<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-24936
7TH LEVEL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2480669
(State of incorporation) (I.R.S. Employer Identification No.)
1110 EAST COLLINS BOULEVARD
SUITE 122
RICHARDSON, TEXAS 75081
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 498-8100
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained here, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
-----
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 28, 1997 was approximately $31,147,599. As of
February 28, 1997, there were 13,594,522 outstanding shares of the registrant's
common stock.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Board of Directors consists of two persons who are employees of the
Company and three persons who are outside directors and there are currently two
vacant positions. The executive officers and directors of the Company, and
their ages as of May 1, 1997, are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- --- ----------------------------------------------
<S> <C> <C>
Donald Schupak............. 54 Chairman of the Board and Director
Robert Alan Ezrin.......... 48 President, Chief Executive Officer and
Director
W. Scott Page.............. 45 Executive Vice President of Production and
Director
Merv Adelson............... 67 Director
James A. Cannavino......... 52 Director
Paul Bodnoff............... 40 Vice President of Marketing and Office of the
President
David W. Craig............. 53 Chief Financial Officer
Jeffrey Croson............. 38 Senior Vice President of Sales and Office of
the President
Douglas W. Gillespie....... 35 Senior Vice President of Research and
Development and Office of the President
</TABLE>
Directors of the Company are elected to serve one-year terms and until
their successors have been elected and qualified. Executive officers serve at
the discretion of the Board of Directors.
PRINCIPAL OCCUPATIONS OF DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are descriptions of the principal occupations and business
experience of the Company's executive officers and directors.
Donald Schupak currently serves as Chairman of the Board and Director. He
has been a member of the Board of Directors since January 1997 and has been
Chairman since March 1997. Mr. Schupak is the Chief Executive Officer of Schupak
Group, an organization that provides strategic planning, management consulting
and corporate services to corporations worldwide. Mr. Schupak has been with
Schupak Group since 1990. On March 27, 1997, he became the Chairman of the Board
for Danskin, Inc. He served as Chairman and Chief Executive Officer at Horn &
Hardart Company from 1988 to 1990. Mr. Schupak is also a member of the Advisory
Board of the Maxwell School of Citizenship and Public Affairs at Syracuse
University.
Robert Alan Ezrin currently serves as President, Chief Executive Officer
and Director; Mr. Ezrin is a founder of the Company and has served as President
and Director since November 1995 and has served as Chief Executive Officer since
March 1997. Mr. Ezrin served as Vice President, Co-Chairman of the Board and
Director of the Company since its inception in April 1993 until November 1995.
Mr. Ezrin served as Executive Vice President of Production from April 1994 to
November 1995. From 1984 through 1994, Mr. Ezrin was a Producer with Lozem
Productions, Inc. Mr. Ezrin has more than 25 years of experience in the
international entertainment business, producing music, video and television
projects for numerous internationally known stars such as Pink
2
<PAGE>
Floyd, Rod Stewart, KISS, Peter Gabriel and Roger Daltry. Mr. Ezrin is Chairman
of the Board of Directors of Metropolitan Los Angeles Cities in Schools.
W. Scott Page is a founder of the Company and has been a Vice President and
Director of the Company since its inception in April 1993 and has served as
Executive Vice President of Production since November 1995. Mr. Page served as
Executive Vice President of Creative from March 1994 until November 1995. Prior
to joining the Company, from November 1988 through April 1993, Mr. Page was
President of The Walt Tucker Group, a post-production studio that he founded
which specialized in long and short form music videos and graphics
merchandising. Mr. Page also was a tenor saxophonist and guitarist for the
musical rock groups Pink Floyd, Supertramp and others.
Merv Adelson has served as a Director of the Company since February 1994.
Since 1989, Mr. Adelson has been the owner of East-West Capital Associates,
Inc., a merchant banking and venture capital company, and currently serves as
its Chairman of the Board and Chief Executive Officer. Mr. Adelson co-founded
the predecessor of Lorimar Telepictures in 1969, which was sold to Warner Bros.
in 1989. Mr. Adelson is also a director of Time Warner, Inc.
James A. Cannavino has served as a Director of the Company since January
1997. He is currently the President, Chief Executive Officer and a Director of
Perot Systems Corporation. Mr. Cannavino served as President, Chief Operating
Officer and Director of Perot Systems from September 1995 to September 1996.
