<PAGE>
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
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
[X] Definitive Proxy Statement Commission Only (as permitted by
[_] Definitive Additional Materials Rule 14a-6(e)(2)
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 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 transactions applies:
- --------------------------------------------------------------------------------
(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.:
- --------------------------------------------------------------------------------
(3) Filing party:
- --------------------------------------------------------------------------------
(4) Date filed:
- --------------------------------------------------------------------------------
<PAGE>
FILM ROMAN, INC.
___________
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held June 16, 1999
___________
TO OUR STOCKHOLDERS:
Notice is hereby given that the 1999 Annual Meeting of Stockholders of Film
Roman, Inc. ("Film Roman" or the "Company") will be held at the Sheraton
Universal Hotel, 333 Universal Terrace Parkway, Universal City, California,
91608, on June 16, 1999 at 10:30 a.m., Pacific Daylight Savings time. The
Annual Meeting is being held for the following purposes:
1. To elect three Class III directors of the Company, to hold office for
three years and until their respective successors are duly elected.
The persons nominated by the Board of Directors of the Company (Mr.
Dixon Q. Dern, Mr. James M. McNamara and Mr. Daniel D. Villanueva) are
described in the accompanying Proxy Statement;
2. To approve a Second Amendment to the Company's 1996 Stock Option
Plan, as amended, to increase the maximum number of shares of Common
Stock that may be issued pursuant to awards granted under the plan
from 1,750,000 shares to 2,100,000 shares;
3. To approve the Company's 1999 Non-Employee Directors Stock Option
Plan; and
4. To transact such other business as may properly come before the Annual
Meeting or any of its adjournments or postponements.
Only stockholders of record of the Common Stock of the Company at the close
of business on April 20, 1999 are entitled to notice of, and to vote at, the
Annual Meeting and any of its adjournments or postponements.
All stockholders are cordially invited to attend the Annual Meeting in
person. However, to ensure your representation at the Annual Meeting, you are
urged to mark, sign and return the enclosed Proxy as promptly as possible in the
postage prepaid envelope enclosed for that purpose. Any stockholder of record
attending the Annual Meeting may vote in person, even though he or she has
returned a Proxy.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Dixon Q. Dern
Dixon Q. Dern
Secretary
North Hollywood, California
May 7, 1999
IN ORDER TO ENSURE YOUR REPRESENTATION AT THE MEETING, PLEASE COMPLETE, DATE,
SIGN AND RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED ENVELOPE AS PROMPTLY AS
POSSIBLE. IF YOU ARE A STOCKHOLDER OF RECORD AND DO ATTEND THE MEETING, YOU
MAY, IF YOU PREFER, REVOKE YOUR PROXY AND VOTE YOUR SHARES IN PERSON.
<PAGE>
FILM ROMAN, INC.
12020 Chandler Boulevard, Suite 200
North Hollywood, CA 91607
________________
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
To Be Held June 16, 1999
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors (the "Board") of Film Roman, Inc., a Delaware
corporation ("Film Roman" or the "Company"), for use at the 1999 Annual Meeting
of Stockholders (the "Annual Meeting") to be held at the Sheraton Universal
Hotel, 333 Universal Terrace Parkway, Universal City, California, 91608, on June
16, 1999 at 10:30 a.m., and at any of its adjournments or postponements, for the
purposes set forth herein and in the attached Notice of Annual Meeting of
Stockholders. Accompanying this Proxy Statement is the Board of Directors' Proxy
for the Annual Meeting, which you may use to indicate your vote on the proposals
described in this Proxy Statement.
At the Annual Meeting, the stockholders of the Company will vote upon (i)
the election of three Class III directors for a term of three years; (ii) a
Second Amendment to the Company's 1996 Stock Option Plan, as amended, increasing
the maximum number of shares of Common Stock that may be issued pursuant to
awards granted under the plan from 1,750,000 shares to 2,100,000 shares; (iii)
the approval of the Company's 1999 Non-Employee Directors Stock Option Plan; and
(iv) such other business, if any, as may properly come before the Annual Meeting
or any of its adjournments or postponements.
All Proxies which are properly completed, signed and returned to the
Company prior to the Annual Meeting, and which have not been revoked, will,
unless otherwise directed by the stockholder, be voted in accordance with the
recommendations of the Board of Directors set forth in this Proxy Statement. A
stockholder may revoke his or her Proxy at any time before it is voted either by
filing with the Secretary of the Company, at its principal executive offices, a
written notice of revocation or a duly executed proxy bearing a later date, or,
with respect to stockholders of record, by attending the Annual Meeting and
expressing a desire to vote his or her shares in person.
The close of business on April 20, 1999 has been fixed as the record date
for the determination of stockholders entitled to notice of, and to vote at, the
Annual Meeting or any adjournments or postponements of the Annual Meeting. At
the record date, 8,524,190 shares of Common Stock, par value $.01 per share (the
"Common Stock"), were outstanding. The Common Stock is the only outstanding
class of capital stock of the Company entitled to vote at the Annual Meeting. A
stockholder is entitled to cast one vote for each share held of record on the
record date on all matters to be considered at the Annual Meeting. 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, 1999, will constitute a quorum.
Abstentions and broker non-votes will be included in the number of shares
present at the Annual Meeting for the purpose of determining the presence of a
quorum. Abstentions will be counted toward the tabulation of votes cast on
proposals submitted to stockholders and will have the same effect as negative
votes, while broker non-votes will not be counted either as votes cast for or
against such matters. The Class III 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. The amendment
of the 1996 Stock Option Plan will require the affirmative vote of a majority of
the shares of Common Stock present or represented and voting on this matter at
the Annual Meeting (which shares voting affirmatively also constitute at least a
majority of the required quorum). The approval of the 1999 Non-Employee
Directors Stock Option Plan will require the affirmative vote of a majority of
the shares of Common Stock present or represented and voting on this matter at
the Annual Meeting (which shares voting affirmatively also constitute at least a
majority of the required quorum).
A copy of the Company's 1998 Annual Report to Stockholders and this Proxy
Statement and the accompanying Proxy will be mailed to stockholders on or about
May 7, 1999.
<PAGE>
PROPOSAL NO. 1
ELECTION OF DIRECTORS
The Bylaws of the Company, as amended to date, provide that the Board of
Directors shall consist of no fewer than six and no more than nine directors,
with the number to be set by resolution of the Board of Directors. The Board of
Directors currently consists of seven directors.
The Board is divided into three classes serving staggered terms of three
years each. At each annual meeting of stockholders, directors constituting one
class are elected, each for a three-year term. The current terms of the Class
III directors expire at the Annual Meeting, the terms of the two Class I
directors expire at the annual meeting of stockholders in 2000 and the terms of
the two Class II directors expire at the annual meeting of stockholders in 2001.
Pursuant to the Company's Bylaws and the Delaware General Corporation Law
("DGCL"), a vacancy on the Board may be filled by the remaining directors. The
Board has appointed James M. McNamara to fill the position on the Board vacated
by Phil Roman and has nominated Dixon Q. Dern, James M. McNamara and Daniel D.
Villanueva for election as Class III directors.
Unless otherwise instructed, the Proxy holders will vote the Proxies
received by them for the nominees named below. If any nominee is unable or
unwilling to serve as a director at the time of the Annual Meeting or any of its
postponements or adjournments, the Proxies will be voted for such other
nominee(s) as shall be designated by the current Board of Directors to fill any
vacancy. The Company has no reason to believe that any nominee will be unable
or unwilling to serve if elected as a director.
The Board of Directors proposes the election of the following nominees as
directors:
Dixon Q. Dern
James M. McNamara
Daniel D. Villanueva
If elected, each nominee is expected to serve until the 2002 Annual Meeting
of Stockholders and until his or her successor is duly elected and qualified.
The Board of Directors unanimously recommends a vote "FOR" the election of the
Nominees listed above.
2
<PAGE>
Information with Respect to Nominees and Continuing Directors
The following table sets forth certain information with respect to the
nominees for director and the continuing directors of the Company as of March
31, 1999:
<TABLE>
<CAPTION>
Year First
Elected or
Appointed
Name: Age Director Principal Occupation
----- --- ---------- --------------------
<S> <C> <C> <C>
Nominees:
Dixon Q. Dern 70 1995 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.
Daniel D. Villanueva (1) 61 1998 Mr. Villanueva was appointed to the Board of Directors in
April 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, which is the
general partner of Bastion Capital Fund, L.P. ("Bastion"), an
investment fund. Since 1990, Mr. Villanueva has also 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., a Spanish-language television
broadcast company, or its predecessor from 1964 to 1990. Mr.
