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As filed with the Securities and Exchange Commission on February 1, 1999
Registration No. 333-69861
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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7TH LEVEL, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2480669
(State or other jurisdiction of (I.R.S. Employer
incorporation organization) Identification No.)
1201 Richardson Drive, Suite 277
Richardson, Texas 75080
(972) 498-8100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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RICHARD S. MERRICK
Chief Executive Officer
7th Level, Inc.
1201 Richardson Drive, Suite 277
Richardson, Texas 75080
(972) 498-8100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
GERALD ADLER, ESQ.
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, New York 10022
(212) 758-9500
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this registration statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
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The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PROSPECTUS
7TH LEVEL, INC.
2,416,667 SHARES OF
COMMON STOCK
We are furnishing this document to you to allow Fletcher International
Limited to sell up to 2,416,667 shares of our common stock. Fletcher may sell
these shares from time to time on the over-the-counter market in regular
brokerage transactions, in transactions directly with market makers or in
certain privately negotiated transactions.
Our common stock is quoted on the Nasdaq National Market under the
symbol "SEVL". On January 29, 1999, the closing price of our common stock as
reported by the Nasdaq National Market was $2.75 per share.
WE URGE YOU TO READ CAREFULLY THE "RISK FACTORS" SECTION BEGINNING ON
PAGE 5 WHERE WE DESCRIBE SPECIFIC RISKS ASSOCIATED WITH 7TH LEVEL AND THESE
SECURITIES BEFORE YOU MAKE YOUR INVESTMENT DECISION.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1999.
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ADDITIONAL INFORMATION MADE AVAILABLE TO YOU
This prospectus is part of a Registration Statement on Form S-3 that
we filed with the Securities and Exchange Commission. Certain information in
the Registration Statement has been omitted from this prospectus in accordance
with the rules of the SEC.
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. Our file number is 0-24936.
You may read and copy materials that we have filed with the SEC,
including the registration statement, at the following SEC public reference
rooms:
450 Fifth Street, N.W. Northwest Atrium Center 7 World Trade Center
Room 1024 500 West Madison Street Suite 1300
Washington, D.C. 20549 Suite 1400 New York, New York 10048
Chicago, Illinois 60661
You can call the SEC at 1-800-732-0330 for further information about
the public reference room.
We are also required to file electronic versions of these documents
with the SEC, which may be accessed through the SEC's World Wide Web site at
http://www.sec.gov. Our common stock is quoted on the Nasdaq National Market.
Reports, proxy and information statements and other information concerning 7th
Level may be inspected at the Nasdaq Stock Market at 1735 K Street, NW,
Washington, D.C. 20006.
We have not authorized any dealer, salesperson or other person to give
any information or represent anything not contained in this prospectus. You
should not rely on any unauthorized information. This prospectus does not offer
to sell or buy any shares in any jurisdiction in which it is unlawful. The
information in this prospectus is current as of the date on the cover.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The SEC allows us to "incorporate by reference" certain of our
publicly-filed documents into this prospectus, which means that information
included in these documents is considered part of this prospectus. Information
that we file with the SEC subsequent to the date of this prospectus will
automatically update and supersede this information. We incorporate by
reference the documents listed below and any future filings made with the SEC
under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended, until Fletcher has sold all the shares of common stock
described in this Prospectus.
The following documents files with the SEC are incorporated by
reference in this prospectus:
1. Our Annual Report on Form 10-K for the year ended
December 31, 1997.
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2. Our Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998.
3. Our Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998.
4. Our Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.
5. Our Current Reports on Form 8-K dated April 23, 1998,
July 9, 1998, December 14, 1998, and January 15, 1999.
6. The description of our common stock contained in our
Registration Statement on Form 8-A filed with the SEC under the
Exchange Act.
We will furnish without charge to you, on written or oral request, a
copy of any or all of the documents incorporated by reference, other than
exhibits to those documents. You should direct any requests for documents to:
7th Level, Inc., 1201 Richardson Drive, Suite 277, Richardson, Texas 75080,
Attention: Chief Executive Officer, or by telephone (972) 498-8100.
FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS
MAY NOT PROVE TO BE ACCURATE
This prospectus contains or incorporates forward-looking statements
including statements regarding, among other items, our business strategy,
growth strategy, and anticipated trends in our business. We may make additional
written or oral forward-looking statements from time to time in filings with
the SEC or otherwise. When we use the words "believe," "expect," "anticipate,"
"project" and similar expressions, this should alert you that this is a
forward-looking statement. Forward-looking statements speak only as of the date
the statement is made.
