<PAGE>
================================================================================
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
IMAGE ENTERTAINMENT, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(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:
-------------------------------------------------------------------------
Notes:
<PAGE>
- --------------------------------------------------------------------------------
IMAGE ENTERTAINMENT, INC.
- --------------------------------------------------------------------------------
9333 Oso Avenue
Chatsworth, California 91311
NOTICE OF 1998 ANNUAL MEETING
TO BE HELD SEPTEMBER 11, 1998
Dear Shareholder:
The annual meeting of shareholders of Image Entertainment, Inc., a
California corporation, will be held at The Chatsworth Hotel, located at 9777
Topanga Canyon Boulevard, Chatsworth, California, on Friday, September 11, 1998,
at 10:00 a.m. (local time), for the following purposes:
1. ELECTION OF DIRECTORS. To elect 4 directors to hold office until their
----------------------
respective successors are duly elected and qualified - Ira S. Epstein,
Martin W. Greenwald, Russell Harris and Stuart Segall have been nominated
for election (Proposal 1).
2. APPROVAL OF THE COMPANY'S 1998 INCENTIVE PLAN. To approve and adopt the
----------------------------------------------
Company's 1998 Incentive Plan (Proposal 2).
3. RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS. To ratify the
----------------------------------------------------
appointment of KPMG Peat Marwick LLP as the Company's independent auditors
for the fiscal year ending March 31, 1999 (Proposal 3).
4. OTHER BUSINESS. To transact such other business as may properly come
---------------
before the meeting and any adjournments thereof.
Enclosed with this Notice is a Proxy Statement which describes the
foregoing items of business and a Proxy.
The Board of Directors has fixed the close of business on July 13, 1998 as
the record date for determination of shareholders entitled to notice of and to
vote at the meeting.
By Order of the Board of Directors,
/s/ Cheryl Lee
CHERYL LEE
Corporate Secretary
Chatsworth, California
July 29, 1998
- --------------------------------------------------------------------------------
ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER
OR NOT YOU PLAN TO ATTEND IN PERSON, YOU ARE URGED TO MARK, SIGN, DATE AND
RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN THE ENVELOPE PROVIDED.
EVEN IF YOU HAVE GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON AT THE MEETING.
PLEASE NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK
OR OTHER NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN FROM THE
RECORD HOLDER A PROXY ISSUED IN YOUR NAME.
- --------------------------------------------------------------------------------
<PAGE>
PROXY STATEMENT
__________________________
FOR ANNUAL MEETING OF SHAREHOLDERS OF
IMAGE ENTERTAINMENT, INC.
__________________________
SEPTEMBER 11, 1998
Proxy Statements and Proxies are being furnished to the shareholders of
Image Entertainment, Inc., a California corporation (the "Company"), in
connection with the solicitation of proxies by the Company's board of directors
(the "Board") for use at the Company's annual meeting of shareholders and any
adjournments thereof (the "Annual Meeting"). The Company's principal executive
offices are located at 9333 Oso Avenue, Chatsworth, California 91311 and its
telephone number is (818) 407-9100. It is anticipated that Proxy Statements and
Proxies will first be mailed to shareholders on or about July 29, 1998.
TIME, DATE AND PLACE OF THE ANNUAL MEETING.
The Annual Meeting will be held at The Chatsworth Hotel, located at 9777
Topanga Canyon Boulevard, Chatsworth, California, on Friday, September 11, 1998,
at 10:00 a.m. (local time).
RECORD DATE / SHAREHOLDERS ENTITLED TO VOTE.
Only shareholders of record at the close of business on July 13, 1998, the
record date (the "Record Date") fixed by the Board, are entitled to notice of
and to vote at the Annual Meeting. On the Record Date, there were 13,533,139
shares of the Company's common stock, no par value (the "Common Stock"),
outstanding. No shares of the Company's preferred stock, $1.00 par value, are
outstanding.
SOLICITATION OF PROXIES
VOTING OF PROXIES.
A Proxy is enclosed for you to vote on Proposals 1, 2 and 3. If the Proxy
is properly executed and returned prior to the Annual Meeting, the shares of
Common Stock it represents will be voted as you direct or, if you indicate no
direction, FOR the director nominees named in Proposal 1 and FOR Proposals 2 and
3.
In the event of cumulative voting for directors, the proxyholders appointed
by the Proxy (the "Proxyholders") will have discretionary authority to cumulate
votes among the director nominees with respect to which the Proxyholders'
authority to vote was not withheld. The Proxyholders will have discretionary
authority to vote on such business (other than Proposals 1, 2 and 3) as may
properly come before the Annual Meeting (the Board does not currently know of
any such business).
1
<PAGE>
REVOCABILITY OF PROXIES.
A shareholder may revoke a proxy at any time before it is voted at the
Annual Meeting by filing with the Secretary of the Company a written notice of
revocation or a duly executed proxy bearing a later date, or by voting in person
at the Annual Meeting.
VOTING IN PERSON BY BENEFICIAL OWNERS.
If your shares of Common Stock are held of record by a broker, bank or
other person, and you wish to attend the Annual Meeting and vote in person, you
must obtain from the broker, bank or other holder of record a proxy confirming
your beneficial ownership of the shares and bring it to the Annual Meeting.
COSTS OF THE SOLICITATION.
The Board is making this proxy solicitation, the costs of which (including
the reasonable charges and expenses of brokerage firms, banks and others for
forwarding proxy materials to beneficial owners of Common Stock) will be borne
by the Company. Proxies will be solicited through the mails, and may also be
solicited personally or telephonically by the Company's officers, other regular
employees and directors (without additional compensation).
VOTE REQUIRED FOR APPROVAL
Except with respect to cumulative voting for directors, each share of
Common Stock outstanding as of the Record Date is entitled to one vote on each
matter of business that may properly come before the Annual Meeting.
A majority of the shares of Common Stock outstanding on the Record Date,
represented in person or by proxy, will constitute a quorum at the Annual
Meeting. Assuming a quorum is present, the four nominees receiving the highest
number of votes will be elected as directors (Proposal 1). Votes against a
candidate have no legal effect. Assuming a quorum is present, the affirmative
vote of the holders of a majority of the shares of Common Stock represented in
person or by proxy and voting at the Annual Meeting (the shares affirmatively
voted must also constitute at least a majority of the required quorum and of the
votes cast) is required to approve the 1998 Incentive Plan (Proposal 2) and to
ratify the appointment of KPMG Peat Marwick LLP as the Company's independent
auditors (Proposal 3).
Abstentions will be treated as present and entitled to vote for purposes of
determining the presence of a quorum. Abstentions, however, will not constitute
a vote "for" or "against" any matter, and thus will be disregarded in the
calculation of a plurality or of shares voting or votes cast on any matter
submitted to the shareholders for a vote.
"Broker non-votes" (i.e., shares held by brokers or nominees as to which
instructions have not been received from the beneficial owners or persons
entitled to vote and as to which the broker has physically indicated on the
proxy that the broker or nominee does not have discretionary power to vote on a
particular matter) are counted as present and entitled to vote for purposes of
determining the presence of a quorum. However, for purposes of determining the
outcome of any matter as to which the broker has physically indicated on the
proxy that it does not have discretionary authority to vote, those shares will
be treated as not present and not entitled to vote with respect to that matter
(even though those shares are considered present for quorum purposes
2
<PAGE>
and may be entitled to vote on other matters). Any unmarked proxies, including
those submitted by brokers or nominees, will be voted as indicated in the
accompanying proxy card.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the shares of
Common Stock beneficially owned or deemed to be beneficially owned as of July 1,
1998 by (i) each person known to the Company to be the beneficial owner of (or
deemed under Rule 13d-3 to be the beneficial owner of) more than 5% of the
Common Stock, (ii) each director of the Company, (iii) each executive officer
named in the Summary Compensation Table set forth in the Executive Compensation
section, and (iv) all directors and executive officers as a group:
<TABLE>
<CAPTION>
COMMON STOCK PERCENT
NAME BENEFICIALLY OWNED/(1)//(2)/ OF CLASS/(3)/
- ---- ---------------------------- -------------
<S> <C> <C>
IMAGE INVESTORS CO./ (4)//(5)/.............................. 6,181,509 41.38%
c/o Metromedia Company
One Meadowlands Plaza
East Rutherford, NJ 07073
JOHN W. KLUGE AND STUART SUBOTNICK/ (4)//(5)/
c/o Metromedia Company
One Meadowlands Plaza
East Rutherford, NJ 07073
MARTIN W. GREENWALD /(6)/................................... 1,061,633 7.84%
STUART SEGALL /(6)/......................................... 917,960 6.78%
RUSSELL HARRIS /(5)//(7)/................................... 162,633 1.20%
IRA S. EPSTEIN /(8)/........................................ 75,981 *
CHERYL LEE.................................................. 157,159 1.16%
JEFF FRAMER................................................. 103,400 *
DAVID BORSHELL.............................................. 131,398 *
ALL DIRECTORS & EXECUTIVE OFFICERS AS A GROUP (7 PERSONS)... 2,609,134 19.28%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
* Less than 1%.
(1) The number of shares beneficially owned includes shares of Common Stock in
which a person has sole or shared voting power and/or sole or shared
investment power. Except as noted below, each person named reportedly has
sole voting and investment powers with respect to the Common Stock
beneficially owned by such person, subject to applicable community property
and similar laws. On July 1, 1998, there were 13,533,139 shares of Common
Stock outstanding.
3
<PAGE>
(2) The number of shares listed as beneficially owned by each named person (and
the directors and executive officers group) includes shares of Common Stock
underlying options, warrants and rights (including conversion rights)
exercisable as of or within 60 days after July 1, 1998, as follows:
<TABLE>
<S> <C>
Image Investors Co.......................................... 1,403,209 /(4)//(5)/
John W. Kluge and Stuart Subotnick/ (4)//(5)/
Mr. Greenwald............................................... 285,000
Mr. Segall.................................................. 25,000
Mr. Harris.................................................. 75,320 /(5)/
Mr. Epstein................................................. 72,981
Ms. Lee..................................................... 157,159
Mr. Framer.................................................. 103,400
Mr. Borshell................................................ 131,000
All directors & executive officers as a group (7 persons)... 849,860
</TABLE>
(3) Common stock not outstanding but which underlies options, warrants and
rights (including conversion rights) exercisable as of or within 60 days
after July 1, 1998 is deemed to be outstanding for the purpose of computing
the percentage of the Common Stock beneficially owned by each named person
(and the directors and executive officers group), but is not deemed to be
outstanding for any other person.
(4) All of the shares of Common Stock are held of record by Image Investors Co.
("IIC"). The shares of Common Stock listed in the table as beneficially
owned by IIC may also be deemed to be beneficially owned by John W. Kluge
and Stuart Subotnick by virtue of their being directors, executive officers
and the sole shareholders of IIC. Messrs. Kluge and Subotnick have shared
voting and investment powers with respect to such shares. Amendment No. 11
(dated December 30, 1992) to a Schedule 13D, dated July 18, 1988, filed on
behalf of IIC, John W. Kluge and Stuart Subotnick, states that IIC, John W.
Kluge and Stuart Subotnick each "disclaims membership in a group, although
a group might be deemed to exist." There are demand and piggyback
registration rights with respect to 4,672,479 shares of Common Stock
beneficially owned by IIC (which includes 1,379,310 shares of Common Stock
issuable upon conversion of debt under a credit agreement dated as of
September 29, 1997 but does not include shares or rights acquired pursuant
to the Stock Purchase Agreement referenced in footnote 5 below).
(5) Under a stock purchase agreement, dated as of December 29, 1987, as amended
(the "Stock Purchase Agreement"), certain investors (including IIC and Mr.
Harris) acquired shares of Common Stock from the Company. The Schedule
13D, dated December 29, 1987, filed in connection with the initial
acquisition of shares under the Stock Purchase Agreement states that the
investors "disclaim status as a group." The Stock Purchase Agreement
provides that antidilution rights be granted in connection with certain
issuances of Common Stock. Antidilution rights to 23,899 shares exercisable
by IIC and 2,339 shares exercisable by Mr. Harris as of or within 60 days
after July 1, 1998 are included in the table. The antidilution rights
exercisable by IIC are included in the table as beneficially owned by John
W. Kluge and Stuart Subotnick by virtue of their being directors, executive
officers and sole shareholders of IIC. The Stock Purchase Agreement also
provides that investors collectively holding a specified percentage of
"Shares" (as defined in the Stock Purchase Agreement) may cause the Company
to register the Shares with the Securities and Exchange Commission.
4
<PAGE>
(6) Includes 1,030 shares of Common Stock held of record by Momandad, Inc., a
corporation of which Messrs. Greenwald and Segall are the sole
shareholders. With respect to such shares, Messrs. Greenwald and Segall
share voting and investment powers.
(7) Includes 87,313 shares of Common Stock held by Mr. Harris as trustee for a
family trust.
(8) Includes 2,000 shares of Common Stock held by Mr. Epstein's Keogh plan.
PROPOSAL 1
ELECTION OF DIRECTORS
NOMINEES.
The Bylaws provide for a Board consisting of a minimum of 4 and a maximum
of 7 members.
The name of each nominee for election to the Board, his principal
occupation, age, all positions and offices with the Company held by him and the
year he first became a director and additional biographical data is set forth
below. For information regarding each nominee's security ownership, see
"Security Ownership of Certain Beneficial Owners and Management" above.
MARTIN W. GREENWALD.....................................................Age: 56
- -------------------
Chairman of the Board, Chief Executive Officer and President since April 1981,
and Treasurer since January 1988. Mr. Greenwald is a 1964 graduate of Fairleigh
Dickinson University. Since July 1990, Mr. Greenwald has been a board member of
the Permanent Charities Committee of the Entertainment Industries, an umbrella
organization which coordinates charitable contributions. Mr. Greenwald has been
the Chairperson of the Optical Videodisc Association (OVDA) (formerly the
Laserdisc Association of America) since 1995.
STUART SEGALL...........................................................Age: 53
- -------------
Director and Vice President (not an executive officer) since April 1981. Mr.
Segall's principal occupation is that of principal of Stu Segall Productions, a
television and motion picture production company with offices in North
Hollywood, California and a full-service production facility in San Diego,
California. From 1984 to 1989, Mr. Segall was a supervising producer for Steven
J. Cannell Productions, Hollywood, California.
IRA S. EPSTEIN..........................................................Age: 66
- --------------
Director since June 1990. Mr. Epstein is of counsel to the Beverly Hills law
firm of Weissman, Wolff, Bergman, Coleman & Silverman. Prior to that, Mr.
Epstein was the managing partner of Cooper, Epstein & Hurewitz, where he
practiced law from 1975 to 1993. Mr. Epstein has held officer and director
positions in numerous corporations.
RUSSELL HARRIS..........................................................Age: 54
- --------------
Director since January 1991. Mr. Harris is a private investor and
telecommunications consultant. Mr. Harris is also a director of one non-public
entity. Mr. Harris was President and director of County Voice, a public utility
licensed to provide radio paging services in Southern California, from November
1985 to January 1992. From 1983 to 1987, Mr. Harris held various executive
positions with Metromedia Telecommunications, Inc.
5
<PAGE>
VOTE REQUIRED.
Four directors are to be elected at the Annual Meeting to hold office until
the Company's next annual meeting of shareholders and until their respective
successors have been elected and qualified. Proxies solicited by the Board will
be voted, unless authority to vote is withheld, for the nominees named above or,
if any of these nominees were unavailable to stand for election (an occurrence
not expected by the Board), such substitute nominee(s) as selected by the Board.
If any shareholder has given notice at the Annual Meeting, before the
voting for directors begins, of the shareholder's intention to cumulate votes,
then all shareholders may cumulate their votes, but only for nominees whose
names have been placed in nomination before the voting. Under cumulative
voting, each shareholder is entitled to the number of votes equal to the number
of directors to be elected multiplied by the number of shares of Common Stock
held by the shareholder. The shareholder may cast all those votes for a single
nominee or distribute them among as many nominees as the shareholder sees fit.
If voting for directors is noncumulative, each share of Common Stock will be
entitled to one vote for each of the nominees.
In the event of cumulative voting for directors, the Proxyholders will have
discretionary authority to cumulate votes among the nominees named above
(including any substitute nominees) with respect to shares for which the
Proxyholders' authority to vote was not withheld, so as to elect a maximum
number of such nominees.
Assuming a quorum is present, the nominees receiving the highest number of
votes will be elected as directors (votes against a candidate have no effect).
If voting for directors is noncumulative, the holders of a majority of the
shares of Common Stock voting could elect all the directors.
BOARD COMMITTEES AND MEETINGS.
The Board has standing audit and compensation committees, but no nominating
committee (the functions of a nominating committee are performed by the entire
Board). The audit committee is composed of Messrs. Epstein and Harris. The
audit committee's primary functions are to recommend to the Board the firm to be
retained by the Company as its independent auditors, to consult with the
auditors with regard to the plan of audit, the results of the audit and the
audit report, and to confer with the auditors with regard to the adequacy of
internal accounting controls. The audit committee met twice during fiscal 1998.
The compensation committee is composed of Messrs. Epstein and Harris. The
compensation committee's primary functions are to review and approve salaries,
bonuses and other compensation payable to the Company's executive officers. The
compensation committee met twice during fiscal 1998.
The Board met five times during fiscal 1998. Each director attended all of
the meetings. The Board administers the Company's 1994 Eligible Directors Stock
Option Plan, as amended, and the compensation committee administers the
Company's 1990 and 1992 Stock Option Plans and other employee benefit plans of
the Company.
COMPENSATION OF DIRECTORS.
Non-employee directors each receive a fee of $400 for each Board meeting
attended.
Since July 12, 1994, the Company has made automatic annual awards to non-
employee directors (the "Formula Option Grants") under the Company's 1994
Eligible Directors Stock Option Plan, as amended (the "Directors Plan"). On
July 14, 1997 (the first business day following July
6
<PAGE>
12, 1997) and July 13, 1998 (the first business day following July 12, 1998),
Messrs. Epstein and Harris were each granted an option to purchase 15,000 shares
of Common Stock under the Directors Plan at a per share exercise price of $3.25
and $7.94, respectively. (See Proposal 2 for a description of the formula
director awards under the Company's proposed 1998 Incentive Plan that in years
after 1998 would replace the Formula Option Grants if the 1998 Incentive Plan is
approved by the shareholders.)
The Formula Options granted pursuant to the Directors Plan expire 10 years
after the date of grant, subject to earlier termination as described below. The
Formula Options become exercisable in installments at the rate of 50% of the
shares initially subject to the Formula Option on the date six months after the
grant date, and another 25% of such initial number of shares on the date 12
months and on the date 18 months after the grant date.
If a director's services as a member of the Board of Directors terminate by
reason of death or disability, his Formula Options become fully exercisable and
remain exercisable for one year thereafter or until the expiration of their
stated term, whichever occurs first, and then terminate. If the director's
services terminate for any other reason, his Formula Options, to the extent they
are exercisable on such date, remain exercisable for six months or until the
expiration of their stated term, whichever occurs first, and then terminate.
The Formula Options not exercisable at the time of a termination of service will
terminate.
Upon the occurrence of certain events described in the Directors Plan (such
as a dissolution, liquidation or certain merger or asset transactions or changes
in control of the Company), each Formula Option will become immediately
exercisable, provided that no Formula Option will be accelerated to a date which
is less then six months after the date of grant of the Formula Option.
The Company's proposed 1998 Incentive Plan would replace the existing
Formula Option Grants feature of the Directors Plan with a similar Formula
Director Awards feature and would permit the Board (or a duly authorized
committee appointed by the Board, with Board ratification or approval) to grant
one or more discretionary awards to all directors who are not executive officers
of the Company. In addition, subject to shareholder approval, the 1998
Incentive Plan provides for an option grant substantially similar to the 1998
installment of the Formula Option Grants under the Directors Plan to Stuart
Segall, a current nominee for reelection as a director. Mr. Segall has not
previously participated in the Formula Option Grants under the Directors Plan
because he has been a non-salaried vice-president of the Company. (See Proposal
2.)
