<PAGE>
As filed with the Securities and Exchange Commission on April 29, 1998
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
FILM ROMAN, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
<PAGE>
FILM ROMAN, INC.
12020 CHANDLER BOULEVARD
North Hollywood, CA 91607
April 29, 1998
To Our Stockholders:
You are cordially invited to attend the Film Roman, Inc. Annual Meeting of
Stockholders (the "Annual Meeting") which will be held on Tuesday, June 16,
1998, at 10:30 a.m., Pacific time, at the Sheraton Universal Hotel, 333
Universal Terrace Parkway, Universal City, California 91608. All stockholders
of record as of Monday, April 20, 1998 are entitled to vote at the Annual
Meeting.
The Annual Meeting will be held to: (a) elect two Class II directors to
serve until the 2001 annual meeting of stockholders or until their successors
are elected and have qualified; (b) approve the Company's 1996 Stock Option
Plan, including an amendment (i) increasing the number of shares of Common
Stock that may be issued or sold under the Stock Option Plan from 1,227,695 to
1,750,000 shares (no more than 325,000 of which may be issued or sold to non-
employee directors) and (ii) increasing the maximum number of shares of Common
Stock with respect to which options may be granted to any single participant
under the Stock Option Plan during any calendar year from 400,000 to 700,000
shares (as amended, the "Stock Option Plan"); (c) ratify the appointment of
independent auditors for the fiscal year ending December 31, 1998; and (d)
transact such other business, if any, as may properly be brought before the
Annual Meeting or any adjournments or postponements thereof.
We appreciate your continued confidence in the Company and hope you will
attend the Annual Meeting in person.
Whether or not you expect to attend the Annual Meeting, please complete,
sign, date and return the enclosed proxy card promptly to ensure that your
shares will be represented at the Annual Meeting. If you attend the Annual
Meeting, you may vote in person even if you have sent in your proxy card.
Sincerely,
Phil Roman
Chairman
<PAGE>
FILM ROMAN, INC.
12020 CHANDLER BOULEVARD
North Hollywood, CA 91607
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 16, 1998
The Annual Meeting of Stockholders of Film Roman, Inc. (the "Company") will
be held at the Sheraton Universal Hotel, 333 Universal Terrace Parkway,
Universal City, California, 91608 on Tuesday, June 16, 1998, at 10:30 a.m.,
Pacific time, for the following purposes:
1. To elect two Class II directors to serve until the 2001 annual meeting
of stockholders or until their successors are elected and have qualified; and
2. To approve the Company's 1996 Stock Option Plan, including an amendment
(i) increasing the number of shares of Common Stock that may be issued or sold
under the Stock Option Plan from 1,227,695 to 1,750,000 shares (no more than
325,000 of which may be issued or sold to non-employee directors) and (ii)
increasing the maximum number of shares of Common Stock with respect to which
options may be granted to any single participant under the Stock Option Plan
during any calendar year from 400,000 to 700,000 shares;
3. To ratify the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending December 31, 1998; and
4. To transact such other business, if any, as may properly be brought
before the Annual Meeting or any adjournments or postponements thereof.
Stockholders of record at the close of business on Monday, April 20, 1998
are entitled to notice of, and to vote at, the Annual Meeting. The list of
stockholders will be available for examination for the ten days prior to the
Annual Meeting at Film Roman, Inc., 12020 Chandler Boulevard, Suite 200, North
Hollywood, California 91607.
All stockholders are cordially invited to attend the Annual Meeting.
PLEASE COMPLETE THE ACCOMPANYING PROXY AND RETURN IT IN THE ENCLOSED
ADDRESSED ENVELOPE.
By Order of the Board of Directors
Dixon Q. Dern
Secretary
North Hollywood, California
April 29, 1998
<PAGE>
FILM ROMAN, INC.
____________________
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
JUNE 16, 1998
This Proxy Statement is furnished to stockholders of Film Roman, Inc.
("Film Roman" or the "Company") in connection with the solicitation of proxies
in the form enclosed herewith for use at the Annual Meeting of Stockholders to
be held on Tuesday, June 16, 1998 (the "Annual Meeting") at 10:30 a.m., Pacific
time, for the purposes of: (1) electing two Class II directors to serve until
the 2001 annual meeting of stockholders or until their successors are elected
and have qualified; (2) approving the Company's 1996 Stock Option Plan,
including an amendment (i) increasing the number of shares of Common Stock that
may be issued or sold under the Stock Option Plan from 1,227,695 to 1,750,000
shares (no more than 325,000 of which may be issued or sold to non-employee
directors) and (ii) increasing the maximum number of shares of Common Stock with
respect to which options may be granted to any single participant under the
Stock Option Plan during any calendar year from 400,000 to 700,000 shares; (3)
ratifying the appointment of Ernst & Young LLP as the Company's independent
auditors for the fiscal year ending December 31, 1998; and (4) transacting such
other business, if any, as may properly be brought before the Annual Meeting or
any adjournments or postponements thereof. A copy of the Company's 1997 Annual
Report to Stockholders and this Proxy Statement and accompanying proxy card will
be first mailed to stockholders on or about May 4, 1998.
This solicitation is made on behalf of the Board of Directors of the
Company (the "Board"). Costs of solicitation will be borne by the Company.
Directors, officers and employees of the Company may also solicit proxies by
telephone, telegraph, fax or personal interview. The Company will reimburse
banks, brokerage firms and other custodians, nominees and fiduciaries for
reasonable expenses incurred by them in sending proxy material to stockholders.
The Company has retained American Stock Transfer & Trust Company to assist in
the solicitation of proxies with respect to shares of Common Stock held of
record by brokers, nominees and institutions. The estimated cost of the services
of American Stock Transfer & Trust Company is $3,000, plus expenses.
The Company's principal executive offices are located at 12020 Chandler
Boulevard, Suite 200, North Hollywood, California 91607, and its telephone
number is (818) 761-2544.
SHARES ENTITLED TO VOTE AND REQUIRED VOTE
The outstanding Common Stock, $.01 par value, of the Company ("Common
Stock") constitutes the only class of securities of the Company entitled to vote
at the Annual Meeting. Stockholders of record of the Common Stock at the close
of business on April 20, 1998 are entitled to notice of, and to vote at, the
Annual Meeting. At that date, 8,522,190 shares of Common Stock were
outstanding. The presence at the Annual Meeting, in person or by proxy, of a
majority of the shares of the Common Stock issued and outstanding on April 20,
1998, will constitute a quorum. Each share of Common Stock is entitled to one
vote.
VOTING PROCEDURES
A proxy card is enclosed for your use. You are solicited on behalf of the
Board of Directors to sign, date and return the proxy card in the accompanying
envelope, which is postage prepaid if mailed in the United States.
1
<PAGE>
You have choices on each of the matters to be voted upon at the Annual
Meeting. Concerning the election of the Class II directors, by checking the
appropriate box on your proxy card you may: (a) vote for both such director
nominees; or (b) withhold authority to vote for one or both director nominees.
Concerning the approval of the Stock Option Plan, as amended, you may: (a) vote
for the Stock Option Plan, as amended; (b) vote against the Stock Option Plan,
as amended; or (c) abstain from voting. Concerning the ratification of the
selection of Ernst & Young LLP as the Company's independent auditors you may:
(a) vote for such ratification; (b) vote against such ratification; or (c)
abstain from such ratification.
Unless contrary instructions are indicated on the proxy, all shares
represented by valid proxies received pursuant to this solicitation (and not
revoked before they are voted) will be voted at the Annual Meeting FOR (i) the
election of the Class II director nominees to the Board listed herein (ii) the
approval of the Stock Option Plan, as amended, and (iii) ratification of the
selection of Ernst & Young LLP as the Company's independent auditors. With
respect to any other business which may properly come before the Annual Meeting
and be submitted to a vote of stockholders, proxies received by the Board of
Directors will be voted in accordance with the best judgment of the designated
proxy holders.
