<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): MAY 13, 1999
7TH LEVEL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 0-24936 75-2480669
<S> <C> <C>
(State or other jurisdiction (Commission File Number) (IRS Employer Identification
of incorporation) Number)
</TABLE>
<TABLE>
<S> <C>
925 Westchester Avenue
White Plains, New York 10604
(Address of principal executive offices) (Zip Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (914) 682-4300
NOT APPLICABLE
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT.)
This Form 8-K/A is filed as an amendment to the Current Report on Form 8-K
filed by 7th Level, Inc. (the "Company") on May 26, 1999 in connection with the
Company's acquisition of all of the common stock Panmedia Corporation.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
Pursuant to the terms of the Agreement and Plan of Merger, dated as of May
13, 1999, 7th Level Acquisition Corporation, a wholly-owned subsidiary of 7th
Level, Inc. ("7th Level"), merged with and into Panmedia Corporation
("Panmedia") in exchange for 1,543,860 shares of 7th Level common stock, $.01
par value per share ("7th Level Common Stock"), for all of the outstanding
shares of Panmedia common stock.
The common stock of Panmedia was acquired from Jason and Patricia Roberts
none of whom had a material relationship with 7th Level, or a 7th Level
affiliate, director or officer.
Panmedia is the owner of Learn2.com, a popular learning website. The website
offers step-by-step instructions on a wide spectrum of skills, activities and
tasks; an extensive set of discussion forums where consumers can find and share
information; and hundreds of helpful tips. Approximately 200 comprehensive
tutorials and 1,000 Learnlets (abbreviated tutorials), are currently available
and another 200 tutorials are in the editorial development process. Learn2.com
has been named the #1 "Most Useful Site" by Yahoo! Internet Life, the #1
"Continuing Education" and #1 "Distance Learning" site by Lycos, and named one
of the "5 Top Education Sites of 1998" by PC magazine. Panmedia also provides
website design and implementation services for corporate clients.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
a) Financial statements of business acquired
The following audited financial statements of Panmedia are filed on the
pages listed below:
<TABLE>
<S> <C>
Report of Independent Public Accountants--1998 and 1997........................ F-1
Balance Sheets as of March 31, 1999, December 31, 1998 and 1997................ F-2
Statements of Operations and Accumulated Earnings for three months ended March
31, 1999 and 1998 and the years ended December 31, 1998 and 1997............. F-3
Statements of Cash Flows for the three months ended March 31, 1999 and 1998 and
the years ended December 31, 1998 and 1997................................... F-4
Notes to Financial Statements.................................................. F-5
</TABLE>
b) Pro forma financial information
The following required pro forma financial information of the Company are
filed on the pages listed below:
<TABLE>
<S> <C>
Pro Forma Condensed Combined Balance Sheet as of March 31, 1999............... F-10
Pro Forma Condensed Combined Statements of Operations for the three months
ended March 31, 1999 and March 31, 1998..................................... F-11
Pro Forma Condensed Combined Statements of Operations for the years ended
December 31, 1998 and 1997.................................................. F-12
</TABLE>
(c) Exhibits
23.1 Consent of Arthur Andersen LLP
2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of Panmedia Corporation:
We have audited the accompanying balance sheets of Panmedia Corporation (a
California corporation) as of December 31, 1998 and 1997, and the related
statements of operations and accumulated earnings and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Panmedia Corporation as of
December 31, 1998 and 1997, and the results of its operations and accumulated
earnings and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
June 28, 1999
F-1
<PAGE>
PANMEDIA CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
MARCH 31, ---------- ---------
1999
------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 240,445 $ 97,336 $ 14,161
Accounts receivable........................................................ 94,545 131,213 65,637
Due from shareholder....................................................... -- 79,501 --
Prepaid expenses and other................................................. 6,507 1,482 2,600
------------ ---------- ---------
Total current assets..................................................... 341,497 309,532 82,398
Fixed assets, net............................................................ 76,413 78,267 8,976
Other assets................................................................. 14,850 14,850 --
------------ ---------- ---------
Total assets............................................................. $ 432,760 $ 402,649 $ 91,374
------------ ---------- ---------
------------ ---------- ---------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses...................................... $ 22,320 $ 8,694 $ 20,137
Current portion--notes payable............................................. 1,992 1,992 3,148
Deferred revenue........................................................... 24,975 49,950 --
------------ ---------- ---------
Total current liabilities................................................ 49,287 60,636 23,285
Notes payable................................................................ 2,037 2,485 3,733
------------ ---------- ---------