7
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain annual and long-term compensation,
for each of the last three fiscal years, paid to the Company's Chief Executive
Officer and each Executive Officer whose salary and bonus exceeded $100,000 in
the last fiscal year:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
-------------------------------------- -------------
Other Securities All
Annual Underlying Other
Fiscal Salary Bonus Compensation Options Compensation
Name & Principal Position Year ($)/(1)/ ($)/(2)/ ($)/(3)/ (#) ($)
- ---------------------------- ------ ---------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Martin W. Greenwald, 1998 $ 284,576 $ 90,300 __ 0 $45,990/(4)/
President & CEO 1997 263,187 300 __ 150,000 29,662/(5)/
1996 258,150 230,639 __ 0 4,793/(6)/
Cheryl Lee, 1998 155,392 300 __ 0 2,932/(7)/
Chief Administrative 1997 148,019 5,881 __ 0 3,042/(7)/
Officer 1996 140,969 57,983 __ 60,000 769/(7)/
Jeff Framer, 1998 131,411 300 __ 0 2,381/(7)/
Chief Financial 1997 125,173 5,881 __ 0 2,593/(7)/
Officer 1996 119,202 57,983 __ 60,000 650/(7)/
David Borshell, 1998 125,699 300 __ 0 2,176/(7)/
Sr. VP, Sales, Marketing 1997 119,731 5,881 __ 0 2,644/(7)/
& Operations 1996 111,327 57,983 __ 75,000 622/(7)/
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The fiscal 1998, 1997 and 1996 salary figures for Mr. Greenwald include an
additional annual salary component characterized as an "unaccountable
personal expense allowance" in his employment agreement.
(2) In fiscal 1998, none of the named executive officers earned a bonus under
the formula bonus plan set forth in each such officer's employment
agreement (the "Formula Bonus Plan"). However, in May 1997, Mr. Greenwald
was awarded a $90,000 guaranteed, discretionary bonus for fiscal 1998 which
was paid in biweekly installments commencing June 19, 1997 through March
26, 1998. The discretionary bonus was not part of the Formula Bonus Plan.
The fiscal 1997 and 1996 bonus figures for all of the named executive
officers except Mr. Greenwald represent amounts awarded under the Formula
Bonus Plan. (Mr. Greenwald did not earn a bonus in fiscal 1997 under the
Formula Bonus Plan.) In fiscal 1998, 1997 and 1996, each of the named
executive officers also received a nominal ($300) holiday bonus.
(3) While all the executive officers enjoyed certain perquisites in fiscal
1998, 1997 and 1996, such perquisites did not exceed the lesser of $50,000
or 10% of any executive officer's fiscal year salary and bonus for each
such year.
(4) Includes $3,690 of term life insurance premium payments, $38,230 of
universal life insurance premium payments and $4,070 of Company
contributions to a 401(k) plan.
(5) Includes $3,690 of term life insurance premium payments, $21,805 of
universal life insurance premium payments (which commenced in June 1996)
and $4,167 of Company contributions to a 401(k) plan.
(6) Includes $3,690 of term life insurance premium payments and $1,103 of
Company contributions to a 401(k) plan. Company contributions to the 401(k)
plan commenced on January 1, 1996.
(7) Entire amount consists of Company contributions to a 401(k) plan. Company
contributions to the 401(k) plan commenced on January 1, 1996.
8
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
No options were granted in fiscal 1998 to any of the executive officers.
The following table summarizes options exercised in fiscal 1998 by the
executive officers named in the Summary Compensation Table and certain other
information regarding their outstanding options:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Shares Underlying Value of Unexercised
Unexercised In-the-Money
Shares Value Options at FY-End (#) Options at FY-End
Acquired on Realized -------------------------------- ------------------------------------
Name Exercise (#) ($)/(1)/ Exercisable Unexercisable/(2)/ Exercisable/(3)/ Unexercisable/(3)/
- ---- ------------ --------- -------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Martin Greenwald 0 $0 345,577 90,000 $0 $0
Cheryl Lee 0 0 152,159 5,000 0 0
Jeff Framer 0 0 98,400 5,000 0 0
David Borshell 0 0 129,192 6,250 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on the closing price on NASDAQ/NMS of the Common Stock on March 31,
1998 ($3.063).
(2) In the event of a "Change of Control" (as defined in the Company's 1992
Stock Option Plan), the unvested portion of an option shall immediately
vest. Additionally, the committee administering the Plan may (subject to
Board approval) terminate the Plan and the options. If any termination
occurs, the committee shall give each optionee written notice of the
intention to terminate the Plan and the options, and shall permit the
exercise of the options for at least thirty days immediately preceding the
effective date of such termination. In the event an optionee's employment
with the Company ceases for any reason other than death or disability, the
options will terminate two weeks following the date employment ceases;
however, the committee, in its sole discretion, may extend the exercise
period from two weeks to three months. In the event of an optionee's death
or disability, the options may be exercised for one year thereafter.
Subject to the other provisions of the Plan, the committee has
discretionary authority to amend or terminate the Plan and to do any other
act advisable to administer the Plan.
(3) Market value of underlying securities at exercise or year-end, minus the
exercise price.
DESCRIPTION OF EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN
CONTROL ARRANGEMENTS.
The Company is currently a party to employment agreements with each of the
executive officers named in the Summary Compensation Table. The agreements were
originally entered into on July 1, 1994. Except for base salary, bonus
compensation and fringe benefits, all of the terms and conditions of the
agreements are identical.
The agreements originally provided for a term of two years. The agreements
were amended effective July 1, 1995 to extend the term to June 30, 1998, with an
automatic extension to June 30, 1999 unless a written notice of non-renewal was
given by June 30, 1997. No notices of non-renewal were given.
The agreements originally specified base salary amounts (and, for Mr.
Greenwald, an additional annual salary component characterized as an
"unaccountable personal expense allowance") for the first contract year only.
The agreements (as amended) provide that on the anniversary of each contract
year on July 1, each executive would receive a 5% increase to his or her then
annual base salary (and, for Mr. Greenwald, a 5% increase to his then annual
unaccountable personal expense allowance). The base salary amounts paid to the
named executive officers pursuant to the employment agreements (which, for Mr.
Greenwald, include his
9
<PAGE>
annual unaccountable personal expense allowance) through June 30, 1998 are
reflected in the Summary Compensation Table, on an annualized fiscal year basis.
The base salary amounts increased to $400,000, $190,000, $190,000 and $180,000
for Mr. Greenwald, Ms. Lee, Mr. Framer and Mr. Borshell, respectively, pursuant
to amendments to the employment agreements approved by the Compensation
Committee and the Board, effective July 1, 1998.
The agreements provide for the payment of cash bonuses to the executive
officers as incentive compensation provided certain performance targets are met.
Prior to July 1, 1998, the bonus opportunities represented a percentage of the
Company's fiscal pretax profits from 5/8% to (in the case of Mr. Greenwald) 4%
based upon certain qualifying conditions, relative to gross margin, inventory
levels, return on assets and current ratio. The performance criteria pursuant
to which the bonuses were determined were applicable to all of the executive
officers and subject to change from time to time at the discretion of the
Compensation Committee. Effective July 1, 1998, a new bonus formula will be
applied to determine the annual cash bonus each executive officer will receive,
as described below under the heading "Executive Officer Cash Bonuses."
The agreements provide that stock-based grants will be in such form and
amounts, and at such time or times, as the Board of Directors (or, if
applicable, the committee) determines.
The agreements provide for severance packages consisting of base salary and
insurance continuation for six months, and pro rata bonus compensation for the
longer of six months or that part of the fiscal year occurring prior to
expiration of the term. The agreements also provide for comparable benefits in
the event of an executive's death or permanent disability.
In the event of a "Change of Control" (as defined in the agreements), all
compensation, rights and benefits under the agreements will continue for the
longer of one year following the effective date of termination or through the
expiration of the remaining term of the agreements.
In the event of a termination for "Cause" (as defined in the agreements),
no severance, fringe benefits, compensation or other such rights, including any
pro rata portion of bonus otherwise due, is due or payable.
The executives are entitled to receive medical, life and disability
insurance, vacation and reimbursement for reasonable business expenses. Mr.
Greenwald's agreement further provides for the payment of personal life and
disability insurance premium payments and reimbursement for medical expenses not
covered by medical insurance of up to $30,000 per annum (increased from $17,000
per annum pursuant to an amendment effective July 1, 1996), an additional annual
salary component characterized as an "unaccountable personal expense allowance"
(as stated above), and use of a company car.
Outstanding employee stock options granted under the Company's 1992 Stock
Option Plan and individual option grants without reference to a plan include
provisions for acceleration of exercisability upon a change in control
substantially as summarized in footnote 2 to the Aggregated Option Exercises in
Last Fiscal Year and Fiscal Year-End Option Values Table. Options granted under
the Company's 1990 Stock Option Plan include provisions for acceleration of
exercisability upon a change in control except in the event the acquiring
corporation (or a parent or subsidiary thereof) agrees to (i) assume the
Company's obligations under the plan and the options or (ii) replace the options
with new options having terms at least as favorable to the optionee. Options
granted in May 19, 1994 under individual plans include provisions allowing the
Board to terminate the plan and the option term in the event of a change in
control, whereupon the optionee may exercise the options for at least sixty days
following the effective date of termination.
10
<PAGE>
EXECUTIVE OFFICER CASH BONUSES. As noted in the "Board Compensation
Committee Report on Executive Compensation," effective July 1, 1998 the
Compensation Committee and the Board, after reevaluating the Company's existing
short-term incentive program, approved amendments to the executive officers'
employment agreements which, commencing in and for fiscal year 1999, would
replace the existing annual bonus formula. The cash bonus program for fiscal
1999 will be based on a formula relative to earnings before interest, taxes,
depreciation and amortization ("EBITDA"). These awards are not made under the
1998 Plan but for fiscal years after 1999 could be so made if the 1998 Plan is
approved by shareholders. Section 162(m) requires that (among other things) a
performance-based award to the extent it results in aggregate compensation in
excess of $1,000,000 in any fiscal year must be granted under a plan approved by
shareholders in order to be deductible.
The specific performance targets for fiscal 1998 will be based on a
confidential target EBITDA. The performance award will be determined by
multiplying an annual "Performance Factor" (the percentage determined by
dividing the Company's actual EBITDA by the target EBITDA) by the applicable
officer's "Annual Base Salary Factor" (a percentage of base salary varying by
executive over a range of 30% to 75%) by the officer's base salary. In order
for a bonus award to be paid under this bonus program, the Performance Factor
must reach a minimum of 40%.
The amount of the bonus is capped by a Performance Factor of 125%. For
example, Mr. Greenwald's Annual Base Salary Factor is 75%. If the Company
achieves the minimum performance level, Mr. Greenwald would receive a formula
cash bonus of $120,000; at target the formula bonus would be $300,000 and above
target, a maximum of $375,000. In future years, annual cash bonuses may be
based on different criteria or models.
11
<PAGE>
STOCK PRICE PERFORMANCE GRAPH./*/
The graph below compares the cumulative total return of the Company, the
NASDAQ U.S. Market Index and a Company-selected peer group (viz., Handleman
Company, J2 Communications, Musicland Stores and Rentrak) for the 5-year period
ending March 31, 1998. The graph assumes an initial investment of $100 on April
1, 1993 in the Company, the NASDAQ U.S. Market Index and the Peer Group. The
graph also assumes reinvestment of dividends, if any. (LIVE Entertainment, a
company previously included in the peer group, ceased trading on the NASDAQ
Small Cap Market on July 9, 1997 and has been eliminated from the peer group for
all years presented.)
FIVE-YEAR CUMULATIVE TOTAL RETURN SUMMARY
PERFORMANCE GRAPH APPEARS HERE
<TABLE>
<CAPTION>
Measurement Period IMAGE IMAGE NASDAQ NASDAQ PEER GROUP PEER GROUP
(Fiscal Year Covered) ENTERTAINMENT (%) ENTERTAINMENT ($) U.S. (%) U.S. ($) ONLY (%) ONLY ($)
- ------------------- ---------------- ----------------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Measurement Pt- 1993 $100.00 $100.00 $100.OO
FYE 1994 25.58 $125.58 7.94 $107.94 0.98 $100.98
FYE 1995 5.56 $132.56 11.24 $120.07 (30.15) $ 70.53
FYE 1996 (5.26) $125.58 35.78 $163.03 (51.45) $ 34.24
FYE 1997 (42.59) $ 72.09 11.15 $181.21 (11.11) $ 30.44
FYE 1998 (20.95) $ 56.98 51.87 $275.21 136.65 $ 72.04
</TABLE>
- ----------------------
/*/ This section of the Proxy Statement shall not be deemed to be incorporated
by reference by any general statement incorporating by reference this Proxy
Statement into any filings of the Company pursuant to the Securities Act of 1933
or the Securities Exchange Act of 1934, as amended, except to the extent the
Company specifically incorporates this section by reference therein, and shall
not be deemed soliciting material or otherwise deemed filed under either of such
Acts.
12
<PAGE>
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION./+/
THE COMMITTEE. The Company's Compensation Committee (for the purposes of
this report only, the "Committee") was established in 1992 and is composed
entirely of outside directors. The Committee reviews with the full Board all
aspects of the compensation packages for each executive officer of the Company.
The Committee, and from time to time the full Board, approves such packages and
any amendments thereto. The Committee administers the Company's 1990 Stock
Option Plan, the Restated 1992 Stock Option Plan and other employee benefit
plans of the Company. The following report addresses the Committee's objectives
and its actions and decisions with respect to compensation for the 1998 fiscal
year. Changes made or anticipated for the 1999 fiscal year are also discussed.
COMPENSATION OBJECTIVES. The Committee's goal is to maximize shareholder
value over the long-term by attracting, retaining and motivating key executives.
The executive compensation packages contain three primary components: (i) base
salary, (ii) long-term incentive compensation in the form of stock-based awards,
historically only options, and (iii) short-term incentive compensation in the
form of annual cash bonuses based on the Company's performance. The Company
offers a contributory 401(k) plan and provides health, life and disability
insurance to all full-time employees. In addition, to the extent reasonably
practicable and to the extent it is within the Committee's control, the
Committee intends to limit executive compensation in ordinary circumstances to
that which is deductible by the Company under Section 162(m) of the Internal
Revenue Code.
In light of the challenges facing the Company with regard to the adverse
effect of direct competition from the March 1987 introduction of digital video
discs ("DVDs") on laserdisc ("LD") revenues and the demands of the transition
from LD distribution (which historically has generated 100% of the Company's
revenues) to DVD distribution, the Committee has implemented a new executive
compensation structure in an effort to better integrate executive compensation
with corporate strategic objectives, maintain a strong link between executive
rewards and shareholder interests and encourage long-term retention of executive
officers.
For fiscal 1999, the Committee has reevaluated the Company's
performance-based incentives. Based in part on a survey prepared by and
recommendations of its outside consultants, the Committee proposed significant
changes in the Company's short and long-term incentive plans. Effective July 1,
1998, the Committee and the Board approved amendments to the executive officers'
employment agreements which would replace the existing annual formula bonus
awards with an alternative prospective annual bonus formula that emphasizes
performance related to other business considerations. Bonus opportunities
relative to EBITDA targets were approved for fiscal year 1999. For a further
description of the new bonus formula, see page 11 of this Proxy Statement. In
addition, the Committee authorized the grant to executive officers of restricted
stock units on a schedule also related to EBITDA targets, the first of which
grants are described in Proposal 2 at page 19 of this Proxy Statement and are
subject to shareholder approval of the 1998 Incentive Plan.
- ----------------------
/+/ The Board Compensation Committee Report on Executive Compensation shall not
be deemed to be incorporated by reference by any general statement incorporating
by reference this Proxy Statement into any filings of the Company pursuant to
the Securities Act of 1933 or the Securities Exchange Act of 1934, as amended,
except to the extent the Company specifically incorporates this section by
reference therein, and shall not be deemed soliciting material or otherwise
deemed filed under either of such Acts.
13
<PAGE>
BASE SALARY. Fiscal 1998 base salary was paid in accordance with each
executive's employment agreement. Effective July 1, 1998, the Committee
authorized increases to these amounts principally to remain competitive and to
retain services.
OPTION GRANTS. The Committee views the option grant portion of the
executive compensation packages as a special form of long-term incentive
compensation to be awarded on a limited and non-regular basis. Stock options
granted to executives are priced at or above the fair market value of the Common
Stock on the date of grant and are intended to give management a stake in the
Company's growth while aligning management interests with those of the Company's
shareholders. Awards of stock options are determined based on the Committee's
subjective determination of the amount of such awards necessary, as a supplement
to an executive's base salary and performance-based bonus, to retain and
motivate such executive.
BONUSES. Under their July 1, 1994 employment agreements, as then in effect
(the "Employment Agreements"), and pursuant to a formula plan, all of the
executive officers were entitled to receive a specified percentage of pretax
profits (2% - 4% for Mr. Greenwald provided a minimum pre-tax profit amount was
achieved, and 5/8% for each of Ms. Lee, Mr. Framer and Mr. Borshell) conditioned
upon the achievement of specific performance criteria (such as maximum total
expenses, minimum gross margin, maximum inventory levels, minimum return on
assets, minimum return on net revenue and minimum current ratio). For a
description of the changes made effective July 1, 1998 for fiscal 1999, see
"Description of Employment Contracts - Executive Officer Cash Bonuses" above.
The specific performance criteria and targets have been and likely will remain
subject to change from time to time at the Committee's discretion to adjust for
changes in the Company's business, competitive conditions, changes in its
capitalization, performance and needs. The Committee has not disclosed the exact
targets specified in the bonus plan components because such information is
deemed to be confidential and proprietary, the disclosure of which would be
against the best interests of the Company.
COMPENSATION OF CHIEF EXECUTIVE OFFICER. In fiscal 1998, Mr. Greenwald
received a 5% increase to his base annual salary and an unaccountable personal
expense allowance, in accordance with the terms of his employment agreement.
Mr. Greenwald did not earn any bonus in fiscal 1998 under the terms of the
Formula Bonus Plan set forth in his employment agreement; however, he did
receive a $90,000 guaranteed, discretionary bonus (see below).
COMPENSATION COMMITTEE
Ira S. Epstein
Russell Harris
14
<PAGE>
In May 1997, the Board approved a guaranteed, discretionary bonus for Mr.
Greenwald of $90,000 for fiscal 1998, as described above. The Board,
recognizing that Mr. Greenwald did not earn any bonus monies in fiscal 1997
under the terms of the Formula Bonus Plan set forth in his employment agreement,
deemed it appropriate to grant Mr. Greenwald the discretionary bonus to motivate
him during a period where market conditions and other external factors
dramatically affected the Company's financial performance in a manner beyond his
control and not contemplated when the formula bonus objectives were set, a trend
which was then believed likely to continue in the near future.
BOARD OF DIRECTORS
Martin W. Greenwald (abstaining)
Ira S. Epstein
Russell Harris
Stuart Segall
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
Although the Company has a Compensation Committee, the Board rather than
the Compensation Committee approved Mr. Greenwald's $90,000 guaranteed,
discretionary bonus for fiscal 1998 (with Mr. Greenwald abstaining).
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company entered into a credit agreement with Image Investors Co.
("IIC"), a principal stockholder of the Company owned and controlled by John W.
Kluge and Stuart Subotnick, dated as of September 29, 1997 (the "Credit
Agreement"), pursuant to which the Company borrowed $5 million from IIC, with
interest payable quarterly at 8% per annum, and principal due in five years.
The loan is unsecured and subordinated to the Company's senior lender, Union
Bank, and is convertible into the Company's common stock at any time during the
term at a conversion price of $3.625 per share (the closing price of the
Company's common stock on September 29, 1997). Proceeds from the loan were used
to pay down the Company's outstanding balance under its revolving credit
facility with Union Bank.
Kluge and Subotnick, who may be deemed to beneficially own more than 5% of
the Company's Common Stock as the sole shareholders of IIC, may be deemed to
have indirectly controlled Orion Pictures Corporation ("OPC") prior to OPC's
sale to Metro-Goldwyn-Mayer, Inc. OPC's wholly-owned subsidiary Orion Home
Video ("Orion") has licensed laserdisc programming to the Company in the
ordinary course of the Company's business. The Company believes that the terms
of its license agreement with Orion are comparable to the terms of similar
agreements between the Company and unaffiliated parties. During the period
commencing on April 1, 1997 and ending on July 1, 1998, the Company paid Orion
royalties of approximately $93,000. In July 1997, OPC was sold to Metro-
Goldwyn-Mayer, Inc.
