<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[-] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-24936
7TH LEVEL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2480669
(State of incorporation) (I.R.S. Employer Identification No.)
1110 EAST COLLINS BOULEVARD
SUITE 122
RICHARDSON, TEXAS 75081
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 498-8100
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 13,527,341
(Title of Each Class) (Number of Shares Outstanding at
November 8, 1996)
<PAGE>
7TH LEVEL, INC.
Form 10-Q
For the Quarterly Period Ended September 30, 1996
Index
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page No.
--------
<S> <C> <C>
Item 1 Condensed Consolidated Balance Sheets at
September 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of
Operations for the Three and Nine Months
Ended September 30, 1996 and 1995 4
Condensed Consolidated Statements of
Cash Flows for the Nine Months Ended 5
September 30, 1996 and 1995
Notes to Condensed Consolidated 6
Financial Statements
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of 7
Operations
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 12
SIGNATURES 13
</TABLE>
2
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
7TH LEVEL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ ------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $11,089,244 $ 29,940,217
Short-term investments 10,478,649 9,706,270
Accounts receivable, net 5,865,956 6,917,280
Inventories 604,771 385,470
Other current assets 1,606,924 1,210,085
----------- --------------
Total current assets 29,645,544 48,159,322
Property and equipment, net 11,199,853 5,156,058
Intangible assets, net 1,157,256 1,100,492
Other assets 1,452,206 145,808
----------- --------------
Total assets $43,454,859 $ 54,561,680
=========== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 1,580,355 $ 1,263,392
Accrued expenses and other current liabilities 4,950,056 4,074,934
Current portion of long-term debt 1,500,000 -
------------ -------------
Total current liabilities 8,030,411 5,338,326
Long-term debt 4,539,179 118,902
Long-term debt to related parties 581,098 581,098
Other 371,872 257,883
------------ -------------
Total liabilities 13,522,560 6,296,209
Commitments and contingencies
Stockholders' equity:
Common Stock 135,273 130,785
Additional capital 70,099,016 69,168,061
Cumulative translation adjustment (6,489) (14,923)
Unrealized gain (loss) on investments (5,472) 21,791
Accumulated deficit (40,290,029) (21,040,243)
------------- --------------
Total stockholders' equity 29,932,299 48,265,471
------------- --------------
Total liabilities and stockholders' equity $ 43,454,859 $ 54,561,680
============= ==============
</TABLE>
See accompanying notes.
3
<PAGE>
7TH LEVEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1995 September 30, 1996 September 30, 1995
------------------ ------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
Net revenues $ 4,807,418 $ 2,638,095 $ 14,206,389 $ 5,373,709
Cost of revenues 1,977,815 355,668 5,305,451 1,033,690
----------------- ----------------- --------------------- ---------------------
Gross profit 2,829,603 2,282,427 8,900,938 4,340,019
----------------- ----------------- --------------------- ---------------------
Operating expenses:
Research and product
development 6,448,529 2,960,943 16,444,911 7,135,184
Purchased in-process
research and development - - - 1,500,000
Sales and marketing 2,532,481 1,786,656 8,470,944 3,579,589
General and administrative 1,235,995 734,247 3,575,047 2,084,999
Amortization of intangible
assets 28,466 563,799 84,174 1,694,311
----------------- ----------------- --------------------- ---------------------
Total operating expenses 10,245,471 6,045,645 28,575,076 15,994,083
----------------- ----------------- --------------------- ---------------------
Operating loss (7,415,868) (3,763,218) (19,674,138) (11,654,064)
Interest and other, net 234,965 73,225 1,007,275 458,022
----------------- ----------------- --------------------- ---------------------
Net loss $ (7,180,903) $ (3,689,993) $ (18,666,863) $ (11,196,042)
================= ================= ===================== =====================
Loss per common share $ (0.53) $ (0.35) $ (1.39) $ (1.08)
================= ================= ===================== =====================
Weighted average common stock
and common equivalent shares 13,523,500 10,464,660 13,404,726 10,373,114
================= ================= ===================== =====================
</TABLE>
See accompanying notes.
4
<PAGE>
7TH LEVEL, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net Loss ($18,666,863) ($11,196,042)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,781,972 2,166,125
Purchased in-process research and development - 1,500,000
Change in operating assets and liabilities 156,515 (937,817)
------------------ ------------------
Net cash used in operating activities (16,728,376) (8,467,734)
Cash flows from investing activities:
Acquisitions, net of cash acquired (paid) 6,323 (100,000)
Acquisition of property and equipment (7,455,382) (2,617,847)
Acquisition of intangible assets - (504,183)
Equity investments (400,000) -
Purchase of short-term investments (799,642) (1,741,727)
------------------ ------------------
Net cash used in investing activities (8,648,701) (4,963,757)
Cash flows from financing activities:
Issuance of Common Stock under stock options
and stock purchase plans 521,595 258,818
Borrowings under bank line of credit 6,000,000 -
Repayment of long-term obligations - (1,248,750)
------------------ ------------------
Net cash provided by (used in) financing activities 6,521,595 (989,932)
------------------ ------------------
Effect of exchange rate changes on cash 4,509 -
------------------ ------------------
Net decrease in cash (18,850,973) (14,421,423)
Cash and cash equivalents, beginning of period 29,940,217 20,001,612
------------------ ------------------
Cash and cash equivalents, end of period $ 11,089,244 $ 5,580,189
================== ==================
</TABLE>
See accompanying notes.
5
<PAGE>
7TH LEVEL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The condensed consolidated financial statements of 7th Level, Inc.
(the "Company") are unaudited and reflect all adjustments, consisting of normal
recurring adjustments, which are, in the opinion of management, necessary for a
fair presentation of the results for the interim periods. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1995. The results of operations
for the three and nine months ended September 30, 1996 are not necessarily
indicative of the results for the entire year ending December 31, 1996.
2. Loss per Share
Primary loss per share is computed by dividing the net loss by the
weighted average common stock and common stock equivalents outstanding. Warrants
and options to purchase common stock have been excluded from the loss per share
calculation because the effect would be anti-dilutive. Fully diluted loss per
share has not been presented because the result of the computation would be
anti-dilutive.
3. Acquisitions
On March 1, 1996, the Company acquired all of the outstanding stock of
PyroTechnix, Inc. ("PyroTechnix") for 300,000 shares of the Company's common
stock. The acquisition was accounted for as a pooling-of-interests. The related
acquisition costs were charged to expense during the quarter ended March 31,
1996. PyroTechnix is a software development company which specializes in
realtime 3D rendering technology. The operating results for PyroTechnix were not
material to the combined results of the two companies for all periods prior to
the acquisition and therefore results for those periods have not been restated.
The operating results of PyroTechnix have been included in the condensed
consolidated financial statements from the date of the acquisition.
During 1995, the Company acquired Distant Thunder Entertainment, Inc.
in February and Lanpro Corporation and Lanpro Localization Center, Inc. in
December. Pro forma results of operations have not been presented because the
effects of these acquisitions were not significant.
4. Bank Line of Credit
During the quarter ended September 30, 1996, the Company entered into
a fully-secured credit agreement providing for a $6 million term loan to provide
funding for fixed assets previously acquired by the Company and a revolving
credit facility of $5 million for general operating funds. At September 30,
1996, total borrowings under this credit agreement were $6 million. Monthly
interest payments under the $6 million term loan are scheduled at the bank's
prime rate plus 3/4% and quarterly principal payments of $375,000 commence
December 6, 1996. Essentially all of the Company's assets except for the land
and building currently being constructed are pledged in conjunction with these
debt instruments.
6
<PAGE>
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 for the year ended December 31, 1995. 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.
OVERVIEW
The Company's business activities include the development and acquisition
of technological and production processes to create interactive software titles
for use on multimedia PCs. The Company's efforts to date have resulted in the
development and production of eleven titles which include both educational and
entertainment content. The Company's most recent releases were Ace Ventura, a
graphic adventure title and Topsy Turvey, developed with Disney Interactive
("Disney"), based on the animated film The Hunchback of Notre Dame. These two
titles follow the successful release of Monty Python and the Quest for the Holy
Grail in June of 1996.
While the Company plans to continue to make substantial expenditures to
develop its business in 1996, it has acted on a number of cost saving measures
in the third quarter of 1996. For example, the Company has rationalized its
marketing activities to identify those programs which provide the best
returns/1/. In addition, the Company has reduced production staffing in the
quarter but plans to maintain capacity through the implementation of optimized
production processes and technologies/1/. The Company expects that its operating
results will fluctuate as a result of a variety of factors, including changes in
the composition of the Company's revenues, the timing of new title releases and
the seasonal nature of the market for consumer software with peak demand in the
fourth calendar quarter or holiday selling season./1/
RESULTS OF OPERATIONS
Three Month Periods Ended September 30, 1996 and September 30, 1995
Net revenues were derived from product sales and product development
agreements. During the three months ended September 30, 1996, net revenues
totaled $4,807,418, which is 82% higher than the $2,638,095 revenue achieved in
the three months ended September 30, 1995. Revenues for the three months ended
September 30, 1996 were primarily from continuing sales of Monty Python and the
Quest for the Holy Grail and royalty and development revenue from Topsy Turvy
and Timon & Pumbaa's Jungle Games, developed for Disney. Revenues also included
development work for other third parties and sales of existing titles. The
graphic adventure title Ace Ventura began shipping on the last day of the three
months ended September 30, 1996 in limited quantities. Revenues for the three
months ended September 30, 1995 were from sales of four existing titles,
primarily Battle Beast, which was launched in August 1995. More than 20% of the
revenues were from international sales in each of the three months ended
September 30, 1996 and 1995.
Cost of revenues during the three months ended September 30, 1996 was
$1,977,815 or 41% of net revenue, including product development, manufacturing,
and royalty and licensing costs of $639,379, $609,160, and $729,276,
respectively. For the three months ended September 30, 1995, cost of revenues
was $355,668 or 13% of net revenues, including manufacturing, and royalty and
licensing costs of $284,098 and $71,570, respectively. The increase in cost of
revenues in 1996 as a percentage of net revenue is due to several factors,
including the lower margins associated with development revenue and higher
royalty rates. The Company's royalty agreements generally provide for stepped
increases in royalty rates based on quantities sold and accordingly, such rates
have reached higher royalty tiers on certain of the more popular releases, such
as the Python titles. Additionally, Ace Ventura, which is a product of a joint
venture between the Company and Morgan Creek Interactive, Inc. ("Morgan Creek")
has a low gross margin as the Company pays a high effective royalty rate to
Morgan Creek. The agreement also calls for
7
<PAGE>
Morgan Creek to pay one-half of development, manufacturing and marketing
expenses. During the three months ended September 30, 1995 cost of revenues was
unusually low as most revenues were generated from non-royalty bearing titles.
The Company expects fluctuations in gross margin in the future as changes occur
in the composition of the revenue and the associated cost of revenues/1/.
Research and product development expenses were $6,448,529 and $2,960,943
for the three months ended September 30, 1996 and 1995, respectively. Research
and product development costs have increased significantly as the Company has
more than doubled its capacity from the same period in the prior year. Research
and product development expenses for the three months ended September 30, 1996
included $3,482,090 of production expenses, $1,565,436 for software research and
development and $1,401,003 for expenses of the companies acquired in 1995 and
1996 (as described in Note 3) to provide expertise in the development of 3D
technology and graphics design and to provide the capabilities needed to expand
into the Asia Pacific market. During the three months ended September 30, 1995,
research and product development expenses included $2,053,975 of production
expenses and $906,968 for software research and development costs. Although the
Company significantly reduced head count in production during the three months
ended September 30, 1996, such staff reductions followed a heavy production mode
in various studio departments such as animation. The staffing cuts were effected
near the end of the period and severance related amounts were included as
expenses. The Company is focused on optimization of its production processes and
technology and expects these measures to allow more efficient title development
even with reduced staff resources/1/.