Total liabilities........................................................ 51,324 63,121 27,018
------------ ---------- ---------
Commitments and contingencies (Note 9)....................................... -- -- --
Stockholder's equity:
Common stock (no par value), 2,000,000 shares authorized, 1,000 shares
issued and outstanding................................................... -- -- --
Additional paid-in-capital................................................. 12,000 12,000 12,000
Accumulated earnings....................................................... 369,436 327,528 52,356
------------ ---------- ---------
Total stockholder's equity............................................... 381,436 339,528 64,356
------------ ---------- ---------
Total liabilities and stockholder's equity................................... $ 432,760 $ 402,649 $ 91,374
------------ ---------- ---------
------------ ---------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
PANMEDIA CORPORATION
STATEMENTS OF OPERATIONS AND ACCUMULATED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED MARCH 31, DECEMBER 31,
------------------------ ------------------------
1999 1998 1998 1997
----------- ----------- ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues................................................. $ 268,958 $ 136,342 $ 1,103,112 $ 307,634
Cost of revenues............................................. 67,040 24,208 238,646 107,785
----------- ----------- ------------ ----------
Gross profit............................................. 201,918 112,134 864,466 199,849
Operating expenses:
Research, production and development....................... 32,992 7,697 86,454 53,369
Selling and marketing...................................... 73,157 22,713 174,813 43,420
General and administrative................................. 45,307 20,405 242,623 56,188
Depreciation and amortization.............................. 5,452 2,703 15,099 966
----------- ----------- ------------ ----------
Total operating expenses................................. 156,908 53,518 518,989 153,943
Income from operations....................................... 45,010 58,616 345,477 45,906
Interest (income) expense.................................... (1,417) 230 (1,964) 128
----------- ----------- ------------ ----------
Net income............................................... 46,427 58,386 347,441 45,778
----------- ----------- ------------ ----------
Accumulated earnings, beginning.............................. 327,528 52,356 52,356 13,647
Dividends distributed........................................ (4,519) (10,501) (72,269) (7,069)
----------- ----------- ------------ ----------
Accumulated earnings, ending................................. $ 369,436 $ 100,241 $ 327,528 $ 52,356
----------- ----------- ------------ ----------
----------- ----------- ------------ ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
PANMEDIA CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
------------------------ --------------------
1999 1998 1998 1997
----------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income....................................................... $ 46,427 $ 58,386 $ 347,441 $ 45,778
Adjustments to reconcile net income to net cash provided by
operating activities--
Depreciation and amortization.................................. 5,452 2,703 15,099 966
Changes in operating assets and liabilities:
Accounts receivable........................................ 36,668 63,722 (65,576) (47,577)
Due from stockholder....................................... 79,501 -- (79,501) --
Prepaid expenses and other current assets.................. (5,025) 2,600 1,118 (2,600)
Other assets............................................... -- -- (14,850) --
Accounts payable and accrued expenses...................... 13,626 (51) (11,443) 14,070
Deferred revenue........................................... (24,975) -- 49,950
----------- ----------- --------- ---------
Net cash provided by operating activities.................... 151,674 127,360 242,238 10,637
----------- ----------- --------- ---------
Cash flows from investing activities:
Capital expenditures............................................. (3,598) (12,996) (84,390) (9,942)
Proceeds (payments) from debt.................................... (448) (756) (2,404) 6,881
----------- ----------- --------- ---------
Net cash used in investing activities........................ (4,046) (13,752) (86,794) (3,061)
----------- ----------- --------- ---------
Cash flows from financing activities:
Capital contribution............................................. -- -- -- 12,000
Dividends distributed............................................ (4,519) (10,501) (72,269) (7,069)
----------- ----------- --------- ---------
Net cash (used in) provided by financing activities.......... (4,519) (10,501) (72,269) 4,931
Net increase in cash and cash equivalents.................... 143,109 103,107 83,175 12,507
Cash and cash equivalents, beginning............................... 97,336 14,161 14,161 1,654
----------- ----------- --------- ---------
Cash and cash equivalents, ending.................................. $ 240,445 $ 117,268 $ 97,336 $ 14,161
----------- ----------- --------- ---------
----------- ----------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
PANMEDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
1. INCORPORATION AND NATURE OF BUSINESS:
Panmedia Corporation, (the "Company") was incorporated under the laws of the
State of California on January 21, 1998. Prior to incorporation, the Company
operated as a sole proprietorship. The Company provides website design and
implementation services for corporate clients.
