<PAGE>
THE L. L. KNICKERBOCKER CO., INC.
May 15, 1997
To Our Stockholders:
On behalf of the Board of Directors, I cordially invite you to attend the
Annual Meeting of Stockholders to be held Wednesday June 18, 1997 at 10:00 a.m.,
Pacific time, at the Century City Plaza Hotel Tower (Century Level, Cypress
Room), 2025 Avenue of the Stars, Los Angeles, California 90067. The formal
notice and proxy statement for the Annual Meeting are attached to this letter.
It is important that you sign, date and return your proxy card in the
enclosed envelope as soon as possible, even if you currently plan to attend the
Annual Meeting. By doing so, you will ensure that your shares are represented
and voted at the meeting. If you decide to attend, you can still vote your
shares in person, if you wish.
On behalf of the Board of Directors, I thank you for your cooperation and I
look forward to seeing you on June 18th.
Very truly yours,
/s/ LOUIS L. KNICKERBOCKER
-----------------------------------
Louis L. Knickerbocker
Chairman of the Board
<PAGE>
THE L. L. KNICKERBOCKER CO., INC.
30055 Comercio
Rancho Santa Margarita, California 92688
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be Held June 18, 1997
TO THE STOCKHOLDERS OF THE L. L. KNICKERBOCKER CO., INC.
Notice is hereby given that the annual meeting of stockholders of the L. L.
Knickerbocker Co., Inc. (the "Company") will be held at the Century City Plaza
Hotel Tower (Century Level, Cypress Room), 2025 Avenue of the Stars, Los
Angeles, California 90067 on Wednesday, June 18, 1997 at 10:00 a.m., Pacific
time for the following purposes:
1. Election of Directors. To elect by vote of the holders of Common
Stock a total of six persons to the Board of Directors to serve until
the next annual meeting of stockholders and until their successors are
elected and have qualified. The Board of Directors, nominees are:
Louis L. Knickerbocker Gerald A. Margolis
Farrah Fawcett Anthony Shutts
William R. Black F. Rene Alvarez, Jr.
2. Ratification of Appointment of Independent Public Accountants. To
ratify the Board of Directors' selection of Deloitte & Touche LLP as
the Company's independent accountants for the fiscal years ended
December 31, 1997.
3. Ratification of The L.L. Knickerbocker Co., Inc. Incentive Stock
Compensation Plan. To ratify the Board of Directors' resolution
adopting The L.L. Knickerbocker Co., Inc. Incentive Stock Compensation
Plan on March 27, 1997.
4. Other Business. To consider and act upon such other business as
may properly come before the meeting.
Only stockholders of record at the close of business on May 14, 1997
will be entitled to notice of the annual meeting and to vote at the annual
meeting and at any adjournments thereof.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ PEGGY VICIOSO
Peggy Vicioso
Secretary
Dated: May 15, 1997
WHETHER OR NOT YOU CURRENTLY PLAN TO ATTEND THE ANNUAL MEETING IN PERSON, PLEASE
COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE.
YOU MAY REVOKE YOUR PROXY IF YOU DECIDE TO ATTEND THE ANNUAL MEETING AND WISH TO
VOTE YOUR SHARES IN PERSON.
<PAGE>
THE L. L. KNICKERBOCKER CO., INC.
30055 Comercio
Rancho Santa Margarita, California 92688
(714) 858-3661
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
June 18, 1997
GENERAL
This proxy statement is furnished to stockholders of the L. L.
Knickerbocker Co., Inc., a California corporation (the "Company") in connection
with the solicitation of proxies by the Board of Directors of the Company (the
"Board" or "Board of Directors") for use at the Annual Meeting of Stockholders
to be held at 10:00 a.m., Pacific time on Wednesday, June 18, 1997, at the
Century City Plaza Hotel Tower (Century Level, Cypress Room), 2025 Avenue of the
Stars, Los Angeles, California 90067. and at any adjournments thereof (the
"Annual Meeting" or "Meeting").
Common stockholders of record as of the close of business on May 14,
1997 will be entitled to vote at the Meeting or any adjournments thereof. As of
the record date, the Company has outstanding 17,863,411 shares of Common Stock,
each entitled to one vote on all matters to be voted upon. This proxy
statement, the accompanying form of proxy and the Company's annual report to
stockholders for the fiscal year ended December 31, 1996 are being mailed on or
about May 15, 1997 to each stockholder entitled to vote at the Meeting.
VOTING AND REVOCATION OF PROXIES
Voting
If the enclosed proxy is executed and returned in time and not
revoked, all shares represented thereby will be voted. Each proxy will be voted
in accordance with the stockholder's instructions. If no such instructions are
specified, the proxies will be voted FOR the election of each person nominated
for election as a director, FOR the ratification of the Board's selection of
Deloitte & Touche LLP as the Company's independent accountants for the fiscal
year ended December 31, 1997, and FOR the ratification of the Board's resolution
adopting The L.L. Knickerbocker Co., Inc. Incentive Stock Compensation Plan on
March 27, 1997.
Assuming a quorum is present, the affirmative vote of a plurality of
the votes cast at the Meeting will be required for the election of directors;
the affirmative vote of a majority of the votes cast at the Meeting will be
required for the ratification of the Board's selection of Deloitte & Touche LLP
as the Company's independent accountants; the affirmative vote of a majority of
the votes cast at the Meeting will be required for the ratification of the
Board's resolution adopting The L.L. Knickerbocker Co., Inc. Incentive Stock
Compensation Plan; and the affirmative vote of a majority of the votes cast at
the Meeting will be required to act on all other matters to come before the
Annual Meeting. For purposes of determining the number of votes cast with
respect to any voting matter, only those cast "for" or "against" are included.
Abstentions and broker non-votes are counted only for the purposes of
determining whether there is a quorum present at the Meeting. With respect to
all matters (other than the election of directors), abstentions and broker non-
votes will have the effect of reducing the number of affirmative votes required
to achieve a majority of the votes cast.
<PAGE>
Revocation
A stockholder giving a proxy may revoke it at any time before it is
voted by delivery to the Company of a subsequently executed proxy or a written
notice of revocation. In addition, returning your completed proxy will not
prevent you from voting in person at the Annual Meeting should you be present
and wish to do so.
ELECTION OF DIRECTORS
The Company's Amended and Restated By-laws set the number of directors
at six. The size of the Company's Board is currently six directors. On March
31, 1997, Mr. Lowell W. Paxson resigned from the Board of Directors. This
vacancy on the Board of Directors was filled by the appointment, effective May
13, 1997, of Mr. F. Rene Alvarez, Jr. Directors hold office until the next
annual meeting of stockholders and until their successors are elected and have
qualified.
Unless otherwise directed, proxies in the accompanying form will be
voted FOR the nominees listed below. If any one or more of the nominees is
unable to serve for any reason or withdraws from nomination, proxies will be
voted for the substitute nominee or nominees, if any, proposed by the Board of
Directors. The Board has no knowledge that any nominee will or may be unable to
serve or will or may withdraw from nomination. All of the following nominees
are current directors of the Company whose terms end at the 1997 Annual Meeting.
Information concerning nominees for director is set forth below.
THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE BOARD OF
DIRECTORS' NOMINEES FOR DIRECTOR TO BE ELECTED BY THE HOLDERS OF COMMON STOCK.
Nominees for Election by Holders of Common Stock
MR. LOUIS L. KNICKERBOCKER is the founder of the Company and has been
Chief Executive Officer, President, and Chairman since its inception. He
received an AA degree in 1964 from Santa Monica College with a major in medicine
and a minor in economics, then worked from 1965 through 1974 as a salesman and
sales supervisor at M. Cooper & Son, purchased and sold several liquor stores,
and acquired and sold a total of seven restaurants. Between 1974 and 1985, he
acted as a private investor and businessman, investing in real estate and
purchasing and selling small businesses. Mr. Knickerbocker and his wife,
Tamara, Vice President of the Company, formed the Company as International
Beauty Supply in 1985, co-founded LaVie Cosmetics with Michael Elam and
comedienne, Phyllis Diller in 1987, co-founded MLF Enterprises, in 1989 with
Michael Elam and Farrah Fawcett, formed Knickerbocker Creations, Ltd. in 1990
and began developing the celebrity driven products which are now part of the L.
L. Knickerbocker Co., Inc. Age: 54.
MR. ANTHONY P. SHUTTS, CPA was hired as a consultant on April 1, 1993
and became Chief Financial Officer of the Company on June 30, 1993. From 1993
through 1995, Mr. Shutts served as Chief Financial Officer of the Company
approximately 90 hours per month, overseeing the financial records preparation
and reporting, and performing the general functions of CFO. In 1996, Mr. Shutts
joined the Company full time as Chief Financial Officer. He is a certified
public accountant and holds a masters degree in taxation from the University of
Southern California. From 1993 to 1996, Mr. Shutts maintained a private
accountancy and financial consulting practice. Prior to his private practice,
he worked as Business Manager with Breslauer, Jacobson, Rutman & Sherman from
1992 to 1993 and with Allen, Haight & Schurawel as a Senior Accountant from 1991
to 1992. Mr. Shutts worked with Deloitte & Touche as a Senior Consultant from
1986 to 1991. Age: 33.
MS. FARRAH FAWCETT was appointed to the Board of Directors in June
1994. She is a well known celebrity actress and has been the president and a
director of Tolivar Productions, Inc., an acting services firm since 1978. Ms.
Fawcett has participated in the development and marketing of products with MLF
Enterprises (a company she co-owns with Mr. Knickerbocker and Michael Elam) in
1989, and with Knickerbocker Creations, Ltd. in 1991 to 1993. Age: 50.
2
<PAGE>
MR. GERALD A. MARGOLIS was appointed to the Board of Directors and
elected Secretary of the Company in June 1994. He graduated from U.C.L.A. Law
School in 1954 and has been a licensed attorney in private practice and a member
of the California State Bar since 1955. Mr. Margolis was a City Council member
of the Culver City Counsel from 1962 to 1966. Mr. Margolis has advised the
Company on general corporate matters since its inception in 1985. Age: 67.
MR. WILLIAM R. BLACK was appointed to the Board of Directors in
October 1995. Mr. Black joined the Company as Vice President and General
Counsel in April 1997. He received a BSBA and an MBA from the University of
Denver in 1978 and 1981 respectively, and a Juris Doctor from Western State
University College of Law in 1987. Mr. Black is a licensed attorney and a
member of the California State and Federal Bars. Mr. Black worked as an Area
Manager for Deere & Company from 1979 through 1984, Director of Analysis for
Management Resource Services Company from 1984 through 1985, Senior Vice
President of Geneva Corporation from 1985 through 1990, and General Counsel of
Sunclipse, Inc. from 1992 through 1997. He maintained a private law practice
from 1991 through 1997 and has been General Counsel and Director of Pyraponic
Industries, Inc.; Special Counsel for Amcor, Ltd.; General Counsel, Secretary
and Director of Anle Paper Co., Inc.; General Counsel, Secretary and Director of
Mann-Craft Container Corporation; Director of Raymark Container, Inc.; Director
General of Amcor de Mexico, S.A. de C.V. in Jalisco Mexico; and Director
General of Kent H. Landsberg Co. de Mexico, S.A. de C.V. in Baja California
Mexico. Age: 44.