On April 15, 1997, the Company and Orion entered into another license
agreement pursuant to which the Company was granted exclusive rights to release
twelve Orion titles in the DVD format. The Company believes that the terms of
the DVD license agreement are comparable to the terms of similar DVD license
agreements between the Company and unaffiliated parties. During the period
commencing on April 1, 1997 and ending on July 1, 1998, the Company paid Orion
advance royalties of approximately $240,000.
15
<PAGE>
The Company's 1989 Restated Stock Option Plan allows participants to
exercise options and surrender pre-owned shares of the Company's common stock in
lieu of a cash payment of the exercise price, which surrendered shares are
valued at fair market value on the exercise date. On June 22, 1998, Messrs.
Greenwald and Segall each exercised 60,577 options granted under the Restated
1992 Stock Option Plan, at an exercise price of $4.16 per share, and each
surrendered 48,001 shares of the Company's common stock previously held by them.
(The closing price of the Company's common stock on the exercise date was $5.25
per share.)
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors, and persons who beneficially own more than 10%
of the Common Stock, to file with the Securities and Exchange Commission (the
"SEC") and the NASDAQ/NMS initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company. Executive
officers, directors and greater than 10% shareholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) reports they
file. Based solely upon review of the copies of Section 16(a) reports furnished
to the Company, or written representations from certain reporting persons that
no Forms 5 were required for those persons, the Company believes that, during
fiscal 1997 its executive officers, directors and greater than 10% shareholders
complied with all applicable Section 16(a) filing requirements.
PROPOSAL 2
APPROVAL OF 1998 INCENTIVE PLAN
In July 1998, the Board adopted and approved the 1998 Incentive Plan (the
"1998 Plan"), the effectiveness of which was conditioned by the Board upon
shareholder approval. Capitalized terms used but not defined herein have the
meanings assigned to them in the 1998 Plan.
The 1998 Plan can be reviewed on the SEC's Web site at http://www.sec.gov
and may be obtained from the Company without charge. Requests for copies of the
1998 Plan should be directed to:
Cheryl Lee, Esq.
Corporate Secretary
Image Entertainment, Inc.
9333 Oso Avenue
Chatsworth, California 91311
Telephone: (818) 407-9100
PRINCIPAL CHANGES TO STOCK-BASED COMPENSATION.
Shareholders are being asked to approve the 1998 Plan. The following
principal features differ significantly from those of the Company's Directors
Plan, the Company's Restated 1989 Incentive Stock Option Plan (the "1989 Plan"),
which has expired, the 1990 Stock Option Plan (the "1990 Plan") and the Restated
1992 Stock Option Plan, which will expire December 31, 1998 (the "1992 Plan" and
together with the other plans, the "Existing Plans"), under which options to
purchase an aggregate 1,089,567 shares remain outstanding.
The 1998 Plan will be administered by one or more committees appointed by
the Board (the appropriate acting body is referred to as the "Committee"),
currently the Compensation Committee, and all awards to eligible persons will be
authorized by the Board or the Committee. See "Board
16
<PAGE>
Committees and Meetings" at page 6 of this Proxy Statement. For a description
of the Committee's authority under the 1998 Plan, see "Administration" below.
DIRECTORS AS ELIGIBLE PERSONS. Under the 1998 Plan, commencing in 1999 Mr.
Segall, a nominee for re-election as a director and a vice president (but not an
executive officer) of the Company, would be eligible, along with the non-
employee directors, to participate in new formula restricted stock unit awards
and discretionary awards under the 1998 Plan described below, as members of the
Board who are not executive officers of the Company ("Non-Executive Directors").
DIRECTOR AWARDS.
FORMULA DIRECTOR AWARDS. The 1998 Plan contemplates, commencing in
1999, annual automatic grants of restricted stock units payable in shares of
Company Common Stock (the "Formula Director Awards") to Non-Executive Directors,
in lieu of the Formula Option Grants under the Directors Plan.
Commencing in 1999 and ending in 2001, on each October 1 (or the first
business day thereafter), each Non-Executive Director then in office would be
granted automatically (without any action by the Committee or the Board) 2,240
restricted stock units or restricted shares of Common Stock (the "Restricted
Stock Award"). The Restricted Stock Award would vest on a pro rata basis for
each successive day of service during the next 12-month period, commencing on
the grant date. After 2001, the 1998 Plan contemplates that the Board would
periodically revisit, for three year cycles, the size of Restricted Stock Awards
(not to exceed 5,000 shares per director per year) and evaluate them in light of
changed circumstances, the market price of the Company's Common Stock, and other
factors the Board finds relevant to an appropriate level of annual compensation
for eligible directors. The Board would determine the specific size of the
annual grants. A Non-Executive Director would be eligible to receive no more
than one Formula Director Award in one year. The 1998 Plan Formula Director
Awards would supplant and effectively terminate after 1998 future Formula Option
Grants under the Directors Plan.
DISCRETIONARY AWARDS. The 1998 Plan also permits the Board (or a duly
authorized committee appointed by the Board, with Board ratification of the
committee's decision) to grant one or more discretionary awards under the 1998
Plan to Non-Executive Directors, in addition to the Formula Director Awards
described above. Under the 1998 Plan, the Board would grant, or ratify the
decision of the committee to grant, discretionary awards to any Non-Executive
Director in connection with becoming a member of the Board, to reward
exceptional or extraordinary services rendered as a Board member, or in
consideration for services to the Company outside the scope of normal duties in
the ordinary course as a Board member.
SPECIAL OPTION GRANT. Subject to shareholder approval of the 1998
Plan, Mr. Segall received as of July 22, 1998 a one-time option grant on
substantially the same terms as the 1998 installment of the Formula Option
Grants made on July 13, 1998 to non-employee directors under the Directors Plan
as described under the heading "Compensation of Directors" and note 4 to the
"Conditional Awards Granted (as of July 22, 1998)" table below.
INCREASED SHARE AUTHORITY. The 1998 Plan increases by 678,433 shares
(through the imposition of a 2,250,000 share limit on the aggregate number of
shares of Common Stock issued or reissued pursuant to awards under the 1998 Plan
and (after June 30, 1998) under Existing Plans) the number of shares issuable
under employee and director stock plans. The Existing Plans currently authorize
an aggregate 1,571,567 shares that may be issued pursuant to awards (of which,
as of June 30, 1998, approximately 482,000 shares remained available for awards
under the Existing Plans and approximately 1,089,567 shares were subject to
outstanding Options). The Compensation Committee retains administrative
authority under the Existing Plans to administer and take any other permitted
actions under the Existing Plans in respect of the outstanding options.
17
<PAGE>
The aggregate 2,250,000 share limit under the 1998 Plan will be decreased by the
number of shares issued after June 30, 1998 on exercise of options granted under
the Existing Plans.
If the 1998 Plan is approved by shareholders, no new options will be
granted under the Existing Plans. For purposes of determining the number of
shares to be charged against the share limits under the 1998 Plan, shares
relating to any award (or part of an award) that fails to vest, expires, is not
exercised or is cancelled or reacquired will again become available for award
purposes under the 1998 Plan, subject to certain limits (if applicable) in
respect of performance-based awards for purposes of Section 162(m) of the
Internal Revenue Code (the "Code"). Any subsequent use of those shares is
subject to the individual grant limits during the applicable period and to
aggregate plan limits on shares issued. Awards settled in cash are not charged
against the share limits of the 1998 Plan. Upon a stock-for-stock exercise,
share offset or stock settlement of an Option, Stock Unit, Stock Appreciation
Right ("SAR") or other Award, only the net number of new shares issued will be
charged against the share limits. A maximum of 1,125,000 of the shares may be
subject to Incentive Stock Options granted under the 1998 Plan.
ADDITIONAL AWARD TYPES AVAILABLE. In addition to Nonqualified Stock
Options ("NQSOs"), which are available under the Existing Plans, the 1998 Plan
also authorizes the grant of Incentive Stock Options ("ISOs"), SARs, Stock
Bonuses, Stock Units, Performance Awards, Restricted Stock and Restricted Stock
Units, on a current or deferred basis (see "Types of Awards" below), as well as
cash-only incentive awards. Other awards available under the 1998 Plan include
performance stock, phantom stock, dividend equivalent, deferred payment right,
or other type of "derivative security" under Rule 16a-1(c) of the Securities
Exchange Act, or any combination thereof, whether alternative or cumulative
(collectively and together with those awards mentioned in the preceding
sentence, "Awards").
PERFORMANCE AWARDS. The Committee may also may grant Performance Awards to
Eligible Persons. The vesting and/or payment of Performance Awards may be based
on the attainment of one or more performance measures established by the
Committee with respect to the award at the time of grant. The amount of cash or
shares or other property deliverable pursuant to such an award may be based (in
whole or in part) upon the degree of attainment of the performance of the
Company as may be established by the Committee for a specified period of not
more than 10 years (a "performance cycle") to be established by the Committee as
to each Performance Award.
SECTION 162(m) AWARDS: BUSINESS CRITERIA AND CONDITIONS. In addition
to Options and SARs granted "at market", other Performance Awards may be
designed to satisfy the requirements for "performance-based" compensation under
Section 162(m). These awards will be based on the performance of the Company
and/or one or more of its subsidiaries, divisions, segments, or units. The
applicable period(s) over which performance is measured will be not less than
one nor more than 10 years.
The business criteria, other than stock price appreciation, upon which
performance goals with respect to these awards will be established are:
. earnings (before or after taxes or before or after taxes, interest,
depreciation, and/or amortization or before or after extraordinary
items, or any combination thereof);
. cash flow;
. revenue growth;
. profit margins;
18
<PAGE>
. return on equity, on assets, on net investment, or on net revenues;
. inventory ratios;
. specified expense ratios, cost containment or reduction; or
. any combination of the foregoing criteria.
These awards will be earned and payable only if performance reaches
specific, preestablished performance goals approved by the Committee in advance
of applicable deadlines under the Code and while the performance relating to the
goals remains substantially uncertain. The Committee believes that the specific
performance targets with respect to each business criterion will constitute
confidential business information, the disclosure of which could adversely
affect the Company. Before any of these awards are paid, the Committee must
certify that the applicable performance goals have been satisfied. Performance
goals may be adjusted to reflect certain changes, including reorganizations,
liquidations and capitalization and accounting changes, to the extent permitted
by Section 162(m) and subject to the 1998 Plan. In the event of death,
disability, a change in control event, or in such other circumstances as the
Committee may determine, the Committee may provide for full or partial credit
prior to completion of the performance cycle or the attainment of the
performance achievement specified in the Performance Award.
Performance Awards may be stock-based (payable in stock only or cash or
stock) or may be cash-only awards (in either case, subject to the limits
described below under the heading "Increased Individual Award Limits"). No more
than one performance cycle for awards payable only in cash and not related to
shares shall begin in any year. The Committee will have discretion to determine
the performance goals and restrictions or other limitations of the individual
Performance Awards and may reserve "negative" discretion to reduce payments
below maximum Award limits or to determine whether payment or vesting of any
bonus will be deferred or accelerated, subject to the terms of the 1998 Plan and
any other written agreement authorized thereunder by the Compensation Committee.
The Committee will have no discretion to increase the amount of cash or number
of shares to be delivered upon attainment of the performance goals set forth in
the individual performance award agreement in the case of Section 162(m)
qualified awards.
LONG-TERM INCENTIVE OPPORTUNITIES. The 1998 Plan contemplates the
grant of Restricted Stock or Restricted Stock Units to eligible persons (as
described below under "Eligible Persons.") The Committee on July 6, 1998
authorized the grant of Restricted Stock Units to the officers, subject to Board
and shareholder approval of the 1998 Plan. These grants will vest in annual 20%
installments over a 5-year period, commencing June 30, 1999. The "Conditional
Awards Granted (as of July 22, 1998)" table on page 25 of this Proxy Statement
describes the Restricted Stock Units granted, which provide for accelerated
vesting based also (at least for the current year) on a formula related to the
target EBITDA. The number of Restricted Stock Units awarded to officers was
determined by multiplying a specified percentage of base salary (20%, 45% or
70%) by the officer's base salary as of the beginning of the period (which also
varies individually and by position) and dividing the results by an average
trading price of the stock to determine the number of Restricted Stock Units.
The Restricted Stock Units are payable solely in shares.
19
<PAGE>
If the actual EBITDA is below a specified percentage of the target
performance level, only a 20% installment per year will vest. However, if the
Company achieves a minimum of 80% of the target performance level, the vesting
will be accelerated to 33 1/3% for that year. The specified minimum percentages
and applicable business criterion and targets may change from year to year.
Because of the time-based vesting feature, these awards are not qualified
performance-based awards under Section 162(m).
Other types of long-term incentives are permitted by the 1998 Plan in lieu
of or in addition to these initial awards.
INCREASED INDIVIDUAL AWARD LIMITS. The 1998 Plan provides that, during any
calendar year, a maximum of 300,000 shares (under the 1992 Plan, 180,000 shares)
of Common Stock may be subject to 1998 Plan Options and SARs granted to any
individual and a maximum of 400,000 shares of Common Stock may be subject to all
1998 Plan share-based Awards (including Options and SARs) granted to any
individual, subject to certain adjustments. A maximum of 500,000 shares of
Common Stock may be granted under the 1998 Plan as Restricted Stock Awards
(including Formula Director Awards) or Restricted Stock Unit equivalents, the
vesting of which is based on the passage of time and continued service; however,
this limit shall not apply to Restricted Stock or Stock Units issued principally
for past services, in respect of compensation deemed to be otherwise earned but
deferred (including deferrals in the form of Stock Units), or in respect of
Options, SARs or other performance-based awards.
If payable solely in cash, Performance Awards payable to any individual
cannot exceed $1,000,000, times the number of years (not more than five) in the
applicable performance period.
AWARDS GRANTED UNDER THE 1998 PLAN PRIOR TO THE ANNUAL MEETING ARE SUBJECT
TO SHAREHOLDER APPROVAL OF THE 1998 PLAN. (SEE "CONDITIONAL AWARDS GRANTED
SUBJECT TO SHAREHOLDER APPROVAL OF THE 1998 PLAN" BELOW.)
SUMMARY DESCRIPTION OF THE PLAN.
The principal terms of the 1998 Plan, to the extent not addressed above in
the discussion of the Principal Changes to Stock-Based Compensation, are
summarized below. The following summary is qualified in its entirety by
reference to the full text of the 1998 Plan.
PURPOSE. The purpose of the 1998 Plan is to promote the success of the
Company and the interests of its shareholders by attracting, motivating,
retaining and rewarding officers, employees and outside directors with awards
and incentives for high levels of individual performance and improved financial
performance of the Company, and to further align their respective interests with
those of shareholders generally through awards of stock-based incentives. Cash-
only awards are authorized under the 1998 Plan solely to satisfy applicable
requirements for shareholder approval under Section 162(m).
ELIGIBLE PERSONS. Eligible Persons under the 1998 Plan generally include
persons who are directors, officers or employees of the Company. Members of the
Board who are not executive officers of the Company ("Non-Executive Directors")
also receive Formula Director Awards under the 1998 Plan (as described in more
detail at pages 6-7 of this Proxy Statement). (They were not eligible for
discretionary awards under the Company's Existing Plans.)
As of June 1, 1998, there were approximately 6 officers and 103 employees
of the Company and its Subsidiaries and three Non-Executive Directors, all of
whom are Eligible Persons under the 1998 Plan. The Board retains the power to
determine the particular Eligible Persons to whom discretionary awards will be
granted.
20
<PAGE>
ADMINISTRATION. The 1998 Plan will be administered by the Committee (as
defined at page 16 of this Proxy Statement) and all Awards to Eligible People
will be authorized by the Board or the Committee. The Committee will have broad
authority under the 1998 Plan:
. to select the Participants, although grants of discretionary Awards to
Non-Executive Directors would require Board approval or ratification;
. to determine the number of shares that are to be subject to Awards and
the terms and conditions of such Awards, including the price (if any)
to be paid for the shares or the Award;
. to permit the recipient of any Award to pay the exercise or purchase
price of the Common Stock or Award in cash, by the delivery of
previously owned shares of Common Stock or by offset (withholding
shares otherwise to be delivered on exercise, valued at their fair
market value as of the date of exercise in respect of withholding
taxes and/or the exercise price), by notice and third party payment,
or by a promissory note meeting the requirements contained in the 1998
Plan;
. to amend option terms (other than to reprice them), to accelerate the
receipt or vesting of benefits and to extend benefits under an Award;
and
. to make certain adjustments to an outstanding Award and authorize the
conversion, succession or substitution of an Award in connection with
certain reorganizations or Change in Control Events (as generally
described below under "Acceleration of Awards; Possible Early
Termination of Awards").
Notwithstanding the foregoing, to the extent required, the Board shall
interpret or administer the Formula Director Awards program under the 1998 Plan.
The 1998 Plan will not limit the authority of the Board or other Committee
to grant Awards or authorize any other compensation, with or without reference
to the Common Stock, under any authority, although (if approved by shareholders)
it will displace the Existing Plans in respect of future grants.
TYPES OF AWARDS. The 1998 Plan authorizes the grant of Options, SARs,
Stock Bonuses, Restricted Stock, Restricted Stock Units, Performance Awards and
other Stock Units, on a current or deferred basis, and cash-based incentive
awards. Other awards authorized under the 1998 Plan are listed under
"Additional Award Types Available" at page 18. Generally speaking, an Option or
SAR will expire, and any other Award will vest or be forfeited, not more than 10
years after the date of grant, subject to certain deferral opportunities that
may be accorded to participants. The Committee determines the applicable
vesting schedule for each Award. The Company may authorize settlement of Awards
in cash or shares of the Company's Common Stock, subject to preexisting rights
of participants or commitments evidenced by an award agreement.
TRANSFER RESTRICTIONS. Subject to customary exceptions, Awards under the
1998 Plan are not transferable by the recipient other than by will or the laws
of descent and distribution and are generally exercisable only by the recipient.
The Committee, however, may permit the transfer of an Award if the transferor
presents satisfactory evidence that the transfer is for estate and/or tax
planning purposes to certain related persons or entities and without
consideration (other than nominal consideration).
ADJUSTMENTS. As is customary in incentive plans of this nature, the number
and kind of shares available under the 1998 Plan and the outstanding Awards, as
well as exercise or purchase prices and other share limits, are subject to
adjustment in the event of certain reorganizations,
21
<PAGE>
mergers, combinations, consolidations, recapitalizations, reclassifications,
stock splits, stock dividends, asset sales or other similar events, or
extraordinary dividends or distributions of property to the Company's
shareholders.
STOCK OPTIONS. An Option is the right to purchase shares of Common Stock
at a future date at a fixed or variable exercise price (the "Option Price")
during a specified term not to exceed 10 years. The Committee must designate
each Option granted as either an ISO or a NQSO. The Option Price per share will
be determined by the Committee at the time of grant, but in the case of ISOs
will not be less than 100% of the fair market value of a share of Common Stock
on the date of grant (110% in the case of a beneficial holder of more than 10%
of the total combined voting power of all classes of stock of the Company).
ISOs are taxed differently and are subject to more restrictive terms and amounts
under the Code and the 1998 Plan. The 1998 Plan includes a minimum option price
of 85% of fair market value of a share of Common Stock relative to grant date on
any NQSO. Full payment for shares purchased on the exercise of any Option and
any related taxes must be made at the time of such exercise, in cash, shares
already owned or by offset of shares otherwise issuable, or other lawful
consideration, including payment through authorized third party payment
procedures.
STOCK APPRECIATION RIGHTS. An SAR is the right to receive payment of an
amount equal to the excess of the fair market value of a share of Common Stock
on the date of exercise of the SAR over the base price of the SAR. The base
price of each SAR will be established by the Committee at the time of grant of
the SAR and generally will be subject to the same pricing limits as Options.
SARs may be granted in connection with other Awards (typically, Options), in
which case the base price (if below market) may not be lower than the option
exercise price, or independently.