Shares represented by proxies that reflect abstentions or "broker non-
votes" (i.e., shares held by a broker or nominee which are represented at the
Annual Meeting, but with respect to which such broker or nominee is not
empowered to vote on a particular proposal) will be counted as shares that are
present and entitled to vote for purposes of determining the presence of a
quorum. The Class II director nominees shall be elected by a plurality of the
votes of the shares present or represented by proxy at the Annual Meeting and
entitled to vote on the election of directors.
Stockholders may vote by either completing and returning the enclosed proxy
card prior to the Annual Meeting, voting in person at the Annual Meeting, or
submitting a signed proxy card at the Annual Meeting.
YOUR VOTE IS IMPORTANT. ACCORDINGLY, YOU ARE URGED TO SIGN AND RETURN THE
ACCOMPANYING PROXY CARD WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING.
You may revoke your proxy at any time before it is actually voted at the
Annual Meeting by delivering written notice of revocation to the Secretary of
the Company at 12020 Chandler Boulevard, Suite 200, North Hollywood, California
91607, by submitting a later dated proxy, or by attending the Annual Meeting and
voting in person. Attendance at the Annual Meeting will not, by itself,
constitute revocation of the proxy. You may also be represented by another
person present at the Annual Meeting by executing a form of proxy designating
such person to act on your behalf. Shares may only be voted by or on behalf of
the record holder of such shares as indicated in the Company's stock transfer
records.
Votes cast at the Annual Meeting will be tabulated by the persons appointed
by the Company to act as inspectors of election for the Annual Meeting.
2
<PAGE>
PROPOSAL NO. 1:
ELECTION OF NOMINEES TO BOARD OF DIRECTORS
GENERAL INFORMATION
The Bylaws of the Company, as amended to date (the "Bylaws"), provide that
the Board shall consist of between six and nine members, with the number to be
set by resolution of the Board. On April 14, 1998, pursuant to a resolution of
the Board, the number of directors increased from six to seven, and Mr. Daniel
D. Villanueva was appointed as a new member of the Board. In accordance with
the provisions of Article VIII of the Company's Certificate of Incorporation
(the "Charter") and Article III of the Bylaws, Mr. Villanueva will serve as a
Class III director.
The Board is divided into three classes serving staggered terms of three
years each. Pursuant to the Company's Charter and Bylaws, the term of office of
one class of directors expires each year and at each annual meeting the
successors of the class whose term is expiring in that year are elected to hold
office for a term of three years or until their successors are elected and have
qualified. The current terms of the two Class II directors expire at the Annual
Meeting, the three Class III directors expire at the annual meeting of
stockholders in 1999 and the two Class I directors expire at the annual meeting
of stockholders in 2000. The Board has nominated Dr. Dennis Draper and Mr.
Peter Mainstain for election as continuing Class II directors.
Each nominee for director has indicated his willingness to serve if
elected. Proxies received by the Board will be voted for the nominees.
Although the Board does not anticipate that any nominee will be unavailable for
election, in the event of such occurrence the proxies will be voted for such
substitute, if any, as the Board may designate.
In the absence of instructions to the contrary, votes will be cast for the
election of Dr. Draper and Mr. Mainstain as directors pursuant to the proxies
solicited hereby. In the event any nominee is unable or declines to serve as a
director at the time of the Annual Meeting, the proxy will be voted for any
substitute nominee selected by the current Board. However, the proxy cannot be
voted for a greater number of persons than the number of nominees designated by
the Board.
Under the Company's Bylaws and the Delaware General Corporation Law (the
"DGCL"), nominations of persons for election to the Board, other than those made
by or at the direction of the Board, may be made at the Annual Meeting only if
pursuant to a timely notice delivered or mailed to the Secretary of the Company.
To be timely, a stockholder's notice must be delivered to the secretary at the
Company's principal executive offices not less than the close of business on the
120th calendar day in advance of the date the Company's proxy statement was
released to security holders in connection with the previous year's annual
meeting; provided, however, that if no annual meeting was held in the previous
year a proposal shall be received by the Company a reasonable time before the
solicitation is made. A notice of nomination must set forth certain information
as required under the Company's Bylaws and the DGCL.
3
<PAGE>
NOMINEES FOR ELECTION AS DIRECTOR
<TABLE>
<CAPTION>
PRESENT POSITION HELD DIRECTOR
NOMINEE FOR DIRECTOR AGE WITH THE COMPANY SINCE
-------------------- --- --------------------- ---------
<S> <C> <C> <C>
Dennis W. Draper (1) 49 Class II Director 1995
Peter Mainstain (2) 49 Class II Director 1995
</TABLE>
_______________
(1)Member of Compensation Committee.
(2)Member of the Audit Committee.
The principal occupations and positions for the past five years, and in
certain cases prior years, of the director nominees named above are as follows:
Dennis W. Draper: Dr. Draper has been a Director of Film Roman since
August 1995 and has been an Associate Professor of Finance at the University of
Southern California's School of Business since 1977. Dr. Draper serves as
trustee of the First Choice Funds.
Peter Mainstain: Mr. Mainstain has been a Director of Film Roman since
August 1995 and has been a partner of Tanner, Mainstain & Hoffer, an accountancy
corporation, since 1976.
<TABLE>
<CAPTION>
DIRECTORS CONTINUING IN OFFICE
DIRECTOR PRESENT POSITION TERM
NAME SINCE AGE WITH THE COMPANY EXPIRES
- ---- -------- -------- ------------------ -------
<S> <C> <C> <C> <C>
Phil Roman.............................................. 1984 67 Class III Director 1999
Dixon Q. Dern........................................... 1995 69 Class III Director 1999
Daniel D. Villanueva (1)................................ 1998 60 Class III Director 1999
David B. Pritchard...................................... 1997 50 Class I Director 2000
Robert J. Cresci (2).................................... 1995 54 Class I Director 2000
</TABLE>
_______________
(1)Member of Compensation Committee.
(2)Member of Audit Committee.
The principal occupations and positions for the past five years, and in
certain cases prior years, of the directors continuing in office who are named
above are as follows:
Phil Roman: Mr. Roman is Chairman of the Board of Directors. Mr. Roman
was the Company's Chief Executive Officer since the Company was founded in 1984
until September 1997. Phil Roman began his animation career in 1955 at The Walt
Disney Company as an assistant animator on Sleeping Beauty. Over the next 30
years, Mr. Roman worked at many of the major studios, including MGM Animation
and Warner Bros. Cartoons, and was an animator on such productions as The Cat in
the Hat, How the Grinch Stole Christmas, George of the Jungle, Popeye, Snoopy
Come Home and Lord of the Rings. Mr. Roman also directed 13 Emmy-nominated
Charlie Brown specials.
Dixon Q. Dern: Mr. Dern has been a Director of Film Roman since August
1995. Mr. Dern has practiced entertainment law for over 40 years and currently
owns and operates his own private practice which specializes in entertainment,
copyright and communications law.
4
<PAGE>
Daniel D. Villanueva: Mr. Villanueva was appointed to the Board of
Directors on April 14, 1998. From July 1994 to the present, Mr. Villanueva has
been an officer, director and principal stockholder of the corporate general
partner of Bastion Partners, in which is the general partner of Bastion Capital
Fund, L.P. ("Bastion"), an investment fund. Since 1990, Mr. Villanueva also has
been Chairman of Bastion Capital Corp., which manages the affairs of Bastion
pursuant to a management agreement. Mr. Villanueva has over 25 years of
experience as an executive in television, having served in various capacities at
Univision Communications, Inc. or its predecessor from 1964 to 1990. Mr.
Villanueva is a director of Renaissance Cosmetics, Inc., Telemundo Group, Inc.
and is a trustee of Metropolitan West Group of mutual funds.
David B. Pritchard: Mr. Pritchard joined the Company as President and
Chief Executive Officer in September 1997. Prior to working at the Company, Mr.
Pritchard served as HBO's Vice President of Corporate Affairs in New York.
After leaving HBO, he formed his own company, Popular Arts Entertainment. While
there, he produced and developed numerous projects for A&E, HBO and Comedy
Central, as well as providing entertainment news coverage for many different
network shows. After selling Popular Arts Entertainment, Mr. Pritchard founded
Little Fish Inc., where he developed and produced shows for Columbia, Tri Star,
TNT and HBO.