MR. F. RENE ALVAREZ, JR. was appointed to the Board of Directors on
May 13, 1997 to fill the vacancy created by the resignation of Lowell W. Paxson
in March 1997. Mr. Alvarez has been the Senior Vice President, Finance of the
Pacific Bay Homes subsidiary of Ford Motor Company since 1995. He worked as a
member of the finance staff for Ford Motor Company from 1969 to 1989, as
Director of Internal Audit for the USL Capital subsidiary of Ford Motor Company
from 1989 to 1994 and as Audit Manager, Finance Staff, for Ford Financial
Services Group from 1994 to 1995. Mr. Alvarez attained the rank of Captain in
the United States Army, and was awarded the Bronze Star for service in Vietnam.
He received a BS, Accounting, from Canisius College in 1962 and a Juris Doctor
and LLB from State University of New York at Buffalo in 1967. Mr. Alvarez is a
licensed attorney and a member of the New York State Bar. Age: 59.
FURTHER INFORMATION CONCERNING
THE BOARD OF DIRECTORS AND COMMITTEES
The Board of Directors of the Company directs the management of the
business and affairs of the Company as provided by California law, and conducts
its business through meetings of the Board and two standing committees:
Compensation and Stock Option. In addition, from time to time, special
committees may be established under the direction of the Board when necessary to
address specific issues. The Company has no nominating or similar committees.
Committees of the Board - Board Meetings
The Board of Directors of the Company held five meetings in fiscal
1996. Each director except Lowell W. Paxson attended 100% of the aggregate of
(i) meetings of the Board held during the period for which he or she served as a
director and (ii) meetings of all committees held during the period for which he
or she served on those committees. Mr. Paxson attended one meeting. Average
attendance at all such meetings of the Board and committees was approximately
87%.
The COMPENSATION COMMITTEE is charged with the responsibility of
supervising the Company's compensation policies, management awards, reviewing
salaries, approving significant changes in salaried employee benefits, and
recommending to the Board such other forms of renumeration as it deems
appropriate. The Compensation Committee is currently comprised of Mr.
Knickerbocker as chairman, and Ms. Fawcett, Mr. Margolis and Mr. Black. The
Compensation Committee held one meeting in fiscal 1996.
3
<PAGE>
The STOCK OPTION COMMITTEE has the principal functions of determining
individuals to whom stock options will be granted under the L. L. Knickerbocker
1995 Amended and Restated Stock Option Plan (the "Stock Option Plan"), the terms
on which such stock options will be granted, and to administer the Stock Option
Plan. During fiscal 1996, the Stock Option Committee was comprised of Mr.
Knickerbocker as chairman, and Ms. Fawcett, Mr. Margolis and Mr. Black, who are
independent non-employee directors and "disinterested persons" within the
meaning of Rule 16b-3 under the Securities Exchange Act of 1934 (the "Exchange
Act"). The Stock Option Committee held two meetings in fiscal 1996.
RATIFICATION OF THE SELECTION OF INDEPENDENT ACCOUNTANTS
The Board of Directors has selected the accounting firm of Deloitte &
Touche LLP to audit the Company's financial statements for and otherwise act as
the Company's independent accountants with respect to, the fiscal year ended
December 31, 1997. In accordance with the Board's resolution, its selection of
Deloitte & Touche LLP as the Company's independent accountants for fiscal 1997
is being presented to the stockholders for ratification at the Annual Meeting.
The Company knows of no direct or material indirect financial interest of
Deloitte & Touche LLP in the Company or any connection of that firm with the
Company in the capacity of promoter, underwriter, voting trustee, officer or
employee.
Members of Deloitte & Touche LLP will be present at the meeting, will
have an opportunity to make a statement if they so desire, and will be available
to respond to appropriate questions.
THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE RATIFICATION OF
THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS THE INDEPENDENT ACCOUNTANTS OF THE
COMPANY.
RATIFICATION OF THE RESOLUTION OF THE BOARD OF DIRECTORS ADOPTING THE L.L.
KNICKERBOCKER CO., INC. STOCK INCENTIVE COMPENSATION PLAN ON MARCH 27, 1997
On March 27, 1997, the Company's Board of Directors adopted the L.L.
Knickerbocker Stock Incentive Compensation Plan to provide incentive to the
Company's key employees and to attract new employees with outstanding
qualifications. The L.L. Knickerbocker Stock Incentive Compensation Plan
provides that incentive and nonstatutory options to purchase a total of
5,000,000 shares of Common Stock may be granted thereunder. The Company
currently has a nonqualified stock option plan which provides for the grant,
from time to time, of options to purchase up to 2,000,000 shares of Common Stock
to eligible employees, directors and independent contractors providing services
of special importance to the Company. That nonqualified stock option plan was
originally adopted in 1994, and was amended and restated in 1995. Fewer than
100,000 options currently remain available under the nonqualified plan for
grant. Management believes that the ability of the Company to retain and
attract outstanding and qualified employees would be greatly enhanced by the
availability of stock options.
The following is a summary of the terms of the L.L. Knickerbocker
Stock Incentive Compensation Plan. Such summary is qualified in its entirety by
the full text of the L.L. Knickerbocker Stock Incentive Compensation Plan, which
is attached hereto as Exhibit "A".
General Description of the L.L. Knickerbocker Stock Incentive Compensation Plan
On March 27, 1997, the Company's Board of Directors adopted the L.L.
Knickerbocker Stock Incentive Compensation Plan (the "Plan") to provide
incentive to the Company's key employees and to attract new employees with
outstanding qualifications. The Plan provides that options to purchase a total
of 5,000,000 shares of Common Stock may be granted thereunder. The Plan permits
the granting of options intended to qualify as "incentive stock options"
("ISO's") within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended from time to time (the "Code"), the granting of options that do
not so qualify ("NSO's"), and the granting of stock appreciation rights
("SAR's"). The closing bid price of the Company's Common Stock on NASDAQ
National Market System on May 14, 1997 was $5.00. The Company currently has
approximately 520 employees.
4
<PAGE>
Administration of the Plan
The Plan is administered by the Board of Directors, or if the Board so
elects, by a committee appointed by the Board of Directors consisting of not
less than 2 members of the Board (the "Administrator"). The Administrator has
the power to determine the employees to be granted options and the number of
shares to be optioned to each optionee and to interpret the Employee Plan.
Description of the Option Grant Program
Exercise Price. The exercise price of any option is established by
--------------
the Administrator at the time of grant. The exercise price of any NSO's or
ISO's granted under the Plan may not be less than 100% of the Fair Market Value
of one share of Common Stock on the date of grant. So long as the Company's
Common Stock is traded on the NASDAQ National Market System, the fair market
value of one share of Common Stock is the closing bid price on the date of
valuation.
Payment of Exercise Price. The purchase is payable in full in United
-------------------------
States dollars or by certified check upon the exercise of the option, provided
however, that if the applicable option agreement so provides, or the
Administrator, in its sole discretion otherwise approves thereof, the Purchase
Price may be paid, (i) by the surrender of shares of the Company's Common Stock
owned by the person exercising the option and having a fair market value on the
date of exercise equal to the purchase price, or (ii) in any combination of cash
and Common Stock of the Company, as long as the sum of the cash so paid and the
fair market value of the Common Stock so surrendered equals the purchase price.
Additionally, if the optionee is granted SAR's, either in the stock option
agreement or in a separate agreement, such SAR's may be exercised with the
exercise of the options to permit the Company to issue Common Stock with a fair
market value equal to the difference between the exercise price of one option
and the fair market value of one share of Common Stock on the date of exercise,
multiplied by the total number of options exercised.
Limits on Exercise. NSO's have a maximum term of 10 years; ISO's have
------------------
a maximum term of 5 years. The aggregate fair market value (determined as of
the time the option is granted) of stock for which Incentive Options exercisable
for the first time by an optionee may be granted during any calendar year may
not exceed $100,000, but the value of stock for which Incentive Options may be
granted to an Optionee in a given year may exceed $100,000.
In general, if an optionee ceases service to the Company or one or
more of its subsidiary Companies because of death or disability, options shall
not be exercised after the earlier of (i) the term of the option or (ii) twelve
months after the optionee's cessation of service, and such options shall only be
exercisable to the extent vested on the date of cessation of service. If an
optionee resigns or is discharged on account of misconduct, all options
terminate immediately and are no longer exercisable. If an optionee ceases
service for any reason, options shall not be exercised alter the earlier of (i)
the term of the option or (ii) thirty days after the optionee' s cessation of
service, and such options shall only be exercisable to the extent vested on the
date of cessation of service. Options are, during the lifetime of the optionee,
exercisable only by him or her and may not be assigned or transferred other than
by will or by the laws of descent and distribution.
Modifications to Outstanding Options
Within the limitations of the Plan, the Administrator may modify,
extend or renew outstanding options or accept the cancellation of outstanding
options (to the extent not previously exercised) for the granting of new options
in substitution therefor. The foregoing notwithstanding, no modification of an
option shall, without the consent of the optionee, alter or impair any rights or
obligations under any option previously granted.
Special Terms Applicable to ISO's
In addition to the special terms applicable to ISO's described above,
other special terms apply. The exercise price of any ISO granted to an optionee
who owns stock possessing more than 10% of the voting rights of the Company's
outstanding shares must be at least 110% of the fair market value of the shares
subject to the option on the date of grant and the maximum term of such an
option may not exceed five years. The aggregate fair market value of the shares
(determined at the date of the option grant) for which any employee's ISO's may
become exercisable in any calendar year may not exceed $100,000.
5
<PAGE>
Adjustment Provisions
Subject to any required action by stockholders, the number of shares
covered by the Employee Plan, the number of shares covered by each outstanding
option and the exercise price thereof shall be proportionately adjusted for any
increase or decrease in the number of issued shares resulting from a subdivision
or consolidation of shares or the payment of a stock dividend (but only of
Common Stock) or any other increase or decrease in the number of issued shares
effected without receipt of consideration by the Company.