STOCK UNITS AND STOCK BONUSES. A Stock Unit is a bookkeeping entry
representing a fictional share of the Company's Common Stock used for measuring
benefits payable under an Award. It may be subject to vesting or payment
conditions, and may be paid in cash or shares, in addition to or in lieu of
compensation. A Stock Unit carries no voting or other rights of a shareholder,
but may carry dividend equivalent rights. A Stock Bonus represents a bonus in
Shares for services rendered. The Committee may grant Stock Units or Stock
Bonuses to any or all Eligible Persons to reward prior exceptional or special
services, contributions or achievements, or to further share ownership
objectives, in such manner and on such terms and conditions (including any
restrictions on such shares) as determined from time to time by the Committee.
The number of shares so awarded will be determined by the Committee and may be
granted independently of or in lieu of cash bonuses or other awards.
RESTRICTED STOCK AWARDS. A Restricted Stock Award is an award typically
for a fixed number of shares of Common Stock which are subject to restrictions
("Restricted Stock"). The Committee specifies the price, if any, or services
the recipient must provide for the shares of Restricted Stock, the conditions on
vesting (which may include, among others, the passage of time or specified
performance objectives or both) and any other restrictions (for example,
restrictions on transfer) imposed on the shares. A Restricted Stock Award
confers voting but not necessarily any dividend rights prior to vesting.
RESTRICTED STOCK AND UNRESTRICTED STOCK UNITS. A Stock Unit represents a
bookkeeping entry which serves as a unit of measurement relative to a share of
Common Stock for purposes of determining the payment, in Common Stock or cash,
of a stock-related deferred benefit or right under the 1998 Plan. A restricted
or other Stock Unit typically will be payable only in the equivalent number of
shares of Common Stock and can accrue dividend equivalent rights in cash or
additional shares under the 1998 Plan. Stock Unit awards may be either
restricted as to vesting or fully vested at the time of grant (such as when
granted in lieu of cash compensation or option gains deferred). The Committee
may authorize for the benefit of any Eligible Person the deferral of any payment
of cash or shares that may become due or payable under the 1998 Plan, by and
through
22
<PAGE>
Stock Units and dividend or other accretions thereon, or otherwise, under and in
accordance with the specific terms of a non-qualified deferred compensation plan
sponsored by the Company. The Committee may impose additional conditions,
restrictions, or requirements on such deferrals.
PROMISSORY NOTES TO PURCHASE SHARES. The 1998 Plan allows the Committee to
authorize acceptance of one or more promissory notes from any Eligible Person
(including an officer or director) to finance or facilitate the exercise or
receipt of awards and the purchase of shares. The principal of the note must
not exceed the exercise or purchase price and applicable withholding taxes. The
note must be full recourse and secured by the stock purchased, to the extent
required by the Committee or by applicable law, but may include favorable (below
market) terms as to interest rates or other provisions; however, the interest
rate cannot be less than the interest rate necessary to avoid the imputation of
interest under the Code. The term of any note under the 1998 Plan may not
exceed 5 years. The unpaid principal balance of the note will become due and
payable no later than the 10th business day after termination of employment or
service, unless the Committee otherwise provides. This feature of the 1998 Plan
will not be available to any officer or director unless the 1998 Plan is
approved without counting the shares owned by officers or directors as present
or voting on Proposal 2.
CHANGE IN CONTROL; ACCELERATION OF AWARDS; POSSIBLE EARLY TERMINATION OF
AWARDS. Unless the applicable award agreement otherwise provides, upon the
occurrence of a Change in Control Event, each Option and SAR will become
immediately exercisable, Restricted Stock may immediately vest free of
restrictions, and Performance Awards and Stock Units may become payable (at
target performance levels, if applicable). A Change in Control Event under the
1998 Plan generally includes (subject to certain exceptions):
. an acquisition by any Person of beneficial ownership or a pecuniary
interest in more than 45% of the Common Stock or voting securities
then entitled to vote generally in the election of directors of the
Company ("Voting Stock"), other than an acquisition by one or more
Excluded Persons (the Company, IIC, or Messrs. John Kluge, Stuart
Subotnick or Martin Greenwald,) in connection with a new issuance of
Voting Stock (or rights to acquire Voting Stock) after the effective
date of the 1998 Plan by the Company to the Excluded Person in a
transaction that the Committee determines (in advance) does not
constitute a Change in Control Event;
. certain changes in a majority of the Board over a two-year period;
. certain mergers, consolidations or reorganizations or sales of all or
substantially all of the Company's assets involving a more than 50%
change in ownership, upon approval by the Company's shareholders
(collectively, a "Business Combination"), other than a Business
Combination: (1)(a) in which substantially all of the holders of the
Company's Voting Stock hold or receive directly or indirectly 50% or
more of the voting stock of the resulting entity or a parent company
thereof, and (b) after which no Person (other than one or more of the
Excluded Persons) owns more than 50% of the voting stock of the
resulting entity (or a parent company) who did not own directly or
indirectly at least that amount of Voting Stock immediately prior to
the Business Combination; or (2) in which the holders of the Company's
capital stock immediately before such Business Combination will,
immediately following the Business Combination, hold as a group on a
fully diluted basis the ability to elect at least a majority of the
directors the surviving corporation (or a parent company); or
. approval by the Board and (if required by law) by shareholders of the
Company of a plan to consummate the dissolution or complete
liquidation of the Company.
23
<PAGE>
In certain circumstances, Awards which are fully accelerated and which are
not exercised or settled at or prior to a Change in Control Event generally may
be terminated, and Awards held by participants terminated in anticipation of or
after a Change in Control may be accelerated. If the vesting of an Award has
been accelerated expressly in anticipation of an event or subject to shareholder
approval of an event and the Committee or the Board later determines that the
event will not occur, the Committee may rescind the effect of the acceleration
as to any then outstanding and unexercised or otherwise unvested Awards.
TERMINATION OF OR CHANGES TO THE 1998 PLAN AND AWARDS. The Board may amend
or terminate the 1998 Plan at any time and in any manner, including a manner
that increases, within 1998 Plan aggregate limits, awards to officers and
directors. Unless required by applicable law, shareholder approval of
amendments will not be required. No new Awards may be granted under the 1998
Plan after June 30, 2008, although as is the case under the Existing Plans, the
applicable plan provisions and authority of the Committee will continue as to
any then outstanding Awards. (This authority includes authority to amend
outstanding Options or other Awards.)
Outstanding Options and other Awards generally speaking may be amended
(except as to repricing), but the consent of the holder is required if the
amendment materially and adversely affects the holder.
SECURITIES UNDERLYING AWARDS. The closing price of the Company's Common
Stock on July 17, 1998 was $10.00 per share. The Company plans to register
under the Securities Act of 1933, as amended, the Common Stock available under
the 1998 Plan, prior to the time that any shares are issued thereunder.
AWARDS GRANTED SUBJECT TO SHAREHOLDER APPROVAL OF THE 1998 PLAN.
As of July 22, 1998, the Compensation Committee and Board had granted
Formula Director Awards and other Stock Unit Awards in the form of Restricted
Stock Units, as summarized in the following table (together, the "Conditional
Awards"):
THE CONDITIONAL AWARDS ARE SUBJECT TO SHAREHOLDER APPROVAL OF THE 1998
PLAN. IF THE 1998 PLAN IS NOT APPROVED BY SHAREHOLDERS, THE CONDITIONAL AWARDS
WILL NOT BE EFFECTIVE.
24
<PAGE>
CONDITIONAL AWARDS GRANTED (AS OF JULY 22, 1998)
<TABLE>
<CAPTION>
Annual Formula Director
Awards/(1)/ Long-Term Awards/(2)/
--------------------------- -----------------------------
Shares of Restricted
Name of Grantee Restricted Stock/Options (#) Stock Units ("RSUs") (#)/(6)/
- ---------------- ---------------------------- -----------------------------
<S> <C> <C>
Martin W. Greenwald 41,791
Cheryl Lee 12,761
Jeff Framer 12,761
David Borshell 12,090
Executive Group/(3)/ 79,403
Non-Executive Director 6,720/
Group/(4)/ 15,000
Non-Executive Officer 8,955
Employee Group/(5)/
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Figure represents the October 1999 initial grant of the Formula Director
Awards for Non-Executive Directors (to Messrs. Epstein, Harris and Segall)
under the 1998 Plan. Additional like awards will be granted in 2000 and
2001. See page 17 of this Proxy Statement for a further description of the
Formula Director Awards.
Upon termination of services as a member of the Board due to death or Total
Disability, a Formula Director Award held by a director shall become fully
vested. Upon termination of services for any reason other than death or
Total Disability, all Restricted Stock granted pursuant to a Formula
Director Award not yet fully vested shall be automatically forfeited. The
Formula Director Awards are subject to the same acceleration and other
continuing terms of the other Awards under the 1998 Plan as described above
in "Summary Description of the Plan," except that upon a Change in Control
Event, those terms govern only to the extent that any changes in the
Formula Director Awards and any Board or Committee action in respect
thereof (i) are consistent with the effect of the event on Restricted Stock
or Restricted Stock Unit Awards held by persons other than executive
officers or directors of the Company (if any), and (ii) are consistent in
respect of the underlying shares with the effect on shareholders generally.
Any restrictions imposed on such shares or units continue in effect with
respect to any consideration or other securities (the "Restricted
Property") received in respect of the underlying shares, and the Restricted
Property will vest at such times and in such proportion as the applicable
shares of Restricted Stock or Restricted Stock Units.
(2) Figures represent number of stock units represented by the initial
conditional Restricted Stock Unit grants to officers as of July 6, 1998.
The Restricted Stock Units are payable solely in shares and vest commencing
June 30, 1999 and each of the next four anniversaries thereof in equal
installments at a minimum rate of 20% per year. If in any year the Company
achieves a minimum specified percentage of the applicable performance
target, the grant will vest instead at a rate of 33 1/3% for that year.
The performance factor will be set each year, no later than the end of the
1st quarter of the applicable fiscal year. For fiscal year 1999, the
minimum performance to trigger acceleration of vesting is 80% of target
EBITDA. Performance vesting will not occur until the Committee or its
delegate confirm based on audited results that the results satisfy the
applicable minimum performance level. Upon a termination of employment by
the Company without cause or due to retirement, the holder would receive a
pro rata portion of the next installment based on the number of quarters or
partial quarters served during the year. Upon termination of employment
due to death or Total Disability, the officer would receive the next
installment, and upon termination of employment "for cause", the holder
would not be entitled to any unvested portion of the award. The 1998 Plan
grants the Committee discretion to accelerate, extend or otherwise modify
benefits payable under the applicable awards in various circumstances,
including a termination of employment (other than "for cause") or a Change
in Control Event.
(3) Consisting of all current Executive Officers as a group (4 persons).
(4) Represents Formula Director Awards for Non-Executive Directors and, for Mr.
Segall, subject to shareholder approval of the 1998 Plan, an option grant
substantially the same as the options granted on July 13, 1998 to the non-
employee directors under the Directors Plan, at a per share exercise price
of $7.94. (See "Director's Awards - Special Option Grant" above and pages
6-7 of this Proxy Statement for a description of the Formula Option
Grants.) The option will vest in unequal installments over an 18-month
period according to the following schedule: 50% (Month 6), 25% (Month 12),
25% (Month 18). This option is subject to the same acceleration, early
termination and other continuing terms as for options granted under the
Directors Plan, as described at page 7 of this Proxy Statement.
(5) Consisting of all current Non-Executive Officer Employees as a group (2
persons).
25
<PAGE>
(6) Represents the result of a designated dollar amount of the Restricted Stock
Unit award as a percentage of base salary (ranging from 20% to 70%),
divided by $6.70 per share, an average trading price determined as of the
date of Committee action on the grant.
OTHER SPECIFIC BENEFITS.
The grant of other Awards under the 1998 Plan in the future and the nature
of any such Awards are subject to the Committee's discretion. Except as
reported above, and except for the annual Formula Director Awards under the 1998
Plan through 2001, the number, amount and type of Awards to be received by or
allocated to Eligible Persons under the 1998 Plan in the future cannot be
determined.
FEDERAL INCOME TAX TREATMENT OF AWARDS UNDER THE PLAN.
The federal income tax consequences of the 1998 Plan under current federal
law are summarized in the following discussion of general tax principles
applicable to the 1998 Plan. This summary is not intended to be exhaustive and
does not describe state or local tax consequences.
The Company is generally entitled to deduct and the optionee recognizes
taxable income in an amount equal to the difference between the Option Price and
the fair market value of the shares at the time of exercise of an NQSO. With
respect to ISOs, the Company is generally not entitled to a deduction nor does
the participant recognize income, either at the time of grant or exercise or
(provided the participant holds the shares at least two years after grant and
one year after exercise) at any later time. Rather, the participant receives
capital gains treatment on the difference between his basis and ultimate sales
price.
The current federal income tax consequences of other Awards authorized
under the 1998 Plan generally follow certain basic patterns: SARs are taxed and
deductible in substantially the same manner as Options; restricted stock is
taxed at time of vesting (unless effectively deferred through units) (although
employees may elect earlier taxation and convert future gains to capital gains);
bonuses and stock units are generally subject to tax at the time of payment; and
compensation otherwise effectively deferred is taxed when paid. In each of the
foregoing cases, the Company will generally have a corresponding deduction at
the time the participant recognizes income.
If an Award is accelerated under the 1998 Plan in connection with a change
in control (as this term is used under the Code), the Company may not be
permitted to deduct the portion of the compensation attributable to the
acceleration ("parachute payments") if it exceeds certain threshold limits under
the Code, and certain related excise taxes may be triggered. Furthermore, if
compensation attributable to Awards is not "performance-based" within the
meaning of Section 162(m) of the Code, the Company may not be permitted to
deduct aggregate compensation that is not performance-based, to the extent it
exceeds $1,000,000 in any tax year. The Conditional Awards described above are
not considered performance-based under Section 162(m).
VOTE REQUIRED.
The Board has approved the 1998 Plan and believes it to be in the best
interest of the Company and its shareholders. Approval of the 1998 Plan
requires the affirmative vote of a majority of the Common Stock present, or
represented, and entitled to vote at the Annual Meeting.
THE BOARD OF DIRECTORS HAS APPROVED AND RECOMMENDS THE 1998 PLAN. All
members of the Board are eligible to receive Awards under the 1998 Plan and have
been or will be granted Awards contingent upon shareholder approval of the 1998
Plan, as previously described. They thus have a personal interest in the
approval of the 1998 Plan.
26
<PAGE>
PROPOSAL 3
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board has unanimously appointed, and recommends that the shareholders
ratify the appointment of KPMG Peat Marwick LLP, independent certified public
accounts and the Company's auditors since fiscal 1990, as auditors for fiscal
1999. Though shareholder ratification is not required by law or otherwise, the
Board is seeking ratification as a matter of good corporate practice. If the
appointment is not ratified, the Board will reconsider the appointment.
Representatives of KPMG Peat Marwick LLP will be present at the Annual Meeting,
will have the opportunity to make statements if they so desire, and will be
available to respond to appropriate questions.
VOTE REQUIRED.
Assuming a quorum is present, the affirmative vote of the holders of a
majority of the Common Stock represented (in person or by proxy) and voting at
the Annual Meeting (the shares affirmatively voting must also constitute at
least a majority of a quorum) is required to ratify the appointment of KPMG Peat
Marwick LLP as the Company's independent auditors.
SHAREHOLDER PROPOSALS
To be considered for inclusion in the Company's proxy solicitation
materials for the 1999 Annual Shareholders' Meeting, a shareholder proposal
under SEC Rule 14a-8 must be received by the Company's Secretary at the
principal executive offices of the Company no later than March 31, 1999.
The date after which notice of a shareholder proposal (other than in
respect of a nominee for election to the Board of Directors) submitted outside
the processes of Rule 14a-8 (i.e., a proposal to be presented at the 1999 Annual
Shareholders' Meeting but not submitted for inclusion in the Company's proxy
statement) will be considered untimely under the SEC's proxy rules is June 15,
1999.
In addition, Article III, Section 4, of the Company's Bylaws provide as
follows:
Section 4. Nomination for Director. Nominations for election of members
--------- -----------------------
of the Board of Directors may be made by the Board of Directors or by any
shareholder of any outstanding class of voting stock of the Company
entitled to vote for the election of directors. Notice of intention to
make any nominations, other than by the Board of Directors, shall be made
in writing and shall be received by the President of the Company no more
than 60 days prior to any meeting of shareholders called for the election
of directors, and no more than 10 days after the date the notice of such
meeting is sent to shareholders pursuant to Section 4 of Article II of
these bylaws; provided, however, that if only 10 days' notice of the
meeting is given to shareholders, such notice of intention to nominate
shall be received by the President of the Company not later than the time
fixed in the notice of the meeting for the opening of the meeting. Such
notification shall contain the following information to the extent known to
the notifying shareholder: (a) the name and address of each proposed
nominee; (b) the principal occupation of each proposed nominee; (c) the
number of shares of voting stock of the Company owned by each proposed
nominee; (d) the name and residence address of the notifying shareholder;
and (e) the number of shares of voting stock of the Company owned by the
notifying shareholder. Nominations not made in accordance herewith shall be
disregarded by the then chairman of the meeting, and the inspectors of
election shall then disregard all votes cast for each nominee.
27
<PAGE>
ANNUAL REPORT TO SHAREHOLDERS FORM 10-K
The Company's Annual Report to Shareholders (i.e., the Company's Form 10-K
for the fiscal year ended March 31, 1998) accompanies this Proxy Statement but
does not constitute proxy soliciting material. Exhibits to the Annual
Report/Form 10-K are available upon payment of a reasonable fee. Please direct
requests, in writing, to Cheryl Lee, Esq., Corporate Secretary, Image
Entertainment, Inc., 9333 Oso Avenue, Chatsworth, California 91311.
OTHER BUSINESS
The Proxyholders will have discretionary authority to vote on such business
(other than Proposals 1, 2 and 3) as may properly come before the Annual Meeting
(the Board does not know of any such business as of this date) and all matters
incident to the conduct of the Meeting.
By Order of the Board of Directors,
IMAGE ENTERTAINMENT, INC.
CHERYL LEE
Corporate Secretary
Chatsworth, California
July 29, 1998
- --------------------------------------------------------------------------------
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, WE URGE YOU TO PROMPTLY
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT IN THE ENVELOPE
PROVIDED. THANK YOU.
- --------------------------------------------------------------------------------
28
<PAGE>
EXHIBIT A
---------
IMAGE ENTERTAINMENT, INC.