Mr. Cannavino has more than 30 years of experience in the computer and
information technology industries. Prior to joining Perot Systems in September
1995, he was a private investor from April 1995 to September 1995. Previously,
Mr. Cannavino was at IBM Corporation, where he was Senior Vice President of
Strategy and Development from 1993 to April 1995, and prior to this, he served
as Senior Vice President and General Manager of the Personal Systems Group at
IBM from 1991 to 1993.
Paul Bodnoff has been the Company's Vice President of Marketing since
January 1997, and in March 1997, he was appointed to the Office of the
President. Mr. Bodnoff co-founded and served as President of Future Endeavors,
a Canadian multimedia company from February 1994 to December 1996. Prior to
founding Future Endeavors, Mr. Bodnoff was a self-employed private investor from
September 1993 to February 1994. From 1991 through September 1993, Mr. Bodnoff
served as Director of Investor and Industry Relations for Corel Corporation and
before that he served in various marketing capacities for Corel; including
Marketing Director for the multi-award-winning CorelDRAW!
David W. Craig joined the Company as Chief Financial Officer in March 1996.
Prior to joining 7th Level, Mr. Craig was with Convex Computer Corporation, a
supercomputer firm which he joined in 1984, where he most recently served as
Vice President, Finance and Chief Financial Officer. Prior to joining Convex,
Mr. Craig was employed in a variety of financial management positions at Texas
Instruments.
Jeffrey B. Croson was appointed to the Office of the President and Senior
Vice President of Sales, in March 1997, from his former position of Vice
President of Sales which he had held since September 1993. Mr. Croson
previously served as Director of Channel Sales for Micrografx, Inc. between
November 1991 and September 1993. Prior to that he served as Channel Sales
Manager for Lotus Development Corporation.
Douglas W. Gillespie has been Senior Vice President of Research and
Development since November 1996. In March 1997, Mr. Gillespie was appointed to
the Office of the President. From November 1995 to November 1996 he served as
the Vice President of Research and Development and Director of System
Development from April 1995 to November 1995. Mr. Gillespie is one of the
original software engineers at 7th Level and has seventeen years of industry
experience. Prior to joining the Company in May 1993, he served as a senior
software engineer at Micrografx, Inc. from December 1987 to May 1993. Prior to
Micrografx he was an independent consultant to General Motors and other national
corporations.
3
<PAGE>
CERTAIN SIGNIFICANT EMPLOYEES
Set forth below are the names, ages (as of May 1, 1997), positions and a
brief description of the experience of certain significant employees of the
Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- --- ----------------------------------------------
<S> <C> <C>
St. John Bain.............. 40 President of PyroTechnix, Inc.
Ulrike Billion............. 33 Managing Director of Europe
Gary Griggs................ 42 Vice President of Strategic Alliances
Dan Kuenster............... 41 Vice President of Animation
Michael Lynch.............. 32 Vice President of 3D Games
Richard Merrick............ 41 Vice President of Strategic Technology
Veronica Murdock........... 34 Senior Vice President of Operations, Los
Angeles
Thomas Randolph............ 36 President of 7th Level Asia Pacific, Inc. and
Vice President of Strategic Acquisitions
Carolyn Rominger........... 39 Treasurer and Controller
Mark Steeves............... 39 Vice President of Production Technology
</TABLE>
St. John Bain joined the Company as President of 7th Level's PyroTechnix
subsidiary when it was acquired by the Company in February 1996. Mr. Bain had
previously served as President of PyroTechnix, Inc., formally known as Computer
Presentations, Inc. ("CPI"), since 1992 and Vice President of Sales and
Marketing for CPI prior to that.
Ulrike Billion was named Managing Director of Europe in July 1996. She was
the General Manager of Central Europe from December 1994 until July 1996. Prior
to joining the Company in December 1994, Ms. Billion served as Managing Director
of Micrografx Central Europe, GmbH from 1989 to 1994 and before that she served
as Sales and Marketing Manager for EGGS Computer Graphics in Munich, Germany.
Gary Griggs was named Vice President of Strategic Alliances in March 1997.
Prior to this, Mr. Griggs served as the Company's Director of OEM Sales since
December 1994. From March 1992 to December 1994, he was with Micrografx, Inc.,
first as OEM Account Manager, then as Crayola Launch Sales Manager and
ultimately, OEM Business Manager. Previously, Mr. Griggs worked for Lotus
Development Corporation from 1987 to 1992.
