-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ar76RYwNpjpr8dpnFHBwBTQa7YiOMpdz0owxIvVnTEQCI68HCB8SQBeSn9I+A1t5 rlRE6k4CnRqsIb/+P40Iig== 0000842009-98-000002.txt : 19980129 0000842009-98-000002.hdr.sgml : 19980129 ACCESSION NUMBER: 0000842009-98-000002 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19980128 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: KUSHNER LOCKE CO CENTRAL INDEX KEY: 0000842009 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 954079057 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-10661 FILM NUMBER: 98515656 BUSINESS ADDRESS: STREET 1: 11601 WILSHIRE BLVD 21ST FLR CITY: LOS ANGELES STATE: CA ZIP: 95202 BUSINESS PHONE: 3104451111 MAIL ADDRESS: STREET 1: 11601 WILSHIRE BLVD STREET 2: 21ST FLOOR CITY: LOS ANGELES STATE: CA ZIP: 90025 10-K/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ________________________ FORM 10-K/A ________________________ Amendment to Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the fiscal year ended September 30, 199 Commission File No. 0-17295 THE KUSHNER-LOCKE COMPANY (Exact name of registrant as specified in its charter) California 95-4079057 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number)
11601 Wilshire Blvd., 21st Floor, Los Angeles, California 90025 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (310) 481-2000 Securities registered pursuant to Section 12 (b) of the Act: Not Applicable Securities registered pursuant to Section 12(g) of the Act: Common Stock, without par value 10% Convertible Subordinated Debentures, Series A due 2000 13-3/4% Convertible Subordinated Debentures, Series B due 2000 Common Stock Purchase Warrants, Class C 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 1 No 0 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 or Regulation S-K is not contained herein, 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. 0 The aggregate market value based on the closing price of the Registrant's Common Stock held by nonaffiliates of the Registrant was approximately $### as of January 26, 1998. There were 9,132,815 shares of outstanding Common Stock of the Registrant as of January 26, 1998. Total number of pages: 16. Exhibit 21 begins on page: 16. The undersigned registrant (the "Registrant") hereby amends the following items of its Annual Report on Form 10-K for the fiscal year ended September 30, 1997 (the "Report") as follows: PART III The Registrant hereby deletes the information set forth under Items 10, 11, 12 and 13 of the Report and replaces such items in their entirety as set forth below as well as an updated Exhibit 21 of subsidiaries and affiliates of the Company. Item 10. Directors and Executive Officers of Registrant Executive Officers and Directors Directors of the Company are elected annually by the shareholders to serve for a term of one year or until their successors are duly elected and qualified. Set forth below is certain information concerning each person who was an executive officer or director of the Company as of September 30, 1997.
Director Name Age Since Position Peter Locke 54 1983 Co-Chairman and Co-Chief Executive Officer; Donald Kushner 52 1983 Co-Chairman, Co-Chief Executive Officer and Secretary; Director David A. Braun+ 66 1997 Director S. James Coppersmith+ 64 1995 Director Stuart Hersch+ 47 1989 Director Bruce St. J. Lilliston 46 - Chief Operating Officer and President Robert Swan 50 - Chief Financial Officer
______________________ + Member of Audit Committee Background of Executive Officers and Directors The business experience, principal occupations and employment of each of the directors and executive officers of the Company, for at least the past five years, are as follows: Peter Locke co-founded the Company with Donald Kushner in 1983 and currently serves as Co-Chairman and Co-Chief Executive Officer of the Company. Mr. Locke has served as executive producer on substantially all of the Company's programming since its inception. Prior to 1983, Mr. Locke produced several prime-time television programs, including two years of the Stockard Channing Show and the NBC television mini-series The Star Maker, starring Rock Hudson. Mr. Locke also produced two made-for-television movies telecast on CBS and the films The Hills Have Eyes Parts I and II. Donald Kushner co-founded the Company with Peter Locke in 1983 and currently serves as Co-Chairman, Co-Chief Executive Officer and Secretary. Mr. Kushner has served as executive producer on substantially all of the Company's programming since its inception. Mr. Kushner was the producer of Tron, a 1982 Walt Disney theatrical film starring Jeff Bridges, which was nominated for two Academy Awards. David Braun became a director in January 1997. Mr. Braun, who has practiced law in the entertainment industry for over 39 years, has had his own practice since 1994. Mr. Braun was special counsel to Proskauer, Rose, Goetz and Mendelsohn from 1990 to 1992 and became counsel in 1992 and left in 1993 to form his own law firm, Monash Plotkin and Braun, and now David A. Braun, PC. Mr. Braun is a member of the Board of Directors of AVI Entertainment Group, Inc., a music publishing and distribution company, and the Board of Visitors of Columbia University Law School. S. James Coppersmith has served as a director of the Company since May 1995. Mr. Coppersmith has been Chairman of the Board of Trustees of Emerson College, Boston, Massachusetts, since December 1993. Previously, he served as President of WCVB-TV Boston, a division of the Hearst Corporation, from 1982 to June 1994. In addition, Mr. Coppersmith has been a member of the Board of Governors of the Boston Stock Exchange since January 1995. Mr. Coppersmith is a director of Sun America Asset Management Corp., a division of Sun America Corp., Pizzeria Uno Corp., Chyron Corp., Metro Services Group, Inc., and BJ's Wholesale Club (formerly Waban Corp.). Stuart Hersch has served as a director of the Company since August 1989. Since February 1996, Mr. Hersch has been a consultant to several entertainment companies. In April 1996, Mr. Hersch became a consultant to the Company. Mr. Hersch assists the Company in analyzing potential strategic acquisitions and provides the Company consulting services in connection with the Company's infomercial operations. From August 1990 to January 1996, Mr. Hersch was President of the WarnerVision Entertainment division of Atlantic Records, a subsidiary of Time-Warner, Inc. From 1988 to August 1989, Mr. Hersch was Chairman of Hersch Diener & Company, an independent consulting firm. From 1983 to 1987, Mr. Hersch was the Chief Operating and Chief Financial Officer of King World Productions, Inc. Bruce St. J. Lilliston became President and Chief Operating Officer of the Company in October 1996. Prior to joining the Company, Mr. Lilliston practiced entertainment law for 19 years. He represented the Company in various transactions over the preceding two years. Mr. Lilliston served as an arbitrator for the American Film Marketing Association, and also served a special master for the Los Angeles Superior Court. He graduated from the University of Chicago Law School in 1977, where he was an associate editor of the University of Chicago Law Review. He