Subject to any required action by stockholders, if the Company is the
surviving corporation in any merger or consolidation, each outstanding option
shall pertain and apply to the securities to which a holder of the number of
shares subject to the option would have been entitled. If the Company is not
the surviving corporation in any merger or consolidation, then any outstanding
options shall be fully vested and exercisable until five days prior to such
merger or consolidation (but shall terminate thereafter) unless provisions are
made in connection with such transaction for the continuance of the Plan or the
assumption or the substitution for outstanding options of new options covering
the stock of a successor employer corporation, or a parent or subsidiary
thereof, with appropriate adjustments as to the number and kind of shares and
prices. A dissolution or liquidation of the Company shall cause each
outstanding Option to terminate. To the extent that the foregoing adjustments
relate to securities of the Company, such adjustments shall be made by the
Administrator, whose determination shall be conclusive and binding on all
persons.
Change in Control
The Employee Plan provides that in the event a "Change in Control" of
the Company should occur, then the exercise dates of all options granted
pursuant to the Employee Plan shall automatically accelerate and all options
granted pursuant to the Plan shall become exercisable in full. To the extent
the Internal Revenue Code would not permit any ISO to be so accelerated, then
such option, immediately upon the occurrence of such Change in Control shall be
treated for all purposes of the Plan as a NSO and shall be immediately
exercisable. A "Change in Control" is defined in the Plan as a change in
control of a nature that would be required to be reported in response to Item I
of Form S-K required to be filed pursuant to the Securities Exchange Act of
1934, as amended ("1934 Act"), and includes, without limitation if: (i) the
Company shall sell, transfer, or otherwise dispose of fifty percent (50%) or
more of its assets and properties (calculated on the basis of book value); or
(11) any "person" (as such term is used in Section 13(d) and 14(d) of the 1934
Act), other than the Company, is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the 1934 Act), directly or indirectly, of securities of the
Company representing thirty percent (30%) or more of the combined voting power
of the Company's then outstanding securities; or (iii) during the period of two
consecutive years during the term of the Employee Plan, individuals who at the
beginning of such period constitute the Board cease for any reason to constitute
at least a majority thereof, unless the election of each director who was not a
director at the beginning of such period has been approved in advance by
directors representing at least two-thirds of the directors then in office who
were directors at the beginning of the period.
Amendment and Term
The Board may from time to time, with respect to any shares at the
time not subject to options, suspend or discontinue the Plan or revise or amend
it in any respect whatsoever except that, without the approval of the Company's
shareholders, no such revision or amendment shall increase the number of shares
subject to the Plan or change the classes of persons eligible to receive
options. Options may be granted pursuant to the Employee Plan until the
expiration of the Plan on March 27, 2007.
Federal Tax Consequences
Incentive Stock Options. ISO's are intended to be eligible for the
-----------------------
favorable federal income tax treatment accorded "incentive stock options" under
Section 422 of the Code. Incentive options generally have the following
federal income tax consequences:
There generally are no federal income tax consequences to the optionee
or the Company by reason of the grant or exercise of an incentive stock option.
However, the exercise of an incentive stock option may increase the optionee's
alternative minimum tax liability, if any.
6
<PAGE>
If an employee optionee holds stock acquired through exercise of an
incentive stock option for more than two years from the date on which the option
is granted and more than one year from the date on which the shares are
transferred to the optionee upon exercise of the option, any gain or loss on a
disposition of such stock will be long-term capital gain or loss. Generally, if
the optionee disposes of the stock before the expiration of either of these
holding periods (a "disqualifying disposition"), at the time of disposition the
optionee will realize taxable ordinary compensation income equal to the lesser
of (i) the excess of the stock's fair market value on the date of exercise over
the exercise price, or (ii) the optionee's actual proceeds of sale, if any. The
optionee's additional gain or any loss upon the disqualifying disposition will
be a capital gain or loss which will he long-term or short-term depending on
whether the stock was held for more than one year. Slightly different rules may
apply to optionees who acquire stock subject to certain repurchase options or
who are Section 16(b) Insiders.
To the extent the optionee recognizes ordinary income by reason of a
disqualifying disposition, the Company will be entitled (subject to the
requirement of reasonableness, the satisfaction of a withholding obligation and
the provisions of Section 162(m) of the Code) to a corresponding business
expense deduction in the tax year in which the disposition occurs.
Nonstatutory Stock Options. NSO's generally have the following
--------------------------
federal income tax consequences:
Generally there are no tax consequences to the optionee or the Company
by reason of the grant of a nonstatutory stock option, unless the option has an
ascertainable fair market value. Upon exercise of a nonstatutory stock option,
normally the optionee will recognize taxable ordinary income equal to the excess
of the stock's fair market value on the date of exercise over the exercise
price. Generally, with respect to employees, the Company is required to
withhold from regular wages or supplemental wage payments an amount based on the
ordinary income recognized. Subject to the requirement of reasonableness, the
satisfaction of any withholding obligation and the provisions of Section 162(m)
of the Code, the Company will be entitled to a business expense deduction equal
to the taxable ordinary income recognized by the optionee. Upon disposition of
the stock, the optionee will recognize a capital gain or loss equal to the
difference between the selling price and the sum of the amount paid for such
stock plus any amount recognized as ordinary income upon exercise of the option.
Such gain or loss will be long or short-term depending on whether the stock was
held for more than one year. Slightly different rules may apply to optionees
who make an Internal Revenue Code Section 83(b) election, who acquire stock
subject to certain repurchase options or who are Section 16(b) Insiders.
THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE RATIFICATION OF
THE RESOLUTION OF THE BOARD OF DIRECTORS ADOPTING THE L.L. KNICKERBOCKER CO.,
INC. STOCK INCENTIVE COMPENSATION PLAN ON MARCH 27, 1997
7
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
shares of Common Stock beneficially owned as of May 14, 1997 by (i) each
person known to the Company to own beneficially more than 5% of the outstanding
shares of Common Stock as of such date, (ii) each director of the Company and
all non-director nominees for director, (iii) the CEO of the Company and the
four most highly compensated executive officers of the Company for the fiscal
year ended December 31, 1996, and (iv) all directors and executive officers as a
group:
<TABLE>
<CAPTION>
Common Stock Percent
Name Beneficially Owned (1) of Shares (1)
- ------------------------------------------ ---------------------- --------------
<S> <C> <C>
Louis L. Knickerbocker and Tamara
Knickerbocker, Husband and Wife as
Community Property (2) 4,639,285 25.97%
Louis L. Knickerbocker(3) 1,850,000 10.36%
Tamara Knickerbocker(4) 1,258,272 7.04%
Peggy Vicioso (5) 79,500 *
Anthony Shutts (6) 101,001 *
Gerald A. Margolis (7) 210,000 1.18%
Farrah Fawcett (8) 315,000 1.76%
William R. Black (9) 130,000 *
Lowell W. Paxson(10) 3,000 *
All Directors and Executive Officers
as a Group (8 persons) (11) 8,586,058 48.07%
- -----------------------------
</TABLE>
* The percentage of shares of Common Stock beneficially owned does not exceed
one percent of the outstanding shares of Common Stock
(1) For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares of common stock which such person has
the right to acquire within 60 days following May 14, 1997. For purposes
of computing the percentage of outstanding shares of Common Stock held by
each person or group of persons named above, any security which such person
or persons has or have the right to acquire within 60 days following May
14, 1997 is deemed to be outstanding, but is not deemed to be outstanding
for the purpose of computing the percentage ownership of any other person.
(2) Mr. and Mrs. Knickerbocker currently hold 4,639,285 shares as husband and
wife as community property.
(3) Mr. Knickerbocker currently owns 1,600,000 shares of Common Stock, and
options to acquire 500,000 shares of the Company's Common Stock, 250,000 of
which will have vested within 60 days of May 14, 1997 and 250,000 of which
will not have vested within 60 days following May 14, 1997.
(4) Mrs. Knickerbocker currently owns 1,250,000 shares of Common Stock, and
options to acquire 12,362 shares of the Company's Common Stock, 8,272 of
which will have vested within 60 days of May 14, 1997 and 4,090 of which
will not have vested within 60 days following May 14, 1997.
(5) Ms. Vicioso currently owns 45,000 shares of Common Stock, and options to
acquire 159,500 shares of the Company's Common Stock, 34,500 of which will
have vested within 60 days of May 14, 1997 and 125,000 of which will not
have vested within 60 days following May 14, 1997.
(6) Mr. Shutts currently owns 1,001 shares of Common Stock, and options to
acquire 200,000 shares of the Company's Common Stock, 100,000 of which will
have vested within 60 days of May 14, 1997 and 100,000 of which will not
have vested within 60 days following May 14, 1997.
(7) Mr. Margolis currently owns 150,000 shares of Common Stock, and options to
acquire 60,000 shares of the Company's Common Stock, all of which will have
vested within 60 days of May 14, 1997.
(8) Ms. Fawcett currently owns 5,000 shares of Common Stock, and options to
acquire 410,000 shares of the Company's Common Stock, 310,000 of which will
have vested within 60 days of May 14, 1997 and 100,000 of which will not
have vested within 60 days following May 14, 1997.
(9) Mr. Black currently owns 30,000 shares of Common Stock, and options to
acquire 250,000 shares of the Company's Common Stock, 100,000 of which will
have vested within 60 days of May 14, 1997 and 150,000 of which will not
have vested within 60 days following May 14, 1997.
(10) Mr. Paxson currently owns 3,000 shares of Common Stock, and options to
acquire 10,000 shares of the Company's Common Stock, none of which will not
have vested within 60 days following May 14, 1997.
(11) Beneficial ownership of the Directors and Executive Officers as a group is
based on 7,723,286 shares of the Company's Common Stock currently held of
record plus options issued by the Company to Directors and Executive
Officers to acquire 862,772 shares of the Company's Common Stock which
will have vested within 60 days of May 14, 1997.
8
<PAGE>
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers and holders of more than 10% of the Company's Common Stock to
file with the Securities and Exchange Commission reports of ownership and
changes in ownership of Common Stock and other equity securities of the Company
on Forms 3, 4 and 5. Based on a review of such forms and written
representations of reporting persons, the Company believes that during the
fiscal year ended December 31, 1996, its officers and directors and holders of
more than 10% of the Company's Common Stock complied with all applicable filing
requirements.
EXECUTIVE OFFICERS OF THE COMPANY
Set forth below is certain information regarding each of the current
executive officers of the Company. Information about Messrs. Knickerbocker,
Black and Shutts is presented in "ELECTION OF DIRECTORS - Nominees for Election
by Holders of Common Stock." Officers are appointed by and serve at the
discretion of the Board.