Dan Kuenster has been Vice President of Animation since November 1995 and
Director of Animation of the Company since April 1994. Prior to joining the
Company, Mr. Kuenster was President of Kuenster Bros. Animation from June 1991
to April 1994. From 1980 to 1990, Mr. Kuenster was a story board artist and an
animating director of the Don Bluth Studios for such films as An American Tail,
The Land Before Time, All Dogs go to Heaven and Rock-A-Doodle. Between 1978 and
1980, Mr. Kuenster received his animation training at the Walt Disney Studios,
where he worked on The Fox and the Hound under the guidance of Eric Larson.
Michael Lynch was named Vice President of 3D Games in March 1997. Prior to
this he was the Vice President of Production since November 1995. Mr. Lynch
joined the Company as a producer in 1994. Prior to joining the Company, Mr.
Lynch was self-employed and has fifteen years experience in the entertainment
industry, starring in numerous Broadway and television shows, including Les
Miserables, Fiddler On the Roof, General Hospital, Dave's World and Caroline In
the City.
Richard Merrick was named Vice President of Strategic Technology in March
1997. He was the Vice President of Technology from November 1995 until March
1997 and before that Vice President of Research and Development of the Company
since April 1993. Mr. Merrick previously served as Director of System
Development for Micrografx, Inc. between June 1989 and February 1993. Prior to
joining Micrografx, he served as Manager of Research and Development for
Computrac, Inc., a software company, from May 1984 to June 1989.
4
<PAGE>
Veronica Murdock was appointed as Senior Vice President of Operations, Los
Angeles in March 1997. Ms. Murdock had served as Vice President of Los Angeles
Studio Operations from November 1995 to March 1997 and joined the Company as
studio manager in April 1995. Prior to joining the Company, Ms. Murdock served
as Director of Digital Operations for Digital Domain from July 1994 to April
1995, where she was responsible for production staff and studio resources, as
well as software development for the production of visual effects and digital
animation for feature films including Apollo 13, commercials and other media
product contracts. Prior to Digital Domain, Ms. Murdock served as Vice
President, Production at Digital Magic from 1991 to 1994.
Thomas Randolph joined the Company as President of 7th Level's Asia Pacific
subsidiary and Vice President of Strategic Acquisitions when the Company
acquired the Lanpro entities, the predecessor entities to that subsidiary, in
December 1995. Mr. Randolph previously served as President of Lanpro
Corporation since its incorporation in 1993 and was the owner of the predecessor
sole proprietorship to Lanpro Corporation since 1987. He has fifteen years of
experience in the Asian and US markets in localization and distribution of
software, strategic acquisitions and network technology and served as a
consultant to numerous multi-national companies including Fujitsu and TDK.
Carolyn Rominger was named Treasurer and Controller in March 1997. Ms.
Rominger served as Treasurer from February 1994 to March 1997. Prior to joining
the Company, Ms. Rominger was Manager of Treasury and Taxes at Value-Added
Communications, Inc. from January 1993 to February 1994 and as an operations
analyst at Micrografx, Inc. from November 1991 to May 1993. Ms. Rominger is a
certified public accountant and was previously employed by Arthur Andersen & Co.
Mark Steeves has been Vice President of Production Technology of the
Company since November 1995. He was the Vice President of Production from March
1994 to November 1995. Mr. Steeves previously served as Executive Producer for
MetroLight from December 1990 to March 1994. From December 1987 to December
1990, he served as Director of New Media for MetroLight. Mr. Steeves was the
co-developer of the Annie technology and system.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
The Company's directors who are officers of the Company receive no
compensation for their services as directors. The Company's outside directors
receive $10,000 per annum, plus $2,000 per annum for each committee membership,
and they are reimbursed for their out-of-pocket expenses incurred in attending
board meetings. Additionally, pursuant to the Non-Employee Directors' Stock
Option Plan, upon first being elected to the Board of Directors each outside
director is granted an option to purchase 20,000 shares of Common Stock. In
addition, an option to purchase 5,000 shares is granted to each outside director
on the date of each annual meeting. The exercise prices are equal to the fair
market value of such underlying shares on the date of grant; however, Merv
Adelson, an outside director first elected prior to adoption of the Non-Employee
Directors' Stock Option Plan, was granted an option to purchase 10,000 shares of
Common Stock exercisable at a price equal to the fair market value, as
determined by the Board of Directors, of the underlying shares on the date he
was actually elected. The initial options granted under the Non-Employee
Directors' Stock Option Plan vest over a four-year period in 25% increments
beginning on the first anniversary of date of grant. Each annual 5,000 share
option grant is fully vested as of the date of the grant. As of April 15, 1997,
the Non-Employee Directors' Plan has 125,000 shares of Common Stock authorized
to be issued and options to purchase 65,000 of such shares of Common Stock are
outstanding.