received his bachelor of arts degree with honors from Brown University in 1974. Mr. Lilliston was a partner in the law firm of Paul, Hastings, Janofsky & Walker from 1989 to 1991, where he was managing partner of that firm's entertainment finance and transactions practice. Robert Swan joined the Company as Controller on October 28, 1996. On May 1, 1997 Mr. Swan was appointed Chief Financial Officer. Prior to assuming the Chief Financial Officer role for the Company, Mr. Swan had been Chief Financial Officer of AVI Entertainment Group, Inc., a music publishing and distribution company since 1994. From 1991 to 1994 Mr. Swan was Chief Financial Officer of Global Releasing Corporation and several affiliated companies which produced and distributed feature films. One affiliated company, Cannon Television, Inc., was placed in voluntary bankruptcy several months after Mr. Swan left its employ. From 1986 to 1991 Mr. Swan was an audit partner at KPMG Peat Marwick. Mr. Swan is a Certified Public Accountant. Directors who are also executive officers of the Company do not receive any additional compensation for serving as members of the Board of Directors or any committee thereof. Peter Locke and Donald Kushner receive no compensation for serving as a member of the Board of Directors. David A. Braun, S. James Coppersmith and Stuart Hersch receive $25,000 each, for serving on the Board of Directors and any committees thereof. Each of Messrs. Braun, Coppersmith and Hersh were granted options to purchase 16,667 shares at an exercise price of $1.875 in August 1997. During the 1997 fiscal year, there were 12 meetings of the Board of Directors, three meetings of the Option Committee and one meeting of the Audit Committee of the Board of Directors. The Board of Directors and Option Committee took action three times by unanimous written consent. Each director attended all of the meetings of the Board of Directors and the committees held during the period for which he was a director or for which he had served as a committee member. Other Significant Employees The business experience, principal occupations and employment for at least the past five years of certain other significant employees who have made or are expected to make significant contributions to the business of the Company are as follows: Pascal Borno, age 37, joined Kushner-Locke International, Inc., the international theatrical distribution subsidiary of the Company, as President in April, 1997. Prior to joining the Company, Mr. Borno was President and sole shareholder of Conquistador Entertainment, Inc., a producer and distributor of feature films, which he started in September 1994. From 1991 through August 1994 Mr. Borno was Senior Vice President, International Distribution, at Dino De Laurentis Communications, a producer and distributor of feature films and television programs. From 1990 to 1991 Mr. Borno was Vice President, International Distribution, of ITC Entertainment Group, a producer and distributor of feature films. Marvinia Anderson, age 54, has served as President of International Television for Kushner-Locke International, Inc., the Company's international distribution subsidiary, since June 1995. Prior to joining the Company, she served as Vice President of World International Network, Inc. from 1983 to June 1995, and has held executive sales positions at Capital Cities/ABC, Valley Cable TV Inc. and Times Mirror Cable Television, Inc. Richard Marks, age 49, was appointed Executive Vice President and General Counsel of the Company in April 1997. Prior to that, he served as the Company's Senior Vice President in charge of Legal and Business Affairs since joining the Company in October 1993. From 1991 to October 1993, Mr. Marks served as Senior Vice President in charge of Business and Legal Affairs for Media Home Entertainment, an independent film producer and video distributor. From 1983 to 1991 Mr. Marks held similar legal and business affairs positions with Walt Disney Pictures, Paramount Pictures and Weintraub Entertainment Group. Frank Hildebrand, age 47, joined the Company in January 1998 as Executive Vice President - Production. From 1992 through 1997 Mr. Hildebrand was an independent producer and produced numerous films, among them two films for the Company, Freeway and the soon to be released special effects film Beowulf. From 1988 to 1991 he was Executive Vice President at NOVA Entertainment, where he was responsible for the production of all features and television, including the Disney film Firebirds and Triumph of the Spirit, among others. From 1985 to 1987, Mr. Hildebrand was a producer and executive with The Samuel Goldwyn Co., where he produced the successful comedy Once Bitten. Andrew Steinberg, age 33, joined the Company as Executive Vice President-Television in April, 1997. Before joining the Company, Mr. Steinberg was a Senior Packaging Agent at International Creative Management ("ICM") beginning in April 1990, where he represented many producers, writers and authors. Mr. Steinberg also worked with ICM's chairman, Jeff Berg, on building a corporate consulting business. While at ICM, Mr. Steinberg worked closely with the Company and packaged four television projects for the Company, including the CBS made-for-television movie "Unlikely Angel" starring Dolly Parton. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act requires executive officers and directors, and persons who beneficially own more than 10% of any class of the Company's equity securities to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission ("SEC"). Executive officers, directors and beneficial owners of more than 10% of any class of the Company's equity securities are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such forms furnished to the Company during or with respect to fiscal 1997, and certain written representations from executive officers and directors, the Company believes that each such person has complied with all Section 16(a) filing requirements applicable to such executive, except that (i) Robert Swan inadvertently failed to timely file one report on a timely basis, covering zero transactions, (ii) Bruce Lilliston inadvertently failed to file one report on a timely basis, covering one transaction,, and (iii)) each of Peter Locke, Donald Kushner, Bruce Lilliston, Robert Swan, David Braun, S. James Coppersmith and Stuart Hersch failed to file one report covering one transaction, reflecting the receipt by each such officer or director of stock options granted pursuant to \ the 1988 Stock Incentive plan. officers, directors and greater than 10% beneficial owners, except that Robert Swan, Chief Financial Officer of the Company, inadvertently filed one report late, covering zero transactions, and Bruce Lilliston, President and Chief Operating Officer of the Company, inadvertently filed one report late, covering one transaction. Item 11. Executive Compensation Cash Compensation The following table sets forth the cash compensation paid or accrued by the Company during the fiscal year ended September 30, 1997 to the Chief E xecutive Officer and each executive officer of the Company whose salary and bonus exceeded $100,000 (the "Named Executive Officers").