The Company is also the owner of Learn2.com, a popular learning website. The
website offers step-by-step instructions on a wide spectrum of skills,
activities and tasks; an extensive set of discussion forums where consumers can
find and share information; and hundreds of helpful tips. Approximately 200
comprehensive tutorials and 1,000 Learnlets, (abbreviated tutorials), are
currently available and another 200 tutorials are in the editorial development
process.
The Company merged with 7(th) Level, Inc. in May 1999 (See Note 10).
2. SIGNIFICANT ACCOUNTING POLICIES:
CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid short term investments
with original maturities of three months or less.
REVENUE RECOGNITION
Revenues for website design services rendered are recognized based either on
time and material charges incurred during the period, the achievement of project
milestones as defined by customer contracts or percentage of completion for
fixed fee contracts. Unbilled charges consist of labor costs incurred and
estimate earnings, production and other client reimbursable costs. Provisions
for estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Amounts billed which are not yet earned are
classified as deferred revenue in the accompanying balance sheet.
Revenues from advertising sales are recognized ratably in the period in
which the advertisement is displayed, provided that no significant Company
obligations remain and collection of the resulting receivable is probable.
Payments received from advertisers prior to displaying their advertisements on
the website are recorded as deferred revenue and are recognized as revenue
ratably as the advertisements are displayed.
On April 3, 1998, the Company entered into a licensing agreement with a
publisher under which the Company receives royalty income from sales of "The
Learn2 Guide." The Company received $60,000 in royalties which is included in
net revenues on the accompanying statement of operations and accumulated
earnings for the twelve months ended December 31, 1998.
To date, a majority of the Company's revenues are from website design and
implementation services.
F-5
<PAGE>
PANMEDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
DEPRECIATION AND AMORTIZATION
The Company provides for depreciation and amortization using the
straight-line method to allocate the cost of property and equipment over their
estimated useful lives as follows:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
- ---------------------------------------- ------------------------------------------------------------
<S> <C>
Leasehold improvements Lesser of estimated life or remaining term of the lease
Computer equipment 3 years
Office equipment 5 years
Furniture and fixtures 10 years
</TABLE>
LONG-LIVED ASSETS
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Under the
provisions of this statement, the Company has evaluated its long-lived assets
for financial impairment, and will continue to evaluate them as events or
changes in circumstances indicate that the carrying amount of such assets may
not be fully recoverable.
The Company evaluates the recoverability of long-lived assets held for sale
by comparing the assets carrying amount with its fair value less cost to sell.
Based on these evaluations, there were no adjustments to the carrying value of
long-lived assets in 1998 or 1997.