1998 INCENTIVE PLAN
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
1. THE PLAN............................................................ 1
1.1 PURPOSE....................................................... 1
-------
1.2 ADMINISTRATION AND AUTHORIZATION; POWER AND PROCEDURE......... 1
-----------------------------------------------------
1.3 PARTICIPATION; LIMITS ON DISCRETIONARY AWARDS TO NON-
-----------------------------------------------------
EXECUTIVE DIRECTORS........................................... 2
-------------------
1.4 SHARES AVAILABLE FOR AWARDS; SHARE LIMITS..................... 3
-----------------------------------------
1.5 GRANT OF AWARDS............................................... 4
---------------
1.6 AWARD PERIOD.................................................. 4
------------
1.7 LIMITATIONS ON EXERCISE AND VESTING OF AWARDS................. 4
---------------------------------------------
1.8 ACCEPTANCE OF PROMISSORY NOTES TO FINANCE EXERCISE............ 5
--------------------------------------------------
1.9 TRANSFER RESTRICTIONS AND EXCEPTIONS.......................... 5
------------------------------------
1.10 AMENDMENTS/WAIVER OF RESTRICTIONS............................. 6
---------------------------------
2. OPTIONS............................................................. 7
2.1 GRANTS........................................................ 7
------
2.2 OPTION PRICE.................................................. 7
------------
2.3 LIMITATIONS ON GRANT AND TERMS OF INCENTIVE STOCK OPTIONS..... 8
---------------------------------------------------------
2.4 EFFECTS OF TERMINATION OF EMPLOYMENT/SERVICE; TERMINATION OF
------------------------------------------------------------
SUBSIDIARY STATUS; DISCRETIONARY PROVISIONS................... 9
-------------------------------------------
3. RESTRICTED STOCK AWARDS............................................. 10
3.1 GRANTS........................................................ 10
------
3.2 RESTRICTIONS.................................................. 10
------------
3.3 RETURN TO THE COMPANY......................................... 11
---------------------
3.4 STOCK UNIT AWARDS............................................. 11
-----------------
4. STOCK APPRECIATION RIGHTS.......................................... 11
4.1 GRANTS........................................................ 11
------
4.2 PRICING LIMITS................................................ 11
--------------
4.3 EXERCISE OF STOCK APPRECIATION RIGHTS......................... 11
-------------------------------------
4.4 PAYMENT....................................................... 12
-------
4.5 LIMITED STOCK APPRECIATION RIGHTS............................. 12
---------------------------------
5. OTHER AWARDS........................................................ 13
5.1 GRANTS OF PERFORMANCE SHARE AWARDS............................ 13
----------------------------------
5.2 SPECIAL (SECTION 162(M)) PERFORMANCE-BASED AWARDS............. 13
--------------------------------------------------
5.3 STOCK BONUSES AND STOCK UNITS................................. 15
-----------------------------
5.4 DEFERRED PAYMENTS............................................. 15
-----------------
5.5 CASH BONUSES.................................................. 15
------------
5.6 ALTERNATIVE PAYMENTS.......................................... 15
--------------------
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
6. OTHER PROVISIONS.................................................... 16
6.1 RIGHTS OF ELIGIBLE PERSONS, PARTICIPANTS AND BENEFICIARIES.... 16
----------------------------------------------------------
6.2 ADJUSTMENTS; ACCELERATION..................................... 16
-------------------------
6.3 EFFECT OF TERMINATION OF SERVICE ON AWARDS.................... 18
------------------------------------------
6.4 COMPLIANCE WITH LAWS.......................................... 19
--------------------
6.5 TAX MATTERS................................................... 19
-----------
6.6 PLAN AMENDMENT, TERMINATION AND SUSPENSION.................... 20
------------------------------------------
6.7 PRIVILEGES OF STOCK OWNERSHIP................................. 20
-----------------------------
6.8 EFFECTIVE DATE OF THIS PLAN................................... 20
---------------------------
6.9 TERM OF THIS PLAN............................................. 20
-----------------
6.10 GOVERNING LAW/CONSTRUCTION/SEVERABILITY...................... 21
---------------------------------------
6.11 CAPTIONS..................................................... 21
--------
6.12 STOCK-BASED AWARDS IN SUBSTITUTION FOR STOCK OPTIONS OR
-------------------------------------------------------
AWARDS GRANTED BY OTHER CORPORATIONS......................... 21
------------------------------------
6.13 NON-EXCLUSIVITY OF PLAN...................................... 22
-----------------------
7. DEFINITIONS......................................................... 22
8. FORMULA DIRECTOR AWARDS............................................. 28
8.1 IN GENERAL.................................................... 28
----------
8.2 STOCK UNIT GRANTS............................................. 28
-----------------
8.3 VESTING....................................................... 29
-------
8.4 TERMINATION OF DIRECTORSHIP................................... 29
---------------------------
8.5 DIVIDEND EQUIVALENT RIGHTS.................................... 29
--------------------------
8.6 NO RIGHTS AS A SHAREHOLDER.................................... 29
--------------------------
8.7 MANNER AND TIMING OF PAYMENT.................................. 30
----------------------------
8.8 ADJUSTMENTS; ACCELERATION UPON A CHANGE IN CONTROL EVENT;
---------------------------------------------------------
TERMINATION................................................... 30
-----------
</TABLE>
EXHIBIT A DIRECTOR STOCK UNIT AWARD AGREEMENT
ii
<PAGE>
IMAGE ENTERTAINMENT, INC.
1998 INCENTIVE PLAN
1. THE PLAN
1.1 PURPOSE. The purpose of this Plan is to promote the success of the Company
-------
and the interests of its shareholders by attracting, motivating, retaining
and rewarding directors, officers, and employees with awards and incentives
for high levels of individual performance and improved financial
performance of the Company; to attract, motivate and retain experienced and
knowledgeable non-executive directors; and to further align their
respective interests with those of shareholders generally through awards of
stock-based incentives. Capitalized terms are defined in Section 7.
1.2 ADMINISTRATION AND AUTHORIZATION; POWER AND PROCEDURE.
-----------------------------------------------------
1.2.1 COMMITTEE. This Plan will be administered by the Committee and all
---------
Awards to Eligible Persons will be authorized by the Board or the
Committee. All discretionary Awards to Non-Executive Directors must be
approved or ratified by the Board. Action of the Committee with respect to
the administration of this Plan will be taken pursuant to a majority vote
or by written consent of its members.
1.2.2 PLAN AWARDS; INTERPRETATION; POWERS OF COMMITTEE. Subject to the
------------------------------------------------
express provisions of this Plan and any express limitations on the
delegated authority of a Committee, the Committee will have the authority
to:
(a) determine eligibility and the particular Eligible Persons who
will receive Awards;
(b) grant Awards to Eligible Persons, determine the effective date of
grant (which may be a date after but not before the Committee's
authorization of the Award), determine the price at which
securities will be offered or awarded and the amount of
securities to be offered or awarded to any of such persons, and
determine the other specific terms and conditions of such Awards,
and establish the installments (if any) in which such Awards will
become exercisable or will vest, or determine that no delayed
exercisability or vesting is required, and establish the events
of termination or reversion of such Awards, all consistent with
the express limits of this Plan;
(c) approve the forms of Award Agreements (which need not be
identical either as to type of Award or among Participants);
(d) construe and interpret this Plan and any agreements defining the
rights and obligations of the Company and Eligible Persons under
this Plan,
<PAGE>
further define the terms used in this Plan, and prescribe, amend
and rescind rules and regulations relating to the administration
of this Plan;
(e) cancel, modify, or waive Image Entertainment's rights with
respect to, or modify, discontinue, suspend, or terminate any or
all outstanding Awards held by Eligible Persons, subject to any
required consent under Section 6.6;
(f) accelerate or extend the exercisability or extend the term of any
or all outstanding Awards within the maximum ten-year term of
Awards under Section 1.6; and
(g) make all other determinations and take such other action as
contemplated by this Plan or as may be necessary or advisable for
the administration of this Plan and the effectuation of its
purposes.
Notwithstanding the foregoing, the provisions of Section 8 relating to
Formula Director Awards will be automatic and, to the extent provided
therein, self-effectuating. To the extent required by law, any
interpretation or administration of this Plan in respect of Formula
Director Awards and any change or grant beyond the initial period set forth
therein shall be the responsibility of the Board.
1.2.3 BINDING DETERMINATIONS. Any action taken by, or inaction of, the
----------------------
Company, the Board or the Committee relating or pursuant to this Plan will
be within the absolute discretion of that entity or body and will be
conclusive and binding upon all persons. No member of the Board or
Committee, or any officer of the Company, will be liable for any action or
inaction of the entity or body, of another person or member or officer.
Subject only to compliance with the express provisions hereof, the Board
and Committee may act in their absolute discretion in matters within their
authority related to this Plan.
1.2.4 RELIANCE ON EXPERTS. In making any determination or in taking or
-------------------
not taking any action under this Plan, the Committee or the Board, as the
case may be, may obtain and may rely upon the advice of experts, including
professional advisors to the Company. No director, officer or agent of the
Company will be liable for any such action or determination taken or made
or omitted in good faith.
1.2.5 DELEGATION. The Committee may delegate ministerial, non-
----------
discretionary functions to individuals who are officers or employees of the
Company.
1.3 PARTICIPATION; LIMITS ON DISCRETIONARY AWARDS TO NON-EXECUTIVE DIRECTORS.
------------------------------------------------------------------------
Awards other than those provided under Section 8 may be granted by the
Committee only to those persons that the Committee determines to be
Eligible Persons. An Eligible Person who has been granted an Award may, if
otherwise eligible, be granted additional Awards if the Committee so
determines. Awards, except those granted under Section 5.4 or 8, may only
be granted to a Non-Executive Director in one or
2
<PAGE>
more of the following circumstances: (a) in connection with his or her
becoming a member of the Board, (b) to reward his or her exceptional or
extraordinary services as a member of the Board, (c) in consideration for
services to the Company outside of the scope of his or her normal duties in
the ordinary course as a Board member, or (d) to provide parity as to
option compensation for fiscal year 1999 to any Non-Executive Director who
did not participate in the Image Entertainment, Inc. 1994 Eligible
Directors Stock Option Plan in such year.
1.4 SHARES AVAILABLE FOR AWARDS; SHARE LIMITS.
-----------------------------------------
1.4.1 SHARES AVAILABLE. Subject to the provisions of Section 6.2, the
----------------
capital stock that may be delivered under this Plan will be shares of Image
Entertainment's authorized but unissued Common Stock. The shares may be
delivered for any lawful consideration authorized by the Committee or
provided by this Plan.
1.4.2 SHARE LIMITS; INDIVIDUAL LIMITS. The maximum number of shares of
-------------------------------
Common Stock that may be delivered pursuant to Awards granted to Eligible
Persons under this Plan will not exceed the result of (a) 2,250,000, less
(b) the aggregate number of shares delivered pursuant to options granted
under the Former Plans that are outstanding on the effective date of this
Plan (the "Share Limit"). The maximum number of shares that may be
delivered pursuant to those Options that are intended as Incentive Stock
Options will not exceed 1,125,000 shares. The maximum number of shares
subject to those Options and Stock Appreciation Rights that are granted
during any calendar year to any one individual is 300,000 shares, and the
maximum number of shares in the aggregate subject to all Awards that during
any calendar year are granted under this Plan to any one individual is
400,000 shares. The maximum number of shares that may be delivered
pursuant to time-based Restricted Stock Awards and time-based Stock Unit
Awards (including the number of shares issued in respect of Formula
Director Awards) issued initially for nominal or no consideration other
than future services is 500,000 shares; provided that this limit on
Restricted Stock Awards and Stock Unit Awards shall not apply to shares
issued principally for past services, to shares issued in respect of
compensation earned but deferred (including deferrals in the form of Stock
Units), or to shares issued in respect of Options, SARs, or other
Performance-Based Awards under Sections 5.1 and 5.2. The maximum number of
shares that may be subject to Formula Director Awards granted under this
Plan in any calendar year to any one Non-Executive Director is 5,000
shares. Each of the foregoing numerical limits will be subject to
adjustment as contemplated by this Section 1.4 and Section 6.2.
1.4.3 SHARE RESERVATION; REPLENISHMENT AND REISSUE OF UNVESTED AWARDS. No
---------------------------------------------------------------
Award may be granted under this Plan unless, on the date of grant, the sum
of (a) the maximum number of shares issuable at any time pursuant to such
Award, plus (b) the number of shares that have previously been issued
pursuant to Awards granted under this Plan, other than reacquired shares
available for reissue consistent with any applicable legal limitations,
plus (c) the maximum number of shares that have been or may be issued at
any time after the effective date of this Plan upon or in connection
3
<PAGE>
with the exercise of options outstanding on the effective date of this Plan
that were granted under the Former Plans ("Outstanding Options") and any
shares issued pursuant to Awards granted under this Plan or reserved for
issuance pursuant to Awards that are outstanding on the applicable date
does not exceed the Share Limit. Shares that are subject to or underlie
Awards that expire or for any reason are cancelled or terminated, are
forfeited, fail to vest, or for any other reason are not paid or delivered
under this Plan or the Former Plans (in respect of Outstanding Options), as
well as reacquired shares, will again, except to the extent prohibited by
law (including Section 162(m)), be available for subsequent Awards under
this Plan. Except as limited by law (including Section 162(m)), if an
Award is settled only in cash or provides that it can only be settled in
cash, such Award need not be counted against any of the limits under this
Section 1.4.
1.5 GRANT OF AWARDS. Subject to the express provisions of this Plan, the
---------------
Committee will determine the number of shares of Common Stock subject to
each Award, the price (if any) to be paid for the shares or the Award and,
in the case of Performance Share Awards, in addition to matters addressed
in Section 1.2.2, the specific objectives, goals and performance criteria
(such as those performance criteria set forth in Section 5.2) that further
define the terms of the Performance Share Award. Each Award will be
evidenced by an Award Agreement signed by Image Entertainment and, if
required by the Committee, by the Participant.
1.6 AWARD PERIOD. Any Option, SAR, warrant or similar right shall expire and
------------
any other Award shall either vest or be forfeited not more than 10 years
after the date of grant; provided, however, that a payment of cash or
delivery of shares pursuant to an Award may be delayed until a future date
under and in accordance with the specific terms of a non-qualified deferred
compensation plan sponsored by the Company.
1.7 LIMITATIONS ON EXERCISE AND VESTING OF AWARDS.
---------------------------------------------
1.7.1 PROVISIONS FOR EXERCISE. Unless the Committee otherwise expressly
-----------------------
provides, once exercisable an Award will remain exercisable until the
expiration or earlier termination of the Award.
1.7.2 PROCEDURE. Any exercisable Award will be deemed to be exercised
---------
when Image Entertainment receives written notice of such exercise from the
Participant, together with any required payment made in accordance with
Section 2.2.2, and any other requirements of exercise or vesting, including
any documents required by Section 6.4, are satisfied.
1.7.3 FRACTIONAL SHARES/MINIMUM ISSUE. Fractional share interests will be
-------------------------------
disregarded, but may be accumulated. The Committee, however, may determine
in the case of Eligible Persons that cash, other securities, or other
property will be paid or transferred in lieu of any fractional share
interests. No fewer than 100 shares, irrespective of any adjustments under
Sections 6.2 or 8.8 of this Plan, may be
4
<PAGE>
purchased on exercise of any Award at one time unless the number acquired
is the total number at the time available for purchase under the Award.
1.8 ACCEPTANCE OF PROMISSORY NOTES TO FINANCE EXERCISE. Image Entertainment,
--------------------------------------------------
in its sole discretion, may, with the Committee's express approval, accept
one or more promissory notes from any Eligible Employee in connection with
the exercise or receipt of any outstanding Award; but any such note will be
subject to at least the following terms and conditions:
1.8.1 PRINCIPAL. The principal of the note will not exceed the amount
---------
required to be paid to Image Entertainment upon the exercise or receipt of
one or more Awards under this Plan and the note will be delivered directly
to Image Entertainment in consideration of such exercise or receipt.
1.8.2 TERM. The initial term of the note will be determined by the
----
Committee; but the term of the note, including extensions, will not exceed
a period of five (5) years.
1.8.3 RECOURSE; SECURITY. The note will provide for full recourse to the
------------------
Participant and will bear interest at a rate determined by the Committee
but not less than the interest rate necessary to avoid the imputation of
interest under the Code. If required by the Committee or by applicable
law, the note will be secured by a pledge of any shares or rights financed
thereby in compliance with applicable law. The terms, repayment
provisions, and collateral release provisions of the note and the pledge
securing the note will conform with applicable rules and regulations of the
Federal Reserve Board as then in effect.
1.8.4 TERMINATION OF EMPLOYMENT. If the employment or service of the
-------------------------
Participant terminates, the unpaid principal balance of the note will
become due and payable no later than the 10th business day after such
termination, unless the Committee at the time expressly authorizes an
extension.
1.8.5 OTHER CONDITIONS. The terms of the loan and terms of issuance of
----------------
the shares shall otherwise comply with all applicable provisions of
California law.
1.9 TRANSFER RESTRICTIONS AND EXCEPTIONS.
------------------------------------
1.9.1 LIMIT ON EXERCISE AND TRANSFER. Unless otherwise expressly provided
------------------------------
in (or pursuant to) this Section 1.9, by applicable law and by the Award
Agreement, as the same may be amended, (a) all Awards are non-transferable
and will not be subject in any manner to sale, transfer, anticipation,
alienation, assignment, pledge, encumbrance or charge; (b) Awards may be
exercised only by the Participant; and (c) amounts payable or shares
issuable pursuant to an Award will be delivered only to (or for the account
of) the Participant.
1.9.2 EXCEPTIONS. The Committee may permit Awards to be exercised by and
----------
paid only to certain persons or entities related to the Participant, or
persons who are
5
<PAGE>
members of the Participant's household, pursuant to such conditions and
procedures as the Committee may establish. Any permitted transfer will be
subject to the conditions that the transfer is consistent with applicable
requirements for registration of the shares with the Securities and
Exchange Commission on a Form S-8 or Form S-3, and that the Committee
receive evidence satisfactory to it that the transfer is being made to
related persons or members of the Participant's household for estate and/or
tax planning purposes and without consideration (other than nominal
consideration). ISOs and Restricted Stock Awards, however, will be subject
to any and all additional transfer restrictions under the Code.
1.9.3 FURTHER EXCEPTIONS TO LIMITS ON TRANSFER. The exercise and transfer
----------------------------------------
restrictions in Section 1.9.1 will not apply to:
(a) transfers to Image Entertainment,
(b) the designation of a beneficiary to receive benefits if the
Participant dies or, if the Participant has died, transfers to or
exercises by the Participant's beneficiary, or, in the absence of
a validly designated beneficiary, transfers by will or the laws
of descent and distribution,
(c) except in the case of ISOs, transfers pursuant to a qualified
domestic relations order if approved or ratified by the
Committee,
(d) if the Participant has suffered a disability that renders the
Participant unable to legally act on his or her own behalf,
permitted transfers or exercises on behalf of the Participant by
the Participant's legal representative, or
(e) the authorization by the Committee of "cashless exercise"
procedures with third parties who provide financing for the
purpose of (or who otherwise facilitate) the exercise of Awards
consistent with applicable laws and the express authorization of
the Committee.
1.10 AMENDMENTS/WAIVER OF RESTRICTIONS. Subject to Section 1.4 and Section 6.6
---------------------------------
and the specific limitations on Awards contained in this Plan, the
Committee from time to time may authorize, generally or in specific cases
only, for the benefit of any Eligible Person, any change in the vesting
schedule, the number of shares subject to, the restrictions upon or the
term of or other terms of, an Option, SAR or other Award granted under this
Plan by cancellation of an outstanding Award and a subsequent regranting of
an Award, by amendment, by substitution of an outstanding Award, by waiver
or by other legally valid means; provided that, without shareholder
approval, in no case shall the per share exercise price of any Option or
base price of any related SAR be reduced by amendment to a price below the
Fair Market Value of a share of Common Stock on the original Award Date of
the Option. Permitted actions include, among others, increases or
decreases in the number of shares subject to the Award, a
6
<PAGE>
longer or shorter vesting and exercise period, a change in the form of
payment, and/or the relaxation or enhancement of other conditions to
payment of the Award.
2. OPTIONS
2.1 GRANTS. Subject to Sections 1.3 and 1.4, one or more Options may be
------
granted under this Section 2 to any Eligible Person. Each Option granted
to an Eligible Employee will be designated by the Committee, in the
applicable Award Agreement, as either an Incentive Stock Option (subject to
Section 2.3) or a Nonqualified Stock Option.
2.2 OPTION PRICE.
------------
2.2.1 PRICING LIMITS. The purchase price per share of the Common Stock
--------------
covered by each Option will be determined by the Committee at the time of
the Award, but in no event will the purchase price per share of shares
covered by an Incentive Stock Option be less than 100% (110% in the case of
a Participant described in Section 2.3.4) of the Fair Market Value of the
Common Stock on the date of grant and in no event will the purchase price
per share of shares covered by a Nonqualified Stock Option be less than 85%
of the Fair Market Value of the Common Stock on the date of grant.
2.2.2 PAYMENT PROVISIONS. The purchase price of any shares purchased on
------------------
exercise of an Option granted under this Section 2 will be paid in full at
the time of each purchase in one or a combination of the following methods:
(a) in cash or by electronic funds transfer;
(b) by certified or cashier's check payable to the order of Image
Entertainment;
(c) if authorized by the Committee in the particular circumstances or
if specifically provided for in the applicable Award Agreement,
and if otherwise permitted under this Plan and consistent with
applicable law, by a promissory note of the Participant
consistent with the requirements of Section 1.8 and 6.4 or by an
offset of shares otherwise deliverable upon exercise of the
Option;
(d) by notice and third party payment in such manner as may be
authorized by the Committee; or
(e) by the delivery of shares of Common Stock of Image Entertainment
already owned by the Participant; provided that the Committee may
in its absolute discretion limit the Participant's ability to
exercise an Award by delivering such shares, and any shares
delivered that were initially acquired from Image Entertainment
must have been owned by the Participant at least six months as of
the date of delivery. Shares of
7
<PAGE>
Common Stock used to satisfy the exercise price of an Option will
be valued at their Fair Market Value on the date of exercise.