In addition to the above mentioned grants Donald Schupak and James A.
Cannavino have each been granted additional options for 75,000 shares of Common
Stock outside of the Non-Employee Directors' Stock Option Plan (collectively
"the Additional Options"). These grants were issued on January 16, 1997, the
date they were elected to the Board of Directors, and are fully vested as of
that date.
5
<PAGE>
At the appropriate time, as determined by the Company's Board of Directors,
the Company shall register for issuance under the Securities Act of 1933, as
amended (the "Act"), the shares of Common Stock acquired upon exercise of the
Additional Options, and to keep such registration effective thereafter
throughout the period the Additional Options are exercisable. In the absence of
such effective registration or an available exemption from registration under
the Act, issuance of shares of Common Stock acquirable upon exercise of the
Additional Options will be delayed until registration of such shares is
effective or an exemption from registration under the Act is available. In the
event exemption from registration under the Act is available upon exercise of
the Additional Options, the holder, if requested by the Company to do so, will
execute and deliver to the Company in writing an agreement containing such
provisions as the Company may require to assure compliance with applicable
securities laws.
Mr. Schupak is taking an active role in the executive management of the
Company and has assumed responsibility for formulation of a strategic plan for
the Company. The Board of Directors has agreed in principle to grant to Mr.
Schupak a significant number of warrants or options to purchase a number of
shares; however, the terms of this compensation agreement had not been finalized
at the time of this filing.
In March 1997, the Company and The Schupak Group entered into an
agreement whereby the Company will pay $12,000 per month to the Schupak Group
for the services of Donald Schupak and other employees of the Schupak Group.
Additionally, Mr. Schupak is entitled to the reimbursement of reasonable travel
and other expenses incidental to the performance of his duties.
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE. The following table summarizes the
compensation paid during 1996, 1995 and 1994 to the Company's Chief Executive
Officer and each person serving as an executive officer on December 31, 1996
(collectively, the "Named Executive Officers")(1).
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION:
ANNUAL COMPENSATION SECURITIES
NAME AND PRINCIPAL FISCAL ------------------- UNDERLYING
POSITION YEAR SALARY BONUS OPTIONS (2) OTHER (3)
------------ ------ ------ ----- ---------- --------
<S> <C> <C> <C> <C> <C>
George D. Grayson (4)................... 1996 $251,083 $ - 100,000 $12,432
Chief Executive Officer and 1995 43,576 100,000 20,000 (5) 1,000
Chairman of the Board 1994 25,000 - - -
Robert Alan Ezrin....................... 1996 263,083 - 50,000 17,378
President and Director 1995 250,500 50,000 10,000 (5) 15,405
1994 155,166 - - -
W. Scott Page........................... 1996 187,667 - - 17,227
Executive Vice President 1995 152,583 - - 15,260
of Production and Director 1994 105,156 - - -
David R. Henkel (4) (6)................. 1996 251,083 - 25,000 32,796 (7)
Chief Operating Officer 1995 237,500 50,000 10,000 (5) 55,623 (7)
and Director 1994 163,731 100,000 90,000 -
David W. Craig.......................... 1996 135,388 - 70,000 3,180
Chief Financial Officer 1995 - - - -
1994 - - - -
</TABLE>
____________________
(1) This table does not include compensation for Messrs. Paul Bodnoff, Jeffrey
Croson and Douglas W. Gillespie who were elected as executive officers
subsequent to December 31, 1996.
6
<PAGE>
(2) Represents the number of options (each to acquire one share of Common Stock)
granted pursuant to the 7th Level, Inc. Amended and Restated Incentive Stock
Option Plan ("the Incentive Stock Option Plan").
