to the timing or extent of any such development. In this regard,
because many of the personal computers currently found in schools are not
configured as multimedia systems and do not have sufficient processing power and
memory to run the current generation of interactive products, development of the
market for core curriculum based interactive software products will depend in
part upon the acquisition by schools of multimedia systems or other platforms
for which the Company's products may be developed. In addition, market
distribution channels for core curriculum based educational products sold to
schools differ from those through which the Company markets its entertainment
titles. Accordingly, successful entry into the school market for such education
products will require the Company to develop effective distribution channels not
currently used by the Company.
The Company also intends to enter the market for multimedia development
tools through the development of a commercial version of TopGun(TM), the
Company's proprietary interactive software development and playback system. The
commercial success of TopGun(TM) will require selling efforts, distribution
channel access and customer support different from that required for the
Company's existing products. Further, the multimedia development tools market is
characterized by an existing installed base of competitors' tools. As such,
there can be no assurance that the Company will be able to successfully market,
distribute or support TopGun(TM), nor can there be any assurance that TopGun(TM)
will be able to gain market share from existing competitors' tools.
MANAGEMENT OF GROWTH
The Company has experienced and may continue to experience rapid growth,
having grown from 17 permanent employees and no historical revenues at January
1, 1994 to 268 permanent employees (supplemented by freelance talent and
temporary employees) as of April 30, 1996 and net revenues of $12,161,205 during
1995 and $4,373,088 for the three months ended March 31, 1996. This type of
rapid growth places a significant strain on the Company's operating procedures,
financial resources, information systems and employees. The Company plans to
introduce a significant number of additional products, expand its product
development and production capacity, increase its development expenditures,
expand its work force, enter into strategic relationships with third parties,
expand into international markets and license certain technologies and
production processes to third parties. To manage such growth, the Company will
be required to continue to implement and improve its operating systems and to
train and manage its employees. If the Company is unable to manage its growth
effectively in its existing or new markets, the Company's operating results
could be materially adversely affected.
PROTECTION OF PROPRIETARY RIGHTS
The Company regards certain of its software and production techniques as
proprietary and attempts to protect such software and techniques under patent,
copyright, trademark and trade secret laws as well as through contractual
restrictions on disclosure, copying and distribution. The Company currently
plans to distribute most of its software products on CD-ROM disks. It is
possible for unauthorized third parties to copy or to reverse engineer the
Company's products to obtain and use some programming or production techniques
that the Company regards as proprietary. The Company has experienced only
limited unauthorized copying of its products in the past, but if a significant
amount of
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unauthorized copying of the Company's products were to occur, the Company's
business, financial condition and operating results could be adversely affected.
Further, there can be no assurance that the Company's competitors will not
independently develop technologies that are substantially equivalent or superior
to the Company's technologies. As the number of interactive software products in
the market increases and the functionality of these products further overlaps,
the Company believes that interactive software will increasingly become the
subject of claims that such software infringes the copyrights or patents of
others. Any such claims, with or without merit, can be time consuming and
difficult to defend.
MANUFACTURING AND DISTRIBUTION RISKS; PRODUCT RETURNS
The production of the Company's products consists of pressing CD-ROM disks,
assembling purchased product components, printing product packaging and user
manuals and packaging finished products, all of which are performed for the
Company by third party vendors in accordance with the Company's specifications
and forecasts. Currently, the Company uses primarily one vendor for each of
these services. While these services are available from multiple parties and at
multiple sites, there can be no assurance that an interruption in the
manufacture of the Company's products could be remedied without undue delay and
without materially and adversely affecting the Company's results of operations.
The Company sells product primarily to distributors. Sales to a limited
number of distributors have and will continue to constitute a substantial
portion of the Company's revenues. Certain of the Company's agreements with its
distributors are terminable by either party, with or without cause. The
Company's agreements with its distributors generally contain no minimum purchase
obligations. If the Company were to lose all or a significant portion of the
revenue attributable to its principal distributors, or if its principal
distributors were to lose sales of the Company's products to their principal
accounts, the loss could have a material adverse effect on the Company's
operating results. The distribution channels through which consumer software
products are sold have been characterized by rapid change, including
consolidations and financial difficulties of certain distributors and the
emergence of new channels for distribution of consumer software products such as
mass merchandisers. In addition, there are an increasing number of companies
competing for access to these channels. Retailers of the Company's products
typically have a limited amount of shelf space and promotional resources, and
competition is intense among software products in general and interactive
software titles in particular for adequate levels of shelf space and promotional
support. Competitors of the Company with larger product lines and greater
numbers of popular titles typically have greater bargaining power with
distributors and resellers. The Company may not be able to achieve the levels of
support and shelf space that such competitors receive.