Sales and marketing expenses were $2,532,481 and $1,786,656 for the three
months ended September 30, 1996 and 1995, respectively. Sales and marketing
expenses for the three months ended September 30, 1996 included $1,228,525 of
expenses for advertising, marketing and public relations and $1,303,956 of
expenses related to internal staffing. For the three months ended September 30,
1995 expenses of $1,037,861 for advertising, marketing and public relations and
$748,795 related to internal staffing were incurred. As a percentage of net
revenues, sales and marketing expenses related to internal staffing remained
steady at 27% compared to 28%, for the three months ended September 30, 1996 and
1995, respectively. However, the advertising, marketing and public relations
expenses decreased to 26% from 39% as a percentage of net revenues in the three
months ended September 30, 1996 compared to the same period in 1995. The 1996
quarter also included bad debt provisions for the bankruptcy of a U.S.
distributor, Neostar. The Company has focused its efforts to judiciously review
and implement only marketing activities with the highest returns.
General and administrative expenses for the three months ended September
30, 1996 were $1,235,995 compared with $734,247 in the three months ended
September 30, 1995. The increase of $501,748 is associated with the expansion of
the Company's operational and administrative support infrastructure. As a
percentage of net revenues, in the three months ended September 30, 1996,
general and administrative expenses have remained relatively unchanged at 26%
compared to 28% in the three months ended September 30, 1995.
Amortization of intangible assets was $28,466 for the three months ended
September 30, 1996, and primarily represents amortization of intangible assets
acquired in the Lanpro Acquisition. These assets were acquired on December 29,
1995 and are being amortized over periods up to seven years. Amortization of
intangible assets during the three months ended September 30, 1995 was $563,799
and primarily related to intangible assets acquired in the MetroCel asset
acquisition in March of 1994 which were fully amortized by December 31, 1995.
Net interest income was $234,965 for the three months ended September 30,
1996 compared with $73,225 in the three months ended September 30, 1995. This
change was due to higher average cash balances which were generated by a public
stock offering in late 1995.
8
<PAGE>
Nine Month Periods Ended September 30, 1996 and September 30, 1995
For the nine months ended September 30, 1996, net revenues totaled
$14,206,389 compared to $5,373,709 for the nine months ended September 30, 1995.
The revenues for the nine months ended September 30, 1996 have increased 164%
over the revenues for the nine months ended September 30, 1995 because of the
increase in the number of titles offered by the Company as well as higher OEM,
license and development revenues in the nine months ended September 30, 1996.
Cost of revenues during the nine months ended September 30, 1996 was
$5,305,451 or 37% of revenue. For the nine months ended September 30, 1995 cost
of revenues was $1,033,690 or 19% of sales. The gross margin was negatively
impacted by changes in the revenue mix for the nine months ended September 30,
1996, through the inclusion of development revenue, which has a higher cost of
revenue than product sales or OEM licensing revenue. For the nine months ended
September 30, 1995, revenues were derived from product sales and OEM licensing.
Research and product development expenses were $16,444,911 for the nine
months ended September 30, 1996 compared to $8,635,184 for the nine months ended
September 30, 1995, which included a $1,500,000 write-off related to the
acquisition of in-process research and development costs in the purchase of
Distant Thunder. Excluding the write-off, research and product development
expenses increased 130% over the same period of the prior year. Research and
product development expenses have increased significantly in 1996 from 1995. The
Company has expanded production activity by having numerous 2D and 3D titles in
simultaneous production and is engaged in various language translation
activities in studio offices in Los Angeles, San Francisco, Dallas, Cincinnati
and Munich. In addition, the Company's development efforts support the higher
number of titles in production as well as the multimedia and internet authoring
and production tools under development. While the Company has aggressively
invested to increase its capacity to produce new titles for release, the Company
has experienced higher costs than expected and several titles which were
expected to ship in the second half of 1996 have been delayed. The Company has
introduced a number of technological efficiencies in the traditional animation
production processes, is planning additional improvements, and is currently
focusing on ways to reduce costs, to improve the financial performance and to
increase the competitive strength of the Company in this area/1/.
Sales and marketing expenses were $8,470,944, or 60% of revenues, for the
nine months ended September 30, 1996, compared to $3,579,589, or 67% of
revenues, for the nine months ended September 30, 1995. The Company's expansion
into global distribution channels, the increased advertising, marketing and
public relations expenses to support revenue growth and growth of the Company's
sales and marketing organization all contributed to the 137% increase in
spending in sales and marketing.
General and administrative expenses were $3,575,047 for the nine months
ended September 30, 1996, compared with $2,084,999 in the nine months ended
September 30, 1995. These increases were associated with the expansion of the
Company's operational and administrative support infrastructure. As a percentage
of revenues, general and administrative expenses declined to 25% from 39% for
the nine months ended September 30, 1996 and 1995, respectively.
Amortization of intangibles assets was $84,174 for the nine months ended
September 30, 1996 and included the amortization of intangible assets acquired
in the Lanpro acquisition. Amortization expense was $1,694,311 for the nine
months ended September 30, 1995, which represents amortization of intangible
assets acquired in the MetroCel asset acquisition which were fully amortized in
December 1995.
Net interest income was $1,007,275 for the nine months ended September 30,
1996, which is more than twice the amount of $458,022 recognized in the nine
months ended September 30, 1995. This improvement is attributable to higher
average cash balances and repayment of certain outstanding debt from the
proceeds generated from a public stock offering in late 1995. However, interest
income has declined each successive quarter of 1996 as cash balances have
declined.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and short term investments decreased $18,078,594 to $21,567,893 at
September 30, 1996, from $39,646,487 at December 31, 1995. The decrease is
primarily the result of the net loss of $18,666,863 incurred in the first nine
months of 1996. The Company's cash position was also reduced by $4,274,431 to
cover asset additions for expanded computer and network capacity along with
$3,180,951 expended for land and construction-in-progress of the future site of
the Dallas operations. This decrease in cash was offset by $6,000,000 in
proceeds generated from borrowings under a new bank line of credit for
equipment-based financing. Monthly interest payments under the $6 million term
loan are scheduled at the bank's prime rate plus 3/4% and quarterly principal
payments of $375,000 commence December 6, 1996. Additionally the Company has
$5,000,000 available under a second line for general working capital
requirements. Essentially all of the Company's assets except for the land and
building currently being constructed are pledged in conjunction with these debt
instruments. (See note 4.) The Company expects to continue to fund the
development of new titles and technologies and sales and marketing activities to
launch new products/1/. The Company plans to spend approximately $3.5 million
for completion of the construction of the corporate offices for Dallas
operations/1/. The Company also anticipates making additional capital
expenditures for expansion of its computer network to include connectivity
between all offices/1/. Outside funding alternatives are being examined to
finance the Dallas building costs.
The Company anticipates that its capital resources, including the
anticipated borrowings for the Dallas building will be sufficient to satisfy its
capital requirements for the foreseeable future/1/. To date, however, the
Company continues to 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 and various other factors, some of which
may be beyond the Company's control. In the future, the Company's capital
requirements will be affected by each of these factors as well as its
investments in technological and production process research/1/. 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/1/.
STRATEGIC RELATIONSHIP STATUS
In June 1996, the Company signed an agreement with Future Endeavors
Incorporated ("Future Endeavors") to publish on a worldwide basis all
entertainment products that are developed by the Canadian company for an initial
three-year period. The Company made a $400,000 investment in Future Endeavors
and has made and expects to continue making royalty advances from time to time
to fund title development/1/. Additionally, the Company has provided its
development tools to Future Endeavors for use in producing titles. Future
Endeavors will receive royalty payments on revenues of each title published by
7th Level, including Tracer, the first title which was released in June 1996.
In April 1996, the Company entered into an agreement with Disney to co-
develop a new PC game featuring the characters from Disney's animated film The
Hunchback of Notre Dame. The agreement calls for Disney to fund the development
expenses for the Hunchback title and for the Company to receive royalties based
on revenues generated by the game. The Hunchback title includes five single and
multiplayer games. In July 1996, the Company's development work was completed as
scheduled and the title was released to Disney for publishing. Disney began
shipping this title in August 1996. This is the second in Disney's GameBreak!
series and the second collaboration between Disney and the Company.
In August 1995, the Company entered into an agreement with Morgan Creek
Interactive, Inc. ("Morgan Creek") for formation of a joint venture to develop
at least two computer software titles based on Morgan Creek's character, "Ace
Ventura." The first title, a graphic adventure game was competed and released
in September 1996. The Company has made and will continue to make capital
contributions to the venture to fund the costs of development of the titles and
will fund all marketing expenses and duplication costs for the titles. All
revenues of the venture are to be shared equally by the parties after
10
<PAGE>
repayment of the Company's capital contributions to fund development expenses,
reimbursement of all amounts advanced by the Company to fund marketing expenses
and duplication costs and payment to the Company of a distribution fee. Morgan
Creek has been granted warrants to purchase 75,000 shares of the Company's
common stock at $20 per share and 100,000 shares of the Company's common stock
at $24 per share, which warrants expire in 1998.
The Company anticipates forming a joint venture (the "QD7 Joint Venture")
for the development, production and distribution of multimedia products with
Quincy Jones--David Salzman Entertainment ("QDE") pursuant to the terms of a
letter agreement/1/. This letter agreement provides that the Company and QDE
shall initially contribute $750,000 and $250,000, respectively, to the QD7 Joint
Venture and contemplates that additional capital contributions shall be made
only with the unanimous consent of both parties. The first title to be developed
by the QD7 Joint Venture, scheduled for release after 1996, is in the design
phase, and is subject to further review based on expected returns/1/. To date,
no material expenditures or commitments have been incurred. All development,
manufacturing, testing, marketing and distribution costs will be advanced by the
Company and then recouped prior to any distribution of net receipts. Pursuant to
the letter agreement, net receipts, after the payment or reimbursement of all
costs, will be applied to the repayment to the Company and QDE of their capital
contributions, with all remaining net receipts to be shared equally by such
parties.
In the normal course of business, the Company evaluates potential
acquisitions and joint ventures that may complement the Company's business.
While the Company has no present plans, commitments or agreements with respect
to any material potential acquisitions or joint ventures other than as disclosed
herein, the Company may in the future consummate acquisitions or enter into
joint ventures which may require the Company to make additional capital
expenditures, and such expenditures may be significant/1/.
____________________________
/1/ This statement is a forward looking statement that involves risks and
uncertainties. Accordingly, no assurances can be given that the actual
events and results will not be materially different than the anticipated
results described in the forward looking statement. 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 for the year ended
December 31, 1995.
11
<PAGE>
7TH LEVEL, INC.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) The following documents are filed as exhibits to this Report:
10.35 - Imperial Bank - Credit Terms and Conditions; $6,000,000 Note;
$5,000,000 Note; General Security Agreement; Mortgage,
Assignment and Grant of Security Interest with Respect to
Trademarks; and Mortgage, Assignment and Grant of Security
Interest with Respect to Copyrights and Other Collateral, all
dated September 6, 1996.