These forward-looking statements are based largely on our
expectations. They are subject to a number of risks and uncertainties, some of
which cannot be predicted or quantified and are beyond our control. Future
events and actual results could differ materially from those set forth in,
contemplated by, or underlying the forward-looking statements. Statements in
this prospectus or made in documents incorporated into this prospectus,
describe factors that could contribute to or cause differences between our
expectations and actual results.
We have described many of these factors in "Risk Factors" and "The
Company." Because of these risks and uncertainties, the forward-looking
information contained in this prospectus may not in fact occur or prove to be
accurate. All subsequent written and oral forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by this section.
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7TH LEVEL, INC.
7th Level, Inc. provides technology, products and services which
enliven and enrich the means by which companies and individuals can communicate
using the Internet. Our primary focus is the creation and display of 2D and 3D
animated characters that can host websites, deliver "speaking" e-mail and act
as agents to provide customer support and training.
Our product line is all branded under the number "7." Our products
include software that we have recently begun to sell on a limited basis to
customers on our web site and e-commerce websites of other companies. We also
continue to focus on the licensing of technology and the creation of custom
characters for companies which:
o are engaged in developing and marketing websites for "web
communities";
o attract or are seeking to attract a large number of registered
users;
o sell products online; or
o are engaged in providing customer service solutions and/or
training tutorials.
Our current suite of Internet and desktop communication products
include:
AGENT 7: This product creates animated characters for use on both
personal and professional websites.
MAIL 7: This product allows even novice users of the Internet to
create "talking e-mail" using their own voice or a customized message.
PRESENT 7: This product creates animated "presenters" to enhance
Microsoft PowerPoint presentations and other text based documents.
This product is specifically designed for desktop use.
Together, these products constitute COMMUNICATE 7, a suite that allows
users to distinguish their content and technology by delivering captivating
information through websites, e-mail and desktop presentations.
To implement our strategy, we have formed and continue to form
relationships with major Internet content, technology and community building
companies, as well as companies that are engaged in providing customer service
solutions and/or training tutorials. The significant strategic relationships
that we have developed to date include the following:
o RealNetworks - We created a special version of Agent 7 for use
with RealNetworks' industry standard web multimedia technology
which is being offered for sale on RealNetworks' e-commerce web
site.
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o GeoCities - We entered into a co-marketing agreement with
Geocities to promote our products to their membership for use on
Geocities' personal websites and mail.
o New England Patriots, NFL Football Team - The Patriots have
integrated our technology into its online marketing and branding
campaign.
We continue to explore potential strategic alliances or other
arrangements to maximize stockholder value.
Additional information on 7th Level is available via its web site at
www.7thlevel.com. Our principal executive offices are located at 1201
Richardson Drive, Suite 277, Richardson, Texas 75080, telephone (972) 498-8100.
RISK FACTORS
We Have a History of Losses and an Accumulated Deficit
Commencing in the summer of 1997, we changed our business from that of
a producer and distributor of CD ROM content to that of a supplier of animation
technology principally directed at the Internet market. From inception in May
1993, we have never earned an annual profit. We introduced Agent 7, our first
Internet product in August 1998. In 1998, we generated relatively limited
revenues from operations, and have incurred net losses each year since our
inception in May 1993. Our net losses for the 1995, 1996 and 1997 fiscal years
were approximately $14.6 million, $24.3 million and $22.5 million,
respectively. As of December 31, 1997, we had an accumulated deficit of $68.3
million. In addition, for the nine months ending September 30, 1998, we
incurred a net loss of $9.8 million and a one time increase to the loss
attributable to the common stockholders of approximately $15.0 million due to a
beneficial conversion feature contained in the terms of a convertible preferred
stock issuance completed in May 1998. We expect to incur significant net losses
through approximately the end of 1999 and may continue to incur net losses
thereafter.
We Face Future Capital Needs and Uncertainty in Acquiring Additional Financing
to Meet Those Needs
We anticipate that currently available funds, including funds we may
receive from selling additional shares of common stock to Fletcher under the
Subscription Agreement and cash flow generated from business operations, will
be sufficient to meet anticipated needs for working capital, capital
expenditures, and business expansion for at least the next twelve months. We
may need to raise additional funds in order to develop, acquire and/or market
products, businesses, or technologies. If additional funds are raised through
the issuance of equity or convertible securities, your percentage ownership in
7th Level will be reduced. Also, these securities may have rights, preferences
or privileges senior to common stock. However, it is possible that additional
financing may not be available on terms favorable to us, or at all. If
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adequate funds are not available or are not available on acceptable terms, we
may not be able to take advantage of our business opportunities.