The Company's agreements with its distributors generally require that sales
to a contracting distributor be made at a price no greater than that at which
product is sold to any third party (including another distributor) and provide
price protection in the form of credits to the contracting distributor if the
Company sells a particular product to a third party at a price that is lower
than the price at which that product was sold to the contracting distributor.
These provisions typically extend price protection for products previously sold
by the Company to the contracting distributor but which have not yet been sold
through the distribution chain to the consumer. Most of the Company's
distributors provide a variety of merchandising or marketing services (for which
they are compensated by cash payments or credits against receivables), and the
range and value of these services varies significantly from one distributor to
another. Because of the variety of such arrangements and their potential impact
on product pricing, it is possible, although the Company believes it is
unlikely, that one or more distributors could assert a claim for price credits
based upon sales made to other parties who buy products from the Company at a
price, net of the value of services provided, that is less than the price paid
by such distributors. While no such claims have been made or threatened, there
can be no assurance that such claims will not be asserted in the future.
The Company accepts product returns for stock balancing, on defective
products and upon termination of a distributor agreement or discontinuance of a
product. The Company's stock balancing policy allows distributors to make
returns according to negotiated terms or pursuant to promotional terms which may
be in effect. Generally, stock balancing returns are accepted up to a limit of
20% of product sales to the distributor during the previous month or quarter.
From the inception of the Company through March 31, 1996, the Company has
provided allowances of approximately 10% of sales. Future product returns which
are greater than the Company's allowances could adversely affect the Company's
operating results.
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DEPENDENCE ON KEY EMPLOYEES
The Company's future success depends to a significant degree on the
continued service of its key personnel and on its ability to attract, motivate
and retain highly qualified employees. In particular, the Company is dependent
upon the management services of George D. Grayson and the creative talent and
entertainment industry knowledge of Robert A. Ezrin and W. Scott Page. The
Company's key employees may voluntarily terminate their employment with the
Company at any time subject, in certain cases, to notice requirements.
Competition for such employees is intense and the process of locating key
management and technical personnel with the combination of skills and attributes
required to execute the Company's strategy is often lengthy. Accordingly, the
loss of the services of key personnel could have a material adverse effect upon
the Company's results of operations and on its research and development efforts.
While the Company maintains for the Company's benefit a $5,000,000 key man life
insurance policy covering George D. Grayson and currently intends to continue to
do so, the Company is not obligated to maintain such key man life insurance and
there can be no assurance that it will do so.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Future sales of substantial amounts of Common Stock in the public market
could aversely affect prevailing market prices for shares of Common Stock. Of
the approximately 13 million shares outstanding as of March 31, 1996,
approximately 9.8 million shares, including all of the shares offered hereby,
are or will be eligible for immediate sale in the public market subject, in some
cases, to the volume restrictions of Rule 144 under the Securities Act. The
remainder of the shares held by existing stockholders will become eligible for
sale at various times pursuant to Rule 144. In addition, certain stockholders of
the Company have rights to cause the Company to register the sale of their
shares under the Securities Act.
CONCENTRATION OF STOCK OWNERSHIP; FACTORS INHIBITING TAKEOVER
The Company's executive officers and directors together beneficially own
approximately 43% of the outstanding Common Stock. As a result, such persons
will continue to exercise substantial influence or control over the Company's
affairs and business. In addition, the Company's Board of Directors can, without
obtaining stockholder approval, issue shares of preferred stock having rights
that could adversely affect the voting power of holders of the Common Stock.
Also, Section 203 of the Delaware General Corporation Law restricts certain
business combinations with any "interested stockholder" as defined by such
statute. Any of the foregoing factors may delay, defer or prevent a change in
control of the Company.