INCOME TAXES
The Company has elected S Corporation status for federal and state income
tax reporting purposes. As a result, the Company's earnings are taxable directly
to the stockholder. The Company remains liable, however, for the State of
California taxes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
The Company's estimates and future results could be adversely affected by a
number of uncertainties related to its new software products. Such factors
include, but are not limited to, market acceptance; ability to obtain sales
volumes and adequate prices; the Company's sustained commitment of resources to
further develop and market its technology; and the technological competitive
advantage of these new products.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 requires disclosure of all components of
comprehensive income on an annual and interim basis. Comprehensive income is
defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. SFAS No.
130 is effective
F-6
<PAGE>
PANMEDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
for fiscal years beginning after December 15, 1997. The adoption had no impact
on the Company's financial position, results of operations and accumulated
earnings or cash flows in the current year.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". SOP 98-1 requires computer
software costs associated with internal use software to be charged to operations
as incurred until certain capitalization criteria are met. SOP 98-1 is effective
beginning January 1, 1999. The Company does not expect adoption of this
statement to have a material impact on its financial position, results of
operations and accumulated earnings or cash flows.
3. FIXED ASSETS, NET:
Fixed assets, at cost as of December 31, 1998 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Leasehold improvements................................................... $ 15,176 $ --
Computer equipment....................................................... 43,474 9,942
Furniture, fixtures and office equipment................................. 35,682 --
--------- ---------
94,332 9,942
Less--accumulated depreciation........................................... 16,065 966
--------- ---------
$ 78,267 $ 8,976
--------- ---------
--------- ---------
</TABLE>
Depreciation and amortization expense on property and equipment, including
capital leases, was approximately $15,099 and $966 in 1998 and 1997,
respectively.
4. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS:
SFAS No. 105, "Disclosure of Information About Financial Instruments With
Off-Balance Sheet Risk and Financial Instruments With Concentrations of Credit
Risk," requires disclosure of any significant off-balance sheet risk and credit
risk concentrations.
During 1998, sales to 2 customers amounted to approximately 53% and 16% of
total sales. In 1997, sales to 4 customers amounted to approximately 32%, 18%,
11% and 10% of total sales.
5. NOTES PAYABLE:
In 1997, the Company financed certain equipment through the issuance of
notes payable. The notes mature through September 2000.
At December 31, 1998 and 1997 notes payable consisted of:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Notes payable.............................................................. $ 4,477 $ 6,881
Less current portion....................................................... 1,992 3,148
--------- ---------
Notes payable--long term................................................... $ 2,485 $ 3,733
--------- ---------
--------- ---------
</TABLE>
F-7
<PAGE>
PANMEDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
5. NOTES PAYABLE: (CONTINUED)
Future minimum payments under the notes are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ---------------------------------------------------------------------------
<S> <C> <C>
1999....................................................................... $ 2,292
2000....................................................................... 1,910
</TABLE>
6. RELATED PARTY TRANSACTIONS:
On November 17, 1998, the Company loaned the stockholder $79,501. Subsequent
to year end the loan was paid in full.
7. STOCKHOLDER'S EQUITY:
COMMON STOCK
The Company has authorized capital of 2,000,000 shares of common stock, no
par value per share, and 1,000 shares issued and outstanding.
8. LEASES:
The Company is committed under an operating lease, principally for office
space expiring through 2003. Rent expense for the operating lease was
approximately $50,185 and $27,500 for 1998 and 1997 respectively. Future minimum
base rents under terms of the noncancellable operating lease are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- -----------------------------------------------------------------------------------
<S> <C>
1999............................................................................... $ 59,400
2000............................................................................... 59,400
2001............................................................................... 59,400
2002............................................................................... 59,400
Thereafter......................................................................... 19,800
</TABLE>
9. COMMITMENTS AND CONTINGENCIES:
The Company is involved in certain claims and lawsuits that are generally
incidental to its business. The Company is vigorously contesting all such
matters and believes that their ultimate resolution will not have a material
adverse effect on the Company's financial position, results of operations and
accumulated earnings or cash flows.