The Markets for Some of Our Products and Services Are Still in Development
Our success depends in large part on our ability to continue to
develop the following:
- a profitable market for our Communicate 7 communications suite
including Internet content, e-commerce and community building
companies as well as companies that are engaged in providing
customer service solutions and/or training tutorials; and
- other new products and services.
Because the markets for our Communicate 7 are new and evolving, the
demand for these products and services is highly uncertain.
The success of our Communicate 7 product line will depend on a number
of factors, including :
- our ability to establish adoption of the products in major
online portals, online communities and other high-traffic
Internet sites;
- our ability to distribute and market Communicate 7 and its
online components, Agent 7 and Mail 7, so that a sufficient
level of users adopt and demand our technology products; user
adoption and demand is potentially an important component of our
effort to market our technology to corporations, including
online portals, communities and other websites;
- the inclusion of our Communicate 7 software and technology in
products manufactured by others, including personal computers
and bundled with other software products;
- our ability to generate significant revenues through e-commerce,
technology licensing and other opportunities to be profitable.
The receipt of transactional fees derived from the use of our products
for e-commerce and advertising on the Internet will depend upon our
ability to:
- establish relationships with e-commerce companies and
advertisers which use our technology in connection with online
sales and/or advertising on the Internet ; and
- build a direct sales force to establish advertising and
e-commerce partners.
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Market acceptance of our custom community building solutions service
will depend upon our ability to:
- demonstrate to our customers and prospective customers a
competitive advantage for them resulting from use of our
technology;
- maintain a technology lead over our competitor's offerings;
- maintain an acceptable level of customer service to support our
technology products; and
- build a direct sales force to establish customers for this
service.
We Face Rapid Technological Change and Frequent New Product Introductions
The markets for our products and services are characterized by rapid
technological change, frequent new product introductions, and evolving industry
standards. We believe that our future success depends upon our ability to
develop and market products and services that incorporate and apply new
technologies, and our ability to enhance and expand our existing product lines
and services. We will need to spend significant amounts of capital to develop,
market and enhance our products and services to meet and take advantage of
technological changes. We may not be:
- able to develop or market new products or services successfully;
- successful in commercially developing new products and services;
- able to respond effectively to technological changes, new
industry standards, or new products or services offered by our
competitors; or
- able to raise sufficient capital when required to implement our
strategies.
Our failure to anticipate technological change or evolving industry
standards, and to successfully introduce new products and services, would
affect the performance of our business.
We Face Intense Competition
The digital animation and "intelligent agent" products and services
industry is intensely competitive, rapidly changing and significantly affected
by new product introductions and other market activities of industry
participants. We are aware of numerous competitors that provide products and
services similar to those offered by us, including:
- Animated character software vendors, including Microsoft,
Macromedia, Extempo, ToggleThis, 3D Planet, Atomic 3D, Pulse and
Parable;
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- Recommendation and agent software vendors, including Net
Perceptions, Autonomy and Aptex; and
- Q&A natural language response systems vendors, including
Teknimedia, Big Science, Inference and c-serv.
In addition, with the rapid expansion of the Internet, it is likely
that more competitors will enter the digital animation and "intelligent agent"
market . Increased competition may result in the development of products which
are superior to ours, or are perceived by the market to be superior, which
could cause price reductions, reduced gross margins and loss of market share
for us.
Some of our competitors have longer operating histories, presence in
key areas overlapping with our key markets, greater name recognition, access to
larger customer bases and significantly greater financial, sales, marketing,
distribution, technical and other resources than us. As a result, these
competitors may be able to adapt to new or emerging technologies and changes in
customers requirements, or devote greater resources to the development,
promotion and sales of their products and services, more quickly than us. We
could face a competitive disadvantage if two-way data broadcast or information
services are developed that transmit digital information at high speeds which
enable higher quality autonomous agents using alternative media delivery
technologies, including video. This competitive disadvantage would affect the
performance of our business.
We Depend in Part on Licensed Technology
Certain technology critical to the operation of Agent 7 products and
solutions, including the Voxware speech recognition engine and the SoftVoice
Speech Synthesis engine, are licensed from third parties. Although we have
significantly improved these technologies and applied them in unique ways with
other proprietary techniques, other parties may obtain versions of these
technologies and compete with us. This could affect the performance of our
business.