Villanueva is also is a trustee of Metropolitan West Group of
mutual funds.
James M. McNamara 45 1999 Mr. McNamara has been a director of Film Roman since
February 1999. Since June 1998, Mr. McNamara has been an
investor/entrepreneur focused on new media and international
broadcasting. From April 1996 to June 1998, Mr. McNamara
was President of Universal Television Enterprises, where his
responsibilities included domestic syndication first-run
programming and international sales. Prior to that time, from
1991 through 1995, Mr. McNamara served as Chief Executive
Officer of New World Entertainment. Between 1991 and
1995, Mr. McNamara served in various capacities, including
President of New World International. Mr. McNamara is
currently a director of Scandinavian Broadcasting Systems,
S.A. In addition, Mr. McNamara currently serves as a director
of United American Broadcasting and GRB Entertainment,
both private companies.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Year First
Elected or
Appointed
Name: Age Director Principal Occupation
----- --- ---------- --------------------
<S> <C> <C> <C>
Continuing Directors:
David B. Pritchard 51 1997 Mr. Pritchard joined the Company in September 1997 as
President and Chief Executive Officer. In 1996, Mr. Pritchard
founded Little Fish, Inc., where he developed and produced
programming for Columbia TriStar, TNT and HBO until
joining Film Roman. In 1990, Mr. Pritchard founded Popular
Arts Entertainment which produced and developed numerous
projects for A&E, HBO, Comedy Central, as well as providing
entertainment news coverage for many different network
shows. Prior to Mr. Pritchard's founding of Popular Arts, he
served as a Vice President of Corporate Affairs at HBO in
New York.
Robert J. Cresci (2) 55 1995 Mr. Cresci has been a director of the Company 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., a manufacturer and
distributor of cutting machine tools and accessories, EIS
International, Inc., a manufacturer of telephone call processing
systems, Sepracor, Inc., a pharmaceutical research company,
Arcadia Financial, Ltd., an automobile loan servicer, Hitox,
Inc., a manufacturer of paint and plastic components, Aviva
Petroleum, Ltd., an oil and gas developer, Quest Education
Corporation, a postsecondary school operator, Castle Dental
Centers, Inc., a manager of dental networks, Candlewood
Hotel Co., Inc., a developer and manager of hotels, SeraCare,
Inc., a manufacturer of medical diagnostic products, and
several private companies.
Dennis W. Draper (1) 50 1995 Dr. Draper has been a director of Film Roman since August
1995. He holds a Ph.D. in Business from Stanford University
and has been an Associate Professor of Finance at the
University of Southern California's School of Business since
1977. Dr. Draper also serves as trustee of the First Choice
Funds.
Peter Mainstain (2) 50 1995 Mr. Mainstain has been a director of Film Roman since August
1995. He is a certified public accountant as well as an officer
and shareholder of Tanner, Mainstain, Hoffer & Peyrot, an
accountancy corporation, where he has been employed since
1976.
</TABLE>
______________________
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
4
<PAGE>
Board Meetings and Committees
The Board of Directors held six meetings and acted one additional time by
unanimous written consent during fiscal 1998. No director attended less than
75% of all the meetings of the Board of Directors and those committees on which
he served in fiscal 1998.
The Board of Directors has an Audit Committee. The Audit Committee
currently consists of Messrs. Cresci and Mainstain. Mr. Cresci chairs the Audit
Committee. As directed by the Board, the function of the Audit Committee
includes 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 accounting 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 the engagement
of the Company's independent public accountants as auditors of the books,
records and accounts of the Company. One meeting of the Audit Committee was held
during fiscal 1998.
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.
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 1996 Stock Option Plan. During fiscal 1998, the Compensation
Committee held one meeting.
Compensation of Directors
For the year ended December 31, 1998, all non-employee directors received
$6,000 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. Beginning in fiscal
1999, all non-employee directors will receive $6,000 per year as compensation
for serving on the Board of Directors, $1,000 for attendance at each meeting of
the Board of Directors and $500 for attendance at each meeting of a committee of
the Board of Directors. If the stockholders approve Proposal No. 3, each non-
employee director will receive an annual grant of an option to purchase 5,000
shares of Common Stock on the date of the Company's annual meeting of
stockholders.
COMPENSATION COMMITTEE REPORT
Compensation Committee Interlocks and Insider Participation
As of the date of the Compensation Committee Report, April 28, 1999, the
Compensation Committee of the Board of Directors was comprised of Dr. Draper and
Mr. Villanueva. Dr. Draper chaired, and continues to chair, the Compensation
Committee. No executive officer of the Company either served in 1998 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.
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 of 1933, as amended (the "Securities
Act") or the Securities Exchange Act of 1934, as amended (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 13 shall not be
incorporated by reference into any such filings.
5
<PAGE>
* * * * *
The Compensation Committee of the Board of Directors serves as an advisory
committee to the Board and is 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. With the assistance of the Chief Executive Officer, the
Compensation Committee 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,
and the current market for executives. The Compensation Committee also
considers 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 area 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. 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 1998.
The 1998 base salary for Mr. Roman, former Chairman, was $325,000. In
connection with Mr. Roman's resignation, Mr. Roman, the Company and Film Roman
California, a California corporation and a wholly-owned subsidiary of the
Company, entered into an agreement pursuant to which the Company and Film Roman
California remain obligated to pay Mr. Roman a discounted amount of his base
salary in varying installments through August 6, 2000. Mr. Pritchard, the
Company's President and Chief Executive Officer has a base salary of $300,000.
On January 5, 1998, Mr. Pritchard received a grant of options to purchase
194,011 shares of Common Stock at an exercise price of $1.50 per share.
Additionally, on December 17, 1998, Mr. Pritchard received a grant of options to
purchase 125,000 shares of Common Stock at an exercise price of $1.438 per
share. In September 1998, Mr. Shpall was hired as the Company's Chief Operating
Officer with a base salary of $275,000 during his first year of employment and
$300,000 during his second year of employment. As further consideration, Mr.
Shpall received a grant of options to purchase 200,000 shares of Common Stock at
an exercise price of $1.438 per share, exercisable in various installments over
two years, depending on whether Mr. Shpall remains an employee of the Company
during such time. During 1998, the employment agreement for Mr. Vein, an
Executive Vice President of the Company, was amended and its terms extended for
an additional two years. From January 1, 1998 through August 2, 1998, Mr. Vein
had a base salary of $225,000. Pursuant to Mr. Vein's amended employment
agreement, his 1998 base salary was increased as of August 3, 1998 to $235,000.
To the extent readily determinable and as one of the factors in its
consideration, the Compensation Committee considers the anticipated tax
treatment to 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
6
<PAGE>
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.
Stock Option Exchange Program
In June 1998, the Board of Directors reviewed the stock options issued to
certain employees of the Company which had an exercise price higher than the
market price of the Company's Common Stock and concluded that such options were
not providing the desired incentive. In response, the Board of Directors
approved a program (the "Exchange Program") under which certain employees were
offered the opportunity to exchange unexercised stock options previously granted
at exercises price ranging from $8.00 to $10.00 per share, on a one-for-one
basis, for new stock options with an exercise price of $1.438 per share, and a
new vesting schedule whereby 20% of the options vest on September 1 of each year
over the course of five years from the date of exchange. Those Named Executive
Officers given the opportunity to exchange their stock options are shown in the
table entitled "10-Year Option/SAR Repricings" on page 11.
April 28, 1999
BY THE COMPENSATION COMMITTEE
Dennis W. Draper, Chairman
Daniel D. Villanueva
7
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth, as to the Chief Executive Officer and each
of the other four most highly compensated officers whose compensation exceeded
$100,000 during the last fiscal year (the "Named Executive Officers"),
information concerning all compensation paid for services to the Company in all
capacities during the last three fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
------------
Number of
Fiscal Year Annual Compensation Securities
Ended --------------------- Underlying All Other
Name and Principal Position December 31, Salary Bonus Options (1) Compensation (2)
--------------------------- ------------ -------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
Phil Roman (3)....................... 1998 $325,000 $ - - $ 2,000
Former Chairman 1997 325,000 - - 2,000
1996 331,250 - 125,000 57,851
David B. Pritchard................... 1998 $311,539 $ - 319,011 $ -
President and Chief 1997 86,539 (4) - 388,023 -
Executive Officer
William A. Shpall.................... 1998 $ 63,462 (5) - 200,000 $ 1,250
Chief Operating Officer
Jon F. Vein.......................... 1998 $229,039 $ - 177,500 (6) $ 2,000
Executive Vice President, 1997 218,861 - - 2,000
Business and Legal Affairs 1996 158,424 - - 2,055
Gregory S. Arsenault................. 1998 $176,479 $ - 73,750 (7) $ 2,000
Senior Vice President, 1997 174,420 - - 2,000
Finance and Administration 1996 159,110 - - 2,064
</TABLE>
______________________
(1) 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 Proposal to Amend the
1996 Stock Option Plan" and "Employment Contracts."
(2) Represents contributions pursuant to the Company's 401(k) profit sharing
plan for each individual listed in the table. On behalf of Mr. Roman in
1996, the Company contributed (i) $2,375 to the Company's 401(k) profit
sharing plan; (ii) $10,088 in automobile insurance, service and lease
payments (iii) $26,500 in life insurance premiums and (iv) payments for
personal travel and accounting services which accounted for the remainder of
Mr. Roman's other annual compensation.
