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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 15, 1999
7TH LEVEL, INC.
(Exact name of registrant as specified in itsc charter)
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Delaware 0-24936 75-2480669
(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation) Identification
Number)
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1201 Richardson Drive, Suite 277
Richardson, Texas 75080
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 498-8100
Not Applicable
(Former name or former address, if changed since last report.)
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Item 4. Changes in Registrant's Accountant.
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As of January 15, 1999, the Registrant retained the services of Arthur
Andersen LLP as their principal accountant to audit the Registrant's financial
statements. The Registrant dismissed KPMG LLP as their principal accountant.
The decision to change accountants was recommended by the Board.
KPMG LLP's report on the consolidated financial statements of the
Registrant and subsidiaries as of December 31, 1997 and 1996 and for each of the
years in the three-year period ended December 31, 1997 contained a separate
paragraph stating that "the Company 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 the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in note 3. The
consolidated financial statements and financial statement schedule do not
include any adjustments that might result from the outcome of these
uncertainties."
On April 20, 1998, the Registrant received commitments for an aggregate $10
million financing ($4.5 million principal amount of senior secured promissory
notes and $5.5 million liquidation preference of non-convertible preferred
stock). The terms of the financing provided that upon stockholder approval the
non-convertible preferred stock would be automatically exchanged into
convertible preferred stock and the holders of the senior secured promissory
notes would have the option of exchanging their notes into convertible preferred
stock. On July 13, 1998, an aggregate of $10 million liquidation preference of
the Registrant's Series B Convertible Preferred Stock was issued to the holders
of the senior secured promissory notes and non-convertible preferred stock.
Between April 20, 1998 and July 13, 1998, the market price of the Registrant's
common stock increased such that the conversion price of the Series B
Convertible Preferred Stock was greater than the market price of the Common
Stock on April 20, 1998 but less than the market price of the common stock on
July 13, 1998. Due to the beneficial conversion feature of the Series B
Convertible Preferred Stock, the Registrant was required to increase the loss
attributable to common stockholders for the quarter ended September 30, 1998.
The one-time occurrence was accounted for similar to a non-cash dividend and had
no effect on the Company's net loss or aggregate stockholders' equity.
KPMG LLP informed the Registrant about the accounting treatment of the
beneficial conversion feature. Management then requested KPMG LLP to look into
alternative accounting treatments. Management believes that its inquiries and
discussions regarding this matter did not constitute a disagreement. However,
KPMG LLP has informed the Registrant that in view of all the circumstances
surrounding the discussions about this issue this matter constitutes a
disagreement as contemplated by Item 4 of Form 8-K and Item 304(a)(1) of
Regulation S-K. Upon KPMG LLP informing the Registrant that in KPMG's opinion
there was no alternative accounting treatment, the Registrant followed the
advice of KPMG LLP and accounted for the Series B Convertible Preferred Stock as
described above to the satisfaction of KPMG LLP.
The Registrant has authorized KPMG LLP to respond fully to the inquiries of
Arthur Andersen LLP concerning the subject matter of the beneficial conversion
feature.
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Item 7. Financial Statements and Exhibits.
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(c) Exhibits.
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16.1 KPMG LLP letter re change in certifying accountant.
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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.
7TH LEVEL, INC.
By: /s/ RICHARD S. MERRICK
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Richard S. Merrick
Chief Executive Officer
Date: January 22, 1999
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INDEX TO EXHIBITS
Exhibit No.
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16.1 KPMG LLP letter re change in certifying accountant.
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Exhibit 16.1
KPMG LLP letterhead
January 22, 1999
Securities and Exchange Commission
Washington, D.C. 20549
Ladies and Gentlemen:
We were previously principal accountants for 7th Level, Inc. and under the date
of January 30, 1998, we reported on the consolidated financial statements of 7th
Level, Inc. and subsidiaries as of December 31, 1997 and 1996 and for each of
the years in the three-year period ended December 31, 1997. On January 15, 1999,
our appointment as principal accountants was terminated. We have read 7th Level,
Inc.'s statements included under Item 4 of its Form 8-K dated January 15, 1999,
and agree with such statements, except that we are not in a position to agree or
disagree with 7th Level, Inc.'s statement that the change in principal
accountants was recommended by the Company's Board of Directors.
Very truly yours,
/s/ KPMG LLP
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KPMG LLP