We Depend upon Strategic Alliances or Relationships
Our future success will, in part, depend upon our ability to maintain
existing and develop additional strategic alliances or relationships. We
currently have relationships with online services, electronic distributors,
software vendors and a variety of corporate customers. Through these
relationships we may seek to develop additional commercial opportunities in
delivering our products for use to individual consumers, in combination with
advertising and transactional partnerships and for use in customized
communications and community solutions. We will be dependent on the efforts of
third parties to assist in commercializing these products and services. In
addition, our strategic partners may pursue alternative technologies or develop
alternative products either on their own or in collaboration with others,
including our competitors. We may not be able to develop or maintain these
strategic relationships, which could affect the performance of our business.
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We may also seek to enter into arrangements with third parties for
foreign commercialization of our products and services. Our ability to address
markets outside the Unites States is likely to depend in large part on our
ability to enter into strategic arrangements with third parties, as well as the
efforts of those third parties.
We Face Risks Associated with Acquisitions
A dynamic of the Internet industry has been that companies enter into
ventures and other arrangements with rapidity. We are constantly engaged in
discussions with other companies whose business may complement our existing
products and services, expand our customer base, or enhance our technological
capabilities. These discussions at some point may result in an acquisition.
Acquisitions involve a number of potential risks, including:
- difficulties in the assimilation of the acquired companies'
operations, technology, products and personnel;
- completion and integration of acquired in-process technology;
- diversion of management's resources;
- uncertainties associated with operating in new markets; and
- the potential loss of the acquired companies' key employees.
Even if successfully integrated, the acquired companies' operations
may not achieve levels of revenues or productivity comparable to those achieved
by our existing operations, or otherwise perform as expected.
In addition, in order to finance acquisitions or fund the operations
of any acquired business, we may issue additional shares of common stock or
debt, which could dilute your investment in 7th Level or add significant
interest expense. We may not be able to raise equity or debt financing on
acceptable terms. Acquisitions also may reduce our cash balances and/or result
in the amortization of expenses related to goodwill and other intangible assets
and other charges to operating results. Although we expect to analyze carefully
any proposed acquisition, any acquisition that is completed may not result in
long-term benefits to us or our stockholders.
We Face a Risk of System Failure or Inadequacy
Our operations depend to a significant extent on our ability to
maintain our computer and telecommunications systems. We must also protect our
systems against damage from fire, natural disaster, power loss,
telecommunications failure, or similar events. Our business depends in
significant part on our Corporate Operations Center in Richardson, Texas.
Although we have arranged for off-site back-up for our network control, this
measure does not eliminate the significant risk to our operations from a
natural disaster or system failure. In addition, growth of our customer base
may strain the capacity of our computer and telecommunications systems
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and/or lead to degradations in performance or system failure. Any damage to or
loss of our computer and telecommunications networks, including our Operations
Center could affect the performance of our business.
We Face Risks Associated with Patents and Proprietary Rights
Our success and ability to compete effectively will depend, in part,
on our ability to protect our intellectual property. We rely on a combination
of patent, copyright, trademark and trade secret laws, confidentiality and
nondisclosure agreements, and other measures to establish and protect our
proprietary technologies and processes. We have applied for several patents
which are necessary for the operation of our business. We may not be issued
these patents based on our applications or future applications, and even if
these patents are issued they may not be sufficiently broad to protect our
technology. In addition, any existing or future patents may not be adequate to
protect our interests. The laws of certain countries in which our products may
be sold or licensed may not protect our products and intellectual property
rights to the same extent as the laws of the United States.
We use employee and third-party confidentiality and non-disclosure
agreements to protect our trade secrets and unpatented know-how. We also
require our employees to assign to us all rights in any proprietary information
or technology made or contributed by the employee during his or her employment
with us. In addition, we regularly enter into non-disclosure agreements with
third parties, including consultants, potential strategic partners and
customers. Unfortunately, these methods cannot guarantee the confidentiality of
our trade secrets or unpatented know-how nor can they prevent third parties
from independently developing substantially equivalent proprietary information
or copying, developing, or otherwise obtaining and using our proprietary
information without authorization.
We may have to resort to litigation in the future to enforce our
intellectual property rights, to determine the validity and scope of the
proprietary rights of others, or to defend ourselves against claims of
infringement or invalidity by others. While we are not currently engaged in any
intellectual property litigation or proceedings, we may be in the future. An
adverse outcome in a litigation or similar proceeding could subject us to
significant liabilities to third parties, require disputed rights to be
licensed from others, or require us to cease marketing or using certain
products or services. The cost of addressing any intellectual property
litigation, both in legal fees and the diversion of management resources,
regardless of whether the claim is valid, could be significant
We Depend on Senior Management and Key Employees
We depend to a significant extent upon the performance of our
executive officers and other key personnel. We have not entered into employment
agreements with some of our executive officers and are not the beneficiary of
life insurance on any of them. Although we have agreements with certain members
of management not to compete with us, these agreements may not be enforceable.