2.2.3 "SPECIAL CASHLESS EXERCISE" PROVISIONS. Without limiting the
--------------------------------------
generality of the foregoing, and if authorized by the Committee in the
particular circumstances or if specifically provided for in the applicable
Award Agreement, an Option can be exercised and payment made by delivering
a properly executed exercise notice together with irrevocable instructions
to a broker to promptly deliver to Image Entertainment the amount of sale
proceeds necessary to pay the exercise price and/or any applicable tax
withholding under Section 6.5, to the extent consistent with applicable
law.
2.2.4 DELIVERY CONDITION. Image Entertainment will not be obligated to
------------------
deliver certificates for any shares of Common Stock on exercise of an
Option unless and until it receives full payment of the exercise price and
any related withholding obligations have been satisfied.
2.3 LIMITATIONS ON GRANT AND TERMS OF INCENTIVE STOCK OPTIONS.
---------------------------------------------------------
2.3.1 $100,000 LIMIT. To the extent that the aggregate Fair Market Value
--------------
of stock with respect to which incentive stock options first become
exercisable by a Participant in any calendar year exceeds $100,000, taking
into account both Common Stock subject to Incentive Stock Options under
this Plan and Common Stock subject to incentive stock options under all
other plans of the Company or any other includable parent or subsidiary
corporations (as these terms are used under Section 422(d) and defined in
Section 424(e) and (f) of the Code), such options will be treated as
Nonqualified Stock Options. For this purpose, the Fair Market Value of the
stock subject to options will be determined as of the date the options were
awarded. In reducing the number of options treated as incentive stock
options to meet the $100,000 limit, the most recently granted options will
be reduced first. To the extent a reduction of simultaneously granted
options is necessary to meet the $100,000 limit, the Committee may, in the
manner and to the extent permitted by law, designate which shares of Common
Stock are to be treated as shares acquired pursuant to the exercise of an
Incentive Stock Option.
2.3.2 OPTION PERIOD. Subject to Section 1.6, each Option and all rights
-------------
thereunder will expire no later than 10 years after the Award Date.
2.3.3 OTHER CODE LIMITS. Incentive Stock Options may only be granted to
-----------------
Eligible Employees of the Company that meet the other eligibility
requirements of the Code. There will be imposed in any Award Agreement
relating to Incentive Stock Options such other terms and conditions as from
time to time are required in order that the Option be an "incentive stock
option" as that term is defined in Section 422 of the Code.
8
<PAGE>
2.3.4 LIMITS ON 10% HOLDERS. No Incentive Stock Option may be granted to
---------------------
any person who, at the time the Option is granted, owns (or is deemed to
own under Section 424(d) of the Code) shares of outstanding Common Stock
possessing more than 10% of the total combined voting power of all classes
of stock of the Company, unless the exercise price of such Option is at
least 110% of the Fair Market Value of the stock subject to the Option and
such Option by its terms is not exercisable after the expiration of five
years from the date such Option is granted.
2.4 EFFECTS OF TERMINATION OF EMPLOYMENT/SERVICE; TERMINATION OF SUBSIDIARY
-----------------------------------------------------------------------
STATUS; DISCRETIONARY PROVISIONS.
--------------------------------
2.4.1 OPTIONS - RESIGNATION OR DISMISSAL. Unless the Committee otherwise
----------------------------------
provides, if a Participant's employment by (or other service specified in
the Award Agreement to) the Company terminates for any reason (the date of
such termination being referred to as the "Severance Date") other than
Retirement, Total Disability or death, or a Termination For Cause, the
Participant will have, subject to earlier expiration or termination
pursuant to or as contemplated by Section 1.6 or 6.2, until 3 months after
the Severance Date to exercise any Option to the extent it has become
exercisable on or before the Severance Date, and to the extent not
exercisable on the Severance date, the Option will terminate on the
Severance Date. In the case of a Termination For Cause, the Option will
terminate on the Severance Date.
2.4.2 OPTIONS - DEATH OR TOTAL DISABILITY. Unless the Committee otherwise
-----------------------------------
provides, if a Participant's employment by (or specified service to) the
Company terminates as a result of Retirement, Total Disability or death,
the Participant, Participant's Personal Representative or the Participant's
Beneficiary, as the case may be, will have, subject to earlier expiration
or termination pursuant to or as contemplated by Section 1.6 or 6.2, until
24 months after the Severance Date to exercise any Option to the extent it
has become exercisable on or prior to the Severance Date, and to the extent
not exercisable on the Severance date, the Option will terminate on the
Severance Date.
2.4.3 CERTAIN SARS. Any SAR granted concurrently or in tandem with an
------------
Option will have the same post-termination provisions and exercisability
periods as the Option to which it relates, unless the Committee otherwise
provides.
2.4.4 COMMITTEE DISCRETION. Notwithstanding the specific provisions of
--------------------
this Section 2.4, in the event of, or in anticipation of, a termination of
employment or service with the Company for any reason, other than
Termination For Cause, the Committee may increase the portion of the
Participant's Award available to the Participant, or Participant's
Beneficiary or Personal Representative, as the case may be, or, subject to
the provisions of Section 1.6, extend the exercisability period, upon such
terms as the Committee expressly approves by resolution or by amendment to
the Award Agreement.
9
<PAGE>
3. RESTRICTED STOCK AWARDS
3.1 GRANTS. Subject to Sections 1.3 and 1.4, the Committee may grant one or
------
more Restricted Stock Awards to any Eligible Person. Each Restricted Stock
Award Agreement will specify the number of shares of Common Stock to be
issued to the Participant, the date of such issuance, the consideration for
such shares (but not less than the minimum lawful consideration under
applicable state law) to be paid by the Participant, the extent (if any) to
which and the time (if ever) at which the Participant will be entitled to
dividends, voting and other rights in respect of the shares prior to
vesting and issuance of shares, and the restrictions (which may be based on
performance criteria, passage of time or other factors or any combination
thereof) imposed on such shares and the conditions of release or lapse of
such restrictions. Stock certificates evidencing shares of Restricted
Stock pending the lapse of the restrictions ("Restricted Shares") will bear
a legend making appropriate reference to the restrictions imposed hereunder
and will be held by the Company or by a third party designated by the
Committee until the restrictions on the shares have lapsed and the shares
have vested in accordance with the provisions of the Award and Section 1.6.
Upon issuance of the Restricted Shares, the Participant may be required to
provide such further assurance and documents as the Committee may require
to enforce the restrictions.
3.2 RESTRICTIONS.
------------
3.2.1 PRE-VESTING RESTRAINTS. Except as provided in Sections 1.9 and 3.1,
----------------------
Restricted Shares comprising any Restricted Stock Award may not be sold,
assigned, transferred, pledged or otherwise disposed of or encumbered,
either voluntarily or involuntarily, until the restrictions on such shares
have lapsed, the shares have become vested and certificates representing
the shares are issued.
3.2.2 DIVIDEND AND VOTING RIGHTS. Unless otherwise provided in the
--------------------------
applicable Award Agreement;
(a) a Participant receiving a Restricted Stock Award shall be
entitled to vote such shares but shall not be entitled to
dividends on any of the shares until the shares have vested; and
(b) all dividends and other distributions on or in respect of
Restricted Shares shall be retained in a restricted account until
the shares have vested, at which time dividends allocable to the
vested shares will also be distributed. Retained dividends shall
revert to Image Entertainment to the extent that they fail to
vest.
3.2.3 CASH PAYMENTS. If the Participant has paid or received cash
-------------
(including any dividends) in connection with the Restricted Stock Award,
the Award Agreement will specify whether and to what extent cash will be
returned to the payor (with or without an earnings factor) as to any
Restricted Shares that cease to be eligible for vesting.
10
<PAGE>
3.3 RETURN TO THE COMPANY. Unless the Committee otherwise expressly provides,
---------------------
Restricted Shares that remain subject to restrictions at the time of
termination of employment or service, or are subject to other conditions to
vesting and payment that have not been satisfied by the time specified in
the applicable Award Agreement, will not vest and will be returned to the
Company in such manner and on such terms as the Committee provides.
3.4 STOCK UNIT AWARDS. Subject to Sections 1.3 and 1.4, the Committee may
-----------------
grant one or more Stock Unit Awards to any Eligible Person. Each Stock
Unit Award Agreement will specify the number of Stock Units subject to the
Award, the date the Award was granted, the payment provisions applicable to
the Award, the consideration (not less than the minimum lawful
consideration under applicable state law) to be paid by the Participant for
any shares of Common Stock to be delivered under the Award if and when it
vests, the extent (if any) to which and the time (if ever) at which the
Participant will be entitled to dividend equivalent rights with respect to
the Stock Units subject to the Award, and any vesting or other restrictions
(which may be based on performance criteria, passage of time or other
factors or any combination thereof) imposed on the Stock Unit Award.
4. STOCK APPRECIATION RIGHTS
(INCLUDING LIMITED STOCK APPRECIATION RIGHTS)
4.1 GRANTS. Subject to Sections 1.3 and 1.4, the Committee may grant to any
------
Eligible Person Stock Appreciation Rights either concurrently with the
grant of another Award or in respect of an outstanding Award, in whole or
in part, or independently of any other Award. Any Stock Appreciation Right
granted in connection with an Incentive Stock Option will contain such
terms as may be required to comply with the provisions of Section 422 of
the Code and the regulations promulgated thereunder, unless the holder
otherwise agrees.
4.2 PRICING LIMITS. The pricing restrictions applicable to Options under
--------------
Section 2.2.1 of this Plan shall apply as well to the base or reference
price of SARs granted under this Plan, except that an SAR may be granted in
respect of an outstanding Option at a base or reference price corresponding
to or in excess of the exercise price of the Option.
4.3 EXERCISE OF STOCK APPRECIATION RIGHTS.
-------------------------------------
4.3.1 EXERCISABILITY. Unless the Award Agreement or the Committee
--------------
otherwise provides, a Stock Appreciation Right related to another Award
will be exercisable at such time or times, and to the extent, that the
related Award will be exercisable.
4.3.2 EFFECT ON AVAILABLE SHARES. To the extent that a Stock Appreciation
--------------------------
Right is exercised, only the actual number of delivered shares of Common
Stock will be charged against the maximum amount of Common Stock that may
be delivered pursuant to Awards under this Plan. The number of shares
subject to the Stock
11
<PAGE>
Appreciation Right and the related Option of the Participant will, however,
be reduced by the number of underlying shares as to which the exercise
related, unless the Award Agreement otherwise provides.
4.3.3 STAND-ALONE SARS. A Stock Appreciation Right granted independently
----------------
of any other Award will be exercisable pursuant to the terms of the Award
Agreement.
4.3.4 PROPORTIONATE REDUCTION. If an SAR extends to less than all the
-----------------------
shares covered by the related Award and if a portion of the related Award
is thereafter exercised, the number of shares subject to the unexercised
SAR shall be reduced only if and to the extent that the remaining number of
shares covered by such related Award is less than the remaining number of
shares subject to such SAR.
4.4 PAYMENT.
-------
4.4.1 AMOUNT. Unless the Committee otherwise provides, upon exercise of a
------
Stock Appreciation Right and the attendant surrender of an exercisable
portion of any related Award, the Participant will be entitled to receive,
subject to Section 6.5, payment of an amount determined by multiplying
(a) the difference obtained by subtracting the exercise or base
reference price per share of Common Stock under the related Award
(if applicable) or the initial share value specified in the
Award, from the Fair Market Value of a share of Common Stock on
the date of exercise of the Stock Appreciation Right, by
(b) the number of shares with respect to which the Stock Appreciation
Right has been exercised.
4.4.2 FORM OF PAYMENT. The Committee, in its sole discretion, will
---------------
determine the form in which payment will be made of the amount determined
under Section 4.4.1 above, either solely in cash, solely in shares of
Common Stock (valued at Fair Market Value on the date of exercise of the
Stock Appreciation Right), or partly in such shares and partly in cash,
provided that the Committee has determined that such exercise and payment
are consistent with applicable law. If the Committee permits the
Participant to elect to receive cash or shares (or a combination thereof)
upon such exercise, the election will be subject to any further conditions
that the Committee may impose.
4.5 LIMITED STOCK APPRECIATION RIGHTS. The Committee may grant to any Eligible
---------------------------------
Person Stock Appreciation Rights exercisable only upon or in respect of a
change in control or any other specified event ("Limited SARs") and such
Limited SARs may relate to or operate in tandem or combination with or
substitution for Options, other SARs or other Awards (or any combination
thereof), and may be payable in cash or shares based on the spread between
the base price of the SAR and a price based upon or equal to the Fair
Market Value of the Shares during a specified period or at a
12
<PAGE>
specified time within a specified period before, after or including the
date of such event.
5. OTHER AWARDS
5.1 GRANTS OF PERFORMANCE SHARE AWARDS. The Committee may grant Performance
----------------------------------
Share Awards to Eligible Persons based upon such factors as the Committee
deems relevant in light of the specific type and terms of the award. An
Award Agreement will specify the maximum number of shares of Common Stock
(if any) subject to the Performance Share Award, the consideration (but not
less than the minimum lawful consideration) to be paid for any such shares
as may be issuable to the Participant, the duration of the Award and the
conditions upon which delivery of any shares or cash to the Participant
will be based. The amount of cash or shares or other property that may be
deliverable pursuant to such Award will be based upon the degree of
attainment over a specified period of not more than 10 years (a
"performance cycle") as may be established by the Committee of such
measure(s) of the performance of the Company (or any part thereof) or the
Participant as may be established by the Committee. The Committee may
provide for full or partial credit, prior to completion of such performance
cycle or the attainment of the performance achievement specified in the
Award, in the event of the Participant's death, Retirement, or Total
Disability, a Change in Control Event or in such other circumstances as the
Committee (consistent with Section 6.10.3(b), if applicable) may determine.
To the extent consistent with Section 5.4, the Committee may provide for
the deferral of payment of or delivery of shares with respect to a
Performance Share Award.
5.2 SPECIAL (SECTION 162(M)) PERFORMANCE-BASED AWARDS. Options or SARs granted
-------------------------------------------------
by the Committee with an exercise price not less than Fair Market Value at
the applicable date of grant for Section 162(m) purposes to Eligible
Employees and which otherwise satisfy the conditions to deductibility under
Section 162(m) of the Code ("Qualifying Awards") are intended to and will
be deemed performance-based awards thereunder. Without limiting the
generality of the foregoing, and in addition to Qualifying Awards granted
under other provisions of this Plan, other performance-based awards within
the meaning of Section 162(m) of the Code ("Performance-Based Awards"),
whether initially in the form of bonus stock, stock units, restricted
stock, performance stock, phantom stock or other rights, including cash-
only bonuses or other incentives, the vesting of which depends on the
performance of the Company on a consolidated, segment, subsidiary, or
division basis, with reference to one or more of the business criteria
identified in Section 5.2.7 relative to preestablished performance goals,
may be granted under this Section 5.2. The applicable business criterion
or criteria, the specific performance goals and, if applicable, the
objective formula or standard for computing the amount payable or the
number of shares to be delivered if the performance goal is (or the
performance goals are) attained, must be approved by the Committee in
advance of applicable deadlines under the Code and while the performance
relating to such goals remains substantially uncertain. The applicable
performance measurement period may be not less than one nor more than
13
<PAGE>
10 years. No more than one performance cycle for awards payable only in
cash and not related to shares, shall begin in any year. Other types of
performance and non-performance awards may also be granted under the other
provisions of this Plan. The following provisions relate to all
Performance-Based Awards (other than Qualifying Awards) granted under this
Plan:
5.2.1 ELIGIBLE CLASS. The eligible class of persons for Awards under this
--------------
Section 5.2 is officers of the Company.
5.2.2 MAXIMUM AWARD. Grants or awards under this Section 5.2 may be paid
-------------
in cash or shares or any combination thereof. In no event shall grants of
share-based Awards made in any calendar year to any Eligible Employee under
this Section 5.2 relate to more than 400,000 shares. In no event shall
grants to any Eligible Employee under this Plan of Awards payable only in
cash and not related to shares provide for payment of more than $1,000,000,
times the number of years (not more than five), in the applicable
performance period.
5.2.3 COMMITTEE CERTIFICATION. To the extent required by Section 162(m),
-----------------------
before any Performance-Based Award under this Section 5.2 is paid, the
Committee must certify that the specific performance goals and any other
material terms of the Performance-Based Award were satisfied.
5.2.4 TERMS AND CONDITIONS OF AWARDS. The Committee will have discretion
------------------------------
to determine the restrictions or other limitations of the individual Awards
under this Section 5.2 (including the authority to reduce Awards, payouts
or vesting or to pay no Awards, in its sole discretion, if the Committee
preserves such authority at the time of grant by language to this effect in
its authorizing resolutions or otherwise). Notwithstanding anything
contained in this Plan to the contrary, the Committee shall have no
discretion to increase the amount of cash or number of shares to be
delivered upon attainment of the performance goals set forth in the
Performance Award Agreement.
5.2.6 ADJUSTMENTS FOR MATERIAL CHANGES. Performance goals or other
---------------------------------
features of an Award under this Section 5.2 may provide that they (a) shall
be adjusted to reflect a change in corporate capitalization, a corporate
transaction (such as a reorganization, combination, separation, or merger)
or a complete or partial corporate liquidation, or (b) shall be calculated
either without regard for or to reflect any change in accounting policies
or practices affecting the Company and/or the business criteria or
performance goals or targets, or (c) shall be adjusted for any other
circumstance or event, or (d) any combination of (a) through (c), but only
to the extent in each case that such adjustment or determination in respect
of Performance-Based Awards would be consistent with the requirements of
Section 162(m) to qualify as performance-based compensation.
5.2.7 BUSINESS CRITERIA. The "business criteria" under this Plan are the
-----------------
following: (a) revenue growth, (b) earnings (before or after taxes or
before or after taxes,
14
<PAGE>
interest, depreciation, and/or amortization or before or after
extraordinary items, or any combination thereof), (c) cash flow, (d) profit
margins, (e) return on equity, (f) return on assets or return on net
investment, (g) return on net revenue, (h) inventory ratios, (i) cost
containment or reduction, (j) specified expense ratios, or (k) any
combination of the foregoing criteria. The financial terms in this Section
5.2.7 are used as applied under applicable generally accepted accounting
principles and in the preparation of the Company's financial reports and
statements.
5.3 STOCK BONUSES AND STOCK UNITS. The Committee may grant Stock Bonuses or
-----------------------------
Stock Units to one or more Eligible Persons to reward prior exceptional or
special services, contributions or achievements, in the manner and on such
terms and conditions (including any restrictions on such shares) as
determined from time to time by the Committee. The number of shares or
Stock Units so awarded will be determined by the Committee. The Award may
be granted independently or in lieu of a cash bonus otherwise payable or to
be paid by the Company and may be paid in the form of Common Stock, an
Option, Restricted Shares, Stock Units, or other Award.
5.4 DEFERRED PAYMENTS. The Committee may provide for the deferral of payment
-----------------
of or delivery of shares with respect to any Award, by or through Stock
Units and accretions thereon or otherwise, under and in accordance with the
specific terms of a non-qualified deferred compensation plan sponsored by
the Company and any applicable other terms of this Plan; provided that in
the case of Qualifying Awards and Performance-Based Awards, the amount
deferred shall be credited with deemed earnings or dividend equivalents in
accordance with Section 162(m).
5.5 CASH BONUSES. The Committee may establish a program of annual or,
------------
consistent with the limitations on performance periods set forth in Section
5.2, periodic incentive awards that are payable in cash to Eligible Persons
based upon the extent to which performance goals are met during the
performance period. The performance goals may depend upon the performance
of the Company on a consolidated, subsidiary, or division basis with
reference to one or more of the business criteria identified in Section
5.2.7 or such other strategic goals or individual objectives (or any
combination of criteria and/or objectives) as the Committee may establish.
5.6 ALTERNATIVE PAYMENTS. In lieu of a cash payment of an Award payable in
--------------------
cash, the Committee may require or allow all or a portion of the Award to
be paid or credited in the form of shares of Common Stock, Restricted
Shares, Stock Units, an Option or other Award.