(3) Mr. Roman resigned from his position with the Company as of February 5,
1999.
(4) Mr. Pritchard began employment with the Company in September 1997 and his
annual base salary for his first year of employment was $300,000.
(5) Mr. Shpall began employment with the Company in September 1998 and his
annual base salary for his first year of employment was $275,000.
(6) Includes options to acquire 75,000 shares issued in December 1998, the
replacement of options to acquire 62,500 shares that were previously granted
to Mr. Vein and canceled pursuant to the Exchange Program and options to
acquire 40,000 shares issued simultaneously with such replacement.
8
<PAGE>
(7) Includes options to acquire 30,000 shares issued in connection with Mr.
Arsenault's amended Employment Agreement and the replacement of options to
acquire 43,750 shares that were previously granted to Mr. Arsenault and
canceled pursuant to the Exchange Program.
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, 1996, 1997 and 1998, the Company contributed $104,923,
$120,431 and $125,818, respectively, to the plan on behalf of its employees.
Option Grants in Last Fiscal Year
The following table sets forth certain information regarding grants of
stock options made to the Named Executive Officers during the year ended
December 31, 1998, 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)
----------------------------------------------------------- ---------------------
Percent of
Number of Total
Shares Options
Underlying Granted to Exercise
Name and Options Employees Price Expiration
Principal Position Granted (2) In Period (3) Per Share Date 5% 10%
- ------------------ ----------- ------------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
David B. Pritchard
President and Chief 194,011 $ 1.50 1/4/08 $182,370 $463,686
Executive Officer........ 125,000 24.6% $1.438 12/16/08 $112,750 $286,500
William A. Shpall
Chief Operating
Officer.................. 200,000 15.43% $1.438 6/15/08 $180,400 $458,400
Jon F. Vein
Executive Vice President,
Business and Legal 102,500(5) $1.438 6/16/08 $ 92,455 $234,930
Affairs.................. 75,000 13.69% $1.438 12/16/08 $ 67,650 $171,900
Gregory S. Arsenault
Senior Vice President,
Finance and 43,750(6) $1.438 6/16/08 $ 39,463 $100,275
Administration........... 30,000 5.69% $1.438 12/16/08 $ 27,060 $ 68,760
</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 SEC 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 "Proposal No. 2 -- Proposal to Amend the 1996 Stock
Option Plan" and "Employment Contracts."
(3) Options covering an aggregate of 1,296,511 shares were granted to eligible
persons during the fiscal year ended December 31, 1998.
9
<PAGE>
(4) Mr. Roman resigned from his position with the Company effective February 5,
1999.
(5) Includes replacement of options to acquire 62,500 shares as of June 17,
1998 under the Exchange Program.
(6) Represents replacement of options to acquire 43,750 shares as of June 17,
1998 under the Exchange Program.
Stock Options Held at Fiscal Year End
The following table sets forth, for each of the Named Executive Officers,
certain information regarding the number of shares of Common Stock underlying
stock options held at fiscal year end and the value of options held at fiscal
year end based upon the last reported sales price of the Common Stock on the
Nasdaq Stock Market's National Market on December 31, 1998 ($1-9/16 per share).
No stock options were exercised by any Named Executive Officer during fiscal
1998.
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at in-the-Money Options
December 31, 1998 at December 31, 1998 (1)
---------------------------- ----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Phil Roman (2)......... 50,000 0 $ 0 $ 0
David B. Pritchard..... 270,507 436,737 18,594 9,094
William A. Shpall...... 100,000 100,000 12,450 12,450
Jon F. Vein............ 58,000 119,500 7,221 14,878
Gregory S. Arsenault... 14,750 59,000 1,836 7,346
</TABLE>
(1) Amounts represent the difference between the aggregated exercise price of
unexercised options and the $1-9/16 closing sale price of the Common Stock
on the Nasdaq National Market on December 31, 1998.
(2) Mr. Roman resigned from his position with the Company effective February 5,
1999.
10
<PAGE>
STOCK OPTION EXCHANGE PROGRAM
The following table provides information concerning the Exchange Program,
including (i) the name and position of each Named Executive Officer who
participated in the Exchange Program, (ii) the date of the repricing, (iii) the
number of securities underlying repriced options, (iv) the per share market
price of the underlying security at the time of the repricing, (v) the original
exercise price of the canceled option at the time of the repricing, (vi) the per
share exercise price of the repriced option received in exchange for the
existing option and (vii) the original option term remaining at the date of
repricing.
TEN YEAR OPTION/SAR REPRICINGS
<TABLE>
<CAPTION>
Securities Length of
underlying Exercise original option
number of Market price price term remaining
options/SARs of stock at time at time of New at date of
repriced or of repricing or repricing or exercise repricing or
Name Date amended (#) amendment ($) amendment($) price ($) amendment
---- ---- ----------- ------------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Gregory S. Arsenault 6/17/98 43,750 $1.438 $10.00 $1.438 8 years
Senior Vice President,
Finance and Administration
Jon F. Vein 6/17/98 62,500 $1.438 $10.00 $1.438 8 years
Executive Vice President,
Business and Legal Affairs
</TABLE>
Employment Contracts
Film Roman, Inc., a California corporation and a wholly-owned subsidiary of
the Company ("Film Roman California") has entered into the following employment
agreements with the Named Executive Officers:
Mr. Roman. On August 7, 1995, Mr. Roman and Film Roman California entered
---------
into an employment agreement pursuant to which Mr. Roman served as Chairman of
the Board for a base salary equal to $325,000 per year. Mr. Roman's employment
agreement was scheduled to expire on August 6, 2000. Mr. Roman and the Company
agreed that he would resign from his positions as an officer and director of the
Company and Film Roman California, and his employment agreement would be
terminated, effective February 5, 1999. In connection with this agreement, Mr.
Roman, the Company and Film Roman California entered into a Termination,
Settlement and Release Agreement (the "Settlement Agreement"). Pursuant to the
Settlement Agreement, the Company and Film Roman California (i) paid Mr. Roman's
base salary on a discounted basis through January 31, 1999; (ii) agreed to pay
$482,386 in seven installments from February 1999 to July 1999 and (iii) agreed
to pay the costs of Mr. Roman's COBRA coverage for a period of 18 months
following the termination date of his medical benefits. In addition, the Company
and Film Roman California agreed to pay Mr. Roman's accrued vacation pay and
further agreed to assign to Mr. Roman the rights to three properties which were
in development during the term of his employment. See "Certain Transactions."
Mr. Pritchard. On August 22, 1997, Mr. Pritchard and Film Roman California
-------------
entered into an agreement summarizing the terms of Mr. Pritchard's employment by
the Company as its President and Chief Executive Officer.
11
<PAGE>
The initial term of Mr. Pritchard's employment commenced on September 15, 1997
and expires on September 14, 1999; however, Film Roman California has three
consecutive annual options to extend the term for additional 12-month periods.
Film Roman California intends to exercise its option to extend the term for one
year. Mr. Pritchard's salary is $300,000 per year for the first two years, with
increases for each option term. Film Roman California 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 Film Roman California, 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 Film Roman California's right
to fully mitigate all salary obligations. Pursuant to the terms of Mr.
Pritchard's agreement, Film Roman California granted him options to purchase
388,023 shares of the Company's Common Stock under the Stock Option Plan in
August 1997 and options for an additional 194,011 shares of the Company's Common
Stock in January 1998. In December 1998, Mr. Pritchard was granted an option to
purchase an additional 125,000 shares of the Company's Common Stock.