In addition, we may not be successful in attracting and retaining qualified
personnel. The loss of the services of any of our executive officers or other
key
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employees, the failure to retain management and key employees, and the failure
to attract and retain qualified personnel, could have a material adverse affect
on us.
We Depend on Our Suppliers
Certain components of our products may be available from a limited
number of sources. Although to date we have been able to obtain adequate
supplies of these components, our inability in the future to obtain sufficient
sole or limited-source components or to develop alternative sources could
result in delays in product introductions or shipments. In addition, we depend
on the quality and reliability of the software components we use and the timely
delivery of these components by our suppliers. We have also elected to obtain
certain services from outside subcontractors, including animation production,
information systems maintenance, web development and software testing. Although
we believe that we can obtain alternate sources for some or all of these
components and services, the inability of any of these suppliers or
subcontractors to provide these services or products to us on a timely basis
could affect the performance of our business.
A Large Portion of Our Revenues Comes from a Small Number of Customers
At present, a relatively small group of our customers are responsible
for a significant percentage of our revenue. For example, royalties and
production fees from IBM, RealNetworks and Disney accounted for a high
percentage of last year's revenue. Although we believe that our current
relationships with our customers are generally good, the loss of one or more of
our major customers could affect the performance of our business.
The Price of Our Common Stock is Volatile
The market price of our common stock, like the stock of many other
technology companies, has been highly volatile because of the following
reasons:
- announcements of technological innovations and new products by
us or our competitors;
- developments in patent or other proprietary rights by us or our
competitors;
- fluctuations in our operating results;
- analyst reports, media stories, news broadcasts, and interviews;
and
- market conditions for technology stocks in general,
could have a significant impact on the future price of our common stock. The
stock market has from time to time experienced extreme price and volume
fluctuations that have particularly affected the market price for many
technology companies. Frequently the reasons are unrelated to the operating
performance of the companies affected.
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The price of our common stock might also be affected by the issuance
of additional shares of our common stock or preferred stock.
Certain Events Could Result in a Dilution of Your Ownership
The following factors could result in a dilution of your ownership in
7th Level:
- the issuance of additional shares of our common stock or
preferred stock to raise additional capital or finance
acquisitions;
- the issuance of additional shares of our common stock upon the
exercise or conversion of outstanding options, warrants and
shares of convertible preferred stock; or
- the issuance of additional shares of our common stock in
connection with the payment of dividends.
As of December 31, 1998, we had 23,763,622 shares of common stock
outstanding and 6,256,782 common stock equivalents including convertible
preferred stock, warrants and stock options. The exercise prices and conversion
prices, as the case may be, of the common stock equivalents range from $.01 and
$11.50 per share. These securities also provide for antidilution protection
upon the occurrence of stock splits, redemptions, mergers and other similar
transactions. If one or more of these events occurs the number of shares of our
common stock that may be acquired upon conversion or exercise would increase.
If converted or exercised these securities will result in a dilution to your
percentage ownership of our common stock.
This prospectus relates to the sale by Fletcher of shares of common
stock which they purchased under the Subscription Agreement. Initially,
Fletcher purchased 1,666,667 shares of common stock for $5,000,000, or $3.00
per share, and rights to purchase an additional 100,000 and 650,000 shares of
common stock for $.01 and $4.50, respectively. The Subscription Agreement
provides that at our election and as long as the market price of our common
stock is greater than $3.00 per share, Fletcher is obligated to purchase up to
an additional $5,000,000 of common stock at market prices when we elect to
exercise our right to sell shares to Fletcher. In addition, Fletcher may
receive additional shares of common stock if our common stock does not meet
certain price targets. Any additional issuances to Fletcher would further
dilute your percentage ownership of our common stock.
The Issuance of Preferred Stock Could Affect a Change of Control
Our board of directors has the authority to issue up to 100,000 shares
of preferred stock. The board of directors also has the authority to fix the
rights, including voting rights, of the preferred stock, without any further
vote or action by you and the other stockholders. Your rights will be subject
to, and may be adversely affected by, the rights of the holders of the
preferred stock that have been issued, or might be issued in the future.
Preferred stock provides
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desired flexibility in connection with possible acquisitions and other
corporate purposes. However, it could have the effect of making it more
difficult for a third party to acquire a majority of our common stock. This
could delay, defer or prevent a change in control. Holders of our preferred
stock may have other rights, including economic rights, senior to our common
stock. As a result, the existence and issuance our preferred stock could affect
the market price of our common stock.