(b) Reports on Form 8-K - none
12
<PAGE>
7TH LEVEL, INC.
Signatures
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.
7TH LEVEL, INC.
Date: November 12, 1996 By /s/ David W. Craig
------------------
David W. Craig
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
13
<PAGE>
EXHIBIT 10.35
IMPERIAL BANK
Entertainment Industries Group
Subject: CREDIT TERMS AND CONDITIONS
Gentlemen:
To induce you to make loans to the undersigned (herein called "Borrower"),
and in consideration of any loan or loans you ("Bank"), in your sole discretion,
may make to Borrower, Borrower warrants and agrees as follows:
A. Borrower represents and warrants that:
1. EXISTENCE AND RIGHTS. Borrower is a corporation duly organized and
existing and in good standing under the laws of the State of Delaware, without
limit as to the duration of its existence and is authorized and in good standing
to do business in the State of Texas and California; Borrower has powers and
adequate authority, rights and franchises to own its property and to carry on
its business as now conducted, and is duly qualified and in good standing in
each State in which the character of the properties owned by it therein or the
conduct of its business makes such qualification necessary; and Borrower has the
power and adequate authority to make and carry out this Agreement.
2. AGREEMENT AUTHORIZED. The execution, delivery and performance of this
Agreement are duly authorized and do not require the consent or approval of any
governmental body or other regulatory authority; are not in contravention of or
in conflict with any law or regulation or any term or provision of Borrower's
articles of incorporation, by-laws, or Articles of Association, as the case may
be, and this Agreement is the valid, binding and legally enforceable obligation
of Borrower in accordance with its terms.
3. NO CONFLICT. The execution, delivery and performance of this
Agreement are not in contravention of or in conflict with any agreement,
indenture or undertaking to which Borrower is a party or by which it or any of
its property may be bound or affected, and do not cause any lien, charge or
other encumbrance to be created or imposed upon any such property by reason
thereof.
4. LITIGATION. There is no litigation or other proceeding pending or
threatened against or affecting Borrower, and Borrower is not in default with
respect to any order, writ, injunction, decree or demand of any court or other
governmental or regulatory authority.
5. FINANCIAL CONDITION. The unaudited balance sheet of Borrower as of
March 31, 1996, a copy of which has heretofore been delivered to you by
Borrower, and all other statements and data submitted in writing by Borrower to
you in connection with this request for credit are true and correct, and said
balance sheet truly presents the financial condition of Borrower as of the date
thereof, and has been prepared in accordance with generally accepted accounting
principles on a basis consistently maintained. Since such date there have been
no material adverse changes in the financial condition or business of borrower.
Borrower has no knowledge of any liabilities, contingent or otherwise, at such
date not reflected in said balance sheet, and Borrower has not entered into any
special commitments or substantial contracts which are not reflected in said
balance sheet, other than in the ordinary and normal course of its business,
which may have a materially adverse effect upon its financial condition,
operations or business as now conducted.
6. TITLE TO ASSETS. Borrower has good title to its assets, and the same
are not subject to any liens or encumbrances other than those permitted by
Section C.2 hereof.
<PAGE>
7. TAX STATUS. Borrower has no liability for any delinquent state, local
or federal taxes, and, if Borrower has contracted with any government agency,
Borrower has no liability for renegotiation of profits.
8. TRADEMARKS, PATENTS. Borrower, as of the date hereof, possesses all
necessary trademarks, trade names, copyrights, patents, patent rights, and
licenses to conduct its business as now operated, without any known conflict
with the valid trademarks, trade names, copyrights, patents and license rights
of others.
9. REGULATION U. The proceeds of this loan shall not be used to purchase
or carry margin stock (as defined within Regulation U of the Board of Governors
of the Federal Reserve system).
B. Borrower agrees that so long as it is indebted to you, under borrowings, or
other indebtedness, it will, unless you shall otherwise consent in writing:
1. RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises
and other authority adequate for the conduct of its business; maintain its
properties, equipment and facilities in good order and repair; conduct its
business in an orderly manner without voluntary interruption and, if a
corporation or partnership, maintain and preserve its existence.
2. INSURANCE. Maintain public liability, property damage and workers'
compensation insurance and insurance on all its insurable property against fire
and other hazards with responsible insurance carriers to the extent usually
maintained by similar businesses and/or in the exercise of good business
judgment.
3. TAXES AND OTHER LIABILITIES. Pay and discharge, before the same
become delinquent and before penalties accrue thereon, all taxes, assessments
and governmental charges upon or against it or any of its properties, and all
its other liabilities at any time existing, except to the extent and so long as:
a. The same are being contested in good faith and by appropriate
proceedings in such manner as not to cause any materially adverse
effect upon its financial condition or the loss of any right of
redemption from any sale thereunder; and
b. It shall have set aside on its books reserves (aggregated to the
extent required by generally accepted accounting practice) deemed by
it adequate with respect thereto.
4. FINANCIAL COVENANTS. Borrower shall A) maintain tangible net worth
(meaning the excess of all assets, excluding any value for goodwill, trademarks,
patents, copyrights, organization expense, all amounts due from affiliates,
officers, directors, stockholders and affiliated entities, and other similar
intangible items, over its liabilities) of not less than $25,000,000 increasing
to $29,000,000 at 12/31/97; B) maintain a ratio of current assets to current
liabilities of not less than 3.0 to 1.0; C) maintain cash and cash equivalent
balances of not less than $11,000,000; D) maintain cash and cash equivalents
plus trade accounts receivable of not less than 20,000,000; E) maintain cash and
cash equivalent balances at Imperial Bank of not less than $4,000,000 and F)
beginning with the year end 1997, maintain a ratio of EBIDA (earnings before
interest, depreciation and amortization for the 12 months ended as of the date
of compliance testing) to debt service (total principal and interest due during
the following 12 month period from the date of compliance testing) of not less
than 1.25 to 1; all as computed and determined in accordance with generally
accepted accounting principles on a basis consistently maintained by Borrower.
Covenant compliance is to be tested on a quarterly basis with the exception of
C, D, and E which are to be tested on a monthly basis.
7TH LEVEL, INC.
CREDIT TERMS AND CONDITIONS DATED 9/6/96.
PAGE 2 OF 6
<PAGE>
At any point that cash and cash equivalent balances fall below $15,000,000,
Borrower shall cause at least 65% of the balances to be held either at Imperial
Bank or in investments purchased through Imperial Bank's Investment Department
or Imperial Trust Company.
5. RECORDS AND REPORTS. Maintain a standard and modern system of
accounting in accordance with generally accepted accounting principles on a
basis consistently maintained; permit your representatives to have access to,
and to examine its properties, books and records at all reasonable times during
normal business hours; and furnish you:
a. As soon as available, and in any event within thirty days after
the close of each month, financial statements including information
necessary to establish compliance with section B.4. above.
b. As soon as available, and in any event within forty-five (45)
days after the close of each quarter of each fiscal year of Borrower,
commencing with the quarter next ending, a balance sheet, profit and
loss statement and reconciliation of Borrower's capital accounts (Form
10-Q) as of the close of such period and covering operations for the
portion of Borrower's fiscal year ending on the last day of such
period, all in reasonable detail, prepared in accordance with
generally accepted accounting principles on a basis consistently
maintained by Borrower and certified by an appropriate officer of
Borrower, subject, however, to year-end audit adjustments.
c. As soon as available, and in any event within ninety (90) days
after the close of each fiscal year of Borrower, an audit report (Form
10-K) of Company as of the close of and for such fiscal year, all in
reasonable detail, with the unqualified opinion of accountants
satisfactory to you.
d. Such other information relating to the affairs of Borrower as you
reasonably may request from time to time.
6. NOTICE OF DEFAULT. Promptly notify Bank in writing of the occurrence
of any event of default hereunder or which would be such an event upon notice
and lapse of time.
C. Borrower agrees that so long as it is indebted to you, it will not, without
your written consent:
1. OUTSIDE INDEBTEDNESS. Create, incur, assume or permit to exist any
indebtedness for borrowed moneys in excess of $100,000 other than loans from you
except obligations now existing as shown in the financial statement dated March
31, 1996, and excluding those obligations being refinanced by your bank; and
loan for the land and building to be constructed in Richardson, Texas; or sell
or transfer, either with or without recourse, any accounts or notes receivable
or any moneys due or to become due.
2. LIENS AND ENCUMBRANCES. Create, incur, or assume any mortgage,
pledge, encumbrance, lien or charge of any kind upon any asset now owned, other
than liens for taxes not delinquent and liens in your favor except for those
already existing as of March 31, 1996 and security interests to secure the
subject loan limited to the land and building to be constructed in Richardson,
Texas.
7TH LEVEL, INC.
CREDIT TERMS AND CONDITIONS DATED 9/6/96.
PAGE 3 OF 6
<PAGE>
3. LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make any loans or advances
to any person or other entity which as defined shall be deducted from the
tangible net worth of Borrower, or any other loans or advances other than in the
ordinary and normal course of its business as now conducted or make any
investment in the securities of any person or other entity other than the United
States Government, with the exception of investments in commercial paper of a
rating not lower than "P-1" or "A-1" as rated by Standard & Poor's and Moody's,
respectively; or guarantee or otherwise become liable upon the obligation of any
person or other entity, except by endorsement of negotiable instruments for
deposit or collection in the ordinary and normal course of its business.
4. ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Purchase or
otherwise acquire the assets or business of any person or other entity; or
liquidate, dissolve, merge or consolidate, or commence any proceedings therefor;
or sell any assets except in the ordinary and normal course of its business as
now conducted; or sell, lease, assign, or transfer any substantial part of its
business or fixed assets, or any property or other assets necessary for the
continuance of its business as now conducted, including without limitation the
selling of any property or other asset accompanied by the leasing back of the
same. Permission for the actions referenced in this paragraph will not be
unreasonably withheld by the Bank.
D. The occurrence of any of the following events of default shall, at your
option, terminate your commitment to lend and make all sums of principal and
interest then remaining unpaid on all Borrower's indebtedness to you immediately
due and payable, all without demand, presentment or notice, all of which are
hereby expressly waived:
1. FAILURE TO PAY NOTE. Failure to pay any installment of principal of
or interest on any indebtedness of Borrower to you, ten (10) days after its due
date.
2. BREACH OF COVENANT. Failure of Borrower to perform any other term or
condition of this Letter of Inducement binding upon Borrower, where such breach
has a material financial consequence, that could reasonably result in a material
adverse effect on the financial condition of the Borrower.
3. BREACH OF WARRANTY. Any of Borrower's material representations or
material warranties made herein or any statement or certificate at any time
given in writing pursuant hereto or in connection herewith shall be false or
misleading in any material respect, that could reasonably result in a material
adverse effect on the financial condition of the borrower.
4. INSOLVENCY; RECEIVER OR TRUSTEE. Borrower shall become insolvent; or
admit its inability to pay its debts as they mature; or make an assignment for
the benefit of creditors; or apply for or consent to the appointment of a
receiver or trustee for it or for a substantial part of its property or
business.
5. JUDGMENTS, ATTACHMENTS. Any money judgment, writ or warrant of
attachment, or similar process shall be entered or filed against Borrower or any
of its assets and shall remain unvacated, unbonded or unstayed for a period
later than five days prior to the date of any proposed sale thereunder, that
could reasonably result in a material adverse effect on the financial condition
of the Borrower.
6. BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against Borrower and, if
instituted against it, shall be consented to.
7. FINANCIAL COVENANTS. Failure to maintain minimum financial covenants
as stated.