Robert Cresci: Mr. Cresci has been a Director of Film Roman since August
1995 and has been a Managing Director of Pecks Management Partners Ltd., an
investment management firm, since September 1990. Mr. Cresci currently serves
on the board of directors of Bridgeport Machines, Inc., EIS International, Inc.,
Sepracor, Inc., Arcadia Financial, Ltd., Hitox, Inc., Garnet Resources
Corporation, HarCor Energy, Inc., Meris Laboratories, Inc., Educational Medical,
Inc., Source Media, Inc., Castle Dental Centers, Inc., Candlewood Hotel Co.,
Inc., and SeraCare, Inc.
COMPENSATION OF DIRECTORS
Directors receive $6,000 per year as compensation for serving on the Board
of Directors, $500 for attendance at each meeting of the Board of Directors and
$250 for attendance at each meeting of a committee of the Board of Directors.
BOARD OF DIRECTORS AND COMMITTEE MEETINGS
Board of Directors. The Board of Directors held three meetings during
1997. During that period, no incumbent director attended fewer than 75% of the
total number of meetings of the Board and of the committees of the Board on
which such director served.
Audit Committee. The Audit Committee of the Board is presently comprised
of Messrs. Cresci and Mainstain. Mr. Cresci chairs the Audit Committee. As
directed by the Board, the functions of the Audit Committee include reviewing,
monitoring and making recommendations to the Board with respect to: (a) the
policies and procedures of the Company and management in maintaining the
Company's books and records and furnishing necessary information to the
Company's independent auditors, (b) the adequacy and implementation of the
Company's internal controls, (c) the adequacy and competency of the accounting
related personnel, (d) the audit reports submitted by the independent auditors
and taking such action in respect of such reports as the Audit Committee deems
appropriate and (e) annually recommending to the Board for appointment by the
Board independent auditors as auditors of the books, records and accounts of the
Company. During the fiscal year ended December 31, 1997, the Audit Committee
held one meeting.
5
<PAGE>
Compensation Committee. The Compensation Committee of the Board of
Directors is presently comprised of Dr. Draper and Mr. Villanueva. Dr. Draper
chairs the Compensation Committee. Mr. Dern served on the Compensation Committee
through April 13, 1998. As directed by the Board of Directors, the functions of
the Compensation Committee include ensuring that the officers and management
personnel of the Company are compensated in terms of salaries, supplemental
compensation and benefits which are internally equitable and externally
competitive, and administering the Stock Option Plan. During the fiscal year
ended December 31, 1997, the Compensation Committee held one meeting.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE FOR THE DIRECTORS
NOMINATED IN PROPOSAL NO. 1.
6
<PAGE>
PROPOSAL NO. 2:
APPROVAL OF THE 1996 STOCK OPTION PLAN, AS AMENDED
GENERAL
The 1996 Stock Option Plan of Film Roman, Inc. was adopted by the Board and
approved by the sole stockholder in September 1996. In April 1998, the Board
approved an amendment to the Stock Option Plan to: (i) increase the number of
shares of Common Stock that may be issued or sold under the Stock Option Plan
from 1,227,695 to 1,750,000 shares (no more than 325,000 of which may be issued
or sold to non-employee directors) and (ii) increase the maximum number of
shares of Common Stock with respect to which options may be granted to any
single participant under the Stock Option Plan during any calendar year from
400,000 to 700,000 shares. Pursuant to the Stock Option Plan, in order for such
amendment to be effective, it must be approved by the Company's stockholders.
Additionally, in order for any options granted under the Stock Option Plan to
not be considered compensation pursuant to Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"), the Company's stockholders must
approve the Stock Option Plan, as amended.
Under the Stock Option Plan, as currently in effect, not more than
1,227,695 shares of Common Stock are authorized for issuance upon the exercise
of options, and there is no limit on the number of shares of Common Stock that
may be issued upon the exercise of options granted to non-employee directors.
As of April 27, 1998, options for the purchase of 1,080,784 shares of Common
Stock had been granted under the Stock Option Plan (of which options for the
purchase of 75,000 shares were granted to non-employee directors). The Board
believes that in order to continue to provide an incentive to secure and retain
key employees of outstanding ability and to provide added incentives to those
employees responsible for the success of the Company, additional shares should
be made available under the Stock Option Plan. As of April 27, 1998, options
for the purchase of 146,911 shares of Common Stock remained available for future
grants under the Stock Option Plan. In order to continue the Company's goal of
using options as incentives to secure and retain key employees of outstanding
ability, the Board has approved an amendment to the Stock Option Plan that would
increase by 522,305 the number of shares of Common Stock approved for issuance
under the Stock Option Plan and would limit the number of shares of Common Stock
that can be issued upon the exercise of options granted to non-employee
directors to 325,000.
The Stock Option Plan currently requires the Board to solicit stockholder
approval prior to it or the Compensation Committee increasing the number of
shares of Common Stock that may be issued or sold under the Stock Option Plan.
The Board believes that it is in the best interests of the Company and the
Company's stockholders to increase the number of shares of Common Stock that may
be issued or sold under the Stock Option Plan, to limit the number of shares of
Common Stock issuable upon the exercise of options granted to non-employee
directors and to increase the maximum number of shares of Common Stock with
respect to which options may be granted to any single participant under the
Stock Option Plan during any calendar year.
As of April 24, 1998, the last reported sales price of the Common Stock on
the Nasdaq National Market was $1.50.
DESCRIPTION OF THE STOCK OPTION PLAN
The principal features of the Stock Option Plan are summarized below, but
the summary is qualified in its entirety by reference to the Stock Option Plan.
The Stock Option Plan (excluding the amendment thereto described in this
Proposal No. 2) is filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1997 which is incorporated herein by
reference.
7
<PAGE>
Administration of the Stock Option Plan. The Stock Option Plan is
administered by the Board or the Compensation Committee (to the extent the Board
delegates to the Compensation Committee the authority to administer the Stock
Option Plan). In the event the Compensation Committee is administering the
Stock Option Plan, no person is eligible to serve on the Compensation Committee
unless such person is then a "disinterested person" within the meaning of
paragraph (c)(2) of Rule 16b-3 and an "outside director" within the meaning of
Section 162(m)(4)(C)(ii) of the Code. The Compensation Committee has complete
discretion to determine which eligible individuals are to receive option grants,
the number of shares subject to each such grant, the status of any granted
option as either an incentive option or a non-qualified stock option under the
Federal tax laws, the exercise schedule to be in effect for the option grant and
the maximum term for which any granted option is to remain outstanding.
Because Mr. Dern and Dr. Draper were not considered "outside directors,"
for the year ended December 31, 1997, the Compensation Committee served in an
advisory capacity and the actions of the Compensation Committee with respect to
the administration of the Stock Option Plan were authorized by the full Board.
Because Dr. Draper no longer provides financial consulting services to the
Company in 1998, he qualifies as an "outside director" under the Code. In
addition, at the Board meeting on April 14, 1998, Mr. Dern resigned from the
Compensation Committee and the Board appointed Mr. Villanueva to the
Compensation Committee. As a result, both members of the Compensation Committee
now qualify as "outside directors" under the Code. Accordingly, the Board
presently intends to delegate the administration of the Stock Option Plan with
respect to options to be granted to employees and consultants to the
Compensation Committee. The Board will, however, retain administration of the
Stock Option Plan with respect to options to be granted to non-employee
directors.
Eligibility. All regular salaried employees of the Company may, at the
discretion of the Compensation Committee, be granted incentive and non-qualified
stock options to purchase shares of Common Stock at an exercise price of not
less than 100% of the fair market value of such shares on the grant date.
Directors of the Company, consultants and other persons who are not regular
salaried employees of the Company are not eligible to receive incentive stock
options, but are eligible to receive non-qualified stock options.