We May Face Year 2000 Problems
We rely on computer hardware, software and related technology,
together with data, in the operation of our business. This technology and data
are used in creating and delivering our products and services, and in our
internal operations, including billing and accounting. We have initiated an
enterprise-wide program to evaluate the technology and data used in the
creation and delivery of our products and services, and in our internal
operations. We do not believe the costs related to the Year 2000 will be
material to our financial position. However, areas of potential problems,
primarily within the software and hardware systems provided by third parties,
have been identified and are scheduled for modification, replacement and
testing prior to Year 2000. These third parties may not be able to successfully
remediate their own Year 2000 issues over which we have no control. If we fail
to complete the implementation of our Year 2000 plan prior to the commencement
of the Year 2000, or our customers and suppliers fail to successfully remediate
their own Year 2000 issues, it could affect the performance of our business.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the common
stock described in this document. Fletcher will receive all of the proceeds
from the sale of the common stock described in this prospectus.
DIVIDEND POLICY
We have never declared cash dividends on our common stock. We intend
to retain any earnings to finance the development and growth of our business.
Accordingly, we do not anticipate that we will declare any cash dividends on
our common stock for the foreseeable future. Our payment of cash dividends, if
any, will depend upon our general financial condition and other factors deemed
relevant by our board of directors.
SELLING STOCKHOLDER
We entered into a Subscription Agreement with Fletcher on December 14,
1998 under which Fletcher purchased 1,666,667 shares of our common stock and
rights to purchase an additional 750,000 shares of our common stock. Fletcher
has not held any position of office or had any material relationship with us
during the past three years.
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The following table provides information regarding Fletcher's
ownership of our common stock as of January 18, 1999 and as adjusted to reflect
the sale of the shares of common stock offered under this prospectus. Unless we
have indicated otherwise, to our knowledge, Fletcher has sole voting and
investment power with respect to its securities. On January 18, 1999, we had
23,777,565 shares of common stock outstanding.
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<CAPTION>
NUMBER OF
BENEFICIAL OWNERSHIP SHARES TO BENEFICIAL OWNERSHIP
OF COMMON STOCK BE SOLD IN OF COMMON STOCK
PRIOR TO OFFERING(1) OFFERING AFTER OFFERING
------------------------ ---------- -----------------------
STOCKHOLDER NUMBER PERCENT NUMBER PERCENT
- ----------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Fletcher International
Limited 1,666,667 7.01% 2,416,667 0 0
</TABLE>
- ------------------------------
(1) This figure does not include Fletcher's rights to purchase 750,000 shares
of our common stock because Fletcher's rights are not exercisable within
the next 60 days to the extent they would cause Fletcher to beneficially
own more than 9.75% of the shares of our common stock. Beneficial
ownership as defined in the Exchange Act includes options and other
convertible securities which are exercisable within 60 days
PLAN OF DISTRIBUTION
We are registering the shares of our common stock covered by this
prospectus.
As used in this prospectus, Fletcher includes donees, pledgees,
transferees or other successors in interest who will hold Fletcher's shares
after the date of this prospectus. We are paying the costs, expenses and fees
of registering the common stock, but Fletcher will pay any underwriting or
brokerage commissions and similar selling expenses relating to the sale of the
shares of common stock.
Fletcher may sell our common stock at market prices prevailing at the
time of the sale, at prices related to the prevailing market prices, at
negotiated prices or at fixed prices, which may be changed. Fletcher may sell
some or all of their common stock through:
o ordinary brokers' transactions which may include long or short
sales;
o transactions involving cross or block trades or otherwise on the
Nasdaq National Market;
o purchases by brokers, dealers or underwriters as principal and
resale by those purchasers for their own accounts under this
prospectus;
o market makers or into an existing market for the common stock;
o other ways not involving market makers or established trading
markets, including direct
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<PAGE>
sales to purchasers or sales effected through agents;
o transactions in options, swaps or other derivatives; or
o any combination of the selling options described in this
prospectus, or by any other legally available means.
Fletcher may enter into hedging transactions with broker-dealers who
may engage in short sales of our common stock in the course of hedging the
positions they assume. Fletcher also may enter into option or other
transactions with broker-dealers that require the delivery by those
broker-dealers of the common stock. Thereafter, the shares may be resold under
this prospectus.
In its selling activities, Fletcher will be subject to applicable
provisions of the Exchange Act and the Exchange Act's rules and regulations,
including Regulation M, which may limit Fletcher's timing of purchases and
sales of our common stock.