10. SUBSEQUENT EVENT:
In May 1999, the Company merged with 7th Level, Inc. ("7th Level"), a public
company that markets interactive courseware that is accessed instantly over the
Internet and intranets. Pursuant to the terms of the Agreement and Plan of
Merger, dated as of May 13, 1999, 7th Level Acquisition Corporation, a wholly-
owned subsidiary of 7th Level, merged with and into the Company in exchange for
1,543,860 shares of 7th Level common stock, $.01 par value per share, for all of
the outstanding shares of the Company's common stock.
F-8
<PAGE>
PANMEDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following unaudited pro forma condensed combined financial statements
present the effect of the merger between 7th Level and the Company as a pooling
of interests. The unaudited pro forma condensed combined balance sheet presents
the combined financial position of 7th Level and the Company as of March 31,
1999 assuming that the merger had occurred as of that date. Such pro forma
information is based upon the historical consolidated balance sheet of 7th
Level. The unaudited pro forma condensed combined statements of operations give
effect to the merger of 7th Level and the Company by combining the consolidated
results of operations of 7th Level for the three months ended March 31, 1999 and
1998 and for each of the two years ended December 31, 1998 and December 31, 1997
with the results of operations of the Company for December 31, 1998 and 1997, as
a pooling of interests. The results of operations for the Company for the year
ended December 31, 1996 are not included in the pro forma information as they
were immaterial to the consolidated results of 7th Level for the respective
period. The financial statements of the Company, included in this document, have
been prepared to conform to the presentation of 7th Level.
Additionally, the unaudited pro forma condensed combined statements of
operations reflect the acquisition by 7th Level of Street Technologies, Inc.,
now known as 7th Street.com in February 1999. This acquisition was accounted for
using the purchase method of accounting. The pro forma condensed combined
balance sheet has been prepared as if such acquisition had been effective as of
December 31, 1998 while the pro forma condensed combined statement of operations
for the year ended December 31, 1998 and the three months ended March 31, 1999
and 1998 have been prepared as if such acquisition had been effective as of
January 1, 1998.
The unaudited pro forma condensed combined financial statements are based on
the estimates and assumptions set forth in the notes to such statements, which
are preliminary and have been made solely for purposes of developing such pro
forma information. The information has been prepared in accordance with the
rules and regulations of the SEC and is provided for comparative purposes only.
The pro forma information does not purport to be indicative of the results that
actually would have occurred had the merger been effected on January 1 of the
years presented.
7th Level and the Company estimate that they will incur direct transaction
costs of approximately $300,000 in connection with the proposed merger of 7th
Level with the Company which will be charged to operations in the quarter in
which the merger is consummated. These amounts are preliminary estimates and are
therefore subject to change. 7th Level may incur additional merger related costs
in subsequent quarters to reflect costs associated with the merger.
All of the financial data set forth below should be read in conjunction with
the consolidated financial statements of 7th Level, Inc. filed in its Form
10-K/A and the financial statements of 7th Street.com, Inc. filed in its Form
8-K/A dated February 16, 1999.