<TABLE>
<CAPTION>
Name Age Position
- ------------------------- ---- -----------------------------------------
<S> <C> <C>
Louis L. Knickerbocker 54 Chief Executive Officer, President
and Chairman of the Board
Peggy Vicioso 35 Executive Vice President and Secretary
Tamara Knickerbocker 33 Vice President
Anthony P. Shutts 33 Chief Financial Officer
and Director
William R. Black 44 Vice President, General Counsel
and Director
</TABLE>
The principal occupations and positions for the past five years, and in
certain cases prior years, of the executive officers of the Company who are not
also nominees for election as director, are as follows:
Ms. Peggy Vicioso joined the Company in December of 1993. She assumed the
position of Executive Vice President in May 1995. Ms. Vicioso graduated in 1981
from Brooks College in California with an Associate of Arts degree in
Merchandising. From 1983 through 1987 Ms. Vicioso served as Operation Manager
for Ocean Pacific Images, a licensee of Ocean Pacific Sportswear. From 1987
through 1993 she worked on the senior merchandising team and ultimately served
as Vice President of Merchandising for Pacific Outlook Sportswear, the largest
licensee of Ocean Pacific Sportswear.
Ms. Tamara Knickerbocker has been with the Company as Vice President since
its inception. In 1985 Ms. Knickerbocker helped to form the Company as
International Beauty Supply, and thereafter helped to form LaVie Cosmetics, MLF
Enterprises and Knickerbocker Creations, Ltd. Since 1985, she has worked to
develop and market products and programs for the home shopping industry. Her
focus has mainly been the creation and development of the products, and she has
emphasized collectibles. Ms. Knickerbocker is currently managing all aspects of
the Marie Osmond Doll Collection program, including product and program
development, production, marketing and sales. In addition, she also oversees
the other collectible programs, including the collectable bears. She has had
primary responsibility for the profitability and diversity of the collectible
lines and is currently coordinating expansion in these programs.
9
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth certain
--------------------------
information concerning annual, long term and other compensation received during
the last three fiscal years and to be received by each of the Named Executive
Officers for services rendered in all capacities to the Company during the three
fiscal years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
------------------------------------ ---------------
Securities
Fiscal All Other underlying
Name and Principal Position Year Salary Bonus Compensation Options(1)
- ------------------------------- ------ --------- --------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Louis L. Knickerbocker 1996 $300,000 N/A N/A N/A
Chairman, Chief Executive 1995 $175,000 $175,000 N/A 500,000
Officer and President 1994 $175,000 N/A N/A N/A
Peggy Vicioso 1996 $100,000 N/A N/A N/A
Executive Vice President 1995 $ 53,173 $ 35,000 N/A 151,250
and Secretary 1994 $ 40,000 $ 13,000 N/A N/A
Tamara Knickerbocker 1996 $ 80,000 N/A N/A N/A
Vice President 1995 $ 75,000 N/A N/A N/A
1994 $ 50,000 N/A N/A N/A
Anthony Shutts 1996 $110,000 N/A N/A N/A
Chief Financial Officer 1995 $ 63,046 N/A N/A 50,000
1994 $ 42,500 N/A N/A N/A
William R. Black 1996 $ N/A N/A N/A 10,000
Vice President and 1995 $ N/A N/A N/A 108,750
General Counsel 1994 $ N/A N/A N/A N/A
- ---------------------------
</TABLE>
(1) All share amounts have been retroactively adjusted to give effect to the
five for one stock split effective August 1995.
Table of Option Grants. The following table sets forth information
----------------------
concerning the grant of stock options during the fiscal year ended December 31,
1996 to each of the Named Executive Officers.
OPTION GRANTS IN THE FISCAL YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Individual Grants(1)
----------------------------------------------------------
Percent of
Total Options Potential Realizable
Granted to Value at Assumed
Employees Exercise or Annual Rates of
Options in Fiscal Base Price Expiration Stock Price Appreciation
Name Granted Year 1996(2) (per share)(3) Date(4) for Option Term
- ----------------------- ------- -------------- -------------- -------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
5% (5) 10%(5)
-------- --------
Peggy Vicioso 9,750 14.21% $7.75 2006 $47,521 $120,427
Tamara Knickerbocker 8,272 12.06% $7.75 2006 $40,317 $102,172
2,853 4.16% $8.00 2006 $14,354 $ 36,376
1,237 1.80% $5.75 2006 $ 4,473 $ 11,336
William R. Black 10,000 14.58% $8.00 2006 $50,312 $127,499
- ---------------------
</TABLE>
10
<PAGE>
(1) These options were granted pursuant to the Company's Stock Option Plan.
(2) In fiscal 1996, 68,603 options were granted pursuant to the Company's Stock
Option Plan. This number was used in calculating the percentages in the
above table.
(3) All exercise prices are set at 100% of the market value of the Company's
stock as of the date of grant.
(4) The Options granted under the Company's Stock Option Plan expire on the
tenth anniversary of the date of grant.
(5) The assumed 5% and 10% annual rates of appreciation over the term of the
options are set forth in accordance with rules and regulations adopted by
the Securities and Exchange Commission and do not represent the Company's
estimate of stock price appreciation.
Aggregate Options Exercised. There were 510,000 options exercised by the
---------------------------
Named Executive Officers during the fiscal year ended December 31, 1996.
DIRECTOR COMPENSATION
Directors, other than management directors (Louis L. Knickerbocker, William
R. Black and Anthony Shutts) currently receive $500 per Board or Committee
meeting attended. Each director, including management directors, is reimbursed
for his or her out-of-pocket expenses arising from attendance at meetings of the
Board or committees thereof.
Pursuant to the Company's Stock Option Plan, each non-management director
receives 50,000 options at the time of his or her initial appointment to the
Board and an additional 10,000 options upon each subsequent election to the
Board by the vote of the stockholders.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT
AND CHANGE- IN-CONTROL ARRANGEMENTS
The Company entered into employment agreements with Louis L. Knickerbocker,
its President, Anthony P. Shutts, its CFO, Peggy Vicioso, its Executive Vice
President, and Tamara Knickerbocker, its Vice President on July 1, 1996. On
April 1, 1997, the Company entered into an employment agreement with William R.
Black, Vice President and General Counsel. The respective terms of the
employment agreements are five years each. The agreements are subject to early
termination by the Company under certain conditions, including breach of the
agreement, fraud by the employee, and/or breach of fiduciary duty owed to the
Company by the employee. The Company has the right to extend the terms of the
employment agreements for an additional five years each upon written notice to
the employees. Under terms of the agreements, each of the employees agrees to
devote his or her full time and effort to the business affairs of the Company
and to use his or her best efforts to promote the best interests of the Company.
Except for the provisions of the Stock Option Plan, there are no
compensatory plans or arrangements with respect to any of the Named Executive
Officers which are triggered by, or result from, the resignation, retirement or
other termination of such executive officer's employment, a change-in-control of
the Company or a change in the executive officer's responsibilities following a
change-in-control.
During the first year, the employment agreements called for Louis L.
Knickerbocker to receive an annual base salary of $300,000, for Anthony Shutts
to receive an annual base salary of $120,000, for Peggy Vicioso to receive an
annual base salary of $100,000, for Tamara Knickerbocker to receive an annual
base salary of $80,000, and for William R. Black to receive an annual base
salary of $150,000. In addition to their respective base salaries, Mr.
Knickerbocker, Mr. Shutts, Ms. Vicioso, Mrs. Knickerbocker and Mr. Black are
eligible to receive an annual bonus in an amount to be determined by a
compensation committee and ratified by the Board of Directors out of a
Management Bonus Fund up to a maximum of 10% of the operating profits of the
Company and are entitled to receive certain stock options from the Stock Option
Plan previously adopted by the Company.
11
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
From June 1994 through the present, Louis L. Knickerbocker, who was on the
Compensation Committee throughout fiscal 1996, has served as President of the
Company and also served as Chairman of the Board of Directors and served on the
Stock Option Committee. Mr. Knickerbocker received no compensation from the
Company for services rendered as Chairman of the Board of Directors or on the
Compensation or Stock Option Committees.
REPORT OF THE COMPENSATION AND STOCK OPTION COMMITTEES
ON EXECUTIVE COMPENSATION
Introduction. The Compensation Committee of the Board of Directors in 1996
was comprised of Louis L. Knickerbocker, Gerald A. Margolis, Farrah Fawcett and
William R. Black. The Company's Stock Option Plan is administered by the Stock
Option Committee, which was comprised in 1996 of Louis L. Knickerbocker, Gerald
A. Margolis, Farrah Fawcett and William R. Black.
Compensation Objectives and Policies. The principle objectives of the
Company's executive compensation are to: (i) support the achievement of desired
Company performance, (ii) align the executive officers' interests with the
success of the Company and with the interests of the Company's stockholders and
(iii) provide compensation that will attract and retain superior talent and
reward performance. These objectives are principally achieved through
compensation in the form of annual base salaries, bonuses and equity investment
opportunities.
The Company entered into employment agreement with certain of its key
employees including Louis L. Knickerbocker, Anthony P. Shutts, Tamara
Knickerbocker and Peggy Vicioso in July 1996. The Company entered into an
employment agreement with William R. Black in April 1997. These agreements are
described in section "Employment Contracts and Termination of Employment and
Change-in-Control Arrangements".
Executive officers generally receive salary increases at the time of their
respective employment anniversaries as approved by the Compensation Committee,
taking into consideration the recommendations of the Company's Chairman and the
Company's Chief Executive Officer. In 1996, executive officer salary increases
ranged from 7% to 89%. In deciding to provide these salary increases to the
executive officers, the Compensation Committee took into account the decision
that bonuses would not be paid under the Company's Executive Bonus Plan (the
"Bonus Plan") for 1996. Based on the Company's performance, the Bonus Plan
would have represented a significant portion of the total compensation for the
executive officers in 1996 as compared to 1995. The Compensation Committee
determined that the Company's growth and acquisition activity in 1996 presented
the need to preserve cash for working capital and the need to re-examine the
base salaries of the executive officers in light of the Company's current and
prospective operations.
The Compensation Committee believes that overall 1996 executive
compensation levels adequately reflected (i) each executive's business results
and performance in his or her area of responsibility, (ii) each executive's
contribution to the overall management team and (iii) each executive's expected
future contributions to the Company.
The Board of Directors believes that executive officers who are in a
position to make a substantial contribution to the long-term success of the
Company and to build stockholder value should have a significant stake in the
Company's on-going success. To this end, the Company's compensation objectives
have been designed to be achieved through significant stock ownership in the
Company by executive officers in additional to base salary and bonus payments.