Long-Term Compensation Awards Annual Securities Compensation (1) Underlying All Other Name and Principal Fiscal Salary Bonnus Options/SARs Compensation (2) Position Year ($) ($) (#) ($) Peter Locke 1997 425,000 -- 166,666/0 48,793 Co-Chairman, Co- 1996 425,000 -- -- 34,313 Chief Executive 1995 425,000 -- -- 32,057 Officer Donald Kushner 1997 425,000 -- 166,666/0 44,253 Co-Chairman, Co- 1996 425,000 -- -- 30,415 Chief Executive 1995 425,000 -- -- 29,255 Officer and Secretary Bruce Lilliston (3) 1997 400,000 -- 41,667/0 -- President and Chief 1996 -- -- -- -- Operating Officer 1995 -- -- -- -- Robert Swan (3) 1997 124,154 -- 25,000/0 -- Chief Financial 1996 -- -- -- -- Officer 1995 -- -- -- --
______________________ (1) Does not include perquisites including $25,000 annual non-accountable expense allowances in the case of Messrs. Locke, Kushner and Lilliston. (2) Term life insurance premiums paid by the Company on behalf of the Named Executive Officers in respect of a $3,500,000 policy and disability insurance premiums paid by the Company on behalf of the Named Executive Officers. (3) Commenced employment in fiscal 1997. Employment Agreements Messrs. Kushner and Locke. In March 1994, Messrs. Kushner and Locke each agreed to an amendment to his respective employment agreement with the Company to (i) extend the term of the agreement to September 1998 and (ii) reduce the maximum annual performance bonus that each may receive to 4% of pre-tax earnings for the applicable period up to a maximum of $200,000 in fiscal 1994, $220,000 in fiscal 1995, $250,000 in fiscal 1996, $270,000 in fiscal 1997 and $290,000 in fiscal 1998. Under the then revised employment agreements, Messrs. Kushner and Locke each were entitled to a base salary of $425,000 in fiscal 1996 through fiscal 1998, subject to potential increase upon review by the Company's Board of Directors after fiscal 1995. In order to induce Messrs. Kushner and Locke to enter into the March 1994 amended employment agreements, the Company granted to each, as of March 7, 1994, options to purchase 150,000 adjusted shares of Common Stock at an adjusted exercise price per share equal to $5.04 (the last reported sale price of the Common Stock on the date of the initial closing of the 8% Debentures). The options vest over a five year period, with 20% vesting respectively on each of the next five annual anniversary dates following the date of the grant (subject to possible acceleration following a "change-in-control" as defined in the Company's 1988 Stock Incentive Plan). Options to purchase up to 90,000 shares of Common Stock have vested to each officer as of January 17, 1998. As of October 1, 1997, Messrs. Kushner and Locke each agreed to a further amendment to his respective employment agreement with the Company to extend the term of the agreement to October 2002. Under the revised employment agreements, Messrs. Kushner and Locke each continue to be entitled to an annual base compensation of $425,000 in fiscal 1997, and are entitled to $25,000 annual increases beginning with the second employment year (commencing October 1998) under the amended agreement up to a maximum of $525,000. In the event the Company achieves earnings before income taxes prior to the profit bonuses in excess of $2,000,000, each of Messrs. Kushner and Locke are entitled to certain profit bonuses at graduated rates ranging from 5% of such annual earnings before income taxes (from the first dollar of earnings before income taxes) up to $4,000,000 to increasing percentages up to 7.5% of annual earnings before income taxes in excess of $8,000,000, but not to exceed two times annual base compensation. In addition, the Company granted to each of Messrs. Kushner and Locke, as of August 1, 1997, options to purchase 83,333 (post reverse split) shares of Common Stock at an exercise price per share equal to $1.875 (the last reported sale price of the Common Stock on the date prior to the award date, as adjusted). These options (time vesting options) vest over a five year period, with 20% vesting respectively on each of the next five annual anniversary dates following the date of the grant (subject to acceleration in the event of termination of optionee's employment agreement by such optionee for "cause" (as defined therein) or wrongfully by the Company or upon certain "Events" (as defined under the Plan), including termination following a "change-in-control" as defined in the Plan). The Company also granted to each of Messrs. Kushner and Locke options to purchase an additional 83,333 (post reverse split) shares of Common Stock at an exercise price per share equal to $1.875, vesting at the rate of 20% per year, but exercisable only upon (i) the achievement of at least 85% of certain annual earnings before income tax targets to be set by the board of directors or (ii) the Company's Common Stock reaching certain public trading prices ranging from $3.00 to $6.00 per share. Such performance options are also subject to accelerated vesting and exercisability under the circumstances described above for the time-vesting option tranche. The Company also provides Messrs. Kushner and Locke with certain fringe benefits, including $3,500,000 of term life insurance with a split dollar ownership structure and disability insurance for each person. If the employment agreement is terminated by employee for "cause" or wrongfully by the Company, the Company is required to pay the present value of all unpaid premiums on the split dollar policy for the ten (10) year period ending February 2007. The Company also agreed to assign any key-man life insurance policy to the employee after certain terminations of the employment agreement. The agreements permit Messrs. Kushner and Locke to collect outside compensation to which they may be entitled and to provide incidental and limited services outside of their employment with the Company and to receive compensation therefor, so long as such activities do not materially interfere with the performance of their duties under the agreements. Each of Messrs. Kushner and Locke also may require the Company to change its name to remove his name