(3) Includes auto allowance, Company match contributions to the Company's 401(k)
Plan and dollar value of life insurance premiums paid by the Company.
(4) Resigned March 10, 1997.
(5) This table does not reflect options granted in 1995 to purchase 100,000
50,000 and 25,000 shares at exercise prices of $16.75, $16.00 and $16.00 per
share that were held by George D. Grayson, Robert Alan Ezrin and David R.
Henkel, respectively, because such options were canceled and new grants were
made in 1996 as shown.
(6) This table does not reflect an option to purchase 36,000 shares of Common
Stock from a founding stockholder which Mr. Henkel acquired in January 1994
and exercised in February 1994 because such option was not granted by the
Company.
(7) Includes the dollar value difference between the price paid and the fair
market value of Common Stock upon exercise of options granted under the
Incentive Stock Option Plan.
OPTION GRANTS IN 1996. The following table sets forth information
regarding the stock option grants the Company made to the Named Executive
Officers during 1996.
<TABLE>
<CAPTION>
% OF TOTAL
OPTIONS POTENTIAL REALIZED VALUE
NUMBER OF GRANTED TO AT ASSUMED ANNUAL
SECURITIES EMPLOYEES RATES OF STOCK PRICE
UNDERLYING IN EXERCISE EXPIRATION APPRECIATION FOR OPTION TERM
NAME OPTIONS 1996 PRICE DATE 5% 10%
- ------------------ ---------- ---------- -------- ---------- --- ----
<S> <C> <C> <C> <C> <C> <C>
George D. Grayson (1) (2) 59,416 4.1% $6.05 10/22/06 $139,914 $486,744
40,584 2.8% 5.50 10/22/06 28,771 244,136
Robert Alan Ezrin (1) 50,000 3.5% 6.05 10/22/06 80,241 372,107
W. Scott Page - - - - - -
David R. Henkel (1) (2) 25,000 1.7% 5.50 10/22/06 36,473 169,140
David W. Craig 70,000 5.2% 5.50 10/22/06 102,124 473,591
</TABLE>
____________________
(1) This table does not reflect options to purchase 20,000 10,000 and 10,000
shares at exercise prices of $6.05, $6.05 and $5.50 per share that were held
by George D. Grayson, Robert Alan Ezrin and David R. Henkel, respectively,
that were initially granted in 1995 for $8.25, $8.25, and $7.50,
respectively, and repriced in 1996.
(2) Resigned March 10, 1997.
OPTION EXERCISES AND FISCAL YEAR END VALUES. The following table provides
information about exercised stock options held by the Named Executive Officers
on December 31, 1996. During 1996, only one of the Named Executive Officers
exercised stock options granted by the Company.
<TABLE>
<CAPTION>
NUMBER OF
SHARES SECURITIES UNDERLYING VALUE OF UNEXERCISED
ACQUIRED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ON VALUE AT DECEMBER 31, 1996 AT DECEMBER 31, 1996(1)
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------- -------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
George D. Grayson (2) - - 5,000 115,000 - (3) - (3)
Robert Alan Ezrin - - 2,500 57,500 - (3) - (3)
W. Scott Page - - - - - -
David R. Henkel (2) 15,000 $174,150 (4) 17,500 62,500 $54,150 (3) $108,300 (3)
David W. Craig - - - 70,000 - - (3)
</TABLE>
____________________
(1) Value based on the December 31, 1996 closing price of the Company's Common
Stock on the NASDAQ National Market System of $3.75 per share.
(2) Resigned March 10, 1997
(3) Underlying options that are not in-the-money are not valued in this table.
(4) Value based on the January 26, 1996 (date of exercise) closing price of the
Company's Common Stock on the NASDAQ National Market System of $11.75 per
share.
7
<PAGE>
EMPLOYMENT CONTRACTS
The Company had employment agreements with George D. Grayson (the "Grayson
Agreement") and David R. Henkel (the "Henkel Agreement").