The purpose of the Stock Plan is to provide an additional incentive to
employees and independent contractors to work to maximize stockholder value and
to facilitate broadening and increasing stock ownership by executives, employees
and other key persons. In 1996, options to purchase an aggregate of 68,603
shares were granted, with 32,112 of those being granted to the Named Executive
Officers. The Stock Option Committee believes that these stock option grants
were appropriate in light of the policy of the Board of Directors that
significant equity ownership by executive officers is an important contributor
to aligning the interests of executive officers with those of the stockholders
of the Company. The number of options awarded to individual officers were set
based on the Stock Option Committee's
12
<PAGE>
perception, partly in light of recommendations by the Company's Chairman and
Chief Executive Officer, as to each officer's ability to affect the Company's
overall future performance.
The Stock Option Committee believes that these options have provided
significant incentives for executives to increase the value of the Company for
the benefit of all stockholders and have offered executives significant
opportunities to profit personally from their efforts to increase that value.
The Compensation Committee and the Stock Option Committee have considered
the impact of Section 162(m) of the Internal Revenue Code on their executive
compensation decisions. Section 162(m) generally disallows a federal income tax
deduction to any publicly-held corporation for compensation paid to the chief
executive officer and the four other most highly compensated executive officers
to the extent that such compensation in a taxable year exceeds $1 million.
Section 162(m), however, does not disallow a deduction for qualified
"performance-based compensation" the material terms of which are disclosed to
and approved by stockholders. The Company's Bonus Plan as in effect in 1995
does not qualify as performance-based compensation for the purposes of Section
162(m). During 1996, the Compensation Committee believed it unlikely that any
executive officer of the Company would receive in excess of $1 million in
compensation, and the Compensation Committee believes that it unlikely that any
executive officer will receive in excess of that amount in 1997. As a result,
the Compensation Committee has not taken any steps to qualify the bonus plan as
performance based compensation, although it anticipates that the Company would
do so before any executive receives salary, bonus and other non-performance
based compensation in excess of $1 million.
Compensation of Chief Executive Officer. Louis L. Knickerbocker's
compensation during 1996 as President and Chief Executive Officer was reviewed
in connection with the Compensation Committee's overall review of executive
officer compensation. As provided above, Mr. Knickerbocker has entered into an
employment agreement with the Company (See "--Employment Contracts and
Termination of Employment and Change-in Control Arrangements"). As was the case
with the increases in salary approved for the other executive officers, the
Compensation Committee believed that his and the Company's performance since his
last compensation review, along with the Company's significantly expanded
operations and the lack of a bonus for 1996, justified an increase in his base
salary.
Compensation Committee Stock Option Committee
---------------------- ----------------------
Louis L. Knickerbocker Louis L. Knickerbocker
Gerald A. Margolis Gerald A. Margolis
Farrah Fawcett Farrah Fawcett
William R. Black William R. Black
The Board Compensation Committee Report on Executive Compensation shall not
be deemed incorporated by reference by any general statement incorporating by
reference this Proxy Statement into any filing under the Securities Act of 1933,
as amended (the "Securities Act") or the Exchange Act and shall not otherwise be
deemed filed under such Acts.
ANNUAL REPORT
The Company's Annual Report for the fiscal year ended December 31, 1996
(the "1996 Annual Report") is included with the mailing of this Proxy Statement.
The 1996 Annual Report contains financial statements of the Company and a report
thereon of Deloitte & Touche LLP, independent accountants.
PROXY SOLICITATION
The cost of soliciting proxies will be paid by the Company. American
Securities Transfer, Inc. has been retained to solicit proxies by mail. The
Company has also arranged for reimbursement, at the rate suggested by NASDAQ, of
brokerage houses, nominees, custodians and fiduciaries for the forwarding of
proxy materials to the beneficial owners of shares held of record. Proxies may
also be solicited by directors, officers and employees of the Company, but such
persons will not be specially compensated for such services.
13
<PAGE>
PROPOSALS OF STOCKHOLDERS
Under certain circumstances, stockholders are entitled to present proposals
at stockholder meetings. Any such proposals to be included in the Proxy
Statement for the Company's 1998 Annual Meeting of Stockholders must be received
by the Company no later than December 4, 1997 in a form that complies with
applicable regulations. Proposals should be directed to the Secretary of the
Company.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "SEC"). Reports, proxy statements and other information filed
by the Company may be inspected and copied at the public reference facilities
maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N. W.,
Washington, DC 20549 and at the Sec's Regional Offices located at 7 World Trade
Center (13th Floor), New York, New York 10048 and Suite 1400 Northwest Atrium
Center, 500 West Madison Street, Chicago, Illinois 60661. Copies of such
materials can be obtained by mail from the Public Reference Section of the SEC
at 450 Fifth Street, N. W., Washington, DC 20549 at prescribed rates. In
addition, such material may also be inspected and copied at the offices of the
National Association of Securities Dealers, Inc. 1735 K Street, N. W.,
Washington, DC 20006-1506.
OTHER MATTERS
The Board knows of no matters other than those listed in the attached
Notice of Annual Meeting which are likely to be brought before the Meeting.
However, if any other matter properly comes before the Meeting, the persons
named on the enclosed proxy card will vote the proxy in accordance with their
best judgment on such matter.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ PEGGY E. VICIOSO
Peggy Vicioso
Secretary
May 15, 1997
14
<PAGE>
EXHIBIT A
THE L. L. KNICKERBOCKER CO., INC.
STOCK INCENTIVE COMPENSATION PLAN
ARTICLE I: INTRODUCTION
Section 1.1. Establishment and Purpose. The L. L. Knickerbocker Co.,
----------- -------------------------
Inc., a California corporation (the "Company"), hereby establishes a stock
incentive plan to be known as "The L. L. Knickerbocker Company, Inc. Stock
Incentive Compensation Plan" (the "Plan"). The Plan is established in order to
give the Company a means by which it may provide (a) managerial and other key
employees, directors and consultants of the Company and its Subsidiaries (as
that term is defined under Section 424(f) of the Internal Revenue Code of 1986
("Code")) an opportunity to acquire shares of the common stock of the Company,
no par value ("Common Stock") and other equity based incentive awards, (b) an
incentive for such persons to continue to promote the best interests of the
Company and its Subsidiaries, and to enhance its and their long-term
performance, and (c) an incentive for such persons to join or remain with the
Company and its Subsidiaries.
Section 1.2. Effective Date. The Plan shall become effective on the
----------- --------------
earlier of the date it is approved by the holders of a majority of the shares of
Common Stock of the Company or adopted by the Board of Directors ("Board") of
the Company; provided, however, that if the stockholders of the Company do not
approve the Plan on or before the first anniversary of the date it is adopted by
Board, the Plan, and all Stock Options (as hereinafter defined) and Stock
Appreciation Rights ("SARs") granted hereunder, shall be null and void and of no
effect.
Section 1.3. Termination of Plan. No grant or award shall be made
----------- -------------------
hereunder more than ten years from the date the Plan becomes effective as
described in Section 1.2 (or after the earlier termination of the Plan pursuant
to Article XII); provided, however, that the Plan and all Stock Options and SARs
granted under the Plan prior thereto shall remain in effect and subject to
adjustment and amendinent as herein provided until they have been satisfied or
terminated in accordance with the terms of the respective grants or awards and
the related Option Agreements and SAR Agreements (as hereinafter defined), if
applicable.
ARTICLE II: ELIGIBILITY
Subject to the terms and conditions of the Plan, the Plan Administrator (as
hereinafter defined) may, from time to time, designate one or more managerial or
other key employees, directors or consultants of the Company or its Subsidiaries
to receive a grant of Stock Options and/or SARs under the Plan. In determining
the persons to whom awards shall be granted, the Plan Administrator shall take
into account the nature of the services rendered by such individuals, their
present and potential contribution to the success of the Company and its
Subsidiaries and such other factors as the Plan Administrator in its sole
discretion shall determine.
ARTICLE III: AWARDS UNDER THE PLAN
Section 3.1. Form. Awards under the Plan shall be granted in the form of
----------- ----
Incentive Stock Options and Non-qualified Stock Options (collectively, "Stock
Options"), as described in Article V, and SARs, as described in Article VI.
15
<PAGE>
Section 3.2. Maximum Limitations. The aggregate number of shares of
----------- -------------------
Common Stock that may be subject to Stock Options and SARs under the Plan is
Five Million (5,000,000), subject to adjustment pursuant to Section 3.3. In the
event that, prior to the end of the period during which Stock Options and SARs
may be granted under the Plan, any Stock Option or SAR under the Plan expires
unexercised or is terminated, surrendered or canceled without being exercised,
in whole or in part, for any reason, the lesser of the number of shares of
Common Stock theretofore subject to such Stock Option or SAR or the unexercised,
terminated, forfeited or unearned portion thereof shall be added to the
remaining number of shares of Common Stock that may be subject to Stock Options
and SARs granted under the Plan, including a grant to a former holder of such
Stock Option or SAR, upon such terms and conditions as the Plan Administrator
shall determine, which terms may be more or less favorable than those applicable
to such former Stock Option or SAR.
Section 3.3. Adjustment Provisions. The aggregate number and kind of
----------- ---------------------
shares with respect to which Stock Options and SARs may be granted, the
aggregate number and kind of shares subject to each outstanding Stock Option and
SAR, and the exercise price per share of each such Stock Option, may all be
appropriately adjusted as the Board may determine for any increase or decrease
in the number of or exchange of shares of Common Stock resulting from a
subdivision or consolidation or exchange of shares, whether through
reorganization, recapitalization, reclassification, stock split-up, reverse
stock split, stock distribution or combination of shares, or the payment of a
share dividend or other increase or decrease in the number of such shares
outstanding effected without receipt of consideration by the Company.
Adjustments under this Section 3.3 shall be made in the sole discretion of the
Board, and such decisions of the Board shall be binding and conclusive, provided
however, that in the case of an ISO (as hereinafter defined), each such
adjustment shall be made in such manner as to not constitute a "modification"
within the meaning of Code Section 424(h)(3).
ARTICLE IV: ADMINISTRATION
Section 4.1. Plan Administrator. The Plan administrator (the "Plan
----------- ------------------
Administrator") shall be the Board of Directors of the Company; provided,
however, that if the equity securities of the Company become subject to Section
16 of the Securities Exchange Act of 1934, as amended (the "Act"), the
administration of the Plan thereafter shall be vested in a Plan Administrator
consisting of the Board or a committee of the Board that is composed solely of
two (2) or more "Non-Employee Directors" as such term is defined in Securities
and Exchange Commission Regulation Section 240.16b-3(b)(3) and, unless the Board
determines otherwise, an "outside director" as such term is defined in Treasury
Regulation Section 1.162-27(e)(3), who shall be appointed by, and may be removed
by, the Board. The decisions of the Plan Administrator under the Plan shall be
conclusive and binding. The Plan Administrator shall not be liable for any
action taken, or determination made, hereunder in good faith. Each individual
serving as member of the Plan Administrator shall be entitled to indemnification
and reimbursement with respect to such service, pursuant to the Company's
bylaws.