Mr. Shpall. Effective September 30, 1998, Mr. Shpall and Film Roman
----------
California entered into an employment agreement that will expire on September
29, 2000. Pursuant to the terms of the agreement, Mr. Shpall serves as the
Company's Chief Operating Officer, and Film Roman California will pay Mr. Shpall
an annual base salary equal to $275,000 during his first year of employment and
$300,000 during his second year of employment. Film Roman California is
entitled to terminate Mr. Shpall's agreement "for cause," (e.g., conviction of a
felony or plea of no contest to any felony for which vicarious liability could
be imposed on Film Roman California, as well as fraud, gross negligence or any
other material breach of the agreement). In the event of termination "without
cause" during the term of his employment, Mr. Shpall shall be entitled to
receive the salary that would have been payable to him during the remainder of
such term. Mr. Shpall is entitled to terminate the agreement if Film Roman
California requires him to report to anyone other than its Chief Executive
Officer, if Film Roman California materially breaches the agreement or within 90
days following a change in control. Pursuant to the terms of Mr. Shpall's
agreement, Mr. Shpall received an option to purchase a total of 200,000 shares
of the Company's Common Stock.
Mr. Vein. Effective August 4, 1997, Mr. Vein and Film Roman California
--------
entered into an employment agreement, which was amended on June 25, 1998 and
which will expire on August 2, 2000 (the "Amended Employment Agreement").
Pursuant to the terms of the Amended Employment Agreement, Mr. Vein now serves
as an Executive Vice President of the Company, and Film Roman California will
pay Mr. Vein an annual base salary of $235,000 through August 2, 1999 and
$250,000 from August 3, 1999 through August 2, 2000. Film Roman California is
entitled to terminate Mr. Vein's employment upon his death or disability, "for
cause" (e.g., commission of a felony or crime involving moral turpitude, gross
negligence or material breach of his employment agreement) or "without cause"
(reasons other than for his death or for cause). In the event of termination
"without cause"during the term of his employment, Mr. Vein shall be entitled to
receive a pro-rated amount of any accrued bonus and unpaid retirement benefits
and all remaining salary that would have been payable to him during the
remainder of the term.
Under the 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. Under Mr. Vein's original employment agreement, he received options to
purchase a total of 62,500 shares of the Company's Common Stock at an exercise
price of $10.00 per share. In June 1998, Mr. Vein surrendered these options and
received options to acquire 62,500 new shares with an exercise price of $1.438
per share and also received an additional option to acquire 40,000 shares at
$1.438 per share. In December 1998, Mr. Vein received an option to purchase an
additional 75,000 shares of the Company's Common Stock at an exercise price of
$1.438 per share.
Mr. Arsenault. On January 2, 1996, Mr. Arsenault and Film Roman California
-------------
entered into an employment agreement. This agreement was amended on December
17, 1998, and extended through December 31, 1999. Pursuant to the terms of the
agreement, Mr. Arsenault serves as the Company's Senior Vice President - Finance
and Administration and Film Roman California will pay Mr. Arsenault a base
salary equal to $233,333 during the remaining term of employment. Film Roman
California can 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). In the event of termination "without cause"
during any term of his employment, Mr. Arsenault shall be entitled to receive a
pro-rated amount of any accrued bonus and
12
<PAGE>
all remaining salary that would have been payable to him during the remainder of
such term. Pursuant to the terms of Mr. Arsenault's agreement, he received
options to purchase 43,750 shares of the Company's Common Stock at an exercise
price of $10.00 per share. In June 1998, Mr. Arsenault surrendered these options
and received options to acquire 43,750 new shares with an exercise price of
$1.438 per share. In connection with the amended employment agreement, Mr.
Arsenault received options to acquire 30,000 shares of stock at an exercise
price of $1.438 per share.
PERFORMANCE GRAPH
The following graph sets forth the percentage change in cumulative total
stockholder return of the Company's Common Stock during the period from October
1, 1996 (the date the Company's initial public offering commenced) to December
31, 1998, compared with (a) the Standard & Poor's 500 Composite Index ("S&P 500
Index") and (b) the Standard & Poor's Entertainment Index ("S&P Entertainment
Index"). The graph assumes that $100 was invested on October 1, 1996 in stock or
on September 30, 1996 in index and assumes reinvestment of dividends. The
stock price performance on the following graph is not necessarily indicative of
future stock price performance.
COMPARISON OF CUMULATIVE RETURN AMONG
FILM ROMAN, INC., THE S&P 500 INDEX
AND THE S&P ENTERTAINMENT INDEX
<TABLE>
<CAPTION>
Cumulative Total Return
---------------------------------------------------------------------------------------
10/1/96 12/96 3/97 6/97 9/97 12/97 3/98 6/98 9/98 12/98
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FILM ROMAN, INC. 100 76 20 18 21 17 16 15 14 16
S & P 500 100 108 111 131 140 144 165 170 153 186
S & P ENTERTAINMENT 100 104 110 119 125 152 171 182 159 206
</TABLE>
13
<PAGE>
OTHER INFORMATION
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of April 20, 1999 certain information
relating to the ownership of the Common Stock by (i) each person known by the
Company to be the beneficial owner of more than five percent of the outstanding
shares of the Company's Common Stock, (ii) each of the Company's directors,
(iii) each of the Named Executive Officers, and (iv) all of the Company's
executive officers and directors as a group. Except as may be indicated in the
footnotes to the table and subject to applicable community property laws, each
such person has the sole voting and investment power with respect to the shares
owned.
<TABLE>
<CAPTION>
Number of Shares of
Common Stock
Name and Address Beneficially Owned (1) Percent (1)
---------------- ---------------------- -----------
<S> <C> <C>
Austin W. Marxe (2)................................... 576,200 6.8%
David M. Greenhouse (2)............................... 576,200 6.8%
Special Situations Fund III, L.P. (2)................. 440,200 5.2%
MGP Advisers Limited Partnership (2).................. 440,200 5.2%
Pecks Management Partners Ltd. (3).................... 1,193,971 14.0%
Phil Roman (4)........................................ 3,130,050 36.5%
David B. Pritchard (5)(6)............................. 270,507 3.1%
William A. Shpall (5)(7).............................. 100,000 1.2%
Jon F. Vein (5)(8).................................... 58,500 *
Gregory S. Arsenault (5)(9)........................... 14,750 *
Robert J. Cresci (10)................................. 1,223,971 14.3%
Dixon Q. Dern (11).................................... 45,100 *
Dennis W. Draper (12)................................. 45,500 *
Peter Mainstain (13).................................. 52,500 *
Daniel D. Villanueva (14)............................. 33,000 *
James M. McNamara (15)................................ 275,000 3.2%
All directors and executive officers as a group (10
persons) (16)........................................ 2,118,828 23.1%
</TABLE>
___________
* Less than one percent.
(1) Under Rule 13d-3 of the Exchange Act, certain shares may be deemed to be
beneficially owned by more than one person (if, for example, persons share
the power to vote or the power to dispose of the shares). In addition,
shares are deemed to be beneficially owned by a person if the person has the
right to acquire the shares (for example, upon exercise of an option) within
60 days of the date as of which the information is provided. In computing
the percentage ownership of any person, the amount of shares outstanding is
deemed to include the amount of shares beneficially owned by such person
(and only such person) by reason of these acquisition rights. As a result,
the percentage of outstanding shares of any person as shown in this table
does not necessarily reflect the person's actual ownership or voting power
with respect to the number of shares of Common Stock actually outstanding at
April 20, 1999.
(2) Based on Schedule 13G filed on February 9, 1999 by Special Situations Fund
III, L.P. ("SSF"), MGP Advisers Limited Partnership ("MGP"), Special
Situations Cayman Fund, L.P. (the "Cayman Fund"), AWM Investment Company,
Inc. ("AWM"), Austin W. Marxe and David M. Greenhouse. SSF, MGP, the Cayman
Fund and AWM have sole power to vote or direct the vote and to dispose or to
direct the disposition of securities which are beneficially owned by Austin
W. Marxe and David M. Greenhouse by virtue of being Executive Officers of
AWM, the Investment Adviser to the Cayman Fund. Mr. Marxe and Mr.
Greenhouse are also the principal
14
<PAGE>
owners of MGP and AWM. The mailing address for SSF, MGP and AWM is 153 East
53rd Street, New York, New York 10022. The mailing address for the Cayman
Fund is c/o CIBC Bank and Trust Company (Cayman) Limited, CIBC Bank
Building, P.O. Box 694, Grand Cayman, Cayman Islands, British West Indies.