Purchase Price of Shares Subject to Options. The price of the shares of
Common Stock subject to each option shall be set by the Committee; provided,
however, that the price per share of an option shall be not less than 100% of
the fair market value of such shares on the date such option is granted;
provided, further, that, in the case of an incentive stock option, the price per
share shall not be less than 110% of the fair market value of such shares on the
date such option is granted in the case of an individual then owning (within the
meaning of Section 424(d) of the Code) more than 10% of the total combined
voting power of all classes of stock of the Company, an subsidiary or any parent
corporation ("greater than 10% stockholders").
Non-Assignability. Options may be transferred only by will or by the laws
of descent and distribution. During a participant's lifetime, options are
exercisable only by the participant.
Terms and Exercisability of Options. Unless otherwise determined by the
Board or the Compensation Committee, all options granted under the Stock Option
Plan are subject to the following conditions: (i) options exercisable in
installments, on a cumulative basis, at the rate of 20% each year beginning on
the first anniversary of the date of the grant of the option, until the options
expire or are terminated, and (ii) following an optionee's termination of
employment, the Company has the right to repurchase any outstanding vested
options or any shares of Common Stock issued to an optionee upon exercise of an
option by notifying the optionee of the Company's decision to so purchase the
shares or options within 60 days of such termination of employment. The purchase
price for the shares of
8
<PAGE>
Common Stock is the difference between the fair market value of the shares of
Common Stock at the date of notification and the exercise price of such options.
Options are not assignable or transferable by the optionee except by will
or the laws of inheritance following the optionee's death. The optionee has no
stockholder rights with respect to the shares subject to his or her outstanding
options until such options are exercised and the purchase price is paid for the
shares.
To the extent that the aggregate fair market value of stock with respect to
which "incentive stock options" (within the meaning of Section 422 of the Code,
but without regard to Section 422(d) of the Code) are exercisable for the first
time by an optionee during any calendar year (under the Stock Option Plan and
all other incentive stock option plans of the Company, any subsidiary and any
parent corporation) exceeds $100,000, such options shall be taxed as non-
qualified stock options. The rule set forth in the preceding sentence shall be
applied by taking options into account in the order in which they were granted.
For this purpose, the fair market value of stock shall be determined as of the
time that the option with respect to such stock is granted.
Options are exercisable in whole or in part by written notice to the
Company, specifying the number of shares being purchased and accompanied by
payment of the purchase price for such shares. The option price may be paid:
(i) in cash or by certified cashier's check payable to the order of the Company,
(ii) by cancellation of indebtedness owed by the Company to the optionee, (iii)
by delivery of shares of Common Stock of the Company already owned by, and in
the possession of the optionee, (iv) if authorized by the Board or the Committee
or if specified in the option agreement for the option being exercised, by a
recourse promissory note made by the optionee in favor of the Company or through
installment payments to the Company, or (v) in such other manner as the Board or
the Committee may specify in order to facilitate the exercise of options by the
holders thereof, including but not limited to a guarantee by the Company of a
third party loan to the optionee.
On the date the option price is to be paid, the optionee (or his or her
successor) must make full payment to the Company of all amounts that must be
withheld by the Company for federal, state or local tax purposes.
Termination of Employment; Death or Permanent Disability. If a holder of
an option ceases to be employed by the Company for any reason other than for
cause or the optionee's death or permanent disability, such optionee's stock
option shall expire three months after the date of such cessation of employment
unless by its terms it expires sooner; provided, however, that during such
period after cessation of employment, such stock option may be exercised only to
the extent it was exercisable according to such option's terms on the date of
cessation of employment. If an optionee dies or becomes permanently disabled
while the optionee is employed by the Company, such optionee's option shall
expire three months (or such other period as specified in such optionee's option
agreement) after the date of such optionee's death or permanent disability
unless by its terms it expires sooner. During such period after death, such
stock option may, to the extent it remains unexercised upon the date of such
death, be exercised by the person or persons to whom the optionee's rights under
such stock option are transferred under the laws of descent and distribution.
Acceleration of Exercisability. In the event the Company is acquired by
merger, consolidation or asset sale, each outstanding option which is not to be
assumed by the successor corporation or replaced with a comparable option to
purchase shares of the capital stock of the successor corporation will, at the
election of the Board (or if so provided in an option or other agreement with an
optionee), automatically accelerate in full.
9
<PAGE>
Adjustments. In the event any change is made to the Common Stock issuable
under the Stock Option Plan by reason of any recapitalization, stock dividend,
stock split, combination of shares, exchange of shares or other change in
corporate structure effected without the Company's receipt of consideration,
appropriate adjustments will be made to (i) the maximum number and class of
shares issuable under the Stock Option Plan and (ii) the number and/or class of
shares and price per share in effect under each outstanding option.
Amendments to the Stock Option Plan. The Board may at any time suspend or
terminate the Stock Option Plan. The Board or Committee may also at any time
amend or revise the terms of the Stock Option Plan, provided that no such
amendment or revision shall, unless appropriate stockholder approval of such
amendment or revision is obtained, (i) increase the maximum number of shares
which may be acquired pursuant to options granted under the Stock Option Plan
(except for adjustments as described in the foregoing paragraph), (ii) change
the minimum purchase price required under the Stock Option Plan, (iii) increase
the maximum term of options provided under the Stock Option Plan or (iv) change
the classes of persons eligible to receive options under the Stock Option Plan.
Termination. The Stock Option Plan will terminate on July 1, 2006, unless
sooner terminated by the Board.
SECURITIES LAWS AND FEDERAL INCOME TAXES
SECURITIES LAWS. The Stock Option Plan is intended to conform to the
extent necessary with all provisions of the Securities Act of 1933, as amended
(the "Securities Act"), and the Securities and Exchange Act of 1934, as amended
(the "Exchange Act"), and any and all regulations and rules promulgated by the
Securities and Exchange Commission (the "Commission") thereunder, including
without limitation Rule 16b-3. The Stock Option Plan will be administered, and
options will be granted and may be exercised, only in such a manner as to
conform to such laws, rules and regulations. To the extent permitted by
applicable law, the Stock Option Plan and options granted thereunder shall be
deemed amended to the extent necessary to conform to such laws, rules and
regulations.
GENERAL FEDERAL TAX CONSEQUENCES. The following summary of the material
federal income tax consequences to the Company is based on current law, is for
general information only and is not tax advice.
Section 162(m) Limitation. Subject to a limited number of exceptions,
Section 162(m) of the Code ("Section 162(m)") denies a deduction to a publicly
held corporation for payments of remuneration to certain employees to the extent
the employee's remuneration for the taxable year exceeds $1,000,000. For this
purpose, remuneration attributable to stock options is included within the
$1,000,000 limitation. However, to the extent that the remuneration is payable
solely on account of the attainment of one or more performance goals and certain
other procedural requirements are met, then such remuneration is not subject to
the $1,000,000 limitation.
The Company has attempted to structure the Stock Option Plan in such a
manner that the remuneration attributable to the stock options will not be
subject to the $1,000,000 limitation. The Company has not, however, requested a
ruling from the Internal Revenue Service or an opinion of counsel regarding this
issue.
Non-Qualified Stock Options. Subject to the limitations set forth in
Section 162(m) and discussed above, the Company is entitled to deduct from its
taxable income the amount that the participant is required to include in
ordinary income at the time of such inclusion.
10
<PAGE>
Qualified Stock Options. The Company is not entitled to any deduction on
account of the grant of the incentive stock options or the participant's
exercise of the option to acquire Common Stock. However, in the event of a
subsequent disqualifying disposition of such shares under circumstances
resulting in taxable compensation to the participant, subject to the limitations
set forth in Code Section 162(m) and discussed above, the Company is entitled to
a tax deduction equal to the amount treated as taxable compensation to the
participant.
STOCKHOLDER APPROVAL
Stockholder approval of the Stock Option Plan, as amended, is required (i)
under Section 162(m) to have the Stock Option Plan, as amended, qualify as an
incentive compensation plan, and (ii) under the rules of the Nasdaq National
Market for listing the shares of Common Stock reserved under the Stock Option
Plan, as amended. Approval of Proposal 2 requires the affirmative vote of the
holders of a majority of the Company's outstanding shares of Common Stock
represented at and entitled to vote at the meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE
APPROVAL OF THE 1996 STOCK OPTION PLAN, AS AMENDED,
AS SET FORTH IN PROPOSAL 2.