Section 4.2. Powers. Within the limits of the express provisions of the
----------- ------
Plan, the Plan Administrator shall determine: (a) the persons to whom awards
hereunder shall be granted, (b) the time or times at which such awards shall be
granted, (c) the form and amount of the awards, and (d) the limitations,
restrictions and conditions applicable to any such award. In making such
determinations, the Plan Administrator may take into account the nature of the
services rendered by
A-2
<PAGE>
such persons or classes of persons, their present and potential contribution to
the success of the Company and its Subsidiaries and such other factors as the
Plan Administrator in its discretion shall determine.
Section 4.3. Interpretations. Subject to the express provisions of the
----------- ---------------
Plan, the Plan Administrator may interpret the Plan; prescribe, amend and
rescind rules and regulations relating to it; determine the terms and provisions
of the respective awards; and make all other determinations it deems necessary
or advisable for the administration of the Plan.
Section 4.4. Determinations. The determinations of the Plan
----------- --------------
Administrator on all matters regarding the Plan, including without limitation
any determination regarding the fair market value of the Company or its stock,
shall be conclusive and binding on all parties.
Section 4.5. Nonuniform Determinations. The Plan Administrator's
----------- -------------------------
determinations under the Plan, including without limitation, determinations as
to the persons to receive awards and the terms and provisions of such awards and
of the agreements evidencing the same need not be uniform and may be made by the
Plan Administrator selectively among persons who receive or are eligible to
receive awards under the Plan, whether or not such persons are similarly
situated.
ARTICLE V: STOCK OPTIONS
Section 5.1. Grant of Options. Stock Options may be granted under the
----------- ----------------
Plan which shall entitle the persons to whom they have been granted the right to
purchase shares of Common Stock pursuant to such terms and conditions as the
Plan Administrator shall from time to time determine, subject to the provisions
of the Plan. Stock Options may be Incentive Stock Options under Section 422 of
the Code ("ISOs") or options that are not ISOs ("Non-qualified Stock Options" or
"NSOs"), as designated by the Plan Administrator. Stock Options that satisfy
Section 5.7 of the Plan but are not designated as either ISOs or NSOs shall be
ISOs.
Section 5.2. Option Agreement. Stock Options shall be evidenced by a
----------- ----------------
written option agreement ("Option Agreement"), executed by the optionee and the
Company, in such form, and containing such terms, conditions and restrictions,
as the Plan Administrator shall determine. The Option Agreement shall set forth
(a) the number of shares of Common Stock subject to the Stock Option; (b) the
exercise price per share of Common Stock subject to the Stock Option, as
described in Section 5.3; (c) the date or dates as of which the Stock Option may
be exercised, the number of shares of Common Stock to which such exercise may
relate, and the date or dates the Stock Option shall expire, as described in
Section 5.4; (d) whether any SARs are awarded in connection with the Stock
Option; and (e) any other conditions or restrictions relating to exercise of the
Stock Option, as described in Section 5.5 or as otherwise described herein.
Option Agreements need not be identical.
Section 5.3. Exercise Price. The per share exercise price of each Stock
----------- --------------
Option shall be 100% of the fair market value of the Common Stock subject to
such Stock Option on the date of grant, or such greater amount as the Plan
Administrator shall determine, as set forth in the Option Agreement. The
exercise price so determined shall also apply to the exercise of any SAR
provided for in the Option Agreement.
A-3
<PAGE>
Section 5.4. Term of Stock Options. Each Stock Option shall become
----------- ---------------------
exercisable at the time or times, and for the number of shares of Common Stock,
determined by the Plan Administrator and set forth in the Option Agreement. Each
Stock Option shall expire, and all rights to purchase Common Stock thereunder
shall cease, on the date or dates determined by the Plan Administrator and set
forth in the Option Agreement; provided, however, that the Stock Option shall
expire, and all rights to purchase Common Stock thereunder shall cease, no later
than ten (10) years from the date such Stock Option is granted, except as
otherwise provided in Section 5.7, or in Articles VIII, IX and X.
Section 5.5. Conditions of Grant.
----------- -------------------
(a) At the time a Stock Option is granted, the Plan Administrator shall
determine the conditions and restrictions, if any, applicable to such award.
Such conditions and restrictions may include, in addition to those set forth in
paragraph (b) hereto, (1) provision for the forfeiture of all or part of the
Stock Option, or of shares of Common Stock received upon exercise of the Stock
Option, upon the occurrence or nonoccurrence of specified events, (2)
restrictions on the sale, resale or other disposition of shares of Common Stock
received upon exercise of the Stock Option, (3) restrictions related to the
payment of dividends with respect to shares subject to or received upon exercise
of the Stock Option, (4) restrictions with respect to the right to vote such
shares, (5) put or call rights with respect to such shares, (6) provisions to
comply with federal and/or state securities laws, and/or (7) other conditions or
restrictions deemed appropriate by the Plan Administrator.
(b) The Plan Administrator, in its discretion, may, as a condition to the
grant or exercise of a Stock Option or SAR, require the person who is the
recipient of such Stock Option or SAR (the "Grantee") to enter into one or more
of the following agreements with the Company:
(1) A covenant not to compete and/or confidentiality agreement with
the Company and its Subsidiaries, which shall become effective
on the date of termination of employment, termination of
consulting relationship or termination of director position of
the Grantee with the Company or its Subsidiaries, as applicable,
and which shall contain such terms and conditions as shall be
specified by the Plan Administrator;
(2) An agreement to cancel any employment agreement, fringe benefit
agreement, consulting agreement or other compensation arrangement
in effect between the Company and the Grantee;
(3) An agreement to permit the Company or its designee to repurchase
shares of Common Stock received upon exercise of a Stock Option,
at such time or times, and at such price, as the Plan
Administrator shall determine and set forth in such agreement;
and/or
(4) An agreement to notify the Company of any intended disposition of
shares of Common Stock received upon exercise of a Stock Option
and to offer to sell such shares to the Company or its designee,
in lieu of any other disposition, at such time or times, and at
such price, as the Plan Administrator shall determine and set
forth in such agreement.
A-4
<PAGE>
If the Grantee shall fail to enter into any such agreement at the request
of the Plan Administrator, then no Stock Options or SARs shall be granted
hereunder to such Grantee and the number of shares of Common Stock that would
have been subject to such Stock Option or SAR shall be added to the remaining
number of shares of Common Stock available under the Plan.
(c) The Plan Administrator, in its discretion, may eliminate, or accelerate
the lapse of, any condition or restriction that it has imposed on an award,
provided however, that in the case of an ISO, each such adjustment shall be made
in such a manner as to not constitute a "modification" within the meaning of
Code Section 424(h)(3). The Plan Administrator, in its discretion, may further
provide, at the date of grant or thereafter, that any conditions and
restrictions set forth pursuant to paragraph (a) or (b) above shall immediately
lapse, in whole or in part, in the event of the termination of a Grantee's
employment, termination of consulting relationship or termination of director
position with the Company or its Subsidiaries, if applicable, due to disability,
death or retirement; provided however, that in the case of an ISO, such lapse
shall be made to occur in such a manner as not to constitute a "modification"
within the meaning of Code Section 424(h)(3).
(d) Any conditions and restrictions set forth pursuant to paragraph (a) or
(b) above shall immediately lapse upon the occurrence of a "Change in Control"
of the Company. In the case of an ISO, such lapse shall be made to occur in such
a manner as to not constitute a "modification" within the meaning of Code
Section 424(h)(3). A "Change in Control" shall be deemed to occur upon:
(1) the acquisition by any entity, person or group of more than 20%
of the outstanding shares of Common Stock (provided that, in the
case of an entity, person or group owning shares on the date the
Plan is adopted, only acquisitions occurring after such date
shall be considered);
(2) a merger or consolidation of the Company with or into one or more
other entities as a result of which the ultimate holders of
outstanding shares of Common Stock immediately prior to such
merger or consolidation hold less than 51 % of the shares of
beneficial ownership of the surviving or resulting Company;
(3) a transfer of all or substantially all of the assets and property
of the Company other than to an entity of which the Company
directly or indirectly owns at least 51 % of the shares of
beneficial ownership;
(4) stockholder approval of the dissolution or liquidation of the
Company; or
(5) during any consecutive two (2) year period, individuals who at
the beginning of such two (2) year period constituted the entire
Board shall cease to constitute a majority of the Board.
Section 5.6. Exercise of Options.
----------- -------------------
(a) Any Stock Option granted under the Plan may be exercised by the Grantee
by delivering to the Secretary of the Company written notice thereof prior to
expiration of the Stock Option. Except as otherwise provided in the Plan or in
the Option Agreement, the purchase price
A-5
<PAGE>
of Common Stock upon exercise of a Stock Option shall be tendered to the Company
in full, contemporaneously with the notice of exercise, with provision for taxes
owed pursuant to Section 5.10. Such purchase price shall be paid (1) in cash or
certified check, (2) in Common Stock valued at its fair market value on the date
of exercise, (3) by exercising an SAR then held by the Grantee and related to
the Stock Option then being exercised, as provided in Section 6.2, (4) by such
other medium of payment as the Plan Administrator, in its discretion, shall
authorize, or (5) by any combination of (1), (2), (3) and (4), as permitted at
the discretion of the Plan Administrator.
(b) Upon the death of a Grantee, any Stock Options which such Grantee was
entitled to exercise on the date immediately preceding his death, and any Stock
Options that such Grantee would become entitled to exercise during the twelve
(12) months following such death, shall be exercisable by the person or persons
to whom that right passes by will or by the laws of descent and distribution for
a period of twelve (12) months after the date of death, but no later than the
Stock Option's expiration date. Any such exercise shall be by written notice
thereof filed with the Secretary of the Company at the principal executive
offices of the Company prior to the Stock Option's expiration date. All terms,
conditions and restrictions relating to any such Stock Option and to the
underlying shares of Common Stock shall continue to apply in the same manner,
and to the same extent, as they would otherwise apply during the Grantee's
lifetime, except as specifically provided hereunder or in the Option Agreement.
(c) Subject to Section 5.10 of the Plan, as soon as is reasonably
practicable after the exercise of a Stock Option, a certificate representing the
shares of Common Stock purchased and registered in the Grantee's name shall be
delivered to the Grantee.
Section 5.7. Additional Rules Applicable to Incentive Stock Options .
----------- -------------------------------------------------------
Notwithstanding any provision of the Plan to the contrary, a Stock Option shall
not be an ISO unless it satisfies the provisions of this Section.
(a) The ISO is granted to, held at all times by, and exercised by an
employee of the Company or its Subsidiaries who is eligible under Code Section
422(a)(2) to receive ISOs.