(3) Based on information received from Pecks Management Partners Ltd. Pecks
Management Partners Ltd. has sole voting power and sole dispositive power
with respect to all 1,193,971 shares. The mailing address for Pecks
Management Partners Ltd. is One Rockefeller Plaza, New York, NY 10020.
(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, 1999; and (ii) 1,300 shares of Common Stock held by Mr.
Roman's spouse for which Mr. Roman disclaims beneficial ownership. The
mailing address for Mr. Roman is c/o Phil Roman Entertainment, 4040
Vineland Avenue, Suite 205, Studio City, CA 91604.
(5) The mailing address for such person is: c/o Film Roman, Inc., 12020
Chandler Boulevard, Suite 200, North Hollywood, California 91607.
(6) Represents 270,507 shares of Common Stock which may be acquired upon
exercise of employee stock options which are currently exercisable.
(7) Represents 100,000 shares of Common Stock which may be acquired upon
exercise of employee stock options which are currently exercisable.
(8) Includes 58,000 shares of Common Stock which may be acquired upon exercise
of employee stock options which are currently exercisable.
(9) Includes 14,750 shares of Common Stock which may be acquired upon exercise
of employee stock options which are currently exercisable.
(10) Includes 1,193,971 shares held by pension trusts and a pension fund which
are managed by Pecks Management Partners Ltd. and for which Mr. Cresci
disclaims beneficial ownership and 30,000 shares of Common Stock which may
be acquired upon exercise of stock options which are currently exercisable.
The mailing address for Mr. Cresci is c/o Pecks Management Partners Ltd.,
One Rockefeller Plaza, New York, New York 10020.
(11) Includes 45,000 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.
(12) Includes 45,000 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 90089.
(13) Includes 45,000 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 & Peyrot, 10866 Wilshire
Boulevard, 10th Floor, Los Angeles, California 90024.
(14) Includes 25,000 shares of Common Stock which may be acquired upon exercise
of stock options which are currently exercisable. The mailing address for
Mr. Villanueva is c/o Bastion Capital Corporation, 1999 Avenue of the
Stars, Suite 2960, Los Angeles, California 90067.
(15) Includes 25,000 shares of Common Stock which may be acquired upon exercise
of stock options which are currently exercisable. The mailing address for
Mr. McNamara is 2049 Century Park East, Suite 2450, Los Angeles, California
90067.
(16) Includes 658,257 shares of Common Stock which may be acquired upon exercise
of stock options which are currently exercisable.
15
<PAGE>
PROPOSAL NO. 2
PROPOSAL TO AMEND THE 1996 STOCK OPTION PLAN
General
The 1996 Stock Option Plan of Film Roman, Inc. (the "Stock Option Plan")
was adopted by the Board and approved by the sole stockholder in 1996. On June
16, 1998, the Company's stockholders approved an amendment to the Stock Option
Plan 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 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.
In February 1999, the Board approved a Second Amendment to the Stock Option
Plan to increase the number of shares of Common Stock that may be issued or sold
under the Stock Option Plan from 1,750,000 to 2,100,000 shares (no more than
325,000 of which may be issued or sold to non-employee directors). The text of
this amendment is set forth as Annex A to this Proxy Statement. Pursuant to the
-------
Stock Option Plan, in order for such amendment to be effective, the Company's
stockholders must approve it. Additionally, in order for any options granted
under the Stock Option Plan or any shares of Common Stock issued pursuant to the
exercise of such options not to 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, 1,750,000 shares of
Common Stock are authorized for issuance upon the exercise of options, all of
which have been granted. 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.
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 350,000 the number of
shares of Common Stock available for issuance under the Stock Option Plan.
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.
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 described in this Proposal) 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.
Administration. 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). With respect to
(i) the participation in the Stock Option Plan of employees subject to the
reporting requirements of Section 16 of the Exchange Act and (ii) any grant of
options intended not to be included as "applicable employee remuneration"
pursuant to the exception in Section 162(m)(4)(C) of the Code, the Compensation
Committee shall consist of at least two or more directors, all of whom are both
"non-employee directors" within the meaning of paragraph (b)(3)(i) of Rule 16b-3
under the Exchange Act and an "outside director" within the meaning of Section
162(m)(4)(C)(i) of the Code and Treasury Regulation Section 1.162-27(e)(3)(i).
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 stock option
or a non-qualified stock option under the federal tax laws, the exercise
16
<PAGE>
price of the options granted (subject to the limitations contained in the Stock
Option Plan) and the period during which the right to exercise an option vests,
in whole or in part.
Both Dr. Draper and Mr. Villanueva qualify as "non-employee directors"
under the Exchange Act and as "outside directors" under the Code. Accordingly,
the Board has delegated the administration of the Stock Option Plan with respect
to options to be granted to employees and consultants to the Compensation
Committee. However, the Board retains 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 and/or any of
-----------
its subsidiaries (as defined in Section 424(f) of the Code) 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.
Consultants 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 Compensation Committee;
provided, however, that the price per share of an incentive stock option shall
be not less than 100% of the fair market value of one such share on the date
such option is granted; provided, further, that, the price per share of an
incentive stock option shall not be less than 110% of the fair market value of
one such share 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 or any of
its subsidiaries.
Non-Assignability. Options may be transferred only by will, by the laws of
-----------------
descent and distribution or pursuant to a domestic relations order. During a
participant's lifetime, options are exercisable only by the participant.
Terms and Exercisability of Options. Each option shall be exercisable in
-----------------------------------
such installments during the period prior to its expiration date as the Board or
Compensation Committee shall determine. The optionee has no stockholder rights
with respect to the shares issuable upon exercise of such options until
certificates representing such shares have been issued and delivered. No shares
shall be issued and delivered unless and until, in the opinion of counsel for
the Company, there has been full compliance with or exception from any
applicable registration requirements under the Act, any listing requirements of
any national securities exchange on which the Common Stock is then listed, and
any other requirements of law or regulatory bodies with jurisdiction over such
issuance and delivery.
The aggregate fair market value of the Common Stock for which "incentive
stock options" (within the meaning of Section 422 of the Code, but without
regard to Section 422(d) of the Code) granted to any optionee under the Stock
Option Plan may by their terms first become exercisable during any calendar year
shall not exceed $100,000, determining fair market value as of the date each
respective option is granted. The rule set forth in the preceding sentence shall
be applied by taking options into account in the order in which they were
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, (v) in whole or in part,
through the surrender of shares of Common Stock then issuable upon exercise of
the option having fair market value on the date of option exercise equal to the
aggregate exercise price of the option or exercised portion, (vi) by any
combination thereof, or (vii) in such other manner as the Board or the
Compensation 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.
Withholding Tax. Upon (i) an optionee's disposition of shares of Common
---------------
Stock acquired pursuant to the exercise of an incentive stock option within two
years of the grant of such option or within one year after the exercise of such
option or (ii) an optionee's exercise of a non-qualified stock option (or an
incentive stock option treated as a
17
<PAGE>
non-qualified stock option), the Company has the right to require such optionee
to pay to the Company the amount of any taxes which the Company shall be
required to withhold with respect thereto.
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
options shall expire three months following the month of such cessation of
employment unless by their terms they expire sooner. If an optionee dies or
becomes permanently disabled while the optionee is employed by the Company, such
optionee's options shall expire three months (or such other period as specified
in such optionee's option agreement) after the date of such cessation of
employment unless by their terms they expire sooner. During such period after
death, such stock options may, to the extent they remain 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 by will or under the laws of
descent and distribution. If an optionee is terminated for cause, all options
shall terminate on the date of cessation of employment unless by their terms
they expire sooner.
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.
Adjustments. In the event any change is made to the Common Stock issuable
-----------
under the Stock Option Plan by reason of any reorganization, merger,
consolidation, recapitalization, reclassification, stock dividend, stock split,
or combination of shares, appropriate adjustments will be made to the number and
kind of shares (and the purchase price for such shares) for the purchase of
which options may be granted; provided, however that any such adjustment in
-------- -------
outstanding options shall be made such that each optionee shall be entitled to
receive that number of shares which such optionee would have been entitled to
receive pursuant to such option if such option had been exercised immediately
prior to such reorganization, merger, consolidation, recapitalization, stock
split, stock dividend or combination of shares; and provided, further, that any
such adjustment in the outstanding options shall be made without change to the
aggregate purchase price applicable to the unexercised portion of the option,
but with a corresponding adjustment in the purchase price for each share covered
by the option.