The Grayson Agreement provided that Mr. Grayson was entitled to cash
compensation of at least $25,000 per annum plus a bonus pursuant to any bonus
plan of the Company. The Grayson Agreement was terminable by the Company upon
Mr. Grayson's death or incapacity or with the vote of five of six disinterested
directors. Upon any termination of Mr. Grayson upon a vote of the Board of
Directors, Mr. Grayson would be entitled to receive accrued salary, bonus and
other benefits and the Company would repurchase from Mr. Grayson any shares of
Common Stock which Mr. Grayson desired to sell within twelve months of his
termination (such twelve month period to be extended if Mr. Grayson was delayed
or prohibited by state or federal securities laws from selling such stock). The
Grayson Agreement was terminable by Mr. Grayson upon ninety days notice. The
Grayson agreement had an original term of five years commencing April 28, 1993
and automatically renewed for successive five year periods unless earlier
terminated in accordance therewith.
On March 10, 1997, Mr. Grayson resigned from his positions as officer,
director and employee of the Company. In connection with such resignation, the
Company agreed to continue paying Mr. Grayson's salary at the then current
annual level of $250,000 for a ninety day period. Additionally, the Company
agreed to an early debt repayment to Mr. Grayson for debt issued February 11,
1994 as a 7% Subordinated Convertible Note. The Company agreed to pay $125,000
to Mr. Grayson as full repayment of $135,142 principal and accrued interest of
approximately $1,000.
The Henkel Agreement provided that Mr. Henkel was entitled to receive cash
compensation of $250,000 per year. Mr. Henkel was also entitled to participate
in any cash bonus plan for key executive officers of the Company adopted
beginning in 1995. The Henkel Agreement provided that if the Company terminated
his employment for any reason other than gross negligence, he would be paid a
severance equal to six months of his current salary (excluding bonuses).
On March 10, 1997, Mr. Henkel resigned from his positions as an officer and
director of the Company. Mr. Henkel and the Company agreed that Mr. Henkel would
provide additional consulting services to the Company through November, 1997 for
which Mr. Henkel will be paid at the rate of $20,833 per month.
INCENTIVE STOCK OPTION PLAN
General
Pursuant to the Incentive Stock Option Plan, the Company may grant
incentive stock options ("Incentive Stock Options" or "ISOs") as defined in
section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and
options that are not intended to be ISOs ("Non-Qualified Stock Option" or
"NQSO"). The Incentive Stock Option Plan covers an aggregate of 3,200,000
shares of Common Stock, subject to adjustment in the event of stock dividends,
stock splits and certain other events. With the exception of 90,000 options
which vest over three years, all options granted pursuant to the Incentive Stock
Option Plan vest over four years.
8
<PAGE>
Administration
The Compensation Committee of the Board of Directors of the Company
(the "Compensation Committee") administers the Incentive Stock Option Plan and,
as such, selects employees to receive options, determines the type and size of
options, determines when options will be granted, and determines the terms of
each option.
Option Share Repurchase Agreement
In February 1994, the Company entered into an Option Share Repurchase
Agreement (the "Repurchase Agreement") with George D. Grayson, Robert A. Ezrin
and W. Scott Page (collectively, the "Contracting Stockholders"). Pursuant to
the Repurchase Agreement, upon the exercise of certain outstanding options
granted under the Incentive Stock Option Plan, the Company has the right to
repurchase the same number of shares of Common Stock from the Contracting
Stockholders at $0.003 per share. In the aggregate, 1,060,500 options and
corresponding shares of Common Stock held by the Contracting Stockholders are or
have been subject to the Repurchase Agreement (as amended). At December 31,
1996, 991,500 options associated with the Option Share Repurchase Agreement had
been granted, of which 434,750 had been exercised and 435,000 had been canceled.
The Company has satisfied, and intends to continue to satisfy, its obligation to
issue shares of Common Stock upon any exercise of an option associated with the
Repurchase Agreement by delivering to the exercising optionee(s) shares of
treasury stock acquired from the Contracting Stockholders, thereby resulting in
no change in the number of outstanding shares of Common Stock due to the
exercise of such options.
Benefits Awarded
As of April 15, 1997, 713,300 shares of Common Stock had been issued upon
exercise of options granted under the Incentive Stock Option Plan, and options
to purchase an additional 2,187,200 shares were outstanding under such plan.
Future awards, if any, that will be made to eligible participants in the
Incentive Plan are subject to the discretion of the Compensation Committee and,
therefore, are not determinable at this time.