11
<PAGE>
PROPOSAL NO. 3:
RATIFICATION OF INDEPENDENT AUDITORS
The Board of Directors, upon recommendation of the Audit Committee, has
appointed Ernst & Young LLP as the Company's independent auditors for the fiscal
year ending December 31, 1998. Ernst & Young LLP has been the Company's
independent auditors since 1994. A representative of Ernst & Young LLP will be
present at the Annual Meeting and will be given an opportunity to make a
statement and answer questions. This appointment is being submitted for
ratification at the Annual Meeting. If the appointment is not ratified, the
appointment will be reconsidered by the Board of Directors, although the Board
of Directors will not be required to appoint different independent auditors for
the Company.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE
RATIFICATION OF THE APPOINTMENT OF ERNST &
YOUNG LLP AS THE COMPANY'S INDEPENDENT
AUDITORS FOR THE FISCAL YEAR
ENDING DECEMBER 31, 1998 AS SET
FORTH IN PROPOSAL NO. 3.
12
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Set forth in the following table is the beneficial ownership of the
Company's Common Stock as of April 20, 1998, for (1) each person known by the
Company to own beneficially 5% or more of the Company's Common Stock, (2) each
person who is currently a director of the Company, (3) each of the Named
Executive Officers (as defined on page 15), and (4) all current directors and
executive officers of the Company, as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP (1)
----------------------------------
NUMBER OF
NAME SHARES PERCENT
- ---- --------- -------
<S> <C> <C>
BCI Growth III, L.P. (2)............................. 1,033,969 12.1%
Pecks Management Partners Ltd.(3).................... 1,063,993 12.5
Phil Roman (4) (5)................................... 3,130,050 36.7
David Pritchard (5).................................. -- --
Jon F. Vein (5)(6)................................... 25,500 *
Gregory Arsenault (5) (7)............................ 18,500 *
Jacqueline Blum (5) (8).............................. 17,500 *
Robert J. Cresci (9)................................. 1,063,993 12.5
Dixon Q. Dern (10)................................... 10,100 *
Dennis W. Draper (11)................................ 10,000 *
Peter Mainstain (12)................................. 12,500 *
Daniel D. Villanueva (13)............................ 13,000 *
All directors and executive officers as a
Group (10 persons) (9)............................. 4,301,143 50.5
</TABLE>
_________________
*Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. Shares of Common Stock subject to options which are
currently exercisable, or will become exercisable within 60 days of April
20, 1998, are deemed outstanding for computing the percentage of the person
or entity holding such securities but are not outstanding for computing the
percentage of any other person or entity. Except as indicated by footnote,
and subject to the community property laws where applicable, the persons
named in the table above have sole voting and investment power with respect
to all shares of Common Stock shown as beneficially owned by them.
(2) Based on Schedule 13G filed on February 12, 1997 by Teaneck Associates
L.P., Teaneck Associates L.P., is the sole general partner of BCI Growth
III, L.P. BCI Advisors, Inc., the investment advisor to BCI Growth III,
L.P., has sole investment and voting power with respect to the shares
beneficially owned by BCI Growth III, L.P. The mailing address for BCI
Growth III, L.P. is c/o BCI Advisors, Inc., Glenpointe Centre West,
Teaneck, New Jersey, 07666. Teaneck Associates L.P. and BCI Advisors, Inc.
disclaim beneficial ownership of such shares.
Footnotes continued on following page
13
<PAGE>
______________________________________
Footnotes continued from previous page
(3) Based on Schedule 13G filed on February 18, 1997 by Pecks Management
Partners, Ltd. The Common Stock as to which this Schedule 13G relates are
owned by three investment advisory clients of Pecks, which clients would
receive dividends and the proceeds from the sale of such shares. One such
client, Delaware State Employee's Retirement Fund, is known to have such
interest with respect to more than 5% of the class. Pecks Management
Partners Ltd., as investment manager for these beneficial owners, has sole
investment and voting power with respect to such shares. Mr. Cresci, a
director of the Company, is a managing partner of Pecks Management Partners
Ltd. The mailing address for Pecks Management Partners Ltd. is One
Rockefeller Plaza, New York, New York 10020. Pecks Management Partners Ltd.
disclaims beneficial ownership of such shares.
(4) Includes: (i) 50,000 shares of Common Stock which may be acquired upon
exercise of employee stock options which will become exercisable within 60
days of April 20, 1998; and (ii) 1,300 shares of Common Stock held by Mr.
Roman's spouse for which Mr. Roman disclaims beneficial ownership.
(5) The mailing address for such person is: c/o Film Roman, Inc., 12020
Chandler Boulevard, Suite 200, North Hollywood, California 91607.
(6) Includes 25,000 shares of Common Stock which may be acquired upon exercise
of employee stock options which are currently exercisable.
(7) Represents 17,500 shares of Common Stock which may be acquired upon
exercise of employee stock options which are currently exercisable.
(8) Includes 17,500 shares of Common Stock which may be acquired upon exercise
of employee stock options which are currently exercisable. Ms. Blum
resigned from her position with the Company effective April 1, 1998.
(9) Represents 1,063,993 shares held by pension trusts and a pension fund which
are managed by Pecks Management Partners Ltd. and for which Mr. Cresci
disclaims any beneficial ownership. The mailing address for Mr. Cresci is
c/o Pecks Management Partners Ltd., One Rockefeller Plaza, New York, New
York 10020.
(10) Includes 10,000 shares of Common Stock which may be acquired upon exercise
of stock options which are currently exercisable. The mailing address for
Mr. Dern is 1901 Avenue of the Stars, Suite 400, Los Angeles, California
90067.
(11) Represents 10,000 shares of Common Stock which may be acquired upon
exercise of stock options which are currently exercisable. The mailing
address for Dr. Draper is c/o The University of Southern California
Business School, University Park, Los Angeles, California.
(12) Includes 10,000 shares of Common Stock which may be acquired upon exercise
of stock options which are currently exercisable. The mailing address for
Mr. Mainstain is c/o Tanner, Mainstain & Hoffer, 10866 Wilshire Boulevard,
10th Floor, Los Angeles, California 90024.
(13) The mailing address for Mr. Villanueva is c/o Bastion Capital Corporation,
1999 Avenue of the Stars, Suite 2960, Los Angeles, CA 90067.
14
<PAGE>
EXECUTIVE COMPENSATION
The following table provides for the periods shown certain summary
information concerning compensation paid or accrued by the Company to or on
behalf of the Company's Chief Executive Officer and each of the four highest
paid executive officers of the Company (collectively, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNNUAL COMPENSATION AWARDS
--------------------------------- -----------------
OTHER ANNUAL SHARES
NAME AND FISCAL COMPENSATION UNDERLYING
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($)(1) OPTIONS (#)(2)
- ------------------ ------ ------------ ---------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Phil Roman........................ 1997 $325,000(1) $ -- $ -- --
Chairman 1996 331,250 -- 57,851 125,000
1995 306,500 -- 41,974 --
David Pritchard................... 1997 $ 86,539(3) $ -- $ -- 388,023
President and
Chief Executive Officer
Jon F. Vein....................... 1997 $218,861 $ -- $ -- --
Senior Vice President 1996 158,424 -- -- 62,500
1995 128,800(4) -- -- --
Gregory Arsenault................. 1997 $174,420 $ -- $ -- --
Senior Vice President-Finance 1996 159,110 -- -- 43,750
and Administration 1995 144,160 -- -- --
Jacqueline Blum................... 1997 $163,962(5) $10,000 $ -- --
Former Senior Vice President 1996 149,519 10,000 -- 43,750
-Worldwide Licensing 1995 123,962 -- -- --
and Marketing
</TABLE>
__________________
(1) Each individual in the table for each year, other than Mr. Roman for 1995
and 1996, received annually (i) a contribution pursuant to the Company's
401(k) profit sharing plan amounting to less than $2,100 and (ii)
perquisites and other personal benefits, securities or property aggregating
less than $50,000 or 10% of the total annual salary and bonus reported for
such individual. On behalf of Mr. Roman, the Company contributed (i)
$2,375, and $2,310 to the Company's 401(k) profit sharing plan in 1996 and
1995, respectively; (ii) $10,088 and $28,358 in automobile insurance,
service and lease payments in 1996 and 1995, respectively, (iii) $26,500 in
life insurance premiums for 1996, and (iv) payments for personal travel and
accounting services which accounted for the remainder of Mr. Roman's other
annual compensation.