Fletcher and any broker-dealers involved in the sale or resale of our
common stock may qualify as "underwriters" within the meaning of Section 2(11)
of the Securities Act of 1933, as amended. In addition, the broker-dealers'
commissions, discounts or concessions may qualify as underwriters' compensation
under the Securities Act. If Fletcher or any broker-dealer qualifies as an
"underwriter," then they will be subject to the prospectus delivery
requirements of section 153 of the Securities Act, which may include delivery
through the facilities of the NASD.
In conjunction with sales to or through brokers, dealers or agents,
Fletcher may agree to indemnify them against liabilities arising under the
Securities Act. We know of no existing arrangements between Fletcher, any other
shareholder, broker, dealer, underwriter or agent relating to the sale or
distribution of our common stock. We have also agreed to indemnify Fletcher and
certain related persons against certain liabilities, including liabilities
under the Securities Act.
In addition to selling its common stock under this prospectus,
Fletcher may:
o Transfer its common stock in other ways not involving market
makers or established trading markets, including by gift,
distribution, or other transfer; or
o Sell its common stock under Rule 144 of the Securities Act, if
the transaction meets the requirements of Rule 144.
We will amend or supplement this prospectus if required under the
Securities Act. We have agreed to keep the Registration Statement effective
until certain events occur which are described in the Subscription Agreement.
If Fletcher sells its shares of common stock in accordance with this
prospectus, then the legends that restrict the transferability of its common
stock will no longer be necessary. Accordingly, the new certificates will be
issued to the transferee without restrictive legends.
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<PAGE>
Under the securities law of certain states, the common stock offered
by Fletcher may only be sold in those states using registered or licensed
brokers or dealers.
LEGAL MATTERS
Swidler Berlin Shereff Friedman, LLP, of New York, New York, will pass
upon the legality of the shares of common stock offered under this prospectus.
EXPERTS
The consolidated financial statements and financial statement schedule
of 7th Level, as of December 31, 1997 and 1996, and for each of the years in
the three-year period ended December 31, 1997, have been incorporated by
reference herein and in the Registration Statement in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as
experts in accounting and auditing.
The report of KPMG Peat Marwick LLP contains an explanatory paragraph
that states that 7th Level has suffered recurring losses since inception and
does not currently have sufficient resources to meet its anticipated operating
requirements during 1998, which conditions raise substantial doubt about 7th
Level's ability to continue as a going concern. The consolidated financial
statements and financial statement schedule do not include any adjustments that
might result from the outcome of this uncertainty.
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Securities and Exchange Commission Registration Fee......... $1,901.29
Printing and Engraving...................................... 4,000.00
Legal Fees and Expenses..................................... 10,000.00
Accounting Fees and Expenses................................ 1,000.00
Miscellaneous............................................... 1,000.00
Total ............................................. 17,901.29
All of the above items, except the registration fee, are estimated.
All expenses incurred in connection with this offering will be borne by 7th
Level.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The indemnification of officers and directors of the Registrant is
governed by Section 145 of the General Corporation Law of the State of Delaware
(the "DGCL") and the Restated Certificate of Incorporation and By-Laws of the
Registrant. Subsection (a) of DGCL Section 145 empowers a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the corporation) by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by the person in connection with
such action, suit or proceeding if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the person's conduct was
unlawful.
Subsection (b) of DGCL Section 145 empowers a corporation to indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that the
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by the person in connection with the defense or
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<PAGE>
settlement of such action or suit if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall be made
in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent
that the Delaware Court of Chancery or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court
of Chancery or such other court shall deem proper.
DGCL Section 145 further provides that to the extent that a present or
former director or officer is successful, on the merits or otherwise, in the
defense of any action, suit or proceeding referred to in subsections (a) and
(b) of Section 145, or in defense of any claim, issue or matter therein, such
person shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection therewith. In all
cases in which indemnification is permitted under subsections (a) and (b) of
Section 145 (unless ordered by a court), it shall be made by the corporation
only as authorized in the specific case upon a determination that
indemnification of the present or former director, officer, employee or agent
is proper in the circumstances because the applicable standard of conduct has
been met by the party to be indemnified. Such determination must be made, with
respect to a person who is a director or officer at the time of such
determination, (1) by a majority vote of the directors who are not parties to
such action, suit or proceeding, even though less than a quorum, or (2) by a
committee of such directors designated by majority vote of such directors, even
though less than a quorum, or (3) if there are no such directors, or if such
directors so direct, by independent legal counsel in a written opinion, or (4)
by the stockholders. The statute authorizes the corporation to pay expenses
incurred by an officer or director in advance of the final disposition of a
proceeding upon receipt of an undertaking by or on behalf of the person to whom
the advance will be made, to repay the advances if it shall ultimately be
determined that he was not entitled to indemnification. DGCL Section 145 also
provides that indemnification and advancement of expenses permitted thereunder
are not to be exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any By-law,
agreement, vote of stockholders or disinterested directors, or otherwise. DGCL
Section 145 also authorizes the corporation to purchase and maintain liability
insurance on behalf of its directors, officers, employees and agents regardless
of whether the corporation would have the statutory power to indemnify such
persons against the liabilities insured.