7TH LEVEL, INC.
CREDIT TERMS AND CONDITIONS DATED 9/6/96.
PAGE 4 OF 6
<PAGE>
E. Miscellaneous Provisions.
1. FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of
Bank or any holder of Notes issued hereunder, in the exercise of any power,
right or privilege hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any such power, right or privilege preclude other
or further exercise thereof or of any other right, power or privilege. All
rights and remedies existing under this agreement or any note issued in
connection with a loan that Bank may make hereunder, are cumulative to, and not
exclusive of, any rights or remedies otherwise available.
With respect to all future software products of Borrower (and all components
thereof including, without limitation, all characters contained therein) and
with respect to all subsequently developed, created, acquired, written or
produced software products (and all components including, without limitation,
all characters contained therein) as soon as any of such software products of
Borrower (or any component thereof) (whether or not it is a derivative of a
software product, which has already been registered for copyright) may be
registered for copyright, the Borrower shall take any and all actions as may be
necessary to register and/or cause to be registered all of the Borrower's rights
in such software product (and/or all components thereof including, without
limitation, all characters contained therein) all in conformity with the laws of
the United States of America and any and all relevant foreign jurisdiction; and
immediately deliver to the Bank, written evidence of each such filing and/or
actual registration of such rights, which rights shall constitute part of the
Collateral hereunder and under all other agreements and documents among the
Borrower and Bank; and as soon as practicable, execute and deliver to the Bank
for filing with the U.S. Copyright Office a copyright mortgage for such software
product(s) (and/or component(s) thereof) substantially in the form attached
hereto as Exhibit A. In addition, with respect to any of Borrower's current
software products (and all components thereof, including, without limitation,
all characters contained therein) in the event Borrower registers the copyright
for any of such software products or any components thereof, including, without
limitation, the characters therein, Borrower shall promptly inform the Bank of
such fact and the Borrower shall execute and deliver to Bank for filing with the
U.S. Copyright Office a copyright mortgage for such software product(s) (and/or
component(s) thereof) substantially in the form hereto as Exhibit A.
The Borrower shall use all reasonable commercial efforts (i) to obtain from all
persons, corporations, partnerships, limited liability companies and other
entities from whom the Borrower has obtained or from time to time will obtain
licenses in connection with the software products which it sells (the
"Licensors") the consent of such Licensors to the Borrower's granting to the
Bank of a security interest in such licenses, (ii) to obtain from the Licensors
their cooperation in connection with the Bank obtaining a perfected first
priority security interest in such licenses, which cooperation shall include,
without limitation, the execution and delivery by the Licensors of memoranda of
licenses and other documents which may be filed in the U.S. Copyright Office to
evidence the licenses granted to the Borrower, and (iii) to obtain from
Licensors the right of the Bank to have a reasonable period of time in which to
foreclose on Borrower's inventory and liquidate the same before said Licensors
terminate the right of the Borrower (or the Bank) to sell the remaining
inventory.
7TH LEVEL, INC.
CREDIT TERMS AND CONDITIONS DATED 9/6/96.
PAGE 5 OF 6
<PAGE>
Executed on behalf of the Borrower by its duly authorized representative.
7th Level, Inc.
By:/s/ David W. Craig Sept. 6, 1996
--------------------------- ------------------------------
Date
Its:CFO
--------------------------
By:/s/ C. Rominger Sept. 6, 1996
--------------------------- ------------------------------
Date
Its:Treasurer
--------------------------
7TH LEVEL, INC.
CREDIT TERMS AND CONDITIONS DATED 9/6/96.
PAGE 6 OF 6
<PAGE>
Imperial Bank
NOTE
$6,000,000.00 Beverly Hills, California, September 6, 1996
On September 6, 2000, and as hereinafter provided, for value received, the
undersigned promises to pay to IMPERIAL BANK ("Bank"), a California banking
corporation, or order, at its Entertainment Industries Group office, the
principal sum of $6,000,000.00 or such sums up to the maximum if so stated, as
the Bank may now or hereafter advance to or for the benefit of the undersigned
in accordance with the terms hereof, together with interest from date of
disbursement or N/A, whichever is later, on the unpaid principal balance at the
rate of 0.750% per year in excess of the rate of interest which Bank has
announced as its prime lending rate (the "Prime Rate"), which shall vary
concurrently with any change in such Prime Rate, or $250.00, whichever is
greater. Interest shall be computed at the above rate on the basis of the
actual number of days during which the principal balance is outstanding, divided
by 360, which shall, for Interest computation purposes, be considered one year.
Interest shall be payable monthly in addition to principal beginning October 6,
1996, and if not so paid shall become a part of the principal. All payments
shall be applied first to interest, and the remainder, if any, on principal.
Principal shall be payable in installments of $375,000.00, or more, each
installment on the 6/th/ day of each quarter, beginning December 6, 1996.
Advances not to exceed any unpaid balance owing at any one time equal to the
maximum amount specified above, may be made at the option of Bank.
Any partial prepayment shall be applied to the installments, if any, in
inverse order of maturity. Should default be made in the payment of principal
or interest when due, or in the performance or observance, when due, of any
item, covenant or condition of any deed of trust, security agreement or other
agreement (including amendments or extensions thereof) securing or pertaining to
this note, at the option of the holder hereof and without notice or demand, the
entire balance of principal and accrued interest then remaining unpaid shall (a)
become immediately due and payable, and (b) thereafter bear interest, until paid
in full, at the increased rate of 5% per year in excess of the rate provided for
above, as it may vary from time to time.
Defaults shall include, but not be limited to, the failure of the maker(s)
to pay principal or interest when due; the filing as to each person obligated
hereon, whether as maker, co-maker, endorser or guarantor (individually or
collectively referred to as the "Obligor") of a voluntary or involuntary
petition under the provisions of the Federal Bankruptcy Act; the issuance of any
attachment or execution against any asset of any Obligor; the death of any
Obligor; or any deterioration of the financial condition of any Obligor which
results in the holder hereof considering itself, in good faith, Insecure.
If any installment payment or principal balance payment due hereunder is
delinquent ten or more days, Obligor agrees to pay a late charge in the amount
of 5% of the payment so due and unpaid, in addition to the payment; but nothing
in this paragraph is to be construed as any obligation on the part of the holder
of this note to accept payment of any installment past due or less than the
total unpaid principal balance after maturity.
If this note is not paid when due, each Obligor promises to pay all costs
and expenses of collection and reasonable attorney's fees incurred by the holder
hereof on account of such collection, plus interest at the rate applicable to
principal, whether or not suit is filed hereon. Each Obligor shall be jointly
and severally liable hereon and consents to renewals, replacements and extension
of time for payment hereof, before, at, or after maturity; consents to the
acceptance, release or substitution of security for this note; and waives demand
and protest and the right to assert any statute of limitations. Any married
person who signs this note agrees that recourse may be had against separate
property for any obligations hereunder. The indebtedness evidenced hereby shall
be payable in lawful money of the United States. In any action brought under or
arising out of this note, each Obligor including successor(s) or assign(s)
hereby consents
<PAGE>
to the application of California law, to the jurisdiction of any competent court
within the State of California, and to service of process by any means
authorized by California law.
No single or partial exercise of any power hereunder, or under any deed of
trust, security agreement or other agreement in connection herewith shall
preclude other or further exercises thereof or the exercise of any other such
power. The holder hereof shall at all times have the right to proceed against
any portion of the security for this note in such order and in such manner as
such holder may consider appropriate, without waiving any rights with respect to
any of the security. Any delay or omission on the part of the holder hereof in
exercising any right hereunder, or under any deed of trust, security agreement
or other agreement, shall not operate as a waiver of such right, or of any other
right, under this note or any deed of trust, security agreement or other
agreement in connection herewith.
7th Level, Inc.
/s/ David W. Craig, CFO
/s/ Carolyn Rominger, Treasurer
<PAGE>
Imperial Bank
NOTE
$5,000,000.00 Beverly Hills, California, September 6, 1996
On March 6, 1998, and as hereinafter provided, for value received, the
undersigned promises to pay to IMPERIAL BANK ("Bank"), a California banking
corporation, or order, at its Entertainment Industries Group office, the
principal sum of $5,000,000.00 MAXIMUM, or such sums up to the maximum if so
stated, as the Bank may now or hereafter advance to or for the benefit of the
undersigned in accordance with the terms hereof, together with interest from
date of disbursement or N/A, whichever is later, on the unpaid principal balance
at the rate of 0.500% per year in excess of the rate of interest which Bank has
announced as its prime lending rate (the "Prime Rate"), which shall vary
concurrently with any change in such Prime Rate, or $250.00, whichever is
greater. Interest shall be computed at the above rate on the basis of the
actual number of days during which the principal balance is outstanding, divided
by 360, which shall, for Interest computation purposes, be considered one year.
Interest shall be payable monthly beginning October 6, 1996, and if not so paid
shall become a part of the principal. All payments shall be applied first to
interest, and the remainder, if any, on principal. Advances not to exceed any
unpaid balance owing at any one time equal to the maximum amount specified
above, may be made at the option of Bank.
Any partial prepayment shall be applied to the installments, if any, in
inverse order of maturity. Should default be made in the payment of principal
or interest when due, or in the performance or observance, when due, of any
item, covenant or condition of any deed of trust, security agreement or other
agreement (including amendments or extensions thereof) securing or pertaining to
this note, at the option of the holder hereof and without notice or demand, the
entire balance of principal and accrued interest then remaining unpaid shall (a)
become immediately due and payable, and (b) thereafter bear interest, until paid
in full, at the increased rate of 5% per year in excess of the rate provided for
above, as it may vary from time to time.
Defaults shall include, but not be limited to, the failure of the maker(s)
to pay principal or interest when due; the filing as to each person obligated
hereon, whether as maker, co-maker, endorser or guarantor (individually or
collectively referred to as the "Obligor") of a voluntary or involuntary
petition under the provisions of the Federal Bankruptcy Act; the issuance of any
attachment or execution against any asset of any Obligor; the death of any
Obligor; or any deterioration of the financial condition of any Obligor which
results in the holder hereof considering itself, in good faith, Insecure.
If any installment payment or principal balance payment due hereunder is
delinquent ten or more days, Obligor agrees to pay a late charge in the amount
of 5% of the payment so due and unpaid, in addition to the payment; but nothing
in this paragraph is to be construed as any obligation on the part of the holder
of this note to accept payment of any installment past due or less than the
total unpaid principal balance after maturity.
If this note is not paid when due, each Obligor promises to pay all costs
and expenses of collection and reasonable attorney's fees incurred by the holder
hereof on account of such collection, plus interest at the rate applicable to
principal, whether or not suit is filed hereon. Each Obligor shall be jointly
and severally liable hereon and consents to renewals, replacements and extension
of time for payment hereof, before, at, or after maturity; consents to the
acceptance, release or substitution of security for this note; and waives demand
and protest and the right to assert any statute of limitations. Any married
person who signs this note agrees that recourse may be had against separate
property for any obligations hereunder. The indebtedness evidenced hereby shall
be payable in lawful money of the United States. In any action brought under or
arising out of this note, each Obligor including successor(s) or assign(s)
hereby consents
<PAGE>
to the application of California law, to the jurisdiction of any competent court
within the State of California, and to service of process by any means
authorized by California law.