(b) The exercise price of an ISO shall not be less than one hundred percent
(100%) of the fair market value of the Common Stock subject to such ISO at the
time of grant.
(c) The aggregate fair market value (determined with respect to each ISO at
the time such ISO is granted) of the shares of Common Stock with respect to
which ISOs are exercisable for the first time by a Grantee during any calendar
year (under this Plan or any other plan of the Company or a Subsidiary) shall
not exceed one hundred thousand dollars ($100,000).
(d) If an ISO is granted to a Grantee who, on the date of grant, owns
(after application of the rules contained in Section 424(d) of the Code) stock
possessing more than ten percent (10%) of the total combined voting power of all
classes of stock of the Company or its Subsidiaries, (1) the option price for
such ISO shall be at least one hundred ten percent (110%) of the fair market
value of the Common Stock subject to such ISO on the date of grant, and (2) such
ISO shall not be exercisable after the date five (5) years from its date of
grant.
A-6
<PAGE>
Section 5 8. Reload Option. In the discretion of the Plan Administrator,
----------- -------------
the grant of any Stock Option may be accompanied by a "Reload Option," which
shall represent an additional Stock Option to acquire the same number of shares
of Common Stock as is used by the Grantee to pay for the exercise of the
original Stock Option pursuant to Section 5.6(a). A Reload Option shall be
subject to all of the same terms and conditions as the original Stock Option,
except that (a) the purchase price of the shares of Common Stock subject to the
Reload Option will be determined by the Plan Administrator at the time the
original Stock Option is exercised (and, in the absence of such determination,
shall be the fair market value thereof at the time the original Stock Option is
exercised), and (b) such Reload Option shall conform to all provisions of the
Plan at the time the original Stock Option is exercised.
Section 5.9. Cancellation of SARs. Upon the exercise of all or a portion
----------- --------------------
of a Stock Option, the related SAR, if any, shall be canceled with respect to an
equal number of shares of Common Stock.
Section 5.10. Taxes. Whenever the Company proposes or is required to
------------ -----
issue or transfer shares of Common Stock to a Grantee under the Plan, the
Company shall have the right to require the Grantee to remit to the Company
funds sufficient to satisfy all federal, state and local tax withholding
requirements prior to the delivery of any certificate or certificates for such
Common Stock. If such certificates have been delivered prior to the time a
withholding obligation arises, the Company shall have the right to require the
Grantee to remit to the Company funds sufficient to satisfy all federal, state
or local withholding tax requirements at the time such obligation arises and to
withhold from other amounts payable to the Grantee, as compensation, consulting
payments or otherwise, as necessary. Whenever payments under the Plan are to be
made to a Grantee in cash, such payments shall be net of any amounts sufficient
to satisfy all federal, state and local withholding tax requirements. In lieu
of requiring a Grantee to make a payment to the Company in an amount related to
the withholding tax requirement, the Plan Administrator may, in its discretion,
permit the Grantee to satisfy the tax withholding obligation either by directing
the Company to withhold a portion of the shares otherwise distributable to the
Grantee, such shares being valued at their fair market value at the date of
exercise, or by delivering to the Company a portion of the shares previously
delivered by the Company, such shares being valued at their fair market value at
the date of delivery of such shares by the Grantee to the Company.
ARTICLE VI: STOCK APPRECIATION RIGHTS
Section 6.1. Grants of SARs. SARs may be awarded by the Plan
----------- --------------
Administrator in connection with any Stock Option granted under the Plan, either
on the date of grant of the Stock Option or thereafter at any time prior to the
exercise, termination or expiration of the Stock Option. SARs shall be subject
to such terms, restrictions and conditions, as described in Article V with
respect to Stock Options, as the Plan Administrator shall determine. SARs shall
be evidenced by provisions in Option Agreements or by separate SAR agreements
("SAR Agreements"), as the Plan Administrator shall determine.
Section 6.2. Exercise of SARs. An SAR shall be exercisable only to the
----------- ----------------
extent that the related Stock Option is exercisable and shall be exercisable
only for such period as the Plan Administrator may determine (which period may
expire prior to the expiration date of the related Stock Option). Upon the
exercise of all or a portion of an SAR in exchange for shares of Common
A-7
<PAGE>
Stock, the related Stock Option shall be canceled with respect to an equal
number of shares of Common Stock. An SAR shall entitle the Grantee to surrender
to the Company unexercised the related Stock Option, or any portion thereof, and
to receive from the Company in exchange therefor that number of shares of Common
Stock having an aggregate fair market value equal to (a) the excess of (1) the
fair market value of one share of Common Stock as of the date the SAR is
exercised over (2) the Stock Option exercise price per share specified in the
Option Agreement, or if applicable, the fair market value of one share of Common
Stock as specified in the SAR Agreement as of its grant date, multiplied by (b)
the number of shares of Common Stock as to which the SAR is being exercised.
Cash shall be delivered in lieu of any fractional shares.
Section 6.3. Settlement of SARs. As soon as is reasonably practicable
----------- ------------------
after the exercise of an SAR, but subject to Section 5.10 of the Plan, the
Company shall (a) issue, in the name of the Grantee, stock certificates
representing the total number of full shares of Common Stock to which the
Grantee is entitled pursuant to Section 6.2 above and cash in an amount equal to
the fair market value, as of the date of exercise, of any resulting fractional
shares, such amounts being net of withholding taxes as provided for in Section
5.10, and (b) if the Plan Administrator causes the Company to settle all or part
of its obligations arising out of the exercise of the SAR in cash pursuant to
Section 6.4, deliver to the Grantee an amount in cash equal to the fair market
value, as of the date of exercise, of the shares of Common Stock it would
otherwise be obligated to deliver, net of withholding taxes.
Section 6.4. Cash Settlement. The Plan Administrator, in its discretion,
----------- ---------------
may cause the Company to settle all or any part of its obligation arising out of
the exercise of an SAR by the payment of cash in lieu of all or part of the
shares of Common Stock it would otherwise be obligated to deliver in an amount
equal to the fair market value of such shares on the date of exercise. Such
settlement shall be net of any required withholding taxes.
Section 6.5. Special Rules for SARs Granted in Tandem with ISOs. With
----------- --------------------------------------------------
respect to SARs granted in tandem with ISOs, the following rules shall apply:
(a) No SAR shall be exercisable unless the fair market value of the shares
of Common Stock on the date of exercise exceeds the option price of the related
ISO.
(b) In no event shall any amounts paid pursuant to the SAR exceed the
difference between the fair market value of the shares of Common Stock on the
date of exercise and the option price of the related ISO.
(c) The SAR must expire no later than the last date the related ISO can be
exercised.
ARTICLE VII: TRANSFERABILITY
No Stock Option or SAR may be transferred, assigned, pledged or
hypothecated (whether by operation of law or otherwise), except as provided by
will, the applicable laws of descent or distribution or pursuant to a qualified
domestic relations order (as defined in Section 414(p) of the Code), and no
Stock Option or SAR shall be subject to execution, attachment or similar
process. Any attempted assignment, transfer, pledge, hypothecation or other
disposition of a Stock Option or SAR, or levy of attachment or similar process
upon the Stock Option or SAR not specifically permitted
A-8
<PAGE>
herein shall be null and void and without effect. Stock Options and SARs may be
exercised only by a Grantee during his or her lifetime, or by the Grantee's
estate or the person who, in accordance with the provisions of the Plan,
acquires the right to exercise such Stock Option and SAR upon the Grantee's
death by bequest or inheritance.
ARTICLE VIII: EFFECT OF TERMINATION OF EMPLOYMENT
Section 8.1. Termination for Cause. Unless earlier terminated pursuant
----------- ---------------------
to the terms of an applicable Option Agreement and SAR Agreement (if any), a
Stock Option and the related SAR shall expire on the date that the Grantee
holding such Stock Option and SAR (i) in the case of an employee of the Company
or its Subsidiaries, such employee is terminated for cause, (ii) in the case of
a director of the Company or its Subsidiaries, such director is removed for
cause, or (iii) in the case of a consultant of the Company or its Subsidiaries,
such consultant's consulting services are terminated for cause, as determined by
the Plan Administrator.
Section 8.2. Termination for Other Reasons. A Stock Option and the
----------- -----------------------------
related SAR shall expire on the first to occur of the expiration date set forth
in the applicable Option Agreement and SAR Agreement (if any) and three (3)
months following the date of termination of Grantee's employment, consulting
relationship or director position with the Company or its Subsidiaries for
reasons other than cause, death, or disability.
Section 8.3. Death or Disability. If Grantee's employment, consulting
----------- -------------------
relationship or director position with the Company and its Subsidiaries
terminates by reason of disability (as determined in accordance with Section
13.5) or by reason of death, his or her Stock Options and SARs, if any, shall
expire on the first to occur of the expiration date set forth in the applicable
Option Agreement and SAR Agreement (if any), respectively, and the first
anniversary of such termination.
Section 8.4. Extension of Term of Options. Notwithstanding the preceding
----------- ----------------------------
provisions of this Article VIII, the Plan Administrator, in its sole discretion,
may, by written notice given to a Grantee, permit the Grantee to exercise a
Stock Option and the related SAR during a period following a termination of
employment, removal of director or termination of consulting services which
period shall not exceed (90) days. By agreement between the Plan Administrator
and the Grantee, upon the extension of the exercise date pursuant to these
provisions, in the case of an ISO, such ISO shall be deemed as an NSO. In the
absence of an agreement between the Plan Administrator and the Grantee, the
extension of the exercise date of such ISO shall be deemed a "modification"
under Code Section 424(h)(3). In no event, however, may the Plan Administrator
permit a Grantee to exercise a Stock Option or SAR after the expiration date
contained in the Option Agreement and SAR Agreement (if any), respectively,
evidencing the grant of such Stock Option and SAR. If the Plan Administrator
permits a Grantee to exercise a Stock Option and the related SAR during a period
following a termination of employment, removal of director or termination of
consulting services pursuant to such preceding provisions, such Stock Option and
SAR shall, to the extent unexercised, expire on the earlier of the expiration of
the extended period or the date that such Grantee violates (as determined by the
Board) any agreement or covenant in effect between the Company and/or its
Subsidiaries and the Grantee, as described in Section 5.5.
A-9
<PAGE>
ARTICLE IX: DISSOLUTION
Upon the dissolution or liquidation of the Company, each Stock Option and
SAR granted hereunder shall expire as of the effective date of such transaction;
provided, however, that the Board shall give at least thirty (30) days prior
written notice of such event to each Grantee during which time he or she shall
have a right to exercise his or her wholly or partially unexercised Stock Option
and SAR (without regard to delayed exercisability provisions, if any) and,
subject to prior expiration pursuant to Article VIII, each Stock Option and SAR
shall be exercisable after receipt of such written notice and prior to the
effective date of such transaction.