F-9
<PAGE>
7TH LEVEL, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 1999
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
PRO FORMA
7TH LEVEL PANMEDIA ADJUSTMENTS COMBINED
---------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 10,635 $ 240 $ -- $ 10,875
Accounts receivable, net...................................... 1,296 95 -- 1,391
Prepaid expenses and other current assets..................... 519 6 -- 525
---------- ----- --- -----------
Total current assets........................................ 12,450 341 -- 12,791
Fixed assets, net............................................. 404 76 -- 480
Capitalized software, net..................................... 15,132 -- -- 15,132
Intangible assets, net........................................ 3,491 -- -- 3,491
Goodwill, net................................................. 9,763 -- -- 9,763
Other assets.................................................. 107 15 -- 122
---------- ----- --- -----------
Total assets................................................ $ 41,347 $ 432 $ -- $ 41,779
---------- ----- --- -----------
---------- ----- --- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable.............................. $ 27 $ 2 $ -- $ 29
Current portion of deferred revenue........................... 2,084 25 -- 2,109
Accounts payable.............................................. 536 22 -- 558
Accrued expenses and other current liabilities................ 3,981 -- 3,981
---------- ----- --- -----------
Total current liabilities................................... 6,628 49 -- 6,677
Deferrred revenue............................................... 1,050 -- -- 1,050
Other........................................................... 32 2 -- 34
---------- ----- --- -----------
Total liabilities........................................... 7,710 51 -- 7,761
Stockholders' equity
Series D Convertible Preferred Stock.......................... -- -- -- --
Common stock.................................................. 311 -- 15(1) 326
Additional paid-in capital.................................... 134,033 12 (15)(1) 134,030
Notes and accounts receivable from directors.................. (1,934) -- -- (1,934)
(Accumulated deficit)/retained earnings....................... (98,773) 369 -- (98,404)
---------- ----- --- -----------
Total stockholders' equity.................................... 33,637 381 -- 34,018
---------- ----- --- -----------
Total liabilities and stockholders' equity.................. $ 41,347 $ 432 $ -- $ 41,779
---------- ----- --- -----------
---------- ----- --- -----------
</TABLE>
- ------------------------------
(1) Issuance of 1,543,860 shares of common stock in exchange for all of the
outstanding shares of Panmedia.
F-10
<PAGE>
7TH LEVEL, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands except per share data)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1999
---------------------------------------------------------------------
7TH PRO FORMA
LEVEL(1) STREET(2) PANMEDIA ADJUSTMENTS COMBINED
----------- ----------- ------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Net revenues........................................ $ 756 $ 245 $ 269 $ -- $ 1,270
Cost of revenues.................................... 119 42 67 -- 228
----------- ----- ----- ----- -----------
Gross profit.................................... 637 203 202 -- 1,042
Operating expenses:
Research and product development.................. 559 299 33 -- 891
Selling and marketing............................. 442 257 73 -- 772
General and administrative........................ 701 161 46 -- 908
Depreciation and amortization..................... 374 83 5 218(3) 680
Restructuring charges............................. 2,493 -- -- -- 2,493
Acquired in-process technology.................... 9,677 -- -- -- 9,677
----------- ----- ----- ----- -----------
Total operating expenses........................ 14,246 800 157 218 15,421
Other (expense) income.............................. (42) 7 1 -- (34)
----------- ----- ----- ----- -----------
Net (loss) income............................... $ (13,651) $ (590) $ 46 $ (218) $ (14,413)
----------- ----- ----- ----- -----------
----------- ----- ----- ----- -----------
Net loss per share.................................. $ (0.50) $ (0.50)
----------- -----------
----------- -----------
Shares used in computation.......................... 27,164 28,708
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1998
-------------------------------------------------------------------
PRO FORMA
7TH LEVEL STREET PANMEDIA ADJUSTMENTS COMBINED
--------- ----------- ------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Net revenues............................................ $ 462 $ 277 $ 136 $ -- $ 875
Cost of revenues........................................ 85 22 24 -- 131
--------- ----- ----- ----- -----------
Gross profit........................................ 377 255 112 -- 744
Operating expenses:
Research and product development...................... 817 468 8 -- 1,293
Selling and marketing................................. 272 191 23 -- 486
General and administrative............................ 1,107 208 20 -- 1,335
Depreciation and amortization......................... 565 -- 3 427(3) 995
--------- ----- ----- ----- -----------
Total operating expenses............................ 2,761 867 54 427 4,109
Other (expense) income.................................. (157) 12 -- -- (145)
--------- ----- ----- ----- -----------
Net (loss) income................................... $ (2,541) $ (600) $ 58 $ (427) $ (3,510)
--------- ----- ----- ----- -----------
--------- ----- ----- ----- -----------
Net loss per share...................................... $ (0.18) $ (0.17)
--------- -----------
--------- -----------
Shares used in computation.............................. 13,784 20,276
--------- -----------
--------- -----------
</TABLE>
- ------------------------------
(1) Operating results include Street Technologies, Inc. from February 17, 1999
through March 31, 1999.