No single or partial exercise of any power hereunder, or under any deed of
trust, security agreement or other agreement in connection herewith shall
preclude other or further exercises thereof or the exercise of any other such
power. The holder hereof shall at all times have the right to proceed against
any portion of the security for this note in such order and in such manner as
such holder may consider appropriate, without waiving any rights with respect to
any of the security. Any delay or omission on the part of the holder hereof in
exercising any right hereunder, or under any deed of trust, security agreement
or other agreement, shall not operate as a waiver of such right, or of any other
right, under this note or any deed of trust, security agreement or other
agreement in connection herewith.
7th Level, Inc.
/s/ David W. Craig, CFO
/s/ Carolyn Rominger, Treasurer
<PAGE>
IMPERIAL BANK
Member FDIC
GENERAL SECURITY AGREEMENT
(Tangible and Intangible Personal Property)
This Agreement is executed on September 6, 1996,by 7TH Level, Inc.
(hereinafter called "Obligor"). In consideration of financial accommodations
given, to be given or continued, the Obligor grants to IMPERIAL BANK
(hereinafter called "Bank") a security interest in (a) all property (i)
delivered to Bank by Obligor, (ii) which shall be in Bank's possession or
control in any matter or for any purpose, (iii) described below, (iv) now owned
or hereafter acquired by Obligor of the type or class described below and/or in
any supplementary schedule hereto, or in any financing statement filed by Bank
and executed by or on behalf of Obligor; (b) the proceeds, increase and products
of such property all accessions thereto, and all property which Obligor may
receive on account of such collateral which Obligor will immediately deliver to
Bank (collectively referred to as "Collateral") to secure payment and
performance of all of Obligor's present or future debts or obligations to Bank,
whether absolute or contingent (hereafter referred to as "Debt"). Unless
otherwise defined, words used herein have the meanings given them in the
California Uniform Commercial Code.
Collateral:
A. VEHICLE, VESSEL, AIRCRAFT:
- -----------------------------
Identification License or New
Year Make/Manufacturer Model and Serial No. Registration No. or Used
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Engine or other equipment:_______________________________________
(For aircraft original ink signature on copy to FAA)
B. DEPOSIT ACCOUNTS:
Type _________________ Account Number _________ Amount $ __________________
In name of____________________ Depository _________________________________ AND
ALL EXTENSIONS OR RENEWALS THEREOF.
<PAGE>
C. ACCOUNTS, INTANGIBLES AND OTHER: (Describe)
All personal property, whether presently existing or hereafter created or
acquired, including but not limited to: All accounts, chattel paper,
documents, instruments, money, deposit accounts and general intangibles
including returns, repossessions, books and records relating thereto, and
equipment containing said books and records. All goods including
equipment and inventory. All proceeds including, without limitation,
insurance proceeds. All guarantees and other security therefor.
The collateral not in Bank's possession will be located at: 1110 E. Collins
Blvd, Ste. 122, Richardson, TX 75081; 1420 Presidential Ave. Richardson. TX
75081; 900 Allen Ave., Glendale, Ca. 9l2Ol; l945 Walnut Hill Lane, Irving, TX
75038; 101 California St., #1775, San Francisco, Ca. 94111; 30 Garfield PI.,
#600, Cincinnati, Oh. 45202
[_] If checked, the Obligor is executing this Agreement as an Accommodation
Debtor only and the Obligor's liability is limited to the security interest
granted in the Collateral described herein. The party being accommodated is
("Borrower").
All the terms and provisions on the reverse side hereof are incorporated herein
as though set forth in full, and constitute a part of this Agreement.
Signature
Name (indicate title, if applicable) Address
- --------------------------------------------------------------------------------
7th Level, Inc. By /s/ David W. Craig, CFO 1110 E. Collins Blvd.,
- --------------------------------------------------------------------------------
By /s/ Carolyn Rominger, Ste. 122 Richardson, TX
- --------------------------------------------------------------------------------
Treasurer 75081
- --------------------------------------------------------------------------------
<PAGE>
SECURITY AGREEMENT (CONTINUED)
Obligor represents, warrants and agrees:
1. Obligor will immediately pay (a) any Debt when due, (b) Bank's costs of
collecting the Debt, of protecting, insuring or realizing on Collateral, end any
expenditure of Bank pursuant hereto, including attorneys' fees and expenses,
with interest at the rate of 24% per year, or the rate applicable to the Debt,
whichever is less, from the date of expenditure, and (c) any deficiency after
realization of Collateral.
2. Obligor will use the proceeds of any loan that becomes Debt hereunder for
the purpose indicated on the application therefore, and will promptly contract
to purchase and pay the purchase price of any property which becomes Collateral
hereunder from the proceeds of any loan made for that purpose.
3. As to all Collateral in Obligor's possession (unless specifically otherwise
agreed to by Bank in writing), Obligor will:
(a) Have, or has, possession of the Collateral at the location disclosed to
Bank and will not remove the Collateral from the location,
(b) Keep the Collateral separate and identifiable.
(c) Maintain the Collateral in good and saleable condition, repair it if
necessary clean, feed, shelter, water, medicate, fertilize, cultivate,
irrigate, prune and otherwise deal with the Collateral in all such ways as
are considered good practice by owners of like property, use it lawfully and
only as permitted by insurance policies, and permit Bank to inspect the
Collateral at any reasonable time.
(d) Not sell, contract to sell, lease, encumber or transfer the Collateral
(other than inventory Collateral) until the Debt has been paid, even though
Bank has a security interest in proceeds of such Collateral.
4. As to Collateral which is inventory and accounts, Obligor:
(a) May, until notice from Bank, sell, lease or otherwise dispose of
inventory Collateral in the ordinary course of business only, and collect
the cash proceeds thereof.
(b) Will, upon notice from Bank, deposit all cash proceeds as received in a
demand deposit account with Bank, containing only such proceeds and deliver
statements identifying units of inventory disposed of, accounts which gave
rise to proceeds, and all acquisitions and returns of Inventory as required
by Bank.
(c) Will receive in trust, schedule on forms satisfactory to the Bank and
deliver to Bank all non-cash proceeds other than inventory received in
trade.
(d) If not in default, may obtain release of Bank's Interest in individual
units of inventory upon request, therefore, payment to Bank of the release
price of such units shown on
<PAGE>
any Collateral schedule supplementary hereto,
and compliance herewith as to proceeds thereof.
5. As to Collateral which are accounts, chattel paper, general intangibles and
proceeds described in 4(c) above, Obligor warrants, represents and agrees:
(a) All such Collateral is genuine, enforceable in accordance with its
terms, free from default, prepayment, defense and conditions precedent
(except as disclosed to and accepted by Bank in writing), and is supported
by consecutively numbered invoices to, or rights against, the debtors
thereon. Obligor will supply Bank with duplicate invoices or other evidence
of Obligor's rights on Bank's request;
(b) All persons appearing to be obligated on such Collateral have authority
and capacity to contract;
(c) All chattel paper is in compliance with law as to form, content and
manner of preparation and execution and has been properly registered,
recorded, and/or filed to protect Obligor's interest thereunder;
(d) If an account debtor shall also be indebted to Obligor on another
obligation, any payment made by him not specifically designated to be
applied on any particular obligation shall be considered to be a payment on
the account in which Bank has a security interest, Should any remittance
include a payment not on an account, it shall be delivered to Bank and, if
no event of default has occurred, Bank shall pay Obligor the amount of such
payment;
(e) Obliger agrees not to compromise, settle or adjust any account or renew
or extend the time of payment thereof without Bank's prior written
consent. /s/ DWC
-------
6. Obligor owns all Collateral absolutely, and no other person has or claims
any interest in any Collateral, except as disclosed to and accepted by Bank in
writing. Obligor will defend any proceeding which may affect title to or Bank's
security interest in any Collateral, and will indemnify and hold Bank free and
harmless from all costs and expenses of Bank's defense.
7. Obligor will pay when due all existing or future charges, liens or
encumbrances on and all taxes and assessments now or hereafter imposed on or
affecting the Collateral and, if the Collateral is in Obligor's possession, the
realty on which the Collateral is located.
8. Obligor will insure the Collateral with Bank as loss payee in form and
amounts with companies, and against risks and liability satisfactory to Bank,
and hereby assigns such policies to Bank, agrees to deliver them to Bank at
Bank's request, and authorizes Bank to make any claim thereunder, to cancel the
insurance on Obligor's default, and to receive payment of and endorse any
instrument in payment of any loss or return premium. If Obligor should fail to
deliver the required policy or policies to the Bank, Bank may, at Obligor's cost
and expense, without any duty to
<PAGE>
do so, get and pay for insurance naming as the insured, at Bank's option, either
both Obligor and Bank, or only Bank, and the cost thereof shall be secured by
this Security Agreement, and shall be repayable as provided in Paragraph 1
above.
9. Obligor will give Bank any information it requires. All information at any
time supplied to Bank by Obligor (including, but not limited to, the value and
condition of Collateral, financial statements, financing statements, and
statements made in documentary Collateral) is correct and complete, and Obligor
will notify Bank of any adverse change in such information. Obligor will
promptly notify Bank of any change of Obligor's residence, chief executive
office or mailing address.
10. Bank is irrevocably appointed Obligor's attorney-in-fact to do any act which
Obligor is obligated hereby to do, to exercise such rights as Obligor may
exercise, to use such equipment as Obligor might use, to enter Obligor's
premises to give notice of Bank's security interest, and to collect Collateral
and proceeds and to execute and file in Obligor's name any financing statements
and amendments thereto required to perfect Bank's security interest hereunder,
all to protect and preserve the Collateral and Bank's rights hereunder. Bank
may:
(a) Endorse, collect and receive delivery or payment of instruments and
documents constituting Collateral;
(b) Make extension agreements with respect to or affecting Collateral,
exchange it for other Collateral, release persons liable thereon or take
security for the payment thereof, and compromise disputes in connection
therewith;
(c) Use or operate Collateral for the purpose of preserving Collateral or
its value and for preserving or liquidating Collateral.
1l. If more than one Obligor signs this Agreement, their liability is joint and
several. Any Obligor who is married agrees that recourse may be had against
separate property for the Debt. Discharge of any Obligor except for full
payment, or any extension, forbearance, change of rate of interest, or
acceptance, release or substitution of Collateral or any impairment or
suspension of Bank's rights against an Obligor, or any transfer of an Obligor's
interest to another shall not affect the liability of any other Obligor. Until
the Debt shall have been paid or performed in full, Bank's rights shall continue
even if the Debt is outlawed. All Obligors waive: (a) any right to require Bank
to proceed against any Obligor before any other, or to pursue any other remedy;
(b) presentment, protest and notice of protest, demand and notice of nonpayment,
demand or performance, notice of sale, and advertisement of sale; (c) any right
to the benefit of or to direct the application of any Collateral until the Debt
shall have been paid; (d) and any right of subrogation to Bank until Debt shall
have been paid or performed in full.
12. Upon default, at Bank's option, without demand or notice, all
<PAGE>
or any part of the Debt shall immediately become due, Bank shall have all rights
given by law, and may sell, in one or more sales, Collateral in any county where
Bank has an office. Bank may purchase at such sale. Sales for cash or on credit
to a wholesaler, retailer or user of the Collateral, or at public or private
auction, are all to be considered commercially reasonable. Bank may require
Obligor to assemble the Collateral and make it available to Bank at the entrance
to the location of the Collateral, or a place designated by Bank.
Defaults shall include:
(a) Obligor's failure to pay or perform this or any agreement with Bank or
breach of any warranty herein, or Borrower's failure to pay or perform any
agreement with Bank.