ARTICLE X: MERGER OR CONSOLIDATION
In the event of a merger or consolidation of the Company, the Plan
Administrator may, in its discretion, revise, alter, amend or modify any Option
Agreement and SAR Agreement (if any) with an Grantee and any then outstanding
and unexercised Stock Option and related SAR granted to a Grantee, in any manner
that it deems appropriate, including but not limited to, any of the following
respects:
(a) The expiration date of each Stock Option and related SAR may be
advanced to the effective date of such transaction. If this paragraph applies,
the Board shall give at least thirty (30) days prior written notice of such
event to each Grantee to whom an outstanding Stock Option or SAR has been
issued. During such period, the Grantee shall have a right to exercise any then
outstanding Stock Option or SAR which has not previously expired in accordance
with its terms, without regard to any provision of the Option Agreement or SAR
Agreement (if any) which would otherwise delay exercisability. Each such Stock
Option and SAR shall remain exercisable after receipt of such written notice
until the earlier of (1) the effective date of merger or consolidation of the
Company or (2) the Stock Option or SAR otherwise expires in accordance with its
terms or the terms of the Plan; or
(b) The Stock Option and related SAR may be deemed to pertain to and apply
to the securities outstanding after such merger or consolidation becomes
effective to which a holder of the number of shares of Common Stock subject to
the unexercised portion of the Stock Option and SAR would have been entitled if
he or she actually owned such shares immediately prior to the record date or
other time any such event became effective. All other terms, restrictions and
provisions of the Option Agreement and SAR Agreement (if any) shall remain in
force and effect, subject to an adjustment the Plan Administrator deems
appropriate to reflect such merger or consolidation.
If the Plan Administrator believes that any such event is reasonably likely
to occur, the Plan Administrator may so revise, alter, amend or modify an Option
Agreement and SAR Agreement (if any) as set forth above, at any time before, and
contingent upon, the consummation of such an event. Notwithstanding the
foregoing, in the case of an ISO, each such adjustment shall be made in such
manner as not to constitute a "modification" within the meaning of Code Section
424(h)(3).
A-10
<PAGE>
ARTICLE XI: POSTPONEMENT OF EXERCISE
The Plan Administrator may postpone the granting, vesting or exercisability
of a Stock Option and related SAR until such time as the Plan Administrator, in
its sole discretion, may deem necessary in order to permit the Company:
(a) to effect, amend or maintain any necessary registration of the
Plan, the Stock Options or the shares of Common Stock issuable upon the
exercise of the Stock Options or the SARs under the Securities Act of
1933, as amended, or the securities laws of any applicable jurisdiction;
(b) to permit any action to be taken in order to:
(1) list such shares of Common Stock on a stock exchange or the
stock market upon which shares of Common Stock are then
listed; or
(2) comply with restrictions or regulations incident to the
maintenance of a public market of its shares of Common
Stock, including any rules or regulations of any stock
exchange or stock market on which the shares of Common Stock
are listed; or
(c) to determine that such shares of Common Stock, Stock Options, SARs
and the Plan are exempt from such registration so that no action of the
kind referred to in (XI)(a) or (XI)(b) above needs to be taken.
The Company shall not be obligated by virtue of any terms and conditions of
any Option Agreement, SAR Agreement (if any) or any provision of the Plan to
recognize the exercise of a Stock Option or SAR or to sell or issue shares of
Common Stock, Stock Options or SARs in violation of the Securities Act of 1933,
as amended, or the law of any government having jurisdiction thereof.
ARTICLE XII: TERMINATION AND AMENDMENT OF PLAN
The Board, without further action on the part of the stockholders of the
Company, may from time to time alter, amend or suspend the Plan or any Stock
Option or SAR granted hereunder or may at any time terminate the Plan, except
that, unless approved by the stockholders of the Company, it may not (except to
the extent provided in Article III):
(a) increase the total number of shares of Common Stock available for
grant under the Plan;
(b) change the class of Grantees eligible to be granted Stock Options and
SARs under the Plan; or
(c) change the provisions of the Plan related to its administration.
A-11
<PAGE>
No action taken by the Board under this Section may materially and
adversely affect any outstanding Stock Option or SAR without the consent of the
holder thereof.
ARTICLE XIII: MISCELLANEOUS
Section 13.l. No Obligation to Exercise Options and SARs. The granting
------------ ------------------------------------------
of a Stock Option and SAR shall impose no obligation upon a Grantee to exercise
such Stock Option and SAR.
Section 13.2. Application of Funds. The proceeds received by the Company
------------ --------------------
from the sale of Common Stock pursuant to Option Agreements will be used for
general corporate purposes.
Section 13.3. No Right To Employment. Nothing in the Plan or any
------------ ----------------------
agreement entered into pursuant to the Plan shall confer upon any Grantee the
right to continue in the employment of the Company or any Subsidiary or affect
any right which the Company or any Subsidiary may have to terminate the
employment of such Grantee.
Section 13.4. Rights as a Stockholder. No Grantee shall have any right or
------------ -----------------------
privileges as a stockholder unless and until certificates for shares of Common
Stock are issuable to him or her.
Section 13.5. Leaves of Absence and Disability. The Plan Administrator
------------ --------------------------------
shall be entitled to make such rules, regulations and determinations as it deems
appropriate under the Plan in respect of any leave of absence taken by or
disability of any Grantee. Without limiting the generality of the foregoing, the
Plan Administrator shall be entitled to determine (a) whether or not any such
leaves of absence shall constitute a termination of employment within the
meaning of the Plan, and (b) the impact, if any, of any such leave of absence on
awards under the Plan theretofore made to any Grantee who takes such leave of
absence.
Section 13.6. Fair Market Value. Whenever the fair market value of Common
------------ -----------------
Stock is to be determined under the Plan as of a given date, such fair market
value shall be:
(a) if the Common Stock is principally traded on an exchange or
market in which prices are reported on a bid and asked basis, the average
of the mean between the bid and the asked price for the Common Stock at the
close of trading for the ten (I 0) consecutive trading days immediately
preceding such given date;
(b) if the Common Stock is principally traded on a national
securities exchange, the average of the closing prices of the Common Stock
on the Composite Tape for the ten (10) consecutive trading days immediately
preceding such given date; and
(c) if the Common Stock is neither traded on the over-the-counter
market nor listed on a national securities exchange, such value as the
Board, in good faith, shall determine in the exercise of its sole and
independent discretion.
Section 13.7. Notices. Every direction, revocation or notice authorized
------------ -------
or required by the Plan shall be deemed delivered to the Company or the Plan
Administrator (a) on the date it is personally delivered to the Secretary of the
Company at its principal executive offices or (b) three (3) business days after
it is sent by registered or certified mail; postage prepaid, addressed to the
A-12
<PAGE>
Secretary at such offices; and shall be deemed delivered to a Grantee (a) on the
date it is personally delivered to him or her or (b) three (3) business days
after it is sent by registered or certified mail, postage prepaid, addressed to
him or her at the last address shown for him or her on the records of the
Company.
Section 13.8. Applicable Law. All questions pertaining to the validity,
------------ --------------
construction and administration of the Plan and Stock Options and SARs granted
hereunder shall be determined in conformity with the laws of the State of
California.
Section 13.9. Severability. In the event that any provision of the Plan
------------ ------------
shall be held illegal or invalid for any reason, such illegality or invalidity
shall not affect the remaining parts of the Plan, and the Plan shall be
construed as if the illegal or invalid provision had not been included.
Section 13.10. Elimination of Fractional Shares. If under any provision
------------- --------------------------------
of the Plan that requires a computation of the number of shares of Common Stock
subject to a Stock Option, the number so computed is not a whole number of
shares of Common Stock, such number of shares of Common Stock shall be rounded
down to the next whole number.
A-13
<PAGE>
THE L. L. KNICKERBOCKER CO., INC.
P The undersigned stockholder of the L. L. Knickerbocker Co., Inc.
hereby appoints LOUIS L. KNICKERBOCKER, PEGGY VICIOSO and ANTHONY P.
R SHUTTS, or any of them, Proxies of the undersigned, each with full power
to act without the other and with the power of substitution, to represent
0 the undersigned at the Annual Meeting of Stockholders of the L. L.
Knickerbocker Co., Inc., to be held at the Century City Plaza Hotel
X Tower, 2025 Avenue of the Stars, Los Angeles, California 90067 on
Wednesday, June 18, 1997 at 10:00 a.m. Pacific time, and at any
Y adjournments thereof, and to vote all shares of stock of the Company
standing in the name of the undersigned with all the powers the
undersigned would possess if personally present, in accordance with the
instructions below and on the reverse hereof, and in their discretion
upon such other business as may properly come before the meeting or any
adjournments thereof.
THIS PROXY WILL BE VOTED ON THE REVERSE HEREOF, AND WILL BE VOTED IN
FAVOR OF PROPOSALS 1, 2, 3 AND 4, IF NO INSTRUCTIONS ARE INDICATED.
IMPORTANT: SIGNATURE REQUIRED ON REVERSE SIDE
-------------------------------------------------------------------------
COMMENTS/ADDRESS CHANGE: PLEASE MARK COMMENT/ADDRESS BOX ON REVERSE SIDE
-------------------------------------------------------------------------
(Continued and to be signed on reverse side)
<PAGE>
[X] Please mark your
votes as in this
example
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE PROPOSALS
<TABLE>
<CAPTION>
FOR all nominees WITHHOLD
listed (except as AUTHORITY to
marked to the vote for all
contrary) nominees listed FOR AGAINST ABSTAIN
<S> <C> <C> <C> <C> <C> <C>
1. ELECTION [_] [_] 2. Ratification of the appointment of Deloitte & Touche LLP as [_] [_] [_]
OF the independent accountants of the Company.
DIRECTORS
3. Ratification the resolution of the Board of Directors [_] [_] [_]
adopting The L. L. Knickerbocker Co., Inc. Incentive Stock
Compensation Plan on March 27, 1997.
4. In their discretion the Proxies are authorized to vote upon [_] [_] [_]
such other business as may properly come before the meeting
or any adjournment thereof.
I PLAN TO ATTEND THE MEETING [_]
COMMENTS/ADDRESS CHANGE
Please mark this box if you [_]
have written comments/address
change on the reverse side.
</TABLE>
The undersigned hereby acknowledges receipt of
the Notice of Annual Meeting of Stockholders to
be held June 18, 1997 and the Proxy Statement
furnished herewith.
Signature(s)_____________________________________ Date:__________
Please sign exactly as your name appears hereon. When signing as
attorney, executor, administrator, trustee or guardian, give full
title as such. If more than one name appears hereon, all parties
should sign.