within one year after the expiration or termination of his employment agreement, except that the Company may continue to use such name for a period of one year after such notice, or for such longer period of time as is reasonably necessary to cause the Company not to default under any indebtedness for borrowed money or other material agreement. In the event Messrs. Kushner's or Locke's employment agreement is terminated following a change of control, as such term is defined therein, such executive would be entitled to a lump sum payment equal to all compensation and benefits provided for in the agreement for the remainder of the term, discounted at the rate of 10% per annum. Mr. Lilliston. On September 14, 1996, the Company entered into an employment agreement with Bruce St. J. Lilliston pursuant to which the Company employed Mr. Lilliston as the President and Chief Operating Officer of the Company effective October 1, 1996 for a three year term. As part of the agreement, Mr. Lilliston will be paid a base salary of $400,000 per year. In addition, the Company loaned him $100,000 on September 3, 1996 and $200,000 in October 1996. The loan was made to assist Mr. Lilliston in the transition from his private law practice to his duties as Chief Operating Officer of the Company. The loan accrues simple interest at the rate of 8% per annum and will be repaid over a five year period at certain specified dates ending October 1, 2001. Mr. Lilliston has the right to receive bonuses equal to the amount of the payments, including interest, due for such loan if Mr. Lilliston is still employed by the Company (including the renewal of his employment agreement if applicable) on certain dates (the "Employment Bonus"). Beginning October 1, 1997, so long as Mr. Lilliston is then employed by the Company (including the renewal of his employment agreement if applicable), he shall be entitled to receive a bonus of $100,000 the first time the adjusted "Average Closing Price" (the average closing price of the common stock over a thirty calendar day period) is $6.00 or more greater than the "First Day Price" (the average closing price of the Common Stock, as adjusted, over the thirty calendar day period immediately prior to October 1, 1996). Thereafter, if Mr. Lilliston is still employed by the Company (including the renewal of his employment agreement if applicable), he shall be entitled to receive an additional $100,000 bonus the first time the Average Closing Price exceeds the First Day Price by $12.00 or more, as adjusted, and each whole six-dollar amount through and including $60.00, as adjusted, (each such bonus, a "Stock Bonus"). The aggregate of such bonuses shall not exceed $1,000,000. The Stock Bonuses shall be reduced by an amount equal to the Employment Bonus up to $150,000 plus interest payable thereon from September 3, 1996. As of October 1, 1997 Mr. Lilliston had not received any Employment Bonus or Stock Bonus. If the Company realizes pre-tax operating profits or earnings per share for any fiscal year during Mr. Lilliston's employment greater than 100% of the Company's largest pre-tax operating profit or earnings per share amount for any of the preceding years of Mr. Lilliston's employment under his employment agreement or in any of the five fiscal years immediately preceding the commencement of such agreement, and if Mr. Lilliston is still employed by the Company at the end of the applicable fiscal year, then Mr. Lilliston shall be entitled to receive a bonus of $50,000 for each such event. No bonus was earned or paid for fiscal 1997. As part of the agreement, the Company agreed to grant Mr. Lilliston options to purchase up to 41,667 adjusted shares of Common Stock, with 20,834 of such options having been granted and vested upon the authorization by the shareholders of the Company of additional shares of common stock in November 1996, 8,334 and 12,500 of such options to be granted and vested one and two years, respectively, after the commencement of the term (the "Term") of the employment agreement (in each case, subject to Mr. Lilliston reaching certain performance criteria to be established by the Board of Directors or a committee thereof). Mr. Lilliston met the performance criteria for the 8,334 share option grant for fiscal 1997, and such options were granted. If Mr. Lilliston's employment is extended for a second term pursuant to such agreement (the "Second Term"), the Company has agreed to grant Mr. Lilliston options to purchase up to an additional 83,334 shares of Common Stock, 41,667, 16,667, and 25,000 of such options to be granted upon commencement and one, and two years, respectively, after the commencement of the Second Term with one-half of each such grant to vest immediately upon grant and the remainder thereof to vest upon Mr. Lilliston reaching certain performance criteria to be established by the Board of Directors or a committee thereof. If Mr. Lilliston's employment is extended beyond a Second Term, the Company has agreed to grant Mr. Lilliston options to purchase up to an additional 41,667 shares of Common Stock as adjusted, with such options granted in full upon such employment extension with one-half of such grant to vest immediately upon grant and the remainder thereof to vest upon Mr. Lilliston reaching certain performance criteria to be established by the Board of Directors or a committee thereof. In the event the performance goals are not met, such options vest at a fixed date in the future, contingent solely on future employment. The exercise price for such options shall be equal to the closing price of the Common Stock on the applicable date of grant. Finally, as part of Mr. Lilliston's agreement, he is allowed to maintain not more than two independent outside legal consultancy client relationships, subject to approval by the Co-Chief Executive Officers, with earnings from such consultancies limited to $150,000 per year. Mr. Swan. Effective May 1, 1997 ("the Effective Date") the Company entered into an employment agreement with Robert Swan pursuant to which the Company hired Mr. Swan as the Chief Financial Officer for a three year