15
<PAGE>
6. OTHER PROVISIONS
6.1 RIGHTS OF ELIGIBLE PERSONS, PARTICIPANTS AND BENEFICIARIES.
----------------------------------------------------------
6.1.1 EMPLOYMENT STATUS. Status as an Eligible Person will not be
-----------------
construed as a commitment that any Award will be made under this Plan to an
Eligible Person or to Eligible Persons generally.
6.1.2 NO EMPLOYMENT CONTRACT. Nothing contained in this Plan (or in any
----------------------
other documents related to this Plan or to any Award) will confer upon any
Eligible Person or other Participant any right to continue in the employ or
other service of the Company or constitute any contract or agreement of
employment or other service, nor will interfere in any way with the right
of the Company to otherwise change such person's compensation or other
benefits or to terminate the employment or other service of such person,
with or without cause, but nothing contained in this Plan or any related
document will adversely affect any independent contractual right of such
person without the Participant's consent. Unless otherwise expressly
provided, no credit shall be given for partial service between vesting
dates.
6.1.3 PLAN NOT FUNDED. Awards payable under this Plan will be payable in
---------------
shares or from the general assets of Image Entertainment, and (except as
provided in Section 1.4.3) no special or separate reserve, fund or deposit
will be made to assure payment of such Awards. No Participant, Beneficiary
or other person will have any right, title or interest in any fund or in
any specific asset (including shares of Common Stock, except as expressly
otherwise provided) of the Company by reason of any Award hereunder.
Neither the provisions of this Plan (or of any related documents), nor the
creation or adoption of this Plan, nor any action taken pursuant to the
provisions of this Plan will create, or be construed to create, a trust of
any kind or a fiduciary relationship between the Company and any
Participant, Beneficiary or other person. To the extent that a
Participant, Beneficiary or other person acquires a right to receive
payment pursuant to any Award hereunder, such right will be no greater than
the right of any unsecured general creditor of the Company.
6.2 ADJUSTMENTS; ACCELERATION.
-------------------------
6.2.1 ADJUSTMENTS. Upon or in contemplation of any reclassification,
-----------
recapitalization, stock split (including a stock split in the form of a
stock dividend) or reverse stock split; any merger, combination,
consolidation, or other reorganization; any spin-off, split-up, or similar
extraordinary dividend distribution ("spin-off") in respect of the Common
Stock (whether in the form of securities or property); any exchange of
Common Stock or other securities of Image Entertainment, or any similar,
unusual or extraordinary corporate transaction in respect of the Common
Stock; or a sale of all or substantially all the assets of Image
Entertainment as an entirety ("asset sale"); then the Committee shall, in
such manner, to such extent (if any) and at such time as it deems
appropriate and equitable in the circumstances:
16
<PAGE>
(a) in any of such events, proportionately adjust any or all of (1)
the number and type of shares of Common Stock (or other
securities) that thereafter may be made the subject of Awards
(including the specific maxima and numbers of shares set forth
elsewhere in this Plan), (2) the number, amount and type of
shares of Common Stock (or other securities or property) subject
to any or all outstanding Awards, (3) the grant, purchase, or
exercise price of any or all outstanding Awards, (4) the
securities, cash or other property deliverable upon exercise of
any outstanding Awards, or (5) (subject to limitations under
Section 6.10.3(b)) the performance standards appropriate to any
outstanding Awards, or
(b) in the case of a reclassification, recapitalization, merger,
consolidation, combination, or other reorganization, spin off or
asset sale, make provision for a cash payment or for the
substitution or exchange of any or all outstanding share-based
Awards or the cash, securities or property deliverable to the
holder of any or all outstanding share-based Awards, based upon
the distribution or consideration payable to holders of the
Common Stock upon or in respect of such event.
In each case, with respect to Awards of Incentive Stock Options, no
adjustment will be made that would cause this Plan to violate Section 422
or 424(a) of the Code or any successor provisions without the written
consent of holders materially adversely affected thereby.
In any of such events, the Committee may take such action prior to such
event to the extent that the Committee deems the action necessary to permit
the Participant to realize the benefits intended to be conveyed with
respect to the underlying shares in the same manner as is or will be
available to shareholders generally.
6.2.2 ACCELERATION OF AWARDS UPON CHANGE IN CONTROL EVENT. Unless the
---------------------------------------------------
Committee otherwise provides in the applicable Award Agreement, immediately
prior to the occurrence of a Change in Control Event:
(a) each Option and Stock Appreciation Right will become immediately
exercisable,
(b) Restricted Stock may immediately vest free of restrictions, and
(c) each Performance Share Award and Stock Unit may become payable to
the Participant (at target performance levels, if applicable) in
the form provided by the Award Agreement or deferred compensation
plan under which it is awarded.
6.2.3 POSSIBLE EARLY TERMINATION OF ACCELERATED AWARDS. If any Option or
------------------------------------------------
other right to acquire Common Stock under this Plan has been fully
accelerated as required
17
<PAGE>
or permitted by Section 6.2.2 but is not exercised prior to (a) a
dissolution of Image Entertainment, or (b) an event described in Section
6.2.1 that Image Entertainment does not survive as a public company, or (c)
the consummation of an event described in Section 6.1 involving a Change in
Control Event approved by the Board, such Option or right will terminate,
subject to any provision that has been expressly made by the Board, the
Committee through a plan of reorganization approved by the Board or
otherwise for the survival, substitution, assumption, exchange or other
settlement of such Option or right.
6.2.4 POSSIBLE RESCISSION OF ACCELERATION. If the vesting of an Award has
-----------------------------------
been accelerated expressly in anticipation of an event or upon shareholder
approval of an event and the Committee or the Board later determines that
the event will not occur, the Committee may rescind the effect of the
acceleration as to any then outstanding and unexercised or otherwise
unvested Awards.
6.2.5 ACCELERATION UPON TERMINATION OF SERVICE IN ANTICIPATION OF, OR
---------------------------------------------------------------
FOLLOWING A CHANGE IN CONTROL EVENT. Notwithstanding the provisions of
-----------------------------------
Section 6.2, unless the Committee otherwise provides prior to a Change in
Control Event or in an Award Agreement, if any Participant's employment is
terminated by the Company for any reason other than a Termination For Cause
either (a) in express anticipation of an announced transaction that would
constitute a Change in Control Event and less than three months before its
occurrence, or (b) within one year after a Change in Control Event, then
all Options/Awards held by the Participant and not previously expired shall
be deemed fully vested immediately prior to the later of the date of
termination or the date of the Change in Control Event, irrespective of the
vesting or early termination provisions of the Participant's Award
Agreement.
6.3 EFFECT OF TERMINATION OF SERVICE ON AWARDS. The Committee will establish
------------------------------------------
the effect of a termination of employment or service on the rights and
benefits for each Award under this Plan and in so doing may make
distinctions based upon the cause of termination. Options and SARs related
to Options are subject to the provisions of Section 2.4 unless otherwise
expressly provided by the Committee.
6.3.1 EVENTS NOT DEEMED TERMINATIONS OF SERVICE. Unless Company policy or
-----------------------------------------
the Committee otherwise provides, the employment or service relationship
shall not be considered terminated in the case of (a) sick leave, (b)
military leave, or (c) any other leave of absence authorized by the Company
or the Committee; provided that unless reemployment upon the expiration of
such leave is guaranteed by contract or law, such leave is for a period of
not more than 90 days. In the case of any Eligible Employee on an approved
leave of absence, continued vesting of the Award while on leave from the
employ of the Company shall be suspended, unless the Committee otherwise
provides or applicable law otherwise requires. In no event shall an Award
be exercised after the expiration of the term set forth in the Award
Agreement.
6.3.2 EFFECT OF CHANGE OF SUBSIDIARY STATUS. For purposes of this Plan
-------------------------------------
and any Award, if an entity ceases to be a Subsidiary a termination of
employment or service
18
<PAGE>
will be deemed to have occurred with respect to each Eligible Person in
respect of the Subsidiary who does not continue as an Eligible Person in
respect of another entity within the Company.
6.4 COMPLIANCE WITH LAWS. This Plan, the granting and vesting of Awards under
--------------------
this Plan, the offer, issuance and delivery of shares of Common Stock, the
acceptance of promissory notes and/or the payment of money under this Plan
or under Awards are subject to compliance with all applicable federal and
state laws, rules and regulations (including but not limited to state and
federal securities law, federal margin requirements) and to such approvals
by any listing, regulatory or governmental authority as may, in the opinion
of counsel for Image Entertainment, be necessary or advisable in connection
therewith. In addition, any securities delivered under this Plan may be
subject to any special restrictions that the Committee may require to
preserve a pooling of interests under generally accepted accounting
principles. The person acquiring any securities under this Plan will, if
requested by Image Entertainment, provide such assurances and
representations to Image Entertainment as the Committee may deem necessary
or desirable to assure compliance with all applicable legal and accounting
requirements.
6.5 TAX MATTERS.
-----------
6.5.1 PROVISION FOR TAX WITHHOLDING OR OFFSET. Upon any exercise,
---------------------------------------
vesting, or payment of any Award or upon the disposition of shares of
Common Stock acquired pursuant to the exercise of an Incentive Stock Option
prior to satisfaction of the holding period requirements of Section 422 of
the Code, the Company shall have the right at its option to (a) require the
Participant (or Personal Representative or Beneficiary, as the case may be)
to pay or provide for payment of the amount of any taxes which the Company
may be required to withhold with respect to such Award event or payment or
(b) deduct from any amount payable in cash the amount of any taxes which
the Company may be required to withhold with respect to such cash payment.
In any case where a tax is required to be withheld in connection with the
delivery of shares of Common Stock under this Plan, the Committee may in
its sole discretion (subject to Section 6.4) grant (either at the time of
the Award or thereafter) to the Participant the right to elect, pursuant to
such rules and subject to such conditions as the Committee may establish,
to have the Company reduce the number of shares to be delivered by (or
otherwise reacquire) the appropriate number of shares valued at their Fair
Market Value, to satisfy such withholding obligation, determined in each
case as of the trading day next preceding the applicable date of exercise,
vesting or payment.
6.5.2 TAX LOANS. If so provided in the Award Agreement, the Company may,
---------
to the extent permitted by law, authorize a short-term loan of not more
than nine (9) months to an Eligible Person in the amount of any taxes that
the Company may be required to withhold with respect to shares of Common
Stock received (or disposed of, as the case may be) pursuant to a
transaction described in Section 6.5.1. Such a loan will be for a term, at
a rate of interest and pursuant to such other terms and
19
<PAGE>
conditions as the Committee, consistent with applicable law, may establish,
but such loan need not necessarily comply with the other provisions of
Section 1.8.
6.6 PLAN AMENDMENT, TERMINATION AND SUSPENSION.
------------------------------------------
6.6.1 BOARD AUTHORIZATION. The Board may, at any time, terminate or, from
-------------------
time to time, amend, modify or suspend this Plan, in whole or in part. No
Awards may be granted during any suspension of this Plan or after
termination of this Plan, but the Committee will retain jurisdiction as to
Awards then outstanding in accordance with the terms of this Plan.
6.6.2 SHAREHOLDER APPROVAL. To the extent then required under Section
--------------------
162(m) of the Code (in respect of awards intended to be exempt from Section
162(m) limits), or Sections 422 and 424 of the Code (in respect of
Incentive Stock Options), or any other applicable law, or deemed necessary
or advisable by the Board, any amendment to this Plan shall be subject to
shareholder approval.
6.6.3 AMENDMENTS TO AWARDS. Without limiting any other express authority
--------------------
of the Committee under (but subject to) the express limits of this Plan,
the Committee by agreement or resolution may waive conditions of or
limitations on Awards to Participants that the Committee in the prior
exercise of its discretion has imposed, without the consent of a
Participant, and may make other changes to the terms and conditions of
Awards that do not affect in any manner materially adverse to the
Participant, the Participant's rights and benefits under an Award.
6.6.4 LIMITATIONS ON AMENDMENTS TO PLAN AND AWARDS. No amendment,
--------------------------------------------
suspension or termination of this Plan or change of or affecting any
outstanding Award will, without the written consent of the Participant,
affect in any manner materially adverse to the Participant any rights or
benefits of the Participant or obligations of the Company under any Award
granted under this Plan prior to the effective date of such change.
Changes contemplated by Section 6.2 will not be deemed to constitute
changes or amendments for purposes of this Section 6.6.
6.7 PRIVILEGES OF STOCK OWNERSHIP. Except as otherwise expressly authorized by
-----------------------------
the Committee or this Plan, a Participant will not be entitled to any
privilege of stock ownership as to any shares of Common Stock not actually
delivered to and held of record by the Participant. No adjustment will be
made for dividends or other rights as a shareholder for which a record date
is prior to such date of delivery.
6.8 EFFECTIVE DATE OF THIS PLAN. This Plan has been approved by the Board as
---------------------------
of July 22, 1998, subject to shareholder approval no later than December
31, 1998.
6.9 TERM OF THIS PLAN. No Award will be granted under this Plan after June 30,
-----------------
2008 (the "termination date"). Unless otherwise expressly provided in this
Plan or in an applicable Award Agreement, any Award granted prior to the
termination date may extend beyond such date, and all authority of the
Committee with respect to Awards
20
<PAGE>
hereunder, including the authority to amend an Award, will continue during
any suspension of this Plan and in respect of Awards outstanding on the
termination date.
6.10 GOVERNING LAW/CONSTRUCTION/SEVERABILITY.
---------------------------------------
6.10.1 CHOICE OF LAW. This Plan, the Awards, all documents evidencing
-------------
Awards and all other related documents will be governed by, and construed
in accordance with the laws of the State of California.
6.10.2 SEVERABILITY. If a court of competent jurisdiction holds any
------------
provision invalid and unenforceable, the remaining provisions of this Plan
will continue in effect.
6.10.3 PLAN CONSTRUCTION.
-----------------
(a) RULE 16B-3. It is the intent of Image Entertainment that the
----------
Awards and transactions permitted by Awards generally satisfy and
be interpreted in a manner that, in the case of Participants who
are or may be subject to Section 16 of the Exchange Act,
satisfies the applicable requirements of Rule 16b-3 so that such
persons (unless they otherwise agree) will be entitled to the
benefits of Rule 16b-3 or other exemptive rules under Section 16
of the Exchange Act in respect of those transactions and will not
be subjected to avoidable liability.
(b) SECTION 162(M). It is the further intent of Image Entertainment
--------------
that (to the extent the Company or Awards under this Plan may be
or become subject to limitations on deductibility under Section
162(m)), Options or SARs granted with an exercise or base price
not less than Fair Market Value on the date of grant, and Awards
granted in accordance with Section 5.2, that are granted to or
held by a person subject to Section 162(m) will qualify as
performance-based compensation or otherwise be exempt from
deductibility limitations under Section 162(m), to the extent
that the Committee authorizing the Award satisfies any applicable
administrative requirements thereof. This Plan will be
interpreted consistent with such intent.
6.11 CAPTIONS. Captions and headings are given to the sections and subsections
--------
of this Plan solely as a convenience to facilitate reference. Such
headings will not be deemed in any way material or relevant to the
construction or interpretation of this Plan or any provision thereof.
6.12 STOCK-BASED AWARDS IN SUBSTITUTION FOR STOCK OPTIONS OR AWARDS GRANTED BY
-------------------------------------------------------------------------
OTHER CORPORATIONS. Awards may be granted to Eligible Persons under this
------------------
Plan in substitution for employee stock options, SARs, restricted stock or
other stock-based awards granted by other entities to persons who are or
who will become Eligible Persons in respect of the Company, in connection
with a distribution, merger or reorganization by or with the granting
entity or an affiliated entity, or the acquisition
21
<PAGE>
by the Company, directly or indirectly, of all or a substantial part of the
stock or assets or operations of the employing entity.
6.13 NON-EXCLUSIVITY OF PLAN. Nothing in this Plan will limit or be deemed to
-----------------------
limit the authority of the Board or the Committee to grant awards or
authorize any other compensation, with or without reference to the Common
Stock, under any other plan or authority.
7. DEFINITIONS
"AWARD" means an award of any Option, Stock Appreciation Right, Restricted
Stock, Stock Bonus, Performance Share Award, Stock Unit (restricted or
unrestricted), cash bonus, performance stock, phantom stock, dividend
equivalent, deferred payment right, or other right or security that would
constitute a "derivative security" under Rule 16a-1(c) of the Exchange Act, or
any combination thereof, whether alternative or cumulative, authorized by and
granted under this Plan.
"AWARD AGREEMENT" means any writing setting forth the terms of an Award that has
been authorized by the Committee.
"AWARD DATE" means the date upon which the Committee took the action granting an
Award or such later date as the Committee designates as the grant or award date
at the time of the Award or, in the case of Awards under Section 8, the
applicable dates set forth therein.
"BENEFICIARY" means the person, persons, trust or trusts designated by a
Participant or, in the absence of a designation, entitled by will or the laws of
descent and distribution, to receive the benefits specified in the Award
Agreement and under this Plan if the Participant dies, and means the
Participant's executor or administrator if no other Beneficiary is designated
and able to act under the circumstances.
"BOARD" means the Board of Directors of Image Entertainment.
"CHANGE IN CONTROL EVENT" shall be deemed to have occurred upon the earliest of
the following dates or events:
(a) the date of an acquisition by any Person of beneficial ownership
(within the meaning of Rule 13d-3 under Exchange Act or of a pecuniary
interest in (either comprising "ownership of") more than 45% of the
------------
Common Stock or voting securities entitled to then vote generally in
the election of directors of Image Entertainment ("Voting Stock"),
------------
after giving effect to any new issue in the case of an acquisition
from Image Entertainment, other than an acquisition by one or more
----- ----
Excluded Persons in connection with a new issuance of Voting Stock
after the effective date of this Plan by Image Entertainment to the
Excluded Person in a transaction that the Committee determines (in
advance of the issuance) does not constitute a Change in Control
Event;
22
<PAGE>
(b) Approval by the shareholders of Image Entertainment of a plan of
merger, consolidation, or reorganization of Image Entertainment or for
sale or other disposition of all or substantially all of Image
Entertainment's consolidated assets as an entirety (collectively, a
"Business Combination"), other than a Business Combination: (1) (A)
--------------------- ----- ----
in which all or substantially all of the holders of Voting Stock hold
or receive directly or indirectly 50% or more of the voting stock of
the entity resulting from the Business Combination or a parent company
thereof, and (B) after which no Person (other than any one or more of
the Excluded Persons) owns more than 50% of the voting stock of the
resulting entity (or a parent company) who did not own directly or
indirectly at least that amount of Voting Stock immediately before the
Business Combination; or (2) in which the holders of the Company's
capital stock immediately before such Business Combination will,
immediately after such Business Combination, hold as a group on a
fully diluted basis the ability to elect at least a majority of the
directors of the surviving corporation or a parent company thereof, as
the case may be (assuming cumulative voting, if applicable).
(c) Approval by the Board and (if required by law) by shareholders of
Image Entertainment of a plan to consummate the dissolution or
complete liquidation of Image Entertainment; or
(d) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board and any new director
(other than a director designated by a person who has entered into an
agreement or arrangement with Image Entertainment to effect a
transaction described in clause (a) or (b) of this definition) whose
appointment, election, or nomination for election was approved by a
vote of at least two-thirds (2/3) of the directors then still in
office who either were directors at the beginning of the period or
whose appointment, election or nomination for election was previously
so approved, cease for any reason to constitute a majority of the
entire Board (excluding in this determination any former directors
whose replacements were so approved).
For purposes of determining whether a Change in Control Event has occurred, a
transaction includes all transactions in a series of related transactions.
"CODE" means the Internal Revenue Code of 1986, as amended from time to time.
"COMMISSION" means the Securities and Exchange Commission.
"COMMITTEE" means the Board or a committee (within the scope of its authority
delegated by the Board) appointed by the Board to administer this Plan, provided
that any committee shall be comprised only of two or more non-employee directors
subject to the following restrictions:
23
<PAGE>
(a) In respect of any decision of the Committee made at a time when the
Participant affected by the decision may be subject to Section 162(m),
and the Awards subject to such decision are intended to satisfy the
requirements for exemption therefrom, the decision shall be approved
by a committee comprised of "outside directors" (as this term is
defined in Section 162(m)) to the extent required by Section 162(m).