Federal Income Taxes
As a general rule, no federal income tax is imposed on an optionee
upon the grant of a Non-Qualified Stock Option and the Company is not entitled
to a tax deduction by reason of such a grant. Instead, an optionee is taxed
upon the exercise of the option, at ordinary income rates, on the excess, if
any, of the fair market value of the shares acquired (determined as of the date
of exercise) over the exercise price. Upon a subsequent disposition of any
shares received upon exercise of a NQSO, the excess of the amount realized on
the disposition over the basis of the shares (exercise price plus any
compensation income recognized) should qualify as long-term or short-term
capital gain, depending on whether the shares were held for more than one year
prior to disposition. The Company will generally by entitled to a tax deduction
for the same taxable year and in the same amount as any compensation included in
the optionee's income.
As a general rule, no federal income tax is imposed on an optionee upon the
grant or exercise of an Incentive Stock Option and the Company is not entitled
to a tax deduction by reason of such a grant or exercise. However, the excess of
the fair market value of the purchased shares over the exercise price is an item
of tax preference to the optionee in the year of exercise for purposes of
determining alternative minimum tax. Instead, under Section 422 of the Code,
when shares acquired through the exercise of an ISO are sold or exchanged in a
taxable disposition, any amount received by the optionee in excess of the
exercise price will be treated as long-term capital gain, and any loss realized
will be treated as a long-term capital loss.
To obtain this favorable tax treatment for ISOs under the Code, an
optionee must not dispose of shares received from the exercise of an ISO within
two years of the grant date and within one year from the date of exercise of the
ISO. In addition, the date of exercise of an ISO must be during or within three
months following the optionee's continuous employment relationship with the
Company, unless the employment terminates due to disability or death. If the
optionee's employment terminates as a result of disability or death, the period
for exercise can extend up to twelve months following the disability and even
longer following death. The terms of options granted under the Plan are at the
discretion of the Compensation Committee and may not comply with these
requirements for favorable treatment under Section 422 of the Code.
If the requirements of the preceding paragraph are not satisfied, the
disposition of the shares acquired
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through the exercise of an ISO will be treated as a "disqualifying disposition."
Upon a disqualifying disposition, the excess of the value of the shares on the
date of exercise over the exercise price will be treated as ordinary income. Any
gain realized in excess of such ordinary income will be long-term or short-term
capital gain, depending on the holding period of the shares. If the shares
acquired through the exercise of such option are sold for an amount less than
the exercise price, such loss will be treated as a long-term or short-term
capital loss, depending on the holding period. In the event of a disqualifying
disposition, the Company will be allowed a deduction in an amount equal to the
amount that the optionee is required to treat as ordinary income in the
Company's taxable year that ends with or within the taxable year in which the
optionee is required to recognize such ordinary income.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Company's
Common Stock as of March 31, 1997 by (a) each director, (b) the Named Executive
Officers, (c) Executive Officers elected subsequent to December 31, 1996, (d)
all persons known to the Company to be the beneficial owners of more than five
percent of the Company's Common Stock and (e) all directors and executive
officers as a group:
<TABLE>
<CAPTION>
APPROXIMATE
NAME OF PERSON NUMBER OF PERCENTAGE OF
OR IDENTITY OF GROUP SHARES CLASS
- ---------------------------------------- --------- --------------
<S> <C> <C>
Merv Adelson (1)........................ 2,519,676 18.0%
10900 Wilshire Boulevard, Suite 750
Los Angeles, California 90024
Entec Associates (2).................... 1,916,658 13.8%
P. O. Box 491459
Los Angeles, California 90049
George D. Grayson (3)................... 1,001,882 7.3%
2801 Dublin Rd.
Parker, TX 75002
W. Scott Page (4) (5)................... 621,568 4.6%
Robert Alan Ezrin (4) (6)............... 571,390 4.2%
Donald Schupak (7) (8).................. 135,092 1.0%
David R. Henkel (9)..................... 121,250 *
James A. Cannavino (7).................. 75,000 *
Douglas W. Gillespie (4) (10)........... 65,721 *
Jeffrey Croson (4) (11)................. 39,187 *
David W. Craig (4) (12)................. 17,500 *
Paul Bodnoff (4)........................ 1,000 *
All directors and executive officers as
a group................................ 5,169,266 36.1%
</TABLE>
____________________
(1) Includes all shares of Common Stock beneficially owned by Entec with respect
to which Mr. Adelson has sole voting power pursuant to a stockholders'
voting agreement and irrevocable proxy. Shares shown as beneficially owned
also include 53,242 shares issuable upon the exercise of warrants which are
exercisable at $7.50 per share, 30,641 shares issuable upon conversion of 7
% Subordinated Convertible Notes and 15,000 shares issuable on the exercise
of vested options with an exercise price of $12.75 per share held by Mr.