term. Mr. Swan is paid a base annual salary of $160,000 for the first year and $175,000 and $200,000, respectively, for the subsequent two years. Mr. Swan has the right to receive a bonus equal to 10% of his base annual salary to the extent that net earnings for each fiscal year are greater than that of the immediately preceding fiscal year. The Company agreed to grant Mr. Swan options to purchase up to 25,000 shares of Common Stock, with options exercisable for 8,334 shares immediately vesting and for 8,333 shares vesting on each of the first and second anniversaries of the agreement. The agreement is subject to early termination by the Company in its discretion on each of the first and second anniversary dates, respectively, of the Effective Date. 1998 Stock Incentive Plan The 1998 Stock Incentive Plan adopted by the Board of Directors in October 1988 (the "Plan") authorizes the granting of stock incentive awards ("Awards") to qualified officers, employees, directors, key employees and third parties providing valuable services to the Company, e.g., independent contractors, consultants and advisors to the Company. In November 1996, the shareholders of the Company voted to increase the adjusted authorized number of shares available under the Plan from 750,000 to 1,250,000. The Plan may be administered by a committee appointed by the Board and consisting of two or more members, each of whom must be disinterested. The Plan is currently administered by S. James Coppersmith, Stuart Hersch and David Braun (the "Committee"). The Committee determines the number of shares to be covered by an Award, the term and exercise price, if any, of the Award and other terms and provisions of Awards. The Plan is designed to help the Company attract and retain qualified persons for positions of substantial responsibility and to provide certain key employees and consultants with an additional incentive to contribute to the success of the Company. As of January 26, 1998, options to purchase 1,095,359 shares of the Company's Common Stock were outstanding under the Plan. Of this amount, options to purchase 111,722 shares had been exercised, 294,611 options had expired or been canceled and 154,641 shares remained available for granting options under the Plan. Awards can be Stock Options ("Options"), Stock Appreciation Rights ("SARs"), Performance Share Awards ("PSAs") and Restricted Stock Awards ("RSAs"). The number and kind of shares available under the Plan are subject to adjustment in certain events. Shares relating to Options or SARs which are not exercised, shares relating to RSAs which do not vest and shares relating to PSAs which are not issued will again be available for issuance under the Plan. An Option may be an incentive stock option ("ISO") or a nonqualified Option. The exercise price for Options is to be determined by the Committee, but in the case of an ISO is not to be less than fair market value on the date the Option is granted (110% of fair market value in the case of an ISO granted to any person who owns more than 10% of the Common Stock). The purchase price is payable in any combination of cash, shares of Common Stock already owned by the participant for at least six months or, if authorized by the Committee, a promissory note secured by the Common Stock issuable upon exercise. In addition, the award agreement may provide for "cashless" exercise and payment. Subject to early termination or acceleration provisions, an Option is exercisable, in whole or in part, from the date specified in the related award agreement (which may be six months after the date of grant) until the expiration date determined by the Committee. An SAR is the right to receive payment based on the appreciation in the fair market value of Common Stock from the date of grant to the date of exercise. In its discretion, the Committee may grant an SAR concurrently with the grant of an Option. An SAR is only exercisable at such time, and to the extent, that the related Option is exercisable. Upon exercise of an SAR, the holder receives for each share with respect to which the SAR is exercised an amount equal to the difference between the exercise price under the related Option and the fair market value of a share of Common Stock on the date of exercise of the SAR. The Committee in its discretion may pay the amount in cash, shares of Common Stock, or a combination thereof. An RSA is an award of a fixed number of shares of Common Stock subject to restrictions. The Committee specifies the prices, if any, the recipient must pay for such shares. Shares included in an RSA may not be sold, assigned, transferred, pledged or otherwise disposed of or encumbered until they have vested. The recipient is entitled to dividend and voting rights pertaining to such RSA shares even though they have not vested, so long as such shares have not been forfeited. A PSA is an award of a fixed number of shares of Common Stock, the issuance of which is contingent upon the attainment of such performance objectives, and the payment of such consideration, if any, as is specified by the \ Committee. The Plan also provides for certain tax-offset bonuses and tax withholding using shares of Common Stock instead of cash. Upon the date a participant is no longer employed by the Company for any reason, shares subject to the participant's RSAs which have not become vested by that date or shares subject to the participant's PSAs which have not been issued shall be forfeited in accordance with the terms of the related Award agreements. Options which have become exercisable by the date of termination of employment or of service on the Committee must be exercised within certain specified periods of time from the date of termination, the period of time to depend on the reason for termination. Options which have not yet become exercisable on the date the participant terminates employment or service on the Committee for a reason other than retirement, death or total disability shall terminate on that date. The Board of Directors may, at any time, terminate, amend or suspend the Plan. In addition, the Committee may, with certain exceptions, amend