Amendments to the Stock Option Plan. The Board or Compensation Committee
-----------------------------------
at any time may suspend or terminate the Stock Option Plan. The Board or
Compensation Committee at any time may also 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 classes of persons eligible to receive
options under the Stock Option Plan or (iii) make any other change that requires
stockholder approval under applicable law, regulation, or Nasdaq or stock
exchange rule.
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 and the Exchange Act,
and any and all regulations and rules promulgated by the SEC 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
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.
18
<PAGE>
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.
Incentive 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 of Common Stock acquired
pursuant to the exercise of an incentive stock option 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 options granted under the Stock Option Plan, as
amended, qualify as performance based compensation, 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 and entitled to vote at the meeting.
The Board of Directors unanimously recommends a vote "FOR" the approval of the
Second Amendment to the 1996 Stock Option Plan as set forth in Proposal No. 2.
19
<PAGE>
PROPOSAL NO. 3
PROPOSAL TO APPROVE THE 1999 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
The Company's 1999 Non-Employee Directors Stock Option Plan was adopted by
the Board of Directors on February 26, 1999, subject to stockholder approval
(the "Plan"). The text of the Plan is set forth as Annex B to this Proxy
-------
Statement. The following is a summary of the principal features of the Plan and
does not purport to be complete. Stockholders are urged to read the Plan in its
entirety. This summary is subject to and qualified in its entirety by reference
to Annex B.
-------
Purpose. The Board adopted the Plan because the Board believes the Plan is
- -------
important to the long-term success of the Company for the Company to be able to
obtain and keep independent directors with superior abilities and experience and
to provide incentives to such independent directors to encourage the highest
level of performance. The Plan seeks to achieve these goals by providing
independent directors with non-statutory stock options. The grant of stock
options motivates high levels of performance and is valuable in recruiting and
retaining independent directors who are in great demand. Approving the Plan
will enable the Company to continue to realize the benefits of granting stock-
based compensation to its independent directors. The approval of the Plan by
the Company's stockholders is necessary to provide automatic annual grants of
stock options to the Company's independent directors.
Shares Subject to the Plan. Upon approval of this Proposal by the stockholders,
- --------------------------
there will be a total of 100,000 shares of Common Stock authorized for option
grants under the Plan. The authorized shares issuable in connection with the
Plan are subject to adjustment in the event of stock splits, stock dividends and
other situations. If any option granted under the Plan expires or terminates
for any reason without having been exercised in full, then the unpurchased
shares subject to that option will once again be available for additional option
grants under the Plan.
Participants. The Plan provides for formula option grants to directors who are
- ------------
not currently officers or employees of the Company. Employee directors are not
eligible to participate in the Plan. Upon the initial election or appointment
to the Board of any person who is not then a current employee or officer of the
Company, (each such person, an "Optionee"), the Committee shall grant to such
Optionee, at the first meeting of the Committee following the date of such
election or appointment and with an effective date of grant as of the date of
the first meeting of the Board of Directors attended by the Optionee after his
or her appointment or election, a ten year option to purchase 25,000 shares of
Common Stock. The Committee shall grant to each Optionee who is then serving on
the Board, with an effective date of grant as of the date of each annual meeting
of the Company's stockholders commencing on the date of the annual meeting for
the fiscal year ending December 31, 1999 (or any special meeting in lieu of an
annual meeting), a ten year option to purchase 5,000 shares of Common Stock.
The grants made pursuant to the Plan constitute the only grants under the Plan
permitted to be made to Optionees, unless the Optionee is expressly made
eligible for additional grants by a resolution of the Board.
Administration. The Plan will be administered by the Board or, at the Board's
- --------------
discretion, a committee of the Board, provided the timing and exercise price of
options and the number of shares subject to each option shall be determined by
the express terms of the Plan.
Pricing of Options. The exercise price of each option shall be equal to 100% of
- ------------------
the fair market value of the shares on the date each option is granted. The
exercise price is payable (a) in United States dollars in cash or by check, (b)
in whole or in part in shares of Common Stock of the Company already owned by
the exercising party or (c) subject to the approval of the Plan administrator,
in shares subject to the option being exercised, valued at fair market value.
Stockholder Rights. An Optionee shall have no dividend rights, voting rights or
- -------------------
other rights as a stockholder with respect to any Common Stock covered by his or
her option prior to the issuance of a stock certificate for such shares
following the exercise of such option. No adjustment shall be made for cash
dividends or other similar rights for which the record date is prior to the date
when such certificate is issued.
Restrictions on Transfer. Unless the option agreement otherwise provides, each
- ------------------------
option is transferable only by will or the laws of descent and distribution and
shall only be exercisable by the participant during his or her lifetime.
20
<PAGE>
Amendment or Termination of the Plan. The Board may, at any time and for any
- ------------------------------------
reason, amend or terminate the Plan; provided, neither the Plan nor any option
agreement entered into pursuant to the Plan may be amended to reprice, or be
terminated to effect the repricing of, an outstanding option, except as provided
in the Plan. The Board must obtain stockholder approval in order to (i)
increase the maximum number of shares for which options may be granted under the
Plan, (ii) materially modify the eligibility requirements to participate in the
Plan, (iii) materially increase benefits to option holders, and (iv) amend the
Plan in any manner which would cause the Plan to cease to comply with Exchange
Act Rule 16b-3. The termination of the Plan, or any amendment thereof, shall
not affect any option previously granted under the Plan.
Federal Income Tax Consequences. The following discussion of the federal income
- -------------------------------
tax consequences of the Plan is intended to be a summary of applicable federal
law. State and local tax consequences may differ. The Plan does not constitute
a qualified retirement plan under Section 401(a) of the Code (which generally
covers trusts forming part of a stock bonus, pension or profit-sharing plan
funded by the employer and/or employee contributions which are designed to
provide retirement benefits to participants under certain circumstances) and is
not subject to the Employee Retirement Income Security Act of 1974 (the pension
reform law which regulates most types of privately funded pension, profit
sharing and other employee benefit plans). Because the federal income tax rules
governing options and related payments are complex and subject to frequent
change, Optionees are advised to consult their tax advisors prior to exercise of
options or dispositions of stock acquired pursuant to option exercise.
Generally, an Optionee is not taxed on the grant of a non-statutory option.
On exercise of a non-statutory option, however, the Optionee generally
recognizes ordinary income equal to the excess of the fair market value of the
shares on the date of exercise over the option exercise price. An Optionee will
recognize gain or loss on the subsequent sale of shares acquired upon exercise
of a non-statutory option in an amount equal to the difference between the sales
price and the tax basis of the shares, which will include the price paid plus
the amount included in the Optionee's taxable income by reason of the exercise
of the non-statutory option. Provided the shares are held by the Optionee as a
capital asset, any gain or loss on subsequent disposition of the shares is
short-term or long-term capital gain or loss depending upon the length of time
the shares have been held. The Company is generally entitled to an income tax
deduction in the year of exercise in the amount recognized by the Optionee as
ordinary income.
Recommendation and Required Approval. The Board of Directors has unanimously
- ------------------------------------
approved the Plan. Stockholder approval of the Plan requires the affirmative
vote of a majority of the shares of Common Stock present or represented and
entitled to vote on this matter at the Annual Meeting. An abstention will be
counted toward the tabulation of votes cast and will have the same effect as a
vote against the proposal. A broker non-vote, however, will not be treated as a
vote cast for or against approval of the proposal.
The Board of Directors unanimously recommends a vote "FOR" the approval of the
1999 Non-Employee Directors Stock Option Plan as set forth in Proposal No. 3.
21
<PAGE>
CERTAIN TRANSACTIONS
Mr. Dern provides legal services to the Company on a regular basis and
receives customary fees for such services. In 1998, Mr. Dern's firm was paid
approximately $121,000 for such services.
Effective February 5, 1999, Mr. Roman retired from his position as Chairman
of the Board of the Company and Film Roman California and Mr. Roman entered into
a Settlement Agreement which terminated Mr. Roman's employment agreement. In
connection with such termination, Film Roman California agreed to pay Mr. Roman
$576,135 in 1999 and $50,000 in 2000. See "Employment Contracts - Mr. Roman."
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive
officers, directors, and persons who own more than ten percent of a registered
class of the Company's equity securities to file reports of ownership and
changes in ownership with the SEC. Executive officers, directors and greater-
than-ten percent stockholders are required by SEC regulations to furnish the
Company with all Section 16(a) forms they file. Based solely on its review of
the copies of the forms received by it and written representations from certain
reporting persons that they have complied with the relevant filing requirements,
the Company believes that, during the year ended December 31, 1998, all the
Company's executive officers, directors and greater-than-ten percent
stockholders complied with all Section 16(a) filing requirements, with the
exception of Jon F. Vein and Gregory S. Arsenault, who filed late Form 4's with
respect to the repricing of their stock options, and David B. Pritchard, who
filed a late Form 4 with respect to option grants.