(2) The securities underlying the options are shares of Common Stock. For a
description of the terms pertaining to such options and other information
relating thereto, see "--Proposal No. 2: Approval of 1996 Stock Option
Plan, as Amended" and "--Employment Agreements."
(3) Mr. Pritchard began employment with the Company in September 1997 and his
annual base salary for his first year of employment is $300,000.
Footnotes continued on following page
15
<PAGE>
______________________________________
Footnotes continued from previous page
(4) Mr. Vein began employment with the Company in February 1995 and his annual
base salary for his first year of employment was $145,600.
(5) Ms. Blum received a $10,000 signing bonuses in 1996 following the
negotiation of her new employment agreement in December 1995. Ms. Blum
resigned from her position with the Company effective April 1, 1998.
During the periods indicated above, none of the individuals listed above
received any awards under any long-term incentive plan, and the Company does not
have a pension plan.
401(k) PROFIT SHARING PLAN
The Company has a defined contribution 401(k) Profit Sharing Plan which
covers substantially all of its employees. The plan became effective on January
1, 1991 and was amended effective January 1, 1992. Under the terms of the plan,
employees can elect to defer up to 15% of their wages, subject to certain
Internal Revenue Service limitations, by making voluntary contributions to the
plan. Additionally, the Company, at the discretion of management, can elect to
match up to 100% of the voluntary contributions made by its employees. For the
years ended December 31, 1995, 1996 and 1997, the Company contributed $93,081,
$104,923 and $120,431, respectively, to the plan on behalf of its employees.
STOCK OPTION PLAN
For a description of the Stock Option Plan, see "Proposal No. 2: Approval
of 1996 Stock Option Plan, as Amended."
16
<PAGE>
OPTION GRANTS DURING FISCAL YEAR ENDED DECEMBER 31, 1997
The following table sets forth certain information regarding grants of
stock options made to the Named Executive Officers during the fiscal year ended
December 31, 1997, including information as to the potential realizable value of
such options at assumed annual rates of stock price appreciation for the 10-year
option terms.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE APPRECIATION
INDIVIDUAL OPTION GRANT FOR OPTION TERM (1)
----------------------------------------------------------------------- ----------------------
NUMBER OF PERCENT OF
SHARES TOTAL OPTIONS MARKET
UNDERLYING GRANTED TO EXERCISE PRICE AT
NAME AND OPTIONS EMPLOYEES PRICE GRANT EXPIRATION
PRINCIPAL POSITION GRANTED(2) IN PERIOD PER SHARE DATE DATE 5% 10%
- ------------------ ----------- ----------- ---------- --------- ----------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Phil Roman
Chairman................... -- -- -- -- -- -- --
David Pritchard
President and Chief
Executive Officer.......... 388,023 100% $1.94 $1.94 2007 $473,410 $1,199,713
Jon F. Vein
Senior Vice President...... -- -- -- -- -- -- --
Gregory Arsenault
Senior Vice President...... -- -- -- -- -- -- --
Jacqueline Blum(3)
Former Senior Vice
President................. -- -- -- -- -- -- --
- ------------------------
</TABLE>
(1) The potential realizable value assumes a rate of annual compound stock
price appreciation of 5% and 10% from the date the option was granted over
the full option term. These assumed annual compound rates of stock price
appreciation are mandated by the rules of the Commission and do not
represent the Company's estimate or projection of future Common Stock
prices.
(2) The securities underlying the options are shares of Common Stock. For a
description of the terms pertaining to such options and other information
relating thereto, see "--Stock Option Plan" and "--Employment Agreements."
(3) Ms. Blum resigned from her position with the Company effective April 1,
1998.
17
<PAGE>
EMPLOYMENT AGREEMENTS
The Company has entered into the following employment agreements with the
Named Executive Officers:
Mr. Roman. Mr. Roman currently serves as Chairman of the Board. Mr. Roman
continues to earn a base salary equal to $325,000 per year pursuant to his
employment agreement entered into on August 7, 1995. In the event the Company
attains certain earnings goals, Mr. Roman is entitled to receive an additional
$25,000 as base salary during the fourth year of employment and an additional
$50,000 per year as base salary during the fifth year of employment.
Mr. Roman is also entitled to an incentive bonus for each calendar year
based on the relationship of earnings to earnings goals for such calendar year.
In the event the Board and/or the Compensation Committee adopts a management
bonus plan, Mr. Roman's employment agreement is expected to be amended to
remove such incentive bonus provisions and Mr. Roman will become eligible to
receive a bonus under the Company's management bonus plan. The Company is
entitled to terminate Mr. Roman's agreement upon his death or disability or "for
cause" (e.g., commission of a felony, gross negligence or material breach of his
employment agreement).
Mr. Pritchard. On August 22, 1997, Mr. Pritchard and the Company entered
into an agreement summarizing the terms of Mr. Pritchard's employment by the
Company. The initial term of Mr. Pritchard's employment commenced on September
15, 1997 and expires on September 14, 1999; however, the Company has three
consecutive annual options to extend the term for additional 12-month periods.
Mr. Pritchard's salary is $300,000 per year for the first two years, with
increases for each optional term. The Company is entitled to terminate Mr.
Pritchard's agreement "for cause," (e.g., conviction of a felony or a crime
involving moral turpitude or the commission of any other act involving willful
malfeasance with respect to the Company, failure to adhere to the Board-approved
business plan, or any other material breach of the agreement.) In the event of
termination "without cause", Mr. Pritchard shall be entitled to continue to
receive his compensation, subject to the Company's right to fully mitigate all
salary obligations. Pursuant to the terms of Mr. Pritchard's agreement, the
Company granted Mr. Pritchard options to purchase 388,023 shares of Common Stock
under the Stock Option Plan in August 1997 and options for an additional 194,011
shares of Common Stock in January 1998. In addition, Mr. Roman has agreed to
grant Mr. Pritchard options to purchase 388,023 shares of the Company's Common
Stock subject to certain terms and conditions relating to Mr. Pritchard's
employment.
Mr. Vein. Effective August 4, 1997, Mr. Vein and the Company entered into
an employment agreement that will expire on August 3, 1998. Pursuant to the
terms of the agreement, Mr. Vein serves as a Senior Vice President of the
Company, and the Company will pay Mr. Vein an annual base salary equal to
$225,000. The Company is entitled to terminate Mr. Vein's agreement upon his
death or disability, "for cause" (e.g., commission of a felony, gross negligence
or material breach of his employment agreement) or "without cause" (reasons
other than for his death or for cause). The Company paid Mr. Vein a one-time
signing bonus of $25,000 upon execution of his employment agreement.
Pursuant to the terms of Mr. Vein's employment agreement Mr. Vein is
entitled to receive bonuses with respect to the project entitled "There Goes the
Neighborhood," which is subject to a development-production agreement between
the Company and Universal Pictures. Mr. Vein is also eligible to receive
bonuses with respect to any additional feature length film projects intended for
initial theatrical release which Mr. Vein initiates or sets up during his
employment and which result in the commencement of principal photography or
animation within three years of the date when a firm commitment is entered into
for such project.
18
<PAGE>
Mr. Arsenault. On January 2, 1996, Mr. Arsenault and the Company entered
into an employment agreement that expires on January 2, 1999, and may be
extended at the Company's option for one additional year. Pursuant to the terms
of the agreement, Mr. Arsenault shall serve as the Company's Senior Vice
President--Finance and Administration and the Company will pay Mr. Arsenault a
base salary equal to $160,160 during the first year of employment, $168,168
during the second year of employment and $176,576 during the third year of
employment. If Mr. Arsenault's agreement is extended to include a fourth year
of employment, Mr. Arsenault's base salary during such year will be $194,234.