any provision of the Plan. All employees, officers and directors of, and consultants to, the Company are eligible to participate in the Plan. The Committee determines which persons shall be granted options, the extent of such grants and, consistent with the Plan, the terms and conditions thereof. As of December 31, 1997, approximately 60 employees of the Company, and three directors of the Company who are not also employees of the Company, are eligible to receive option grants under the Plan. Options granted under the Plan may be either ISOs or options which are not intended to qualify as ISOs, except that ISOs may only be granted to employees of the Company. The aggregate fair market value (determined on the date of grant) of the shares of Common Stock for which ISOs may be granted to any participant under the Plan and any other plan by the Company or its affiliates which are exercisable for the first time by such participant during any calendar year may not exceed $100,000. The options granted under the Plan become exercisable on such dates as the Board determines in the terms of each individual option. Options are subject to termination in the event of a disposition of all or substantially all of the assets or capital stock of the Company by means of a sale, merger, consolidation, reorganization, liquidation or otherwise; unless the Committee arranges for a continuation of the Plan or for the optionee to receive payment or new options covering shares of the corporation purchasing or acquiring the assets or stock of the Company, in substitution of the options granted under the Plan. The Committee in any event may, on such terms and conditions as it deems appropriate, accelerate the exercisability of options granted under the Plan. An ISO to a holder of more than 10% of the total combined voting power of all classes of stock of the Company must expire no later than five years from the date of grant. A nonqualified stock option must expire no later than ten years from the date of the grant. The options granted under the Plan are not transferable other than by will or the laws of descent and distribution. Unexercised options generally lapse 3 months after termination of employment other than by reason of retirement, disability or death (except in the case of ISOs) in which case it terminates one year thereafter. The Plan provides for anti-dilution adjustments which are applicable in the event of a reorganization, merger, combination, recapitalization, reclassification, stock dividend, stock split or reverse stock split; however, no such adjustment need be made if it is determined that the adjustment may result in the receipt of federally taxable income to optionees or the holders of Common Stock or other classes of the Company's securities. Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company as a result of which the Company is not the surviving entity, the Plan shall terminate, and any outstanding awards shall terminate and be forfeited unless assumed by the successor corporation. The Plan currently provides that the Board may amend the Plan at any time without obtaining shareholder approval to the fullest extent permitted by applicable law or regulation, and, in the event the Board determines that shareholder approval is required by applicable law or regulation, than such amendments would be effective once approved by the Board and the holders of a majority of the shares of Common Stock. Option/SAR Grants in Last Fiscal Year
Potential realizable value at assumed rates of stock price appreciation for Individual Grants option term Percent of total Number of options/ securities SARs underlying granted to Exercise Options/ employees or base SARs in fiscal price ($/ Expiration Name granted (#) year Sh) Date 5%($) 10%($) (a) (b) (c) (d) (e) (f) (g) Peter Locke 166,666 40% 1.875 8/1/07 468,748 624,998 Donald Kushner 166,666 40% 1.875 8/1/07 468,748 624,998 Bruce Lilliston 20,834 5% 2.8125 11/21/06 87,894 117,191 Robert Swan 25,000 6% 1.875 4/30/07 70,312 93,750
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
Number of Securities Value of Underlying Unexercised Unexercised In-The-Money Options/SARS Options/SARs at FY-End(#) at FY-End($) Shares Acquired Value Exerciseable/ Exerciseable/ Name on Exercise (#) Realized ($) Unexercisable Unexercisable Peter Locke -0- N/A 90,000/226,666 453,600/614,902 Donald Kushner -0- N/A 90,000/226,666 453,600/614,902 Bruce Lilliston -0- N/A 20,834/0 58,596/0 Robert Swan -0- N/A 8,334/16,666 15,626/31,249
Compensation Committee Interlocks and Insider Participation During fiscal 1997, the Board of Directors did not have a compensation committee. Rather, the full Board of Directors of the Company participated in deliberations and decisions regarding executive compensation. The option committee, comprised of Board members Stuart Hersch, David Braun and S. James Coppersmith, did vote by Unanimous Written Consent to grant new options to certain directors and certain employees in connection with new employment agreements and amendments and extensions of employment agreements with the Company. Other than Messrs. Kushner and Locke, no member of the Board of Directors was, during the fiscal year or formerly, an officer or employee of the Company or any of its subsidiaries, however Stuart Hersch, a director, is paid $7,500 per month pursuant to a consulting contract. During fiscal year 1997, Mr. Locke served as Co-Chairman of the Board and Co-Chief Executive Officer of the Company, and Mr. Kushner served as Co-Chairman of the Board, Co-Chief Executive Officer and Secretary of the Company. Item 12. Security Ownership of Certain Beneficial Owners and Management. BENEFICIAL OWNERSHIP OF CERTAIN STOCKHOLDERS The following table sets forth certain information as of January 26, 1998 concerning the beneficial ownership of Common Stock, by (i) each person who is known to the Company to be a beneficial owner of more than 5% of the outstanding Common Stock; (ii) each of the current Directors of the Company; (iii) each of the Named Executive Officers; and (iv) all current Directors and Executive Officers of the Company as a group.