Adelson.
(2) Michael R. Milken is a general partner of Entec, and the Company believes
that Mr. Milken has sole investment power with respect to, and may be deemed
a beneficial owner of, the shares held by Entec. All shares of Common Stock
beneficially owned by Entec are subject to a stockholders' voting agreement
and irrevocable proxy pursuant to which Mr. Merv Adelson has sole voting
power with respect to the shares of Common Stock beneficially owned by
Entec. Shares shown as beneficially owned include 166,391 shares issuable
upon the exercise of warrants at an exercise price of $7.50 per share and
95,757 shares issuable upon conversion of 7% Subordinated Convertible Notes.
(3) Shares shown as beneficially owned include 68,587 shares which may be
purchased by the Company pursuant to the Option Share Repurchase Agreement
at $0.003 per share upon the exercise of certain options granted or to be
granted under the Company's Incentive Stock Option Plan. Shares shown as
beneficially owned also include 66,554 shares issuable upon the exercise of
warrants at an exercise price of $7.50 per share, 38,304 shares issuable
upon conversion of 7% Subordinated Convertible Notes and 10,000 shares
issuable on the exercise of vested stock options with an exercise price of
$6.05 per share.
(4) Current address is c/o 7th Level, Inc., 1110 East Collins Boulevard, Suite
122, Richardson, Texas 75081.
(5) Shares shown as beneficially owned include 68,583 shares which may be
purchased by the Company pursuant to the Option Share Repurchase Agreement
at $0.003 per share upon the exercise of certain options granted or to be
granted under the Company's Incentive Stock Option Plan.
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<PAGE>
(6) Shares shown as beneficially owned include 68,580 shares which may be
purchased by the Company pursuant to the Option Share Repurchase Agreement
at $0.003 per share upon the exercise of certain options granted or to be
granted under the Company's Incentive Stock Option Plan and 5,000 shares of
Common Stock isssuable on the exercise of vested stock options with an
exercise price of $6.05.
(7) Shares shown as beneficially owned include 75,000 shares issuable on the
exercise of vested stock options with an exercise price of $4.00 per share.
(8) See Item 11. Executive Compensation - Compensation of Directors.
(9) Shares shown as beneficially owned include 5,250 shares of Common Stock
issuable upon the exercise of warrants at an exercise price per share of
$7.50 per share and 5,000 shares of Common Stock issuable on the exercise
of vested stock options with an exercise price of $5.50 per share.
(10) Shares shown as beneficially owned include 7,500 and 2,500 shares issuable
on the exercise of vested stock options with exercise prices of $0.83 and
$5.50, respectively.
(11) Shares shown as beneficially owned include 15,000 and 1,250 shares issuable
on the exercise of vested stock options with exercise prices of $0.17 and
$5.50, respectively.
(12) Shares shown as beneficially owned include 17,500 shares issuable on the
exercise of vested stock options with an exercise price of $5.50 per share.
* Represents beneficial ownership of less than 1% of the Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In March 1997, the Company and The Schupak Group entered into an
agreement whereby the Company will pay $12,000 per month to the Schupak Group
for the services of Donald Schupak and other employees of the Schupak Group.
Additionally, Mr. Schupak is entitled to the reimbursement of reasonable travel
and other expenses incidental to the performance of his duties.
The Company has made equity investments in and funded royalty advances to
Future Endeavors, a company in which Mr. Paul Bodnoff is a significant
shareholder. Mr. Bodnoff was a co-founder and previous President of Future
Endeavors and also holds debt issued by Future Endeavors. See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Strategic Relationship Status.
See Item 11. Executive Compensation Employment Contracts.
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<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12b-15 of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Richardson
and State of Texas, on April 30, 1997.
7TH LEVEL, INC.
By: /s/ DAVID W. CRAIG
-------------------------------------------
David W. Craig
Chief Financial Officer,
(Principal Financial Officer and
Principal Accounting Officer)
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