(b) Any change in Obligor's or Borrower's financial condition which in
Bank's judgment impairs the prospect of Borrower's payment or performance.
(c) Any actual or reasonably anticipated deterioration of the Collateral or
in the market price thereof which causes it, in Bank's judgment, to become
unsatisfactory as security.
(d) Any levy or seizure against Borrower or any of the Collateral.
(e) Death, termination of business, assignment for creditors, insolvency,
appointment of receiver, or the filing of any petition under bankruptcy or
debtor's relief laws of, by or against Obligor or Borrower or any guarantor
of the Debt.
(f) Any warranty or representation which is false or is believed in good
faith by Bank to be false.
13. Bank's acceptance of partial or delinquent payments or the failure of Bank
to exercise any right or remedy shall not waive any obligation of Obligor or
Borrower or right of Bank to modify this Agreement, or waive any other similar
default.
14. On transfer of all or any, part of the Debt, Bank may transfer all or any
part of the Collateral. Bank may deliver all or any part of the Collateral to
any Obligor at any time. Any such transfer or delivery shall discharge Bank from
all liability and responsibility with respect to such Collateral transferred or
delivered. This Agreement benefits Bank's successors and assigns and binds
Obligor's heirs, legatees, personal representatives, successors and assigns.
Obligor agrees not to assert against any assignee of Bank any claim or defense
that may exist against Bank, Time is of the essence. This Agreement and
supplementary schedules hereto contain the entire security agreement between
Bank and Obligor. Obligor will execute any additional agreements, assignments or
documents reasonably required by Bank to carry this Agreement into effect.
15. This Agreement shall be governed by and construed in accordance with the
laws of the State of California, to the jurisdiction of whose courts the Obligor
hereby agrees to submit. Obligor agrees that service of process may be
accomplished by any means authorized by California law. All words used herein
in the
<PAGE>
singular shall be considered to have been used in the plural where the context
and construction so require.
<PAGE>
MORTGAGE, ASSIGNMENT AND GRANT OF SECURITY INTEREST
WITH RESPECT TO TRADEMARKS
KNOW ALL MEN BY THESE PRESENTS, that for good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, the undersigned, 7th
Level, Inc., a Delaware corporation ("Debtor") , the principal offices of which
are located at 1110 East Collins Boulevard, Suite 122, Richardson, Texas 75081,
does hereby irrevocably mortgage, pledge, assign and grant a continuing security
interest to IMPERIAL BANK, a California chartered bank (the "Secured Party" or
"Bank") having an office located at 9777 Wilshire Boulevard, Beverly Hills,
California 90212, and to the Secured Party's successors and assigns, in and to
all right, title and interest of Debtor, now owned or hereafter acquired
throughout the universe, in and to all of the trade names, trademarks, service
names and/or service marks listed on Schedule A attached hereto, all
applications pending with respect thereto and all renewals and extensions
thereof and the good will associated with such marks and names (collectively,
the "Trademarks"), as security for the payment and performance (whether
presently existing or hereafter arising) of any and all indebtedness and
obligations of the Debtor to the Bank pursuant to the terms of (i) that certain
Credit Terms and Conditions, dated September 6, 1996, by and among Debtor and
Secured Party, (ii) the General Security Agreement, by and among Debtor and
Secured Party, dated September 6, 1996, (iii) all promissory notes of Debtor in
favor of Secured Party now existing or hereafter executed by Debtor and (iv) all
other agreements and documents among Debtor and Secured Party now existing or
hereafter entered into, as any of the foregoing may be amended or modified from
time to time (collectively the "Loan Documents"). The obligations of Debtor to
Bank pursuant to the Loan Documents are also secured by other personal property
of Debtor pursuant to the Loan Documents.
This Mortgage, Assignment and Grant of Security Interest With Respect to
Trademarks is subject to all of the applicable terms and conditions in the Loan
Documents. Upon the occurrence of a default or breach by the Debtor under any
of the Loan Documents, the Bank may exercise any and all rights and remedies of
the Bank under the Loan Documents, and the laws of State of California and of
the United States of America and any other relevant jurisdictions.
The Debtor does hereby irrevocably appoint the Bank as such Debtor's
attorney in fact to do all acts and things permitted or contemplated by the
terms hereof and/or the Loan Documents. This power of attorney is coupled with
an interest and is irrevocable.
The Debtor agrees that if any person, corporation, partnership, trust,
limited liability company, or other entity, shall do or perform any acts which
the Bank believes (i) constitutes a trademark infringement on any of the
Trademarks, (ii) infringes any right of the Debtor or the Bank, or (iii)
constitutes an unauthorized or unlawful use thereof, then the Bank may and shall
have the right to take such steps and institute such suits or proceedings as the
Bank may deem advisable or necessary to prevent such acts and conduct and to
secure damages and other relief by reason thereof and to generally take such
steps as may be advisable or necessary or proper for the full protection of the
rights of the parties, but the Bank shall not be obligated to do any of the
foregoing. The Bank may take such steps or institute such suits or proceedings
in its own name or in the name of the Debtor or in the names of the parties
jointly.
This Mortgage, Assignment and Grant of Security Interest With Respect to
Trademarks shall in all respects be subject to, construed in accordance with and
governed by, the laws of the State of California without giving effect to that
State's choice of law
<PAGE>
rules.
IN WITNESS WHEREOF, the undersigned have executed this instrument as of
September 6, 1996.
7TH LEVEL, INC.,
A DELAWARE CORPORATION
By: /s/ David W. Craig
-----------------------------------
Its: CFO
----------------------------------
2
<PAGE>
ALL-PURPOSE ACKNOWLEDGMENT
<TABLE>
<CAPTION>
==============================================================================================================================
State of Texas ) CAPACITY CLAIMED
County of Dallas ) BY SIGNER
<S> <C>
On Sept. 6 , 1996_before me, Shelly Roberts * INDIVIDUAL(S)
----------------- ---------------------------- *X CORPORATE ____________________________
DATE OFFICER(S) CFO
personally appeared David W. Craig --------------------------------
----------------------------------------------- TITLE(S)
NAME(S) OF SIGNER(S) * PARTNER(S)
* ATTORNEY-IN-FACT
*X personally known to me -OR- * TRUSTEE(S)
* SUBSCRIBING WITNESS
* proved to me on the basis of satisfactory evidence to be the * GUARDIAN/CONSERVATOR
person(s) whose name(s) is/are subscribed to the within * OTHER:_________________________________
instrument and acknowledged to me that he/she/they executed
the same in his/her/their authorized capacity(ies), and __________________________________________
that by his/her/their signature(s) on the instrument the
person(s), or the entity upon behalf of which the person(s) __________________________________________
acted, executed the instrument.
SIGNER IS REPRESENTING:
Witness my hand and official seal. NAME OF PERSON(S) OR ENTITY(IES)
7/th/ Level, Inc.
/s/ Shelly Roberts ------------------------------------------
--------------------------------------------------------------
SIGNATURE OF NOTARY __________________________________________
__________________________________________
==============================================================================================================================
OPTIONAL SECTION
THIS CERTIFICATE MUST BE ATTACHED TO THE TITLE OR TYPE OF DOCUMENT: Mortgage, Assignment and Grant of
DOCUMENT DESCRIBED AT RIGHT: ---------------------------------
- -------------------------------- Security Interest With Respect to Copyrights and Other Collateral
Though the data requested here is not required by law, -----------------------------------------------------------------
it could prevent fraudulent reattachment of this form.
NUMBER OF PAGES________DATE OF DOCUMENT_____________
SIGNER(S) OTHER THAN NAMED ABOVE xxx
==============================================================================================================================
</TABLE>
3
<PAGE>
SCHEDULE A
----------
DESCRIPTION OF TRADEMARKS
-------------------------
DEBTOR: 7th Level, Inc.,
- ------
a Delaware corporation
SECURED PARTY: Imperial Bank, a California chartered bank
- -------------
<TABLE>
<CAPTION>
Regis. or Regis. or
Mark File No. Serial No. Filing Date
---- --------- ---------- -----------
<S> <C> <C> <C>
7th Level 21,643 1,867,516 12/13/94
Virgil Reality 21,786 74/381,029 4/19/93
Tuneland 21,907 1,870,434 12/27/94
Desktop Playground 22,534 1,907,829 7/25/95
Earmax 22,861 74/508,151 3/30/94
Top Gun 22,943 74/511,906 4/13/94
Infinity One 23,170 74/557,316 8/4/94
Battle Beast 23,548 74/636,527 2/21/95
Lil' Howies Fun House 23,555 74/628,554 2/1/95
The Great Word Adventure 23,571 74/628,613 2/2/95
Alphabot 23,610 74/636,529 2/21/95
Arcade America 23,611 74/636,546 2/21/95
Take Your Best Shot 23,643 1,953,162 1/30/96
Genome 23,702 74/660,520 4/13/95
Shark Boy 23,963 74/700,373 7/12/95
Musicopolis 24,243 75/002,813 10/10/95
IQN 24,350 75/028,642 12/6/95
Kid's World 24,407 75/039,371 1/2/96
The Great Math Adventure 24,437 75/055,193 2/8/96
</TABLE>
A-1
<PAGE>
<TABLE>
<S> <C> <C> <C>
The Great Reading
Adventure 24,438 75/055,197 2/8/96
The Great Writing
Adventure 24,438 75/055,196 2/8/96
The Great Geo-
graphy Adventure 24,515 75/067,485 3/5/96
Digibot 24,518 75/077,913 3/25/96
Edubot 24,519 75/077,912 3/25/96
Cold Blooded 24,536 75/075,030 3/19/96
Finn 24,537 75/075,031 3/19/96
The Universal Order 24,576 75/085,935 4/9/96
Netcomix 24,591 75/098,790 5/6/96
The Great Grammar
Adventure 24,629 75/098,789 5/6/96
Studio 7 24,699
Annie 24,732 1,787,986 8/17/93
</TABLE>
A-2
<PAGE>
MORTGAGE, ASSIGNMENT AND GRANT OF SECURITY INTEREST
WITH RESPECT TO COPYRIGHTS AND OTHER COLLATERAL
KNOW ALL MEN BY THESE PRESENTS, that for good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
undersigned, 7th Level, Inc., a Delaware corporation ("Debtor") , the principal
offices of which are located at 1110 East Collins Boulevard, Suite 122,
Richardson, Texas 75081, does hereby irrevocably mortgage, pledge, assign and
grant a continuing security interest to IMPERIAL BANK, a California chartered
bank (the "Secured Party" or "Bank") having an office located at 9777 Wilshire
Boulevard, Beverly Hills, California 90212, and to the Secured Party's
successors and assigns, in and to all right, title and interest of Debtor, now
owned or hereafter acquired throughout the universe, in and to all of the
collateral described in Schedule A attached hereto including, without
limitation, (a) the "Software Products" (as such term is defined on Schedule A
attached hereto), (b) the "Animation Characters" (as such term is defined on
Schedule A attached hereto), (c) all "Literary Properties" (as such term is
defined in Schedule A attached hereto), (d) all copyrights in and related to the
foregoing (including any and all renewals and extensions thereof) and all
accounts, accounts receivable and contracts receivable generated by such
copyrights, and (e) all other collateral described in Schedule A attached hereto
(all of the foregoing collateral is hereinafter severally and collectively
referred to as the "Collateral"), as security for the payment and performance
(whether presently existing or hereafter arising) of any and all indebtedness
and obligations of the Debtor to the Bank pursuant to the terms of (i) that
certain Credit Terms and Conditions, dated September 6, 1996, by and among
Debtor and Secured Party, (ii) the General Security Agreement, by and among
Debtor and Secured Party, dated September 6, 1996, (iii) all promissory notes of
Debtor in favor of Secured Party now existing or hereafter executed by Debtor
and (iv) all other agreements and documents among Debtor and Secured Party now
existing or hereafter entered into, as any of the foregoing may be amended or
modified from time to time (collectively the "Loan Documents").