Common Stock Percent of Beneficial Owner Beneficially Owned Class (7) Peter Locke 587,679 (1) 6.44% 11601 Wilshire Blvd., 21st Floor Los Angeles, CA 90025 (310) 481-2000 Donald Kushner 587,824 (1)(2) 6.44% 11601 Wilshire Blvd., 21st Floor Los Angeles, CA 90025 (310) 4891-2000 Stuart Hersch 76,739 (3) * 11601 Wilshire Blvd., 21st Floor Los Angeles, CA 90025 (310)) 481-2000 David Braun 5,556 (4) * 11601 Wilshire Blvd., 21st Floor Los Angeles, CA 90025 (310) 481-2000 S. James Coppersmith 11,806 (4) * 11601 Wilshire Blvd., 21st Floor Los Angeles, CA 90025 (310) 481-2000 Bruce Lilliston 20,834 (5) * 11601 Wilshire Blvd., 21st Floor Los Angeles, CA 90025 (310) 481-2000 Robert Swan 8,334 (6) * 11601 Wilshire Blvd., 21st Floor Los Angeles, CA 90025 (310) 481-2000 All directors and executive officers as a group (seven individuals) 1,298,772 13.77% (1)(2)(3)(4)(5)(6)
- ------------------------- * Less than 1% (1) Includes 90,000 shares subject to options which are currently exercisable or exercisable within 60 days of the date hereof, and excludes 226,666 options which are not currently exercisable or exercisable within 60 days of the date hereof. (2) Includes 33,333 shares owned by a corporation controlled by Mr. Kushner. (3) Includes 76,739 shares subject to options currently exercisable, and excludes 11,111 shares subject to options which are not currently exercisable or exercisable within 60 days. (4) Includes 5,556 shares subject to options currently exercisable, and excludes 11,111 shares subject to options which are not currently exercisable or exercisable within 60 days. (5) Represents options to purchase 20,834 shares of Common Stock vested immediately as part of Mr. Lilliston's employment agreement. (6) Represents options to purchase 8,334 shares of Common Stock vested immediately as part of Mr. Swan's employment agreement. (7) As a percentage of the 9,132,815 shares outstanding on January 26, 1998 plus certain shares issuable upon conversion of convertible securities or subject to options held by such person or persons. Item 13. Certain Relationships and Related Transactions. In fiscal 1993, the Company entered into a domestic home video distribution agreement with WarnerVision for the feature film Deadly Exposure. Stuart Hersch, a Director of the Company, was President of WarnerVision at that time. The distribution agreement provides for payment by WarnerVision to the Company of an advance in exchange for certain domestic home video rights, subject to certain back-end participation rights of the Company, and payments by the Company to WarnerVision of 30% of the Company's net revenues derived from Canadian home video and broadcast television exploitation of Deadly Exposure. Through September 30, 1997, no payments had been made by the Company to WarnerVision pursuant to such agreement. In fiscal 1994, the Company entered into certain joint ventures with WarnerVision whereby WarnerVision and the Company share production costs and expenses and any resulting revenues with respect to certain motion pictures. The Company has also entered into domestic home video distribution agreements with WarnerVision for the feature films Lady-in-Waiting and Last Gasp. These agreements provide for the payment by WarnerVision to the Company of $510,000 and $530,000 in exchange for WarnerVision receiving participation rights with the Company in the revenues derived from the exploitation of Lady-in-Waiting and Last Gasp, respectively. The Company also agreed to license to WarnerVision domestic distribution rights to Wes Craven Presents: Mind Ripper for a recoupable minimum guaranty payment against revenues. In fiscal 1994, the Company entered into a five picture joint venture with WarnerVision similar to the Lady-in-Waiting and Last Gasp joint ventures. Through September 30, 1997, the Company had received approximately $924,000 from WarnerVision towards the production costs and expenses of these films pursuant to such joint ventures. In December 1994, the Company loaned August Entertainment, Inc. ("August") $650,000 against distribution rights to third party product. August is majority owned by Gregory Cascante, who subsequently joined the Company as President of its new international film distribution division. The loan bears interest at the lesser of (a) Prime (8.5% at January 26, 1998) plus 2% or (b) 10%. The distribution agreement is secured by all assets of August, including a pledge of all sales commissions due to August from the producers of the films Sleep With Me, Lawnmower Man II and Nostradamus. While the right of August to receive such commissions with respect to the film Lawnmower Man II is subordinate to the interests of the production lenders, The Allied Entertainment Group PLC, and its subsidiaries which produced the film have guaranteed payment of such commissions to the extent they would be payable had there been no production loan on that film. Repayment of principal and interest is by collection of commissions assigned as collateral. As of January 26, 1998 the Company has been repaid $519,000 toward interest and principal and approximately $297,000 principal amount remains outstanding. The loan matured in December 1997, and has been extended by agreement of the parties until December 1998. Through April 1997 Mr. Cascante managed the international film sales of the Company through a separate subsidiary of the Company. Under his employment agreement entered into in September 1994, which terminated in April 1997, Mr. Cascante was to receive a percentage of pre-tax profit of Kushner-Locke International, Inc. ranging from 2.5% to 10% based on a sliding scale related to certain profit thresholds, with an aggregate of compensation and