(b) In respect of any decision of the Committee made at a time when the
Participant affected by the decision may be subject to Section 16(b)
of the Exchange Act, and the Awards subject to such decision are
intended to satisfy the requirements for exemption therefrom, the
decision shall be approved by the Board or by a committee comprised of
Non-Employee Directors (as this term is as defined in Rule 16(b)-3 of
the Exchange Act) to the extent required by Rule 16(b)-3.
"COMMON STOCK" means the Common Stock of Image Entertainment and such other
securities or property as may become the subject of Awards, or become subject to
Awards, pursuant to an adjustment made under Section 6.2 of this Plan.
"COMPANY" means, collectively, Image Entertainment and its Subsidiaries.
"DIVIDEND EQUIVALENT" means the amount of cash dividends or other cash
distributions paid by Image Entertainment on that number of shares of Common
Stock which is equal to the number of Stock Units then credited to a
Participant's Stock Unit Account on the applicable measurement date, which
amount shall be allocated (with respect to Formula Director Awards, in
accordance with Section 8 and, with respect to other Stock Unit Awards, in
accordance with the applicable Award Agreement if dividend equivalent rights are
explicitly granted pursuant to that Award Agreement) as additional Stock Units
to the Participant's Stock Account.
"ELIGIBLE EMPLOYEE" means an officer (whether or not a director) or other
employee of the Company.
"ELIGIBLE PERSON" means an Eligible Employee or any Non-Executive Director.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time
to time.
"EXCLUDED PERSON" means
(a) the Company;
(b) any person described in and satisfying the conditions of Rule 13d-
1(b)(1) under the Exchange Act);
(c) any employee benefit plan of Image Entertainment;
24
<PAGE>
(d) Image Investors Co., John Kluge, Stuart Subotnick, or Martin
Greenwald, or any combination thereof; or
(e) any affiliates (within the meaning of the Exchange Act), successors
(other than unaffiliated or unrelated transferees), or heirs,
descendants or members of the immediate families of the individuals
identified in part (d) of this definition.
"FAIR MARKET VALUE" on any date means
(a) if the stock is listed or admitted to trade on a national securities
exchange, the closing price of the stock on the Composite Tape of the
principal national securities exchange on which the stock is so listed
or admitted to trade, on such date, or, if there is no trading of the
stock on such date, then the closing price of the stock as quoted on
such Composite Tape on the next preceding date on which there was
trading in such shares;
(b) if the stock is not listed or admitted to trade on a national
securities exchange, the closing price for the stock on such date, as
furnished by the National Association of Securities Dealers, Inc.
("NASD") through the NASDAQ National Market Reporting System or a
similar organization if the NASD is no longer reporting such
information;
(c) if the stock is not listed or admitted to trade on a national
securities exchange and is not reported on the National Market
Reporting System, the mean between the bid and asked price for the
stock on such date, as furnished by the NASD or a similar
organization; or
(d) if the stock is not listed or admitted to trade on a national
securities exchange, is not reported on the National Market Reporting
System and if bid and asked prices for the stock are not furnished by
the NASD or a similar organization, the value as established by the
Committee at such time for purposes of this Plan.
"FORMER PLANS" means any of the Image Entertainment, Inc. 1990 Stock Option
Plan, the Image Entertainment, Inc. Restated 1992 Stock Option Plan, or the
Image Entertainment, Inc. 1994 Eligible Directors Stock Option Plan, as each may
be amended from time to time.
"FORMULA DIRECTOR AWARD" means a Stock Unit Award granted to a Non-Executive
Director under Section 8 of this Plan and payable solely in shares of Common
Stock.
"IMAGE ENTERTAINMENT" means Image Entertainment, Inc., a California corporation,
and its successors.
"INCENTIVE STOCK OPTION" or "ISO" means an Option that is designated and
intended as an incentive stock option within the meaning of Section 422 of the
Code, the award of that contains such provisions (including but not limited to
the receipt of shareholder approval of
25
<PAGE>
this Plan, if the award is made prior to such approval) and is made under such
circumstances and to such persons as may be necessary to comply with that
section.
"NONQUALIFIED STOCK OPTION" means an Option that is designated as a Nonqualified
Stock Option and will include any Option intended as an Incentive Stock Option
that fails to meet the applicable legal requirements thereof. Any Option
granted hereunder that is not designated as an incentive stock option will be
deemed to be designated a nonqualified stock option under this Plan and not an
incentive stock option under the Code.
"NON-EXECUTIVE DIRECTOR" means a member of the Board who is not an executive
officer of Image Entertainment.
"OPTION" means an option to purchase Common Stock granted under this Plan. The
Committee will designate any Option granted to an Eligible Person as a
Nonqualified Stock Option or an Incentive Stock Option.
"PARTICIPANT" means an Eligible Person who has been granted an Award under this
Plan, including any Non-Executive Director who has received a Formula Director
Award.
"PERFORMANCE SHARE AWARD" means an Award of a right to receive shares of Common
Stock under Section 5.1, or to receive shares of Common Stock or other
compensation (including cash) under Section 5.2, the issuance or payment of
which is contingent upon, among other conditions, the attainment of performance
objectives specified by the Committee.
"PERSON" means an association, a corporation, an individual, a partnership, a
trust or any other entity or organization, including a governmental entity and a
"person" as that term is used under Section 13(d) or 14(d) of the Exchange Act.
"PERSONAL REPRESENTATIVE" means the person or persons who, upon the disability
or legal incompetence of a Participant, has acquired on behalf of the
Participant, by legal proceeding or otherwise, the power to exercise the rights
or receive benefits under this Plan by virtue of having become the legal
representative of the Participant.
"PLAN" means this Image Entertainment, Inc. 1998 Incentive Plan, as it may be
amended from time to time.
"RESTRICTED SHARES" or "RESTRICTED STOCK" means shares of Common Stock awarded
to an Eligible Person under this Plan, subject to payment of such consideration,
if any, and such conditions on vesting (which may include, among others, the
passage of time, specified performance objectives, or other factors) and such
transfer or other restrictions as are established in or pursuant to this Plan
and the related Award Agreement, for so long as such shares remain unvested or
restricted under the terms of the applicable Award Agreement.
"RETIREMENT" means retirement from active service as an employee or officer of
the Company on or after age 55 with 10 or more years of service, or after age
65.
26
<PAGE>
"RULE 16B-3" means Rule 16b-3 as promulgated by the Commission pursuant to the
Exchange Act, as amended from time to time.
"SECTION 162(M)" means Section 162(m) of the Code and the regulations
promulgated thereunder.
"SECURITIES ACT" means the Securities Act of 1933, as amended from time to time.
"STOCK APPRECIATION RIGHT" or "SAR" means a right authorized under this Plan to
receive a number of shares of Common Stock or an amount of cash, or a
combination of shares and cash, the aggregate amount or value of which is
determined by reference to a change in the Fair Market Value of the Common
Stock.
"STOCK BONUS" means an Award of shares of Common Stock granted under this Plan
for no consideration other than past services and without restriction other than
such transfer or other restrictions as the Committee may deem advisable to
assure compliance with law.
"STOCK UNIT" means a bookkeeping entry which serves as a unit of measurement
relative to a share of Common Stock for purposes of determining the payment, in
Common Stock or cash, of a grant or deferred benefit or right under this Plan.
Stock Units carry no dividend, voting, or other rights of a holder of Common
Stock. Stock Units may, however, by express provision in the related Award
Agreement, carry related dividend equivalent rights.
"STOCK UNIT ACCOUNT" means the bookkeeping account maintained by Image
Entertainment on behalf of each Participant who is granted a Stock Unit Award,
which Stock Unit Account is credited with Stock Units (with respect to Formula
Director Awards, in accordance with Section 8 and, with respect to other Stock
Unit Awards, in accordance with the applicable Award Agreement).
"SUBSIDIARY" means any corporation or other entity a majority of whose
outstanding voting stock or voting power is beneficially owned directly or
indirectly by Image Entertainment.
"TERMINATION FOR CAUSE" means (unless otherwise expressly provided in the Award
Agreement or another contract) a termination of service, based upon a finding by
the Company, acting in good faith and based on its reasonable belief at the
time, that the Participant:
(a) is or has been dishonest, incompetent, or negligent in the discharge
of his or her duties to the Company; or has repeatedly refused to
perform stated or assigned duties; or
(b) has committed a theft or embezzlement, or a breach of confidentiality
or unauthorized disclosure or use of inside information, customer
lists, trade secrets or other confidential information, or a breach of
fiduciary duty involving personal profit, or a willful or negligent
violation of any law, rule or regulation or of Company rules or
policy, in any material respect; or has been
27
<PAGE>
convicted of a felony or misdemeanor (other than minor traffic
violations or similar offenses); or
(c) has materially breached any of the provisions of any agreement with
the Company or a parent corporation; or
(d) has engaged in unfair competition with, or otherwise acted
intentionally in a manner injurious to the reputation, business or
assets of the Company; or has induced a customer to break or terminate
any contract with the Company or an affiliate; or has induced any
principal for whom the Company (or an affiliate) acts as agent to
terminate such agency relationship.
A Termination For Cause shall be deemed to occur (subject to reinstatement upon
a contrary final determination by the Board or Committee) on the date when the
Company first delivers notice to the Participant of a finding of Termination For
Cause during which period any benefits under any Awards held shall be suspended
and shall be final in all respects on the date following the opportunity to be
heard and written notice to the Participant that his or her service is
terminated.
"TOTAL DISABILITY" means any medically determinable physical or mental condition
or impairment which prevents the Participant from performing the essential
functions of his or her job with the Company that can be expected to result in
death or that has lasted or can be expected to last for a period of 90
consecutive days or for shorter periods aggregating 150 days in any consecutive
12 month period.
8. FORMULA DIRECTOR AWARDS
8.1 IN GENERAL. Stock Unit Awards under this Section 8 will be made only to
----------
Non-Executive Directors and will be evidenced by Award Agreements
substantially in the form of Exhibit A hereto or such other form approved
by the Board.
8.2 STOCK UNIT GRANTS.
-----------------
8.2.1 INITIAL ANNUAL AWARDS. Subject to Section 8.2.3, at the close of
---------------------
trading on October 1 (or if it is not a business day, the first business
day thereafter) in each year during the term of this Plan commencing in
1999 and ending in 2001, there will be granted automatically (without any
action by the Committee or the Board) a Stock Unit Award (the Award Date of
which will be such date) for 2,240 Stock Units (subject to adjustment under
Section 6.2) to each Non-Executive Director then in office.
8.2.2 SUBSEQUENT ANNUAL AWARDS. Subject to Section 8.2.3, at the close of
------------------------
trading on October 1 in each year during the term of this Plan after 2001,
there will be granted automatically (without any further action by the
Committee or the Board (except as noted in the next sentence)) a Stock Unit
Award (the Award Date of which will be such date) to each Non-Executive
Director then in office. The number of
28
<PAGE>
Stock Units to be credited on each date will be determined by the Board
triennially in advance of the applicable first grant date in the successive
three year periods.
8.2.3 MAXIMUM NUMBER OF SHARES. Annual grants that would otherwise exceed
------------------------
any share limit under Section 1.4 will be prorated within such limitation.
A Non-Executive Director will not receive more than one Formula Director
Award in any calendar year.
8.2.4 CREDITING OF STOCK UNIT ACCOUNTS. A Stock Unit Account will be
--------------------------------
established under this Plan for each Non-Executive Director. A Non-
Executive Director's Stock Unit Account shall be credited with the number
of Stock Units granted under Section 8.2.1, Section 8.2.2, or Section 8.5,
and shall be reduced by the number of such Stock Units that are paid or
forfeited.
8.3 VESTING. Each Formula Director Award shall become vested as to 1/365 of
-------
the total number of Stock Units subject thereto on each of the 365
successive calendar days commencing on the applicable Award Date.
8.4 TERMINATION OF DIRECTORSHIP. If a Non-Executive Director's services as a
---------------------------
member of the Board terminate due to the director's death or Total
Disability, a Formula Director Award then held by the director shall become
fully vested as of such date of termination. If a Non-Executive Director's
services as a member of the Board terminate for any reason other than his
or her death or Total Disability, all Stock Units granted pursuant to a
Formula Director Award which are not then fully vested (including any Stock
Units credited as dividend equivalents with respect to such unvested Stock
Units) shall upon such termination automatically be forfeited.
8.5 DIVIDEND EQUIVALENT RIGHTS. As soon as administratively practicable after
--------------------------
the payment of any cash dividend or other distribution by Image
Entertainment, a Non-Executive Director's Stock Unit Account shall be
credited with additional Stock Units in an amount equal to the Dividend
Equivalents representing dividends paid on a number of shares equal to the
number of Stock Units in the Non-Executive Director's Stock Unit Account as
of the record date for such distribution, divided by the Fair Market Value
of a share of Common Stock as of the applicable crediting date. Dividend
equivalent Stock Units shall vest and be paid (or shall be forfeited) at
the same time as the Stock Units to which they relate.
8.6 NO RIGHTS AS A SHAREHOLDER. A Non-Executive Director's Stock Unit Account
--------------------------
shall be a memorandum account on the books of the Company. The Stock Units
credited to a Non-Executive Director's Stock Unit Account shall be used
solely as a device for the determination of the number of shares of Common
Stock to be eventually distributed to the Participant in accordance with
Section 8.7. Stock Units shall not be treated as property or as a trust
fund of any kind. No Non-Executive Director shall be entitled to voting or
other shareholder rights with respect to Stock Units credited under this
Section 8 or any other Section of this Plan.
29
<PAGE>
8.7 MANNER AND TIMING OF PAYMENT. Each Formula Director Award will be paid, in
----------------------------
the form of Common Stock, within the 10 business days following the first
anniversary of the Award Date of the Award or any earlier termination of
service as a director. The number of shares of Common Stock to be
delivered in payment of a Formula Director Award will equal the number of
vested Stock Units subject to the Award, plus the number of Stock Units
credited as dividend equivalents with respect to such vested Stock Units.
A Non-Executive Director shall have no right to payment with respect to
Stock Units that are forfeited or otherwise fail to vest (including any
Stock Units credited as dividend equivalents with respect thereto). The
Committee or the Board may authorize, subject to Section 6.4, deferral
elections with respect to Stock Units.
8.8 ADJUSTMENTS; ACCELERATION UPON A CHANGE IN CONTROL EVENT; TERMINATION.
---------------------------------------------------------------------
Formula Director Awards will be subject to adjustment, assumption,
conversion, substitution or exchange, termination and acceleration as
provided in Section 6.2, but in the case of a Change in Control Event only
to the extent that the changes and any Board or Committee action in respect
thereof (a) are consistent with the effect of the event on Stock Unit
Awards held by persons other than executive officers or directors of Image
Entertainment (if any), and (b) are consistent in respect of the underlying
shares with the effect on shareholders generally.
30
<PAGE>
Exhibit A
---------
IMAGE ENTERTAINMENT, INC.
DIRECTOR STOCK UNIT AWARD AGREEMENT
THIS AGREEMENT dated as of _____________, ____, is between Image
Entertainment, Inc., a California corporation ("IMAGE ENTERTAINMENT"), and
_______________(the "DIRECTOR"). Image Entertainment and the Director agree to
the terms and conditions set forth herein as required by the terms of the Plan.
BACKGROUND
A. Image Entertainment has adopted and the shareholders of Image
Entertainment have approved the Image Entertainment, Inc. 1998 Incentive Plan
(the "Plan").
B. Pursuant to the Plan, Image Entertainment has granted a stock unit
award (the "Stock Unit Award") to the Director upon the terms and conditions
evidenced hereby, as required by the Plan.
1. STOCK UNIT GRANT. Subject to the terms of this Agreement, Image
----------------
Entertainment grants to the Director, as of ____________ __,____ (the "Award
Date"), a Stock Unit Award of an aggregate ____________ Stock Units (the "Award
Units"), under Section 8 of the Plan, subject to the terms and conditions and to
adjustment as set forth herein or pursuant to the Plan.
2. VESTING. The Award Units are subject to the vesting schedule set
-------
forth in Section 8.3 of the Plan and are subject to forfeiture in accordance
with Section 8.4 of the Plan.
3. DIVIDEND EQUIVALENT RIGHTS. The Award Units carry dividend
--------------------------
equivalent rights as set forth in Section 8.5 of the Plan.
4. PAYMENT. Award Units which vest will be paid at the time and in
-------
the manner specified in Section 8.7 of the Plan.
5. ADJUSTMENTS; ACCELERATION. The Award Units are subject to
-------------------------
adjustment and acceleration as set forth in Section 8.8 of the Plan.
6. LIMITED TRANSFERABILITY; NO SHAREHOLDER RIGHTS. The Award Units
----------------------------------------------
are generally nontransferable except as provided in Section 1.9 of the Plan.
Other limitations on the Director's rights with respect to the Award Units are
set forth in Section 8 of the Plan.
A-1
<PAGE>
7. GENERAL TERMS. The Stock Unit Award and this Agreement are
-------------
subject to, and Image Entertainment and the Director agree to be bound by, the
provisions of the Plan that apply to the Stock Unit Award. Such provisions are
incorporated herein by this reference. The Director acknowledges receipt of a
copy of the Plan. Capitalized terms not otherwise defined herein have the
meaning set forth in the Plan.
The parties have signed this Agreement as of the date on page 1.
IMAGE ENTERTAINMENT, INC.
(a California corporation)
By:
--------------------------------
Title:
-----------------------------
(DIRECTOR)
- -----------------------------
(Signature)
- ------------------------------
(Print Name)
- ------------------------------
(Address)
- ------------------------------
(City, State, Zip Code)
- ------------------------------
(Social Security Number)
A-2
<PAGE>
- --------------------------------------------------------------------------------
IMAGE ENTERTAINMENT, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR THE 1998 ANNUAL MEETING OF
SHAREHOLDERS
SEPTEMBER 11, 1998
The undersigned appoints Ira S. Epstein, Martin W. Greenwald, Russell Harris
and Stuart Segall, and each of them, proxies (each with full power of
substitution) to represent the undersigned at the Image Entertainment, Inc. 1998
Annual Meeting of Shareholders to be held on September 11, 1998 and any
adjournments thereof and to vote the shares of the Company's common stock held
of record by the undersigned on July 13, 1998 as directed below.
1. ELECTION OF DIRECTORS (PROPOSAL 1).
FOR all nominees listed below WITHHOLD AUTHORITY to vote
(except as indicated to the for all nominees listed
contrary below). [_] below. [_]
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE(S) STRIKE
A LINE THROUGH THE NAME OF THE NOMINEE(S) IN THE FOLLOWING LIST:
IRA S. EPSTEIN MARTIN W. GREENWALD RUSSELL HARRIS STUART SEGALL
2. APPROVAL OF THE COMPANY'S 1998 INCENTIVE PLAN (PROPOSAL 2).
[_] FOR [_] AGAINST [_] ABSTAIN
3. RATIFICATION OF THE APPOINTMENT OF KPMG PEAT MARWICK LLP AS THE COMPANY'S
INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING MARCH 31, 1999 (PROPOSAL 3).
[_] FOR [_] AGAINST [_] ABSTAIN
4. The proxies are authorized to vote in their discretion upon such other
business as may properly come before the Annual Meeting and any matters
incident to the conduct of the Meeting.
PLEASE SIGN ON REVERSE SIDE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The shares represented by this Proxy will be voted as directed above. If no
direction is indicated, the shares represented by this Proxy will be voted FOR
the director nominees named in Proposal 1, FOR Proposal 2 and FOR Proposal 3
and will be voted in the discretion of the proxies on such other business as
may properly come before the Annual Meeting. The undersigned acknowledges
receipt of the Notice of Annual Meeting of Shareholders and the Proxy Statement
dated July 29, 1998.
Dated: _____________________________________
Signed: ____________________________________
Signed: ____________________________________
Please date this Proxy and sign exactly as
your name appears hereon. If shares are
jointly held, this Proxy should be signed by
each joint owner. Executors, administrators,
guardians or others signing in a fiduciary
capacity should state their full titles. A
Proxy executed by a corporation should be
signed in its name by its president or other
authorized officer. A Proxy executed by a
partnership should be signed in its name by
an authorized person.
PLEASE PROMPTLY COMPLETE, DATE AND SIGN THIS PROXY AND RETURN IT IN THE
ENVELOPE PROVIDED.
- --------------------------------------------------------------------------------