This Mortgage, Assignment and Grant of Security Interest With Respect
to Copyrights and Other Collateral is subject to all of the applicable terms and
conditions in the Loan Documents. Upon the occurrence of a default or breach by
the Debtor under any of the Loan Documents, the Bank may exercise any and all
rights and remedies of the Bank under the Loan Documents, and the laws of State
of California and of the United States of America and any other relevant
jurisdictions.
The Debtor does hereby irrevocably appoint the Bank as such Debtor's
attorney in fact to do all acts and things permitted or contemplated by the
terms hereof and/or the Loan Documents. This power of attorney is coupled with
an interest and is irrevocable.
The Debtor agrees that if any person, corporation, partnership, trust,
limited liability company, or other entity, shall do or perform any acts which
the Bank believes (i) constitutes a copyright infringement on any of the
Literary Properties, any of the Software Products or any of the Animation
Characters, (ii) constitutes a plagiarism or violation, (iii) infringes any
right of the Debtor or the Bank, or (iv) constitutes an unauthorized or unlawful
distribution, exhibition, or use thereof, then the Bank may and shall have the
right to take such steps and institute such suits or proceedings as the Bank may
deem advisable or necessary to prevent such acts and conduct and to secure
damages and other
1
<PAGE>
relief by reason thereof and to generally take such steps as may be advisable or
necessary or proper for the full protection of the rights of the parties, but
the Bank shall not be obligated to do any of the foregoing. The Bank may take
such steps or institute such suits or proceedings in its own name or in the name
of the Debtor or in the names of the parties jointly.
This Mortgage, Assignment and Grant of Security Interest With Respect
to Copyrights and Other Collateral shall in all respects be subject to,
construed in accordance with and governed by, the laws of the State of
California without giving effect to that State's choice of law rules.
IN WITNESS WHEREOF, the undersigned have executed this instrument as
of September 6, 1996.
7TH LEVEL, INC.,
A DELAWARE CORPORATION
By: /s/ David W. Craig
------------------------------------------
Its: CFO
------------------------------------------
2
<PAGE>
<TABLE>
<CAPTION>
================================================================================================================
ALL-PURPOSE ACKNOWLEDGMENT
<S> <C>
State of Texas ) CAPACITY CLAIMED
County of Dallas ) BY SIGNER
On Sept. 6 , 1996 before me, Shelly Roberts
---------------------- ------------------------- x INDIVIDUAL(S)
DATE x CORPORATE ______________________
personally appeared David W. Craig OFFICER(S)---CFO-----------------
---------------------------------- TITLE(S)
NAME(S) OF SIGNER(S) x PARTNER(S)
x ATTORNEY-IN-FACT
x TRUSTEE(S)
x SUBSCRIBING WITNESS
xx personally known to me -OR- x GUARDIAN/CONSERVATOR
x proved to me on the basis of x OTHER:___________________________
satisfactory evidence to be the
person(s) whose name(s) is/are ___________________________________
subscribed to the within
instrument and acknowledged to ___________________________________
me that he/she/they executed
the same in his/her/their SIGNER IS REPRESENTING:
authorized capacity(ies), and NAME OF PERSON(S) OR ENTITY(IES)
that by his/her/their
signature(s) on the instrument ___7th Level, Inc._________________
the person(s), or the entity
upon behalf of which the ___________________________________
person(s) acted, executed the
instrument. ___________________________________
Witness my hand and official
seal.
/s/ Shelly Roberts
-----------------------------------------
SIGNATURE OF NOTARY
================================================================================================================
OPTIONAL SECTION
THIS CERTIFICATE MUST BE TITLE OR TYPE OF DOCUMENT: Mortgage, Assignment and
------------------------
ATTACHED TO THE DOCUMENT Grant of Security Interest With Respect to Copyrights
----------------------------------------------------
DESCRIBED AT RIGHT: and Other Collateral
--------------------
- --------------------------------
Though the data requested here
is not required by law, it NUMBER OF PAGES __________ DATE OF DOCUMENT ___________
could prevent fraudulent
reattachment of this form. SIGNER(S) OTHER THAN NAMED ABOVE xxx
=============================================================================================
</TABLE>
3
<PAGE>
SCHEDULE A
----------
DESCRIPTION OF COLLATERAL
-------------------------
DEBTOR: 7th Level, Inc.,
- ------
a Delaware corporation
SECURED PARTY: Imperial Bank, a California chartered bank
- -------------
The term "Collateral" shall mean all of Debtor's now owned or hereafter acquired
personal property, including, without limitation, all assets, accounts, accounts
receivable, goodwill, contract rights, license agreements, distribution
agreements, Rights-In-Agreements, general intangibles, inventory, equipment,
fixtures, goods, documents, instruments, returned merchandise, chattel paper,
trade names, trade marks, service names and service marks, all applications with
respect thereto and all renewals and extensions thereof (including, without
limitation, those listed on Exhibit 1 attached hereto), and the good will
associated with such marks and names, cash, deposit accounts, policies of
insurance and all products, replacements or substitutions for, and proceeds
(including, without limitation, insurance proceeds) of, and accessions,
accretions and additions to any and all of the foregoing property and interests
in property, and all books and records relating to any of the foregoing
Collateral. Without in any way limiting the generality of the foregoing, the
Collateral shall specifically include all of Debtor's right, title and interest,
now owned or hereafter acquired, throughout the entire universe, in and to each
and all of the following:
1. All Software Products (whether such Software Products are in
preproduction, production, principal photography, post-production or
completed), Animation Characters and Literary Properties, including,
without limitation, all of Debtor's right, title and interest in and to:
1.1 All common law and statutory copyrights and copyright
registrations, and applications for registration, now existing or
hereafter arising, United States of America and foreign, obtained or
to be obtained on or in connection with the Software Products, the
Animation Characters, the Literary Properties or any parts thereof or
any underlying or component element of any Software Product, Animation
Character or Literary Property, including, but not limited to, all
copyrights on the property described in Paragraphs 1.2 through 1.5
hereof together with the right to copyright and all rights to renew or
extend such copyrights and the right (but not the obligation) of the
Secured Party to sue in its own name and/or in the name of any Debtor
for past, present and future infringements of copyright (collectively,
the "Copyrights");
1.2 All rights in and to all music, musical compositions, lyrics
and recordings used and to be used in, or derived from, any of the
Software Products, including, without limitation, all rights to
record, re-record,
<PAGE>
DEBTOR: 7th Level, Inc,
- ------ a Delaware corporation
SECURED PARTY: Imperial Bank, a California chartered bank
- -------------
produce, reproduce, license, synchronize or publish all or any of said
music and musical compositions;
1.3 All physical properties of every kind or nature of or
relating to any of the Software Products and Animation Characters and
all versions thereof, to the extent now or hereafter in existence,
including, without limitation, exposed film, developed film,
positives, negatives, prints, answer prints, special effects, preprint
materials (including, without limitation, negatives, positives,
duplicate negatives, inter-negatives, inter-positives, color
reversals, intermediates, lavenders, fine grain master prints and
matrixes, master tapes, discs, cassettes and cartridges, soundtracks,
recordings, audio and video tapes, discs, cassettes and cartridges,
master magnetic tracks, other optical soundtrack recordings and music
cue sheets, and all other forms of preprint elements used in any way
to produce prints or other copies or additional preprint elements,
whether now known or hereafter devised or created), audio and video
tapes, cassettes and discs (including, without limitation, 8mm, CD-I,
CD-ROM and DVD) of all types and gauges and any and all other physical
properties of every kind and nature relating to any of the Software
Products and Animation Characters in whatever state of completion (all
of the foregoing collectively referred to as the "Physical
Materials"), and any and all rights of access to removal and transfer
of, and duplication and reproduction of, any and all of the Physical
Materials;
1.4 All production, sale, distribution, subdistribution,
leasing, subleasing, license, sublicense, exhibition, telecasting,
broadcasting, transmission, ancillary, publishing, spinoff,
collateral, allied, subsidiary, remake, sequel, merchandising and
other exploitation rights pertinent or related to the Software
Products and Animation Characters, including, without limitation, the
following: (i) all rights throughout the world to sell copies of the
Software Products and Animation Characters in the form of cassettes,
cartridges, tapes, discs (including, without limitation, CD-I, CD-ROM
and DVD), stills, posters, magazines, books or any other devices now
known or hereafter created, conceived or devised; and (ii) all other
merchandising rights, including, without limitation, all rights to
use, exploit and license others to use and exploit any and all
commercial tie-ups of any kind arising out of or connected with the
Literary Properties, the Software Products, the Animation Characters,
and the title or titles of the Software Products, the Animation
Characters and Literary Properties.
1.5 All accounts, accounts receivable, general intangibles,
contract rights and other rights which may arise or may have arisen in
connection with the creation, production, distribution,
subdistribution, exhibition, telecasting, publishing, broadcasting,
licensing, sublicensing, renting,
<PAGE>
DEBTOR: 7th Level, Inc,
- ------ a Delaware corporation
SECURED PARTY: Imperial Bank, a California chartered bank
- -------------
leasing, subleasing, sale, merchandising or other exploitation of all
or any part of the Software Products, the Animation Characters, the
Literary Properties and/or copies thereof.
1.6 All products and proceeds of, replacements and substitutions
for and accessions, accretions and additions to any or all of the
foregoing.
"LITERARY PROPERTIES"
- ---------------------
The term "Literary Properties" shall mean all literary and other properties
which are or may form the basis of any Software Product or which are or may be
incorporated into any Software Product, including, without limitation all
preliminary and final computer programs (including, without limitation, all
computer source codes and object codes), software, software engines, photoplays,
treatments, scenarios, screenplays, scripts, bibles and storyboards at every
stage thereof used or to be used in connection with any Software Product; all
component parts of any Software Product consisting of such literary or other
properties; and all other literary material upon which any Software Product is
or may be adapted or based in whole or in part; in each case whether now in
existence or hereafter made, produced, created, acquired or written and whether
or not in possession of Debtor. The Literary Properties include, without
limitation, those listed on Exhibit 2 hereto.
"ANIMATION CHARACTERS"
- ----------------------
The term "Animation Characters" shall mean all animation characters contained in
or which form the basis of any Software Product and/or Literary Property or
which may be incorporated into any Software Product or Literary Property. The
Animation Characters include, without limitation, those listed on Exhibit 2
attached hereto.
"SOFTWARE PRODUCTS"
- -------------------
The term "Software Products" shall mean all entertainment, educational,
commercial and other interactive and non-interactive software properties in
which Debtor now has or hereafter acquires any right, title or interest
including, without limitation, the software titles and/or the components thereof
listed in Exhibit 2 attached hereto.