(2) Operating results for the period January 1, 1999 through February 16, 1999.
(3) Amortization of intangible assets related to the Street Technologies Inc.
acquisition.
F-11
<PAGE>
7TH LEVEL, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PRO FORMA
7TH LEVEL STREET PANMEDIA ADJUSTMENTS COMBINED
--------- --------- ----------- ------------- -----------
Net revenues............................................ $ 1,571 $ 4,683 $ 1,103 $ -- $ 7,357
Cost of revenues........................................ 233 312 239 -- 784
--------- --------- ----------- ------------- -----------
Gross profit........................................ 1,338 4,371 864 6,573
Operating expenses:
Research and product development...................... 2,310 1,722 86 -- 4,118
Selling and marketing................................. 420 852 175 -- 1,447
General and administrative............................ 5,083 955 243 -- 6,281
Depreciation and amortization......................... 1,807 574 15 1,708(1) 4,104
--------- --------- ----------- ------------- -----------
Total operating expenses............................ 9,620 4,103 519 1,708 15,950
Other (expense) income.................................. (2,676) 86 2 -- (2,588)
--------- --------- ----------- ------------- -----------
Net (loss) income................................... (10,958) 354 347 (1,708) (11,965)
Dividends on preferred stock............................ 338 -- -- -- 338
Beneficial conversion feature associated with preferred
stock................................................. 5,479 -- -- -- 5,479
--------- --------- ----------- ------------- -----------
Net loss available to common shareholders............... $ (16,775) $ 354 $ 347 $ (1,708) $ (17,782)
--------- --------- ----------- ------------- -----------
--------- --------- ----------- ------------- -----------
Net loss per share...................................... $ (0.67) $ (.52)
--------- -----------
--------- -----------
Net loss per share available to common stockholders..... $ (1.03) $ (0.78)
--------- -----------
--------- -----------
Shares used in computation.............................. 16,355 22,847
--------- -----------
--------- -----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------
<S> <C> <C> <C>
PRO FORMA
7TH LEVEL PANMEDIA COMBINED
--------- ------------- -----------
Net revenues....................................................................... $ 10,499 $ 308 $ 10,807
Cost of revenues................................................................... 4,542 108 4,650
--------- ----- -----------
Gross profit................................................................... 5,957 200 6,157
Operating Expenses:
Research and product development................................................. 14,416 54 14,470
Selling and marketing............................................................ 5,842 43 5,885
General and administrative....................................................... 5,310 56 5,366
Depreciation and amortization.................................................... 4,180 1 4,181
--------- ----- -----------
Total operating expenses....................................................... 29,748 154 29,902
Other income....................................................................... 1,333 -- 1,333
--------- ----- -----------
Net (loss) income.............................................................. $ (22,458) $ 46 $ (22,412)
--------- ----- -----------
--------- ----- -----------
Net loss per share................................................................. $ (1.64) $ (1.47)
--------- -----------
--------- -----------
Shares used in computation......................................................... 13,696,730 15,240,590
--------- -----------
--------- -----------
</TABLE>
- ------------------------------
(1) Reflects amortization of intangible assets acquired in the Street
Technologies Inc. acquisition.
F-12
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
<TABLE>
<S> <C> <C>
7TH LEVEL, INC.
By: /s/ MARC E. LANDY
-----------------------------------------
Marc E. Landy
Vice President, Chief Financial Officer
and Secretary
</TABLE>
Date: June 30, 1999
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated June 28, 1999, included in this Form 8-K/A, into 7th Level,
Inc.'s previously filed Registration Statements Nos. 333-65525, 333-10341 and
333-10339 filed on Forms S-8 and Registration Statements Nos. 333-80357,
333-64365 and 333-69861 filed on Forms S-3.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
New York, New York
June 30, 1999