Article Eighth of the Restated Certificate of Incorporation of the
Registrant, as amended (the "Certificate"), provides that no director of the
Registrant shall be personally liable to the Registrant or its stockholders for
monetary damages for breach of fiduciary duty as a director except for
liability (i) for any breach of the director's duty of loyalty to the
Registrant or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL (involving certain unlawful dividends or stock
purchases or redemptions), or (iv) for any transaction from which the director
derived an improper personal benefit.
Article Tenth of the Registrant's Certificate entitles directors and
officers of the Registrant to indemnification to the fullest extent permitted
by Section 145 of the DGCL, as the
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<PAGE>
same may be supplemented from time to time. The Certificate further provides
that the Registrant may, to the fullest extent authorized by the Board of
Directors, indemnify any employee or agent of the Registrant.
Pursuant to Section 145(g) of the DGCL, the Registrant's By-Laws, as
amended, authorize the Registrant to obtain insurance to protect officers and
directors from certain liabilities, including liabilities against which the
Registration cannot indemnify its officers and directors. The Registrant
maintains a primary directors and officers liability and company reimbursement
policy which, among other things, provides for payment up to $3 million on
behalf of any of the Registrant's past, present or future directors or officers
against Loss (as defined in such policy). The Registrant also maintains a
supplemental insurance and company reimbursement policy providing for, among
other things, payment up to $2 million on behalf of any of the Registrant past,
present or future directors or officers against Loss (as defined in such
policy).
ITEM 16. EXHIBITS
The following exhibits are filed as part of this Amendment No. 1 to
the Registration Statement.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
5.1* Opinion of Swidler Berlin Shereff Friedman, LLP.
23.1* Consent of KPMG Peat Marwick LLP.
23.2* Consent of Swidler Berlin Shereff Friedman, LLP (included in
Exhibit 5.1).
24.1* Power of Attorney.
* Previously filed on December 29, 1998.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
in the
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<PAGE>
aggregate, represent a fundamental change in the information set
forth in this Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from the
low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Securities
and Exchange Commission pursuant to Rule 424(b) promulgated
under the Securities Act of 1933 if, in the aggregate, the
changes in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in this Registration
Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement;
Provided, however, that paragraphs (a)(1)(i) and (ii) shall not apply
if the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by 7th Level pursuant
to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in this Registration Statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered herein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in this Registration
Statement shall be deemed to be a new registration statement relating to the
securities offered herein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling
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<PAGE>
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all the requirements for filing on Form S-3 and has duly caused this Amendment
No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, hereunto duly authorized, in the City of Richardson, State of
Texas, on this 1st day of February, 1999.
7TH LEVEL, INC.
By: /s/ Richard S. Merrick
------------------------------
Richard S. Merrick
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No 1 to the Registration Statement has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Richard S. Merrick Chief Executive Officer and Director February 1, 1999
- --------------------------------- (Principal Executive Officer)
Richard S. Merrick
/s/ Donald Schupak Chairman of the Board of Directors and February 1, 1999
- --------------------------------- Director (Principal Financial and
Donald Schupak Accounting Officer)
* Vice Chairman of the Board of Directors February 1, 1999
- --------------------------------- and Director
Robert Alan Ezrin
* Director February 1, 1999
- ---------------------------------
Merv Adelson
* Director February 1, 1999
- ---------------------------------
James A. Cannavino
</TABLE>
*By: /s/ Richard S. Merrick
----------------------------
Richard S. Merrick
Attorney-in-Fact
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<PAGE>
7TH LEVEL, INC.
FORM S-3
REGISTRATION STATEMENT
EXHIBIT INDEX
Exhibit
-------
5.1* Opinion of Swidler Berlin Shereff Friedman, LLP
23.1* Consent of KPMG Peat Marwick LLP
23.2* Consent of Swidler Berlin Shereff Friedman, LLP (included
in Exhibit 5.1)
24.1* Power of Attorney
- ----------------
* Previously filed on December 29, 1998.
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