At the end of each calendar year, Mr. Arsenault is eligible to receive a bonus
in an amount determined by the Board of Directors. The Company is entitled to
terminate Mr. Arsenault's agreement upon his death or disability, "for cause"
(e.g., commission of a felony, gross negligence or material breach of his
employment agreement) or "without cause" (reasons other than for his death or
disability or for cause). Mr. Arsenault is entitled to terminate the agreement
if Mr. Roman ceases to be President of the Company. Pursuant to the terms of
Mr. Arsenault's agreement, the Company granted Mr. Arsenault options for the
purchase of 43,750 shares of Common Stock at an exercise price of $8.00 per
share.
Ms. Blum. On December 15, 1995, Ms. Blum and the Company entered into an
employment agreement that expired on January 1, 1998. In the first quarter of
1998, the Company decided to reduce its fixed overhead by outsourcing its
licensing and merchandising activities. Therefore, the Company did not
negotiate a new employment agreement with Ms. Blum. The Company and Ms. Blum
entered into a short-term agreement for the continuation of her services, and
Ms. Blum resigned from her position with the Company effective April 1, 1998.
19
<PAGE>
The following table relates to options exercised during fiscal year 1997
and options outstanding at December 31, 1997:
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED DECEMBER 31, 1997
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED "IN-THE-MONEY"
OPTIONS AS OF OPTIONS AS OF
DECEMBER 31, 1997(#) DECEMBER 31, 1997 ($)(1)
-------------------- ------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Phil Roman................................... 25,000 100,000 $0 $0
David Pritchard.............................. -- 388,023 0 0
Jon F. Vein.................................. 25,000 37,500 0 0
Gregory Arsenault............................ 17,500 26,250 0 0
Jacqueline Blum(2)........................... 17,500 26,250 0 0
</TABLE>
__________________________
(1) Amounts would represent the difference between the aggregated exercise
prices of unexercised options and the $1.69 closing sale price of the
Common Stock on the Nasdaq National Market on December 31, 1997.
(2) Ms. Blum has resigned her position with the Company effective April 1,
1998.
20
<PAGE>
COMPENSATION COMMITTEE REPORT
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As of the date of the Compensation Committee Report, April 13, 1998, the
Compensation Committee of the Board of Directors was comprised of Mr. Dern and
Dr. Draper. Dr. Draper chaired, and continues to chair, the Compensation
Committee. No executive officer of the Company either served in 1997 or now
serves as a member of the Board of Directors or compensation committee of any
entity which has one or more executive officers who serve on the Board or are
members of the Compensation Committee. Mr. Dern provides legal services to the
Company on an ongoing basis and Dr. Draper provided independent financial
consulting services to the Company during 1997. Each of Mr. Dern and Dr. Draper
received customary fees for such services. See "Certain Transactions."
REPORT ON ANNUAL COMPENSATION OF EXECUTIVE OFFICERS
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act or the Exchange Act, that might
incorporate future filings, including this Proxy Statement, in whole or in part,
the following Compensation Committee Report on Executive Compensation and the
Stock Performance Graph on Page 23 shall not be incorporated by reference into
any such filings.
* * * * * *
In 1997, through the date of the Compensation Committee Report, April 13,
1998, the Compensation Committee of the Board of Directors served as an advisory
committee to the Board and was responsible for reviewing the compensation of the
senior management team and for making recommendations regarding compensation.
Compensation Philosophy
The Compensation Committee's philosophy is to provide sufficient
compensation to attract, motivate, and retain skilled management while linking
that compensation to corporate performance and increases in stockholder wealth
where possible.
The Compensation Committee, with the assistance of the Chief Executive
Officer, determines the compensation of the executive officers based on its
evaluation of the Company's overall performance, primarily based on the
Company's operating performance compared with the Company's operating plan, as
well as various qualitative factors such as the extent to which the executive
officer has contributed to forming a strong management team, the growth and
development of proprietary and fee-for-services programming and other factors
which the Compensation Committee believes are indicative of the Company's
ongoing ability to achieve its long-term growth and profit objectives. With
respect to each executive, the Compensation Committee focuses on that individual
executive's areas of responsibility and his or her contribution toward achieving
corporate objectives.
Compensation Program
Consistent with achieving the Company's long-term objectives, executive
compensation packages are generally comprised of two components--base
compensation and stock options. The base compensation portion of the
compensation package is determined by considering such factors as breadth of
responsibility, areas of expertise and experience, and comparable compensation
in the industry. During 1997, executive compensation information for
entertainment companies was obtained from two
21
<PAGE>
independent sources by the Compensation Committee. As is the custom in the
industry, most of the senior management team is under some form of employment
contract with the Company. The stock option incentive portion of the
compensation package has been implemented through the Company's Stock Option
Plan. Each member of the senior management team has been granted options which
are intended to provide each individual with a strong economic interest in the
appreciation of the stock price. The Stock Option Plan permits the Board of
Directors to grant options to other key employees to provide similar incentives.
A number of key employees have been granted such options. While the Compensation
Committee might consider performance bonuses in the event of exceptional
contributions to enhance corporate performance, no such consideration was made
in 1997.
The 1997 base salary for Mr. Roman, Chairman, was $325,000. During the
year, Mr. Pritchard was hired as the Company's new President and Chief Executive
Officer with a base salary of $300,000. As further consideration in August
1997, Mr. Pritchard received a grant of options to purchase 388,023 shares of
Common Stock and in January 1998, Mr. Pritchard received a grant of options to
purchase 194,011 shares of Common Stock. All such options have an exercise
price of the fair market value on date of grant and are exercisable in various
installments over four years, depending on whether Mr. Pritchard remains as an
employee of the Company during such time. In addition, Mr. Vein, Senior Vice
President, executed a new employment contract (upon expiration of his previous
employment agreement) with a base salary of $225,000 and a signing bonus of
$25,000.
To the extent readily determinable and as one of the factors in its
consideration matters, the Compensation Committee considers the anticipated tax
treatment of the Company and to its executives of various payments and benefits.
Some types of compensation payments and their deductibility depend upon the
timing of an executive's vesting or exercise of previously granted rights,
qualification of the Compensation Committee and other reasons. Further,
interpretations of and changes in the tax laws and other factors beyond the
Compensation Committee's control also affect the deductibility of compensation.
For these and other reasons, the Compensation Committee will not necessarily
limit executive compensation to that amount deductible under Section 162(m) of
the Internal Revenue Code of 1986, as amended. The Compensation Committee will
consider various alternatives to preserving the deductibility of compensation
payments and benefits to the extent reasonably practicable and to the extent
consistent with its other compensation objectives.
April 13, 1998
By the Compensation Committee
Dennis W. Draper, Chairman
Dixon Q. Dern
22
<PAGE>
STOCK PERFORMANCE GRAPH
Set forth below is a line graph comparing the total cumulative return of
the Company's Common Stock since the Common Stock began trading on the Nasdaq
National Market on October 1, 1996 in connection with its initial public
offering through to December 31, 1997 to (a) the Standard & Poor's 500 Composite
Index ("S&P 500 Index"), and (b) the Standard and Poor's Entertainment Index
("S&P Entertainment Index").
The historical stock market performance of the Common Stock shown below is
not necessarily indicative of future stock performance.
COMPARISON OF 15 MONTH CUMULATIVE TOTAL RETURN*
AMONG FILM ROMAN, INC., THE S & P 500 INDEX
AND THE S & P ENTERTAINMENT INDEX
PERFORMANCE GRAPH APPEARS HERE
<TABLE>
<CAPTION>
Measurement Period FILM S & P S & P
(Fiscal Year Covered) ROMAN, INC. 500 INDEX ENTERTAINMENT
- ------------------- ----------- --------- -------------
<S> <C> <C> <C>
Measurement Pt- 10/1/96 $100 $100 $100
FYE 12/96 $ 76 $108 $104
FYE 03/97 $ 20 $111 $110
FYE 06/97 $ 18 $131 $119
FYE 09/97 $ 21 $140 $125
FYE 12/97 $ 17 $144 $152
</TABLE>
* ASSUMES $100 WAS INVESTED ON OCTOBER 1, 1996 IN STOCK OR ON SEPTEMBER 30,
1996 IN INDEX AND ASSUMES REINVESTMENT OF DIVIDENDS.
The Stock Performance Graph above shall not be deemed incorporated by
reference by any general statement incorporating by reference this Proxy
Statement into any filing under the Securities Act or under the Exchange Act,
except to the extent the Company specifically incorporates this information by
reference, and shall not otherwise be deemed filed under such Acts.