<PAGE>
DEBTOR: 7th Level, Inc,
- ------ a Delaware corporation
SECURED PARTY: Imperial Bank, a California chartered bank
- -------------
"RIGHTS-IN AGREEMENTS"
- ----------------------
The term "Rights-In Agreements" shall mean any agreement, arrangement or
understanding now existing or hereafter entered into, to which Debtor, directly
or by assignment, other transfer or operation of law, is a party and pursuant to
which Debtor has been granted, sold, conveyed, licensed, sublicensed, leased,
subleased or otherwise transferred rights with respect to the creation,
production, manufacture, sale, distribution, subdistribution, leasing,
subleasing, license, sublicense, exhibition, telecasting, broadcasting or other
exploitation of any Software Product or any elements thereof and/or the
Copyrights in any of the foregoing.
NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, DEBTOR DOES NOT HEREBY PLEDGE,
MORTGAGE, ASSIGN, HYPOTHECATE OR GRANT A SECURITY INTEREST IN (I) ANY AGREEMENT
OR CONTRACT WHICH BY THE TERMS OF WHICH MAY NOT BE PLEDGED, MORTGAGED, ASSIGNED,
HYPOTHECATED OR ENCUMBERED WITHOUT THE CONSENT OF THE OTHER PARTY OR PARTIES
THERETO OR (II) ANY COPYRIGHT OR COPYRIGHTABLE PROPERTY WHICH BY THE TERMS OF
THE AGREEMENT OR CONTRACT PURSUANT TO WHICH DEBTOR ACQUIRED ITS RIGHTS IN SUCH
COPYRIGHT OR COPYRIGHTABLE PROPERTY, MAY NOT BE PLEDGED, MORTGAGED, ASSIGNED,
HYPOTHECATED OR ENCUMBERED, WITHOUT THE CONSENT OF THE OTHER PARTY OR PARTIES
THERETO, IN EACH CASE WHERE SUCH CONSENT HAS NOT BEEN OBTAINED.
<PAGE>
EXHIBIT 1
---------
DESCRIPTION OF TRADEMARKS
-------------------------
DEBTOR: 7th Level, Inc.,
- ------
a Delaware corporation
SECURED PARTY: Imperial Bank, a California chartered bank
- -------------
<TABLE>
<CAPTION>
Regis. or Regis. or
Mark File No. Serial No. Filing Date
- ---- --------- ---------- -----------
<S> <C> <C> <C>
7th Level 21,643 1,867,516 12/13/94
Virgil Reality 21,786 74/381,029 4/19/93
Tuneland 21,907 1,870,434 12/27/94
Desktop Playground 22,534 1,907,829 7/25/95
Earmax 22,861 74/508,151 3/30/94
Top Gun 22,943 74/511,906 4/13/94
Infinity One 23,170 74/557,316 8/4/94
Battle Beast 23,548 74/636,527 2/21/95
Lil' Howies Fun House 23,555 74/628,554 2/1/95
The Great Word Adventure 23,571 74/628,613 2/2/95
Alphabot 23,610 74/636,529 2/21/95
Arcade America 23,611 74/636,546 2/21/95
Take Your Best Shot 23,643 1,953,162 1/30/96
Genome 23,702 74/660,520 4/13/95
Shark Boy 23,963 74/700,373 7/12/95
Musicopolis 24,243 75/002,813 10/10/95
IQN 24,350 75/028,642 12/6/95
</TABLE>
<PAGE>
DEBTOR: 7th Level, Inc,
- ------ a Delaware corporation No. Filing Date
MARK -----------
----
SECURED PARTY: Imperial Bank, a California chartered bank
- -------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Kid's World 24,407 75/039,371 1/2/96
The Great Math Adventure 24,437 75/055,193 2/8/96
The Great Reading
Adventure 24,438 75/055,197 2/8/96
The Great Writing
Adventure 24,438 75/055,196 2/8/96
The Great Geo-
graphy Adventure 24,515 75/067,485 3/5/96
Digibot 24,518 75/077,913 3/25/96
Edubot 24,519 75/077,912 3/25/96
Cold Blooded 24,536 75/075,030 3/19/96
Finn 24,537 75/075,031 3/19/96
The Universal Order 24,576 75/085,935 4/9/96
Netcomix 24,591 75/098,790 5/6/96
The Great Grammar
Adventure 24,629 75/098,789 5/6/96
Studio 7 24,699
Annie 24,732 1,787,986 8/17/93
</TABLE>
<PAGE>
DEBTOR: 7th Level, Inc,
- ------ a Delaware corporation No. Filing Date
MARK -----------
----
SECURED PARTY: Imperial Bank, a California chartered bank
- -------------
<TABLE>
<CAPTION>
United Kingdom
--------------
<S> <C> <C> <C>
Battle Beast 23,949 2025258 6/26/95
Arcade America 23,951 2025260 6/28/95
7th Level 23,976 2026709 7/12/95
Germany
-------
Battle Beast 23,950 WZ41168 6/28/95
Arcade America 23,952 WZ41169 6/28/95
7th Level 23,975 WZ41262 7/13/95
</TABLE>
<PAGE>
DEBTOR: 7th Level, Inc,
- ------ a Delaware corporation
SECURED PARTY: Imperial Bank, a California chartered bank
- -------------
EXHIBIT 2
List of Literary Properties
---------------------------
1.
2.
3.
List of Animation Characters
----------------------------
<TABLE>
<CAPTION>
Title Character's Name Date of Registration
- ---------------- ------------------------ Registration Number
------------ -------------
<S> <C> <C> <C>
Cold Blooded Child Finn / CB
Cold Blooded Teen Finn / CB
Cold Blooded Action Finn / CB
Cold Blooded Finn / CB
Cold Blooded Willem / CB
Cold Blooded Rudolph / CB
Cold Blooded Halfbeard / CB
Cold Blooded Auntie Claws / CB
Cold Blooded Drul Brynner / CB
Cold Blooded Wax Dummies / CB
Cold Blooded Moby / CB
Cold Blooded Lucretius (Lenny) / CB
Cold Blooded Lucretius 3D Eye / CB
Cold Blooded Squigglies / CB
Cold Blooded Mara / CB
Howie 2 Stinky / H2 Feb/01/96 VAu354-836
</TABLE>
<PAGE>
DEBTOR: 7th Level, Inc,
- ------ a Delaware corporation
SECURED PARTY: Imperial Bank, a California chartered bank
- -------------
<TABLE>
<CAPTION>
Title Character's Name Date of Registration
- ----- ----------------
Registration Number
------------ ------------
<S> <C> <C> <C>
Howie 2 Alphabot / H2 Feb/01/96 VAu354-834
Howie 2 Sarabear / H2 Feb/01/96 VAu354-835
Howie 2 Ladybear / H2 Feb/01/96 VAu354-833
Howie 2 Gus the Goose / H2 Feb/01/96 VAu354-832
Howie 2 Manny the Moose / H2 Feb/01/96 VAu358-222
Howie 2 Drippy the Duck / H2 Feb/01/96 VAu358-220
Howie 2 Don the Round Worm / H2 Feb/01/96 VAu354-842
Howie 2 Walleye Rabbit / H2 Feb/01/96 VAu354-831
Howie 2 Wacky the Squirrel / H2 Feb/01/96 VAu354-841
Howie 2 Macky the Squirrel / H2 Feb/01/96 VAu354-840
Howie 2 Stuffy the Pig / H2 Feb/01/96 VAu354-839
Howie 2 Croc the Crocodile / H2 Feb/01/96 VAu354-838
Howie 2 Ardy the Aardvark / H2 Feb/01/96 VAu354-837
Howie 2 Possy the Possum / H2 Feb/02/96 VAu332-575
Howie 2 Old Bill the Goat / H2 Feb/01/96 VAu354-830
Howie 2 Woody the Woodchuck / H2 Feb/01/96 VAu354-843
Howie 2 Beav the Beaver / H2 Feb/02/96 VAu332-577
Battle Beasts Sparky / BB Feb/13/96
Battle Beasts Sparticus / BB Feb/13/96
Battle Beasts Kuli / BB Feb/13/96
Battle Beasts Kulapesh / BB Feb/13/96
Battle Beasts Vernie / BB Feb/13/96
Battle Beasts Vermie / BB Feb/13/96 VAu357-002
Battle Beasts Nicky / BB Feb/13/96 VAu357-001
Battle Beasts Nasator / BB Feb/13/96
</TABLE>
<PAGE>
DEBTOR: 7th Level, Inc,
- ------ a Delaware corporation
SECURED PARTY: Imperial Bank, a California chartered bank
- -------------
<TABLE>
<CAPTION>
Title Character's Name Date of Registration
- ----- -----------------
Registration Number
------------ ------
<S> <C> <C> <C>
Battle Beasts Tor / BB Feb/13/96
Battle Beasts Torkuda / BB Feb/13/96
Battle Beasts Mortie / BB Feb/13/96
Battle Beasts Morden BB Feb/13/96
Battle Beasts Toad / BB Feb/13/96
Battle Beasts Beast Toad / BB Feb/13/96
Battle Beasts The General / BB April/25/96 VAu295-565
Battle Beasts Toadman / BB April/25/96 VAu295-566
Battle Beasts Wart / BB April/25/96 VAu329-767
Arcade America Belch / AA Feb/21/95 VAu319-216
Arcade America Bluefood / AA Feb/21/95 VAu330-768
Arcade America Broadway Bill / AA Feb/23/95 VAu329-321
Arcade America Clamp / AA Feb/21/95 VAu319-214
Arcade America Joey / AA Feb/21/95 VAu319-213
Arcade America Lil' Suzie / AA Feb/21/95 VAu319-212
Arcade America Plant / AA Feb/21/95 VAu319-291
Arcade America The Roadkill / AA Feb/21/95 VAu319-209
Arcade America Rotunda Splat / AA Feb/21/95 VAu319-211
Arcade America Surf / AA Feb/21/95 VAu319-210
Arcade America Wedgie / AA Feb/21/95 VAu319-215
Arcade America Bat / AA Feb/27/95 VAu325-497
Arcade America Skull / AA Feb/27/95 VAu321-061
List of Software Titles
Title ------------------------ Date of Registration Registration
- ----- -------------------- Number
-------------
Arcade America Feb/27/95
</TABLE>
<PAGE>
DEBTOR: 7th Level, Inc,
- ------ a Delaware corporation
SECURED PARTY: Imperial Bank, a California chartered bank
- -------------
<TABLE>
<CAPTION>
Title Character's Name Date of Registration
- ----- ----------------
Registration Number
------------ ------------
<S> <C> <C> <C>
Joey's Room Feb/27/95 PAu 1-983-020
Cold Blooded
Howie 2
Battle Beasts
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JUL-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 11,089,244 0
<SECURITIES> 10,478,649 0
<RECEIVABLES> 7,557,853 0
<ALLOWANCES> 1,691,897 0
<INVENTORY> 604,771 0
<CURRENT-ASSETS> 29,645,544 0
<PP&E> 13,997,667 0
<DEPRECIATION> 2,797,814 0
<TOTAL-ASSETS> 43,454,859 0
<CURRENT-LIABILITIES> 8,030,411 0
<BONDS> 0 0
0 0
0 0
<COMMON> 135,273 0
<OTHER-SE> 29,797,026 0
<TOTAL-LIABILITY-AND-EQUITY> 43,454,859 0
<SALES> 0 0
<TOTAL-REVENUES> 4,807,418 14,206,389
<CGS> 1,977,815 5,305,451
<TOTAL-COSTS> 10,245,471 28,575,076
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (234,965) (1,007,275)
<INCOME-PRETAX> (7,180,903) (18,666,863)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (7,180,903) (18,666,863)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,180,903) (18,666,863)
<EPS-PRIMARY> (0.53) (1.39)
<EPS-DILUTED> 0 0
</TABLE>