PLAN OF DISTRIBUTION
The Shares were acquired by the Selling Stockholders in a private
transaction. The Shares may be sold from time to time to purchasers directly by
any of the Selling Stockholders. Alternatively, each of the Selling Stockholders
may from time to time offer his Shares through underwriters, dealers or agents,
who may receive compensation in the form of underwriting discounts, concessions
or commissions from the Selling Stockholder and/or purchasers of the Shares for
whom they may act as agent. The Selling Stockholders and any underwriters,
dealers or agents that participate in the distribution of the Shares might be
deemed to be underwriters, and any profit on the sale of such Shares by them and
any discounts, commissions or concessions received by any such underwriters,
dealers or agents might be deemed to be underwriting discounts and commissions
under the Securities Act. At the time a particular offer of any of the Shares is
made by a Selling Stockholder, to the extent required pursuant to the Securities
Act, a supplement to this Prospectus will be distributed which will set forth
the aggregate principal amount of stock being offered and the terms of the
offering, including the name or names of any underwriters, dealers and agents,
any discounts, commissions and other items constituting compensation from the
Selling Stockholder and any discounts, commissions or concessions allowed or
reallowed or paid to dealers. The Company will not bear any expenses incurred by
any of the Selling Stockholders in connection with the sale of the Shares
offered hereby other than expenses relating to the registration of the offer and
sale of the Shares under the Securities Act.
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The Shares may be sold from time to time in one or more transactions on
NASDAQ. Any such sales will be made at prices prevailing on the date of the
sale.
SELLING STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock by each of the Selling Stockholders as
of May 15, 1996. Unless otherwise indicated, each person named below has sole
voting and investment power with respect to all shares of Common Stock shown as
beneficially owned by such person, subject to community property laws where
applicable and the information set forth in the footnotes to the table below.
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NUMBER OF SHARES NUMBER OF SHARES
BENEFICIALLY OWNED NUMBER OF SHARES BENEFICIALLY OWNED
NAME OF SELLING STOCKHOLDER PRIOR TO OFFERING BEING OFFERED AFTER OFFERING(1)
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St. John H. Bain 143,931 41,016 102,915
David W. Mize 42,389 12,080 30,309
John Littlehale 40,462 11,530 28,932
St. John Bain 8,671 2,471 6,200
Gail S. Bain 8,671 2,471 6,200
E. Roy Duff 7,707 2,196 5,511
V. Anderson Coombe 7,225 2,059 5,166
William O. DeWitt, Jr. 7,225 2,059 5,166
Mercer Reynolds, III 7,225 2,059 5,166
Robert M. Mauk 2,890 824 2,066
Elizabeth S. Wilkinson Trust 2,409 686 1,723
John D. and Gillian I. Littehale 1,927 549 1,378
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(1) Assumes the sale of all Shares hereunder, although none of the Selling
Stockholders are under any obligation known to the Company to sell any
Shares.
USE OF PROCEEDS
Each Selling Stockholder will receive all of the net proceeds from the sale
of the Shares owned by such Selling Stockholder and offered hereby. The Company
will not receive any of the proceeds from the sale of such Shares.
LEGAL OPINION
The legality of the Shares offered hereby will be passed upon for the
Company by Vinson & Elkins L.L.P., Dallas, Texas.
EXPERTS
The financial statements and schedule of 7th Level, Inc. as of December 31,
1995 and 1994, and for the years then ended, and the period from April 28, 1993
(inception) through December 31, 1993, and the financial statements of 7th Level
Sole Proprietorship as of December 31, 1993 and for the period from January 1,
1993 (inception) through December 31, 1993 appearing in the Company's Annual
Report on Form 10-K have been incorporated by reference herein in reliance upon
the reports of KPMG Peat Marwick LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
8
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following sets forth expenses and costs expected to be incurred in
connection with the issuance and distribution of the securities registered
hereby payable by the Company:
<TABLE>
<S> <C>
Commission registration fee................... $ 334.48
Legal fees and expenses....................... 4,000.00
Accounting fees and expenses.................. 3,000.00
Miscellaneous................................. 1,000.00
----------
Total............................... $ 8,334.48
==========
</TABLE>
All of the foregoing, except the Commission registration fee, are
estimated. All of the foregoing will be paid by the Company.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to Section 102(b)(7) of the Delaware General Corporation Law
(the "DGCL"), the Company has included in its Restated Certificate of
Incorporation, as amended, a provision that eliminates the personal liability of
a director to the Company or its stockholders for monetary damages for breach of
his fiduciary duty as a director except for (i) any breach of the duty of
loyalty to the Company or its stockholders, (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) payment of an improper dividend or improper repurchase or improper
redemption of the Company's stock under Section 174 of the DGCL or (iv) any
transaction from which the director derived an improper personal benefit. The
Company's Restated Certificate of Incorporation, as amended, further provides
that in the event the DGCL is amended to allow the further elimination or
limitation of the liability of directors, then the liability of the Company's
directors shall be eliminated or limited to the fullest extent permitted by the
amended DGCL.