OTHER INFORMATION
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
Any stockholder who intends to present a proposal at the next Annual
Meeting of Stockholders, for inclusion in the Company's Proxy Statement and
Proxy form relating to such Annual Meeting, must submit that proposal to the
Company at its principal executive offices by January 4, 1999.
SOLICITATION OF PROXIES
It is expected that the solicitation of proxies will be primarily by mail.
The cost of solicitation by management will be borne by the Company. The
Company will reimburse brokerage firms and other persons representing beneficial
owners of shares for their reasonable disbursements in forwarding solicitation
material to those beneficial owners. Proxies may also be solicited by certain of
the Company's directors and officers, without additional compensation,
personally or by mail, telephone, telegram or otherwise for the purpose of
soliciting such proxies.
22
<PAGE>
ANNUAL REPORT ON FORM 10-K
THE COMPANY'S ANNUAL REPORT ON FORM 10-K, WHICH HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR ENDED DECEMBER 31, 1998,
WILL BE MADE AVAILABLE TO STOCKHOLDERS WITHOUT CHARGE UPON WRITTEN REQUEST TO
THE COMPANY'S CHIEF FINANCIAL OFFICER, 12020 CHANDLER BOULEVARD, SUITE 200,
NORTH HOLLYWOOD, CALIFORNIA 91607, U.S.A.
ON BEHALF OF THE BOARD OF DIRECTORS
/s/ Dixon Q. Dern
Dixon Q. Dern
Secretary
North Hollywood, California 91607
May 7, 1999
23
<PAGE>
Annex A
SECOND AMENDMENT
TO
1996 STOCK OPTION PLAN
OF
FILM ROMAN, INC.
WHEREAS, Film Roman, Inc., a Delaware corporation (hereinafter the
"Company"), maintains the 1996 Stock Option Plan of the Company, effective as of
September 9, 1996 and as amended on June 16, 1998 (hereinafter the "Stock Option
Plan"); and
WHEREAS, pursuant to Section 13.1 of the Stock Option Plan, the Board of
Directors of the Company (hereinafter the "Board") may amend the Stock Option
Plan from time to time;
NOW THEREFORE, BE IT RESOLVED, that the Stock Option Plan be amended as
follows, effective June 16, 1999.
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
2,100,000 shares, of which no more than 325,000 shares 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.
RESOLVED FURTHER, that this Second Amendment to the Stock Option Plan shall
be presented to the stockholders of the Company for approval at the Annual
Meeting to be held on June 16, 1999.
A-1
<PAGE>
Annex B
FILM ROMAN, INC.
1999 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
1. Purpose.
-------
This 1999 Non-Employee Directors Stock Option Plan (hereinafter, the
"Plan") is intended to promote the interests of Film Roman, Inc., a Delaware
corporation (the "Company"), by providing an inducement to obtain and retain the
services of qualified persons who are not employees or officers of the Company
to serve as members of its Board of Directors (the "Board").
2. Available Shares.
----------------
The total number of shares of Common Stock, $.01 par value per share, of
the Company (the "Common Stock"), for which options may be granted under the
Plan shall not exceed 100,000 shares, subject to adjustment in accordance with
paragraph 10 of the Plan. Shares subject to the Plan are authorized but unissued
shares or treasury shares. If any options granted under the Plan are surrendered
before exercise, or lapse without exercise, in whole or in part, the shares
reserved therefor shall continue to be available under the Plan.
3. Administration.
--------------
The Plan shall be administered by the Board or by a committee appointed by
the Board (the "Committee") comprised solely of two or more Non-Employee
Directors (as defined in Rule 16b-3 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")). In the event the Board does not appoint a
Committee, the Board shall have all power and authority to administer the Plan.
In such event, the word "Committee" wherever used herein shall be deemed to mean
the Board. The Committee shall, subject to the provisions of the Plan, have the
power to construe the Plan, to determine all questions hereunder, and to adopt
and amend such rules and regulations for the administration of the Plan as it
may deem desirable.
4. Granting of Options.
-------------------
Upon the initial election or appointment to the Board of any person who is
not then a current employee or officer of the Company (each such person an
"Optionee"), the Committee shall grant to such Optionee, at the first meeting of
the Committee following the date of such election or appointment and with an
effective date of grant as of the date of the first meeting of the Board of
Directors attended by the Optionee after the Optionee's appointment or election,
a ten year option to purchase 25,000 shares of Common Stock. The Committee
shall grant to each Optionee who is then serving on the Board, with an effective
date of grant as of the date of each Annual Meeting of the Company's
stockholders commencing at the Annual Meeting for the fiscal year ending
December 31, 1999 (or any Special Meeting in lieu of an Annual Meeting), a ten
year option to purchase 5,000 shares of Common Stock. The grants made pursuant
to this Section 4, and any grants made pursuant to Section 10, shall constitute
the only grants under the Plan permitted to be made to an Optionee, unless the
Optionee is expressly made eligible for additional grants by a resolution of the
Board.
5. Option Price.
------------
The purchase price of the stock covered by an option granted pursuant to
this Plan (the "Exercise Price") shall be 100% of the fair market value of such
shares on the day the option is granted. The option price will be subject to
adjustment in accordance with the provisions of Section 10 below. For purposes
of this Plan "fair market value" per share at any date shall mean (i) if the
Common Stock is listed on an exchange or exchanges, or admitted for trading in a
market system which provides last sale data under Rule 11Aa3-1 of the Exchange
Act (a "Market System"), the last reported sales price per share on the last
business day prior to such date on the principal exchange on which it is traded,
or in such a Market System, as applicable, or if no sale was made on such day on
such principal exchange or in such
B-1
<PAGE>
a Market System, as applicable, the last reported sales price per share on the
most recent day prior to such date on which a sale was reported on such exchange
or such Market System, as applicable; or (ii) if the Common Stock is not then
traded on an exchange or in such a Market System, the average of the closing bid
and asked prices per share for the Common Stock in the over-the-counter market
as quoted on Nasdaq on the day prior to such date; or (iii) if the Common Stock
is not listed on an exchange or quoted on Nasdaq, an amount determined in good
faith by the Committee, whose determination shall be final and conclusive for
purposes of the Plan and any agreement entered into pursuant to the Plan.
6. Period of Option.
----------------
Unless sooner terminated in accordance with the provisions of Section 8
below, an option granted hereunder shall expire on the date which is ten years
after the date of grant of the option.
7. Vesting of Shares, Legends and Non-transferability of Options.
-------------------------------------------------------------
(a) Vesting.
-------
Options granted under this Plan shall vest fully upon issuance.
(b) Legend on Certificates.
----------------------
The certificates representing such shares shall carry such appropriate
legends and such written instructions shall be given to the Company's transfer
agent as may be deemed necessary or advisable by counsel to the Company in order
to comply with the requirements of the Securities Act of 1933, as amended, or
any state securities laws.
(c) Non-transferability.
-------------------
Any option granted pursuant to this Plan shall not be assignable or
transferable other than by will or the laws of descent and distribution and
shall be exercisable during the Optionee's lifetime only by him or her.
8. Termination of Option Rights.
----------------------------
(a) In the event an Optionee ceases to be a member of the Board for any
reason other than death or permanent disability ("Permanent Disability"), as
determined by the Committee in its sole discretion, any then unexercised portion
of options granted to such Optionee may be exercised by the Optionee until the
earlier of the scheduled expiration date of the option and 90 days after the
date the Optionee ceased to be a member of the Board.
(b) In the event that an Optionee ceases to be a member of the Board by
reason of his or her death or Permanent Disability, all unexercised options
shall be exercisable by the Optionee (or by the optionee's personal
representative, heir or legatee, in the event of death) until the earlier of the
scheduled expiration date of the option or one year after the death or
disability of the Optionee.
(c) Notwithstanding the provisions in this Section 8, the Committee may, in
its sole discretion, establish different terms and conditions pertaining to the
effect of a participant's ceasing to be a member of the Board.