23
<PAGE>
CERTAIN TRANSACTIONS
Mr. Dern provides legal services to the Company on a regular basis and
receives customary fees for such services. In 1997, Mr. Dern's firm was paid
approximately $135,000 for such services. Dr. Draper provided consulting
services to the Company on a regular basis in 1997 and received customary fees
of $145,000 for such services.
OTHER INFORMATION
OTHER MATTERS AT THE MEETING
The Board of Directors does not know of any matters to be presented at the
Annual Meeting other than those mentioned in this Proxy Statement. If any other
matters are properly brought before the Annual Meeting, it is intended that the
proxies will be voted in accordance with the best judgment of the person or
persons voting such proxies.
STOCKHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
Any stockholder who meets the requirements of the proxy rules under the
Exchange Act may submit to the Board of Directors proposals to be considered for
submission to the stockholders at the 1999 Annual Meeting of Stockholders. Any
such proposal must comply with the requirements of Rule 14a-8 under the Exchange
Act and be submitted in writing by notice delivered or mailed by first-class
United States mail, postage prepaid, to the Corporate Secretary, Film Roman,
Inc., 12020 Chandler Boulevard, Suite 200, North Hollywood, California 91607 and
must be received no later than January 4, 1999. Any such notice shall set
forth: (a) the name and address of the stockholder and the text of the proposal
to be introduced; (b) the number of shares of stock held of record, owned
beneficially and represented by proxy by such stockholder as of the date of such
notice; and (c) a representation that the stockholder intends to appear in
person or by proxy at the meeting to introduce the proposal specified in the
notice. The chairman of the meeting may refuse to acknowledge the introduction
of any stockholder proposal not made in compliance with the foregoing
procedures. In addition, the Company's Bylaws provide for notice procedures to
recommend a person for nomination as a director and to propose business to be
considered by stockholders at a meeting.
By Order of the Board of Directors
Dixon Q. Dern
Secretary
North Hollywood, California
April 29, 1998
24
<PAGE>
FIRST AMENDMENT
TO
1996 STOCK OPTION PLAN
OF
FILM ROMAN, INC.
WHEREAS, Film Roman, Inc. (hereinafter the "Company"), a Delaware
corporation, maintains the 1996 Stock Option Plan of the Company, effective as
of September 9, 1996; (hereinafter the "Plan"); and
WHEREAS, pursuant to Section 13.1 of the Plan, the Board of Directors of
the Company (hereinafter the "Board") may amend the Plan from time to time;
NOW THEREFORE, BE IT RESOLVED, that the Plan be amended as follows,
effective June 16, 1998.
1. Section 3 shall be amended and restated in its entirety as follows:
The shares to be issued under the Plan shall consist of the Company's
authorized but unissued Common Stock. Subject to adjustment as provided in
Paragraph 12 hereof, the aggregate number of shares of Common Stock which may be
issued upon exercise of all Options granted under the Plan shall not exceed
1,750,000 shares of which no more than 325,000 may be issued or sold to non-
employee directors. If any Option granted under the Plan shall expire or
terminate for any reason, without having been exercised in full, the unpurchased
shares of Common Stock subject to such Option shall again be available for new
Options to be granted under the Plan.
2. Section 4.4 shall be amended and restated in its entirety as follows:
The maximum number of shares of Common Stock with respect to which Options
may be granted to any single Participant under the Plan during any calendar year
shall not exceed an aggregate of 700,000 shares, provided that if any such
Options expire, are repriced, or are canceled they shall, solely to the extent
required by Section 162(m) of the Code, be counted against this limitation.
RESOLVED FURTHER, that this First Amendment to the Plan shall be presented
to the stockholders of the Company for approval at the Annual Meeting to be held
on June 16, 1998.
<PAGE>
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PROXY CARD
FILM ROMAN, INC.
12020 CHANDLER BOULEVARD, NORTH HOLLYWOOD, CA 91607
PROXY SOLICITED BY BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS--JUNE 16, 1998
Phil Roman and Dixon Q. Dern (the "Proxy Holders"), or any of them, each with
the power of substitution, hereby are authorized to represent the undersigned,
with all powers which the undersigned would possess if personally present, to
vote the shares of Film Roman, Inc. Common Stock of the undersigned at the
Annual Meeting of Stockholders of Film Roman, Inc., (the "Company") to be held
at the Sheraton Universal Hotel, 333 Universal Terrace Parkway, Universal City,
California 91608, at 10:30 A.M., Pacific time, on Tuesday, June 16, 1998, and
at any adjournments or postponements of that meeting upon and in respect of the
following matters and in accordance with the following instructions, with
discretionary authority as to any and all other business that may properly come
before the meeting.
You are encouraged to specify your choices by marking the appropriate boxes,
SEE REVERSE SIDE, but you need not mark any boxes if you wish to vote in
accordance with the Board of Directors' recommendations. PLEASE MARK, SIGN AND
DATE THE REVERSE SIDE AND MAIL PROMPTLY IN THE ENCLOSED ENVELOPE.
Change of Address:
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
(If you have written in the above space, please
mark the corresponding box on the reverse side of
this card.)
[SEE REVERSE SIDE]
PLEASE MARK, SIGN, DATE AND RETURN PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE>
- --------------------------------------------------------------------------------
[X] PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE.
1. To elect two directors to hold office until the Annual Meeting of
Stockholders in the year 2001.
To withhold authority to vote for any individual nominee, write that
nominee's name on the space provided below.
FOR NOMINEE: Dennis W. Draper
[_] Peter Mainstain
_____________________________________________________________________________
[_] Please indicate if a change of address was given on the reverse side.
2. To approve the Company's 1996 Stock Option Plan, as Amended.
FOR AGAINST ABSTAIN
[_] [_] [_]
3. To ratify the selection of Ernst & Young LLP as independent auditors of the
Company for the year ending December 31, 1998.
FOR AGAINST ABSTAIN
[_] [_] [_]
In their discretion, the Proxy Holders are authorized to vote upon such other
matters as may properly come before the Annual Meeting of Stockholders and at
any adjournments or postponements thereof. The Board of Directors at present
knows of no other business to be presented by or on behalf of the Company or
the Board of Directors at the Annual Meeting of Stockholders.
This Proxy Card will be voted as specified or, if no choice is specified, will
be voted FOR the election of the named nominees for director, FOR the Company's
1996 Stock Option Plan, as Amended, and FOR ratification of the selection of
Ernst & Young LLP as the independent auditors of the Company for the year
ending December 31, 1998. The Board of Directors recommends a vote FOR election
of the nominees for director and FOR proposals 2 and 3.
As of the date hereof, the undersigned hereby acknowledges receipt of the
Notice of Annual Meeting of Stockholders to be held June 16, 1998, the
accompanying Proxy Statement and the accompanying Annual Report of the Company
for the year ended December 31, 1997.
Signature(s): ________________________________________ Date: ___________________
Signature(s): ________________________________________ Date: ___________________
NOTE: PLEASE SIGN EXACTLY AS YOUR NAME APPEARS HEREON. IF THE STOCK IS
REGISTERED IN THE NAMES OF TWO OR MORE PERSONS, EACH SHOULD SIGN.
EXECUTORS, ADMINISTRATORS, TRUSTEES, GUARDIANS AND ATTORNEYS-IN-FACT
SHOULD ADD THEIR TITLES. IF SIGNER IS A CORPORATION, PLEASE GIVE FULL
CORPORATE NAME AND HAVE A DULY AUTHORIZED OFFICER SIGN, STATING TITLE.
IF SIGNER IS A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY
AUTHORIZED PERSON.
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