Pursuant to Section 145 of the DGCL, the Company has included in its
Restated Certificate of Incorporation and Bylaws, as amended, provisions that
require the Company to indemnify its directors, officers, employees and agents
to the fullest extent permitted by the DGCL. The Company is required to
indemnify any person who was or is (or is threatened to be made) a party to any
threatened, pending or completed legal action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the Company) by reason of the fact that such person is or was a
director, officer, employee or agent of the Company, or is or was serving at the
request of the Company as a director, officer, employee or agent of another
corporation or enterprise. The indemnity includes expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding,
provided such director, officer, employee or agent acted in good faith and in a
manner he reasonably believed to be in or not opposed to the Company's best
interests and, with respect to any criminal action or proceeding, provided he
had no reasonable cause to believe that his conduct was unlawful.
In addition, the Company is required to indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Company to procure a judgment
in its favor by reason of the fact that he is or was a director, officer,
employee or agent of the Company or is or was serving in such role in another
enterprise at the request of the Company. The indemnity includes expenses
(including attorneys' fees) actually and reasonably incurred by him, provided
the officer or director acted in good faith and in a manner he reasonably
believed to be in or not opposed to the Company's best interests. However, no
such person will be indemnified as to matters for which he is found to be liable
to the Company unless, and only to the extent that, indemnification is ordered
by a court.
II-1
<PAGE>
Pursuant to Section 145(g) of the DGCL, the Company's Bylaws, as
amended, authorize the Company to obtain insurance to protect officers and
directors from certain liabilities, including liabilities against which the
corporation cannot indemnify its directors and officers.
Pursuant to that certain Underwriting Agreement dated October 5, 1995
entered into by the Company in connection with the public offering and sale of
3,000,000 shares of Common Stock, the directors and officers of the Company
signing this Registration Statement and certain controlling persons of the
Company are indemnified against certain liabilities, including those arising
under the Securities Act, in certain instances arising in connection with that
offering.
ITEM 16. EXHIBITS.
4.1 -- Restated Certificate of Incorporation of the Company.
4.2 -- Bylaws of the Company as adopted by the Board of Directors of
the Company as of May 14, 1995; as amended by Amendment No. 1
thereto dated February 11, 1994.
5.1 -- Opinion of Vinson & Elkins L.L.P. as to the legality of the
securities being registered.
23.1 -- Consent of Vinson & Elkins L.L.P. (included in their opinion
filed as Exhibit 5.1 hereto).
23.2 -- Consent of KPMG Peat Marwick LLP.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
Registration Statement or any material change to such
information in the Registration Statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant pursuant to
section 13 or section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the
Securities Act, each filing of the Registrant's annual report pursuant to
section 13(a) or section 15(d) of the Exchange Act that is incorporated by
reference in the Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the provisions described under Item 15 above, or
otherwise, the
II-2
<PAGE>
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Richardson,
State of Texas, on this 21st day of May, 1996.
7TH LEVEL, INC.
By: /s/ George D. Grayson
-------------------------------------
George D. Grayson
Chief Executive Officer and
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ George D. Grayson Chief Executive Officer and Chairman of the May 21, 1996
- ------------------------------------ Board (Principal Executive Officer)
GEORGE D. GRAYSON
/s/ Robert Alan Ezrin President and Director May 21, 1996
- ------------------------------------
ROBERT ALAN EZRIN
/s/ W. Scott Page Executive Vice President of Production and May 21, 1996
- ------------------------------------ Director
W. SCOTT PAGE
/s/ David R. Henkel Chief Operating Officer and Director May 21, 1996
- ------------------------------------
DAVID R. HENKEL
/s/ David W. Craig Chief Financial Officer (Principal May 21, 1996
- ------------------------------------ Financial Officer and Principal Accounting
DAVID W. CRAIG Officer)
Director May ___, 1996
- ------------------------------------
MERV ADELSON
/s/ Steven Fink Director May 21, 1996
- ------------------------------------
STEVEN FINK
/s/ Lewis C. Solmon Director May 21, 1996
- ------------------------------------
LEWIS C. SOLMON
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT DESCRIPTION OF EXHIBIT PAGE NO.