pre-tax profit payments not to exceed 200% of his $187,500 base salary. In October 1995, Mr. Cascante and the Company agreed to amend his employment agreement to remove his pre-tax profit participation in Kushner-Locke International, Inc. Mr. Cascante's base salary for fiscal 1997 was $243,750. On September 14, 1996, the Company entered into an employment agreement with Bruce St. J. Lilliston pursuant to which the Company agreed to hire Mr. Lilliston as the President and Chief Operating Officer of the Company effective October 1, 1996. As part of such agreement, Mr. Lilliston is allowed to maintain not more than two independent outside legal consultancy client relationships, subject to approval by the Chief Executive Officers. Prior to his employment, Mr. Lilliston provided various legal services to the Company through the Law Offices of Bruce St. J. Lilliston. During fiscal 1996, the Company paid Mr. Lilliston $180,000 for such legal services. In addition, Mr. Lilliston had provided various legal services to certain of Kushner-Locke International's distributing licensees as well as August Entertainment. See Item II, Executive Compensation - Employment Agreement - Mr. Lilliston for a further description of Mr. Lilliston's employment arrangement with the Company. Cherry Lane Music Company, Inc. ("Cherry Lane"), which is owned by Milton Okun, a member of the Board of Directors during fiscal 1996, entered into an agreement to become the music administrator for the Company effective August 15, 1994. Cherry Lane receives specified fees for the collection of revenues derived from music publishing and record contracts. In April 1996, the Company entered into a month-to-month consulting agreement with Stuart Hersch which provides for a monthly fee of $7,500 to be paid to Mr. Hersch. Mr. Hersch assists the Company in analyzing potential strategic acquisitions and provides the Company consulting services in connection with the Company's infomercial operations. In August 1997, Mr. Locke obtained an option to acquire 45% of the common stock of 800-U.S.Search ("Search"), a company which conducts public records searches to locate individuals sought to be located, in exchange for indemnifications of the optionor against certain potential liabilities. From August 1997 through November 1997, Mr. Locke personally loaned Search $175,000. In November 1997, an entity owned by a third party but controlled by the Company acquired 80% of the outstanding common stock of Search, and issued to the Company an option at a nominal exercise price to acquire such 80% interest in exchange for the assumption of certain liabilities. At such time, Mr. Locke's option was cancelled. Through January 23, 1998 the Company has advanced Search $495,000 and Search has repaid Mr. Locke $147,000 of his loan. In addition the Company is assisting Search with its fee spot marketing efforts. Search conducts public records searches to locate individuals with whom the consumer has lost contact for a low fixed fee. The Company believes that the terms of the foregoing transactions are no less favorable to the Company than those that could have been obtained in transactions with unaffiliated third parties. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: January 28, 1998 THE KUSHNER-LOCKE COMPANY (Registrant) By: /s/ PETER LOCKE Peter Locke Co-Chairman of the Board, Co-Chief Executive Officer By: /s/ DONALD KUSHNER Donald Kushner Co-Chairman of the Board Co-Chief Executive Officer and Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
Signature Title Date /s/ PETER LOCKE Co-Chairman of the Board January 28, 1998 Peter Locke and Co-Chief Executive Officer; Director /s/ DONALD KUSHNER Co-Chairman of the Board, January 28, 1998 Donald Kushner Co-Chief Executive Officer and Secretary; Director /s/ BRUCE ST.J LILLISTON President and Chief January 28, 1998 Bruce St.J Lilliston Operating Officer /s/ ROBERT SWAN Chief Financial Officer January 28, 1998 Robert Swan /s/ ADELINA VILLAFLOR Controller (Chief Accounting January 28, 1998 Adelina Villaflor Officer) /s/ DAVID BRAUN Director January 28, 1998 David Braun /s/ S. JAMES COPPERSMITH Director January , 1998 S. James Coppersmith Director January , 1998 Stuart Hersch EXHIBIT 21 SUBSIDIARIES AND AFFILIATES OF THE COMPANY THE KUSHNER-LOCKE COMPANY KL INTERNATIONAL, INC. (formerly known as AKL Distributing, Inc., AKL Distribution, Inc. and KL Distribution, Inc.) ACME PRODUCTIONS, INC. (formerly Acme Game Shows, Inc.) KL PRODUCTIONS, INC. (formerly AKL Productions, Inc. and Kushner/Locke Company, Inc.) KUSHNER-LOCKE PRODUCTIONS, INC. (formerly Brave Little Co. and Atlantic/Kushner-Locke Productions, Inc.) THE RELATIVES COMPANY POST AND PRODUCTION SERVICES, INC. (formerly Post Production Services, Inc., KW Acquisitions Corporation and KL Acquisition Corp.) L-K ENTERTAINMENT, INC. FAMILY PICTURES, INC. INTERNATIONAL COURTROOM NEWS SERVICE TROPICAL HEAT, INC. KL SYNDICATION, INC. (formerly D.I., Inc.) ANDRE PRODUCTIONS, INC. TKLC NO. 2, INC. TWILIGHT ENTERTAINMENT, INC. (formerly Gentox Films, Inc.) KLC FILMS, INC. KL FEATURES, INC. (formerly KLC, Inc.) KLF GUILD COMPANY (formerly KLF Guild Co., Inc.) KLF DEVELOPMENT CO. KLTV GUILD CO. KLTV DEVELOPMENT CO. KUSHNER-LOCKE INTERNATIONAL, INC. (formerly KLC Worldwide, Inc.) KL INTERACTIVE MEDIA, INC. DAYTON WAY PICTURES, INC. DAYTON WAY PICTURES II, INC. F.W. COLD CO., INC. DAYTON WAY PICTURES IV, INC. KLC/NEW CITY BLT VENTURE MDP/KLC KLC/M3D TVFIRST KLC/MOVIE SCREEN ENTERTAINMENT KL FEATURES, INC./WARNERVISION KL/7 VENTURE VADO MOUNTAIN PRODUCTIONS OUTPOSTS PRODUCTIONS NEA PRODUCTIONS, INC. KUSHNER-LOCKE INTERNATIONAL (U.K.) LIMITED 800-U.S.SEARCH
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