9. Exercise of Option.
------------------
An option granted hereunder shall be exercisable in whole or in part by
giving written notice to the Company at its principal office address, stating
the number of shares with respect to which the option is being exercised,
accompanied by payment in full for such shares. Payment may be (a) in United
States dollars in cash or by check, (b) in whole or in part in shares of Common
Stock of the Company already owned by the person or persons exercising the
option or shares subject to the option being exercised (subject to such
restrictions and guidelines as the Board may adopt from time to time), valued at
fair market value determined in accordance with the provisions of Section 5 or
(c) consistent with applicable law and subject to the Committee's approval at
its sole discretion, through the delivery of an assignment to the Company of a
sufficient amount of the proceeds from the sale of the Common Stock acquired
upon
B-2
<PAGE>
exercise of the option and an authorization to the broker or selling agent to
pay that amount to the Company, which sale shall be at the participant's
direction at the time of exercise. The Company's transfer agent shall, on behalf
of the Company, prepare a certificate or certificates representing such shares
acquired pursuant to exercise of the option, shall register the Optionee as the
owner of such shares on the books of the Company and shall cause the fully
executed certificate(s) representing such shares to be delivered to the
Optionee as soon as practicable after payment of the option price in full. The
holder of an option shall not have any rights of a stockholder with respect to
the shares covered by the option except to the extent that one or more
certificates for such shares shall be delivered to him or her upon the due
exercise of the option.
10. Adjustments Upon Changes in Capitalization and Other Matters.
------------------------------------------------------------
Upon the occurrence of any of the following events, an Optionee's rights
with respect to options granted to him or her hereunder shall be adjusted as
hereinafter provided:
(a) Stock Dividends.
---------------
If there is any change in the number of outstanding shares of Common Stock
through the declaration of stock dividends or through a recapitalization
resulting in stock splits, or combinations or exchanges of the outstanding
shares of Common Stock, (i) the number of shares covered by outstanding options
issued pursuant to the Plan, and (ii) the Exercise Price of any option issued
pursuant to the Plan in effect prior to such change, shall be proportionately
adjusted by the Committee to reflect such event; provided, however, that any
fractional shares resulting from the adjustment shall be eliminated.
(b) Merger; Consolidation; Liquidation; Sale of Assets.
--------------------------------------------------
In the event the Company is merged into or consolidated with another
corporation under circumstances where the Company is not the surviving
corporation or if the Company is liquidated or sells or otherwise disposes of
all or substantially all of its assets to another corporation (a "Liquidating
Event") while unexercised options remain outstanding under this Plan, (i)
subject to the provisions of clause (ii) below, after the effective date of such
Liquidating Event each holder of an outstanding option, to the extent such
option is vested, shall be entitled, upon exercise of such option, to receive in
lieu of shares of Common Stock, shares of such stock or other securities as the
holders of shares of Common Stock received pursuant to the terms of the
Liquidating Event; or (ii) all outstanding options may be canceled by the Board
as of the effective date of any such Liquidating Event, provided that notice of
such cancellation shall be given to each holder of an option, and each such
option shall immediately vest in full 30 days preceding the effective date of
such Liquidating Event such that each such holder thereof shall have the right
to exercise such option in full during such 30-day period preceding the
effective date of the Liquidating Event.
(c) Issuance of Securities.
----------------------
Except as expressly provided herein, no issuance by the Company of shares
of stock of any class, or securities convertible into shares of stock of any
class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares subject to options. No adjustments
shall be made for dividends paid in cash or in property other than securities of
the Company.
(d) No Fractional Shares.
--------------------
No fractional shares shall actually be issued under the Plan. Any
fractional shares which, but for this subparagraph (d), would have been issued
to an Optionee pursuant to an option shall be eliminated without the Company's
payment of any consideration to the Optionee.
B-3
<PAGE>
(e) Adjustments.
-----------
Upon the happening of any of the foregoing events, the class and aggregate
number of shares set forth in Section 2 above that are subject to options which
previously have been or subsequently may be granted under the Plan shall also be
appropriately adjusted to reflect such events. The Committee shall determine the
specific adjustments to be made under this Section 10 and its determination
shall be conclusive.
11. Restrictions on Issuance of Shares.
----------------------------------
Notwithstanding the provisions of Sections 4 and 9 above, the Company shall
have no obligation to deliver any certificate or certificates upon exercise of
an option until one of the following conditions shall be satisfied: (i) the
shares with respect to which the option has been exercised are at the time of
the issue of such shares effectively registered under applicable federal and
state securities laws as now in force or hereafter amended; or (ii) counsel for
the Company shall have given an opinion that such shares are exempt from
registration under federal and state securities laws as now in force or
hereafter amended; and the Company has complied with all applicable laws and
regulations with respect thereto, including without limitation all regulations
required by any stock exchange upon which the Company's outstanding Common stock
is then listed.
12. Representation of Optionee.
--------------------------
If requested by the Company, the Optionee shall deliver to the Company
written representations and warranties upon exercise of the option that are
necessary to show compliance with federal and state securities laws, including
representations and warranties to the effect that a purchase of shares under the
option is made for investment and not with a view to their distribution (as that
term is used in the Securities Act of 1933, as amended).
13. Option Agreement.
----------------
Each option granted under the provisions of this Plan shall be evidenced by
an option agreement, which agreement shall be duly executed and delivered on
behalf of the Company and by the Optionee to whom such option is granted. The
option agreement shall contain such terms, provisions and conditions not
inconsistent with this Plan as may be determined by the officer executing it.
14. Term and Amendment of Plan.
--------------------------
This Plan was adopted by the Board effective as of February 26, 1999, and
is subject to approval by the stockholders of the Company. Prior to the adoption
of the Plan by the stockholders of the Company, no Optionee shall receive any
option grant hereunder. The Plan will terminate, and no options shall be
granted under the Plan, as of that date which is ten years from the date the
Plan is adopted by the Board, provided the Board may at any earlier time
terminate the Plan or make such modification or amendment thereof as it deems
advisable; provided, further that the Board may not, without approval by the
stockholders, (a) increase the maximum number of shares for which options may be
granted under the Plan (except by adjustment pursuant to Section 10), (b)
materially modify the requirements as to eligibility to participate in the Plan,
(c) materially increase benefits accruing to option holders under the Plan or
(d) amend the Plan in any manner which would cause the Plan to cease to comply
with Exchange Act Rule 16b-3. Neither the Committee nor the Board shall, except
as provided in Section 10, have the power to adjust or amend the exercise price
of any options granted pursuant hereto, whether through amendment, cancellation
or replacement grants, or any other means. Termination or any modification or
amendment of the Plan shall not, without consent of a participant, affect his or
her rights under an option previously granted to him or her.
15. Compliance with Regulations.
---------------------------
It is the Company's intent that this Plan comply in all respects with
Exchange Act Rule 16b-3 and any applicable Securities and Exchange Commission
interpretations thereof. If any provision of the Plan is deemed not to be in
compliance with Exchange Act Rule 16b-3, such provision shall be null and void.
B-4
<PAGE>
16. Tax Withholding Obligations.
---------------------------
To the extent required by applicable federal, state, local or foreign law, an
Optionee or his or her successor shall make arrangements satisfactory to the
Company for the satisfaction of any withholding tax obligations that arise in
connection with the Plan. The Company shall not be required to issue any Common
Stock or make any cash payment under the Plan until such obligations are
satisfied.
B-5
<PAGE>
PROXY CARD
FILM ROMAN, INC.
12020 CHANDLER BOULEVARD, SUITE 200, NORTH HOLLYWOOD, CA 91607
PROXY SOLICITED BY BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS--JUNE 16, 1999
David Pritchard 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 Wednesday, June 16,
1999, 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]
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-------------------------------------------------
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Please mark, sign, date and return promptly using the enclosed envelope.
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<PAGE>
[x] Please mark your votes as in this example.
1. To elect three directors to hold office until the Annual Meeting of
Stockholders in the year 2002.
To withhold authority to vote for any individual nominee, write that
nominee's name on the space provided below.
FOR NOMINEE:
[_] Dixon Q. Dern
[_] Daniel D. Villanueva
[_] James M. McNamara
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[_] Please indicate if a change of address was given on the reverse side.
2. To approve the Second Amendment to the Company's 1996 Stock Option Plan, as
amended.
FOR AGAINST ABSTAIN
[_] [_] [_]
3. To approve the Company's 1999 Non-Employee Directors Stock Option Plan.
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 Second
Amendment to the Company's 1996 Stock Option Plan, as amended and FOR approval
of the Company's 1999 Non-Employee Directors Stock Option Plan. 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, 1999, the accompanying
Proxy Statement and the accompanying Annual Report of the Company for the year
ended December 31, 1998.
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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