- ------------- ------------------------------------------------------------- ----------
<S> <C> <C>
4.1* Restated Certificate of Incorporation of the Company
4.2** Bylaws of the Company as adopted by the Board of Directors of
the Company as of May 14, 1995; as amended by Amendment No. 1
thereto dated February 11, 1994
5.1*** Opinion of Vinson & Elkins L.L.P. as to the legality of the
securities being registered
23.1 Consent of Vinson & Elkins L.L.P. (included in their opinion
filed as Exhibit 5.1 hereto)
23.2*** Consent of KPMG Peat Marwick LLP
</TABLE>
____________________
* Filed as an exhibit to Amendment No. 1 to the Company's Registration
Statement on Form S-1 (File No. 33-79092) filed with the Commission on
September 19, 1994, and incorporated herein by reference.
** Filed as an exhibit to the Company's Registration Statement on Form S-
1 (File No. 33-79092) filed with the Commission on May 18, 1994, and
incorporated herein by reference.
*** Filed herewith.
<PAGE>
EXHIBIT 5.1
VINSON & ELKINS
ATTORNEYS AT LAW
VINSON & ELKINS LLP
3700 TRAMMELL CROW CENTER
2001 ROSS AVENUE
DALLAS, TEXAS 75201-2975
TELEPHONE (214) 220-7700
FAX (214) 220-7716
WRITER'S TELEPHONE
(214) 220-7847
May 21, 1996
7th Level, Inc.
1110 East Collins Boulevard, Suite 122
Richardson, Texas 78051
Re: 7th Level, Inc.
Common Stock, par value $.01 per share
Registration Statement on Form S-3
----------------------------------
Ladies and Gentlemen:
We have acted as counsel for 7th Level, Inc, a Delaware corporation (the
"Company"), in connection with the registration under the Securities Act of
1933, as amended (the "Securities Act"), of the offer and sale of 80,000 shares
(the "Shares") of its common stock, par value $.01 per share (the "Common
Stock"), by certain selling stockholders (the "Selling Stockholders") on the
Company's Registration Statement on Form S-3 (the "Registration Statement") to
be filed with the Securities and Exchange Commission (the "Commission") on or
about May 21, 1996.
In reaching the opinions set forth herein, we have reviewed those
agreements, certificates of public officials, officers of the Company and other
persons, records, documents, and matters of law that we deemed relevant,
including, but not limited to, (a) the Restated Certificate of Incorporation and
By-Laws of the Company and (b) resolutions previously adopted by the Board of
Directors (the "Board") of the Company.
Based on and subject to the foregoing and subject further to the
assumptions, exceptions and qualifications hereinafter stated, we are of the
opinion that the Shares have been validly issued and fully paid and are
nonassessable.
The opinions expressed above are subject in all respects to the following
assumptions, exceptions and qualifications:
a. We have assumed that (i) all signatures on all documents reviewed
by us are genuine, (ii) all documents submitted to us as originals are true
and complete, (iii) all
<PAGE>
7th Level, Inc.
Page 2
May 21, 1996
documents submitted to us as copies are true and complete copies of the
originals thereof, (iv) all information submitted to us in the preparation
of the Registration Statement is true and complete as of the date hereof,
(v) each natural person signing any document reviewed by us had the legal
capacity to do so, (vi) each person signing in a representative capacity
any document reviewed by us had authority to sign in that capacity, and
(vii) the consideration determined by the Board to be received by the
Company for the issuance of each of the Shares has been received by the
Company.
b. The opinions expressed above are limited to the General
Corporation Law of the State of Delaware and the federal laws of the United
States of America.
c. The opinions expressed above speak as of the date hereof and are
limited to the matters expressly set forth herein, and no opinion is to be
implied or inferred beyond such matters.
This opinion may be filed as an exhibit to the Registration Statement. In
giving this consent, we do not admit that we come into the category of persons
whose consent is required under Section 7 of the Securities Act or the rules and
regulations of the Commission promulgated thereunder.
This firm disclaims any duty to advise you regarding any changes in, or
otherwise communicate with you with respect to, the matters addressed herein.
Very truly yours,
VINSON & ELKINS L.L.P.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
7th Level, Inc.:
We consent to incorporation by reference herein of our reports
relating to the financial statements of (a) 7th Level, Inc. as of December 31,
1995 and 1994 and for each of the years in the two-year period ended December
31, 1995 and the period from April 28, 1993 (inception) through December 31,
1993 and (b) 7th Level Sole Proprietorship (a development stage enterprise) as
of December 31, 1993 and for the period from January 1, 1993 (inception) through
December 31, 1993, which reports appear in the December 31, 1995 annual report
on Form 10-K of 7th Level, Inc. We also consent to the reference to our firm
under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Dallas, Texas
May 20, 1996
