<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED.
Filed by the registrant [ ]
Filed by a party other than the registrant [ ]
Check the appropriate box: [ ]
Preliminary proxy statement [ ]
Definitive proxy statement [X]
Definitive additional materials [ ]
Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12 [ ]
Credit Management Solutions, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
CREDIT MANAGEMENT SOLUTIONS, INC.
5950 Symphony Woods Road
Columbia, Maryland 21044
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
MAY 9, 1997
The Annual Meeting of Stockholders of Credit Management Solutions, Inc.
(the "Company") will be held at The Columbia Inn, 10207 Wincopin Circle,
Columbia, Maryland 21044, telephone number (410) 730-3900 on May 9, 1997 at 9:00
a.m. eastern standard time for the following purposes:
(1) To elect two Directors to serve until the 2000 Annual Meeting of
Stockholders or until their respective successors shall have been duly
elected and qualified;
(2) To approve the Company's 1997 Stock Incentive Plan as the
successor to the Company's existing 1996 CMSI Long-Term Incentive Plan and
the 1996 CMSI Non-Qualified Stock Option Plan;
(3) To ratify the selection of Ernst & Young LLP, independent public
accountants, as auditors of the Company for the fiscal year ending December
31, 1997; and
(4) To transact such other business as may properly come before the
Annual Meeting of Stockholders.
Only stockholders of record at the close of business on April 3, 1997 will
be entitled to notice of, and to vote at, the Annual Meeting of Stockholders. A
list of stockholders eligible to vote at the meeting will be available for
inspection at the meeting and for a period of ten days prior to the meeting
during regular business hours at the corporate headquarters at the address
above.
Whether or not you expect to attend the Annual Meeting, your proxy vote is
important. To assure your representation at the meeting, please sign and date
the enclosed proxy card and return it promptly in the enclosed envelope, which
requires no additional postage if mailed in the United States or Canada.
By Order of the Board of Directors
/s/ James R. DeFrancesco
James R. DeFrancesco
President, Chief Executive Officer and
Chairman of the Board of Directors
April 11, 1997
IT IS IMPORTANT THAT THE ENCLOSED PROXY CARD
BE COMPLETED AND RETURNED PROMPTLY
<PAGE> 3
CREDIT MANAGEMENT SOLUTIONS, INC.
PROXY STATEMENT
APRIL 11, 1997
This Proxy Statement is furnished to stockholders of record of Credit
Management Solutions, Inc. (the "Company") as of April 3, 1997 in connection
with the solicitation of proxies by the Board of Directors of the Company (the
"Board of Directors" or the "Board") for use at the Annual Meeting of
Stockholders to be held on May 9, 1997 (the "Annual Meeting").
Shares cannot be voted at the meeting unless the owner is present in person
or by proxy. All properly executed and unrevoked proxies in the accompanying
form that are received in time for the meeting will be voted at the meeting or
any adjournment thereof in accordance with instructions thereon, or if no
instructions are given, will be voted "FOR" the election of the named nominees
as Directors of the Company, "FOR" the approval of the Company's 1997 Stock
Incentive Plan as the successor to the Company's existing 1996 CMSI Long-Term
Incentive Plan and the 1996 CMSI Non-Qualified Stock Option Plan, and "FOR" the
ratification of Ernst & Young LLP, independent public accountants, as auditors
of the Company for the fiscal year ending December 31, 1997, and will be voted
in accordance with the best judgment of the persons appointed as proxies with
respect to other matters which properly come before the Annual Meeting. Any
person giving a proxy may revoke it by written notice to the Company at any time
prior to exercise of the proxy. In addition, although mere attendance at the
Annual Meeting will not revoke the proxy, a stockholder who attends the meeting
may withdraw his or her proxy and vote in person. Abstentions and broker
non-votes will be counted for purposes of determining the presence or absence of
a quorum for the transaction of business at the Annual Meeting. Abstentions will
be counted in tabulations of the votes cast on each of the proposals presented
at the Annual Meeting, whereas broker nonvotes will not be counted for purposes
of determining whether a proposal has been approved.
The Annual Report of the Company (which does not form a part of the proxy
solicitation materials), including the Annual Report on Form 10-K with the
consolidated financial statements of the Company for the fiscal year ended
December 31, 1996, is being distributed concurrently herewith to stockholders.
The mailing address of the principal executive offices of the Company is
5950 Symphony Woods Road, Columbia, Maryland 21044. This Proxy Statement and the
accompanying form of proxy are being mailed to the stockholders of the Company
on or about April 11, 1997.
VOTING SECURITIES
The Company has only one class of voting securities issued and outstanding,
its common stock, par value $0.01 per share (the "Common Stock"). At the Annual
Meeting, each stockholder of record at the close of business on April 3, 1997
will be entitled to one vote for each share of Common Stock owned on that date
as to each matter presented at the Annual Meeting. On April 3, 1997, 7,600,388
shares of Common Stock were outstanding. A list of stockholders eligible to vote
at the Annual Meeting will be available for inspection at the Annual Meeting and
for a period of ten days prior to the Annual Meeting during regular business
hours at the principal executive offices of the Company at the address specified
above.
1
<PAGE> 4
PROPOSAL 1
ELECTION OF DIRECTORS
Two Directors are to be elected at the Annual Meeting to serve as Class I
Directors until the 2000 Annual Meeting of Stockholders or until their
respective successors are duly elected and qualified. Unless otherwise
instructed, the proxy holders will vote the proxies received by them "FOR" the
Company's nominees, Mr. Robert P. Vollono and Mr. Peter M. Leger. Each nominee
is currently a Director of the Company.
Pursuant to the Company's Certificate of Incorporation, the Board of
Directors has been divided into three classes, denominated Class I, Class II and
Class III, with members of each class holding office for staggered three-year
terms or until their respective successors are duly elected and qualified. Class
I consists of Directors Mr. Vollono and Mr. Leger whose terms expire at the
Annual Meeting. Class II consists of Directors Mr. Freiman, Mr. Graham and Mr.
Grody whose terms expire at the 1998 Annual Meeting of Stockholders. Class III
consists of Directors Mr. DeFrancesco and Mr. McDonnell whose terms expire at
the 1999 Annual Meeting of Stockholders. At each annual meeting commencing with
the Annual Meeting, the successors to the Directors whose terms have expired are
elected to serve from the time of their election and qualification until the
third annual meeting of the stockholders following the election or until a
successor has been duly elected and qualified. The Company's Certificate of
Incorporation, as amended, restricts the removal of Directors under certain
circumstances. The number of Directors may be increased to a maximum of 15 by
resolution of the Directors then in office.
If any nominee is unable to be a candidate when the election takes place,
the shares represented by valid proxies will be voted in favor of the remaining
nominees. The Board of Directors does not currently anticipate that any nominee
will be unable to be a candidate for election.
The affirmative vote of a plurality of the Company's outstanding Common
Stock present in person or by proxy at the Annual Meeting is required to elect
the Directors.
INFORMATION REGARDING NOMINEES FOR ELECTION AS DIRECTORS
The Board of Directors currently has seven members. The following
information with respect to the principal occupation or employment, other
affiliations and business experience of each of the two nominees during the last
five years has been furnished to the Company by such nominee. Except as
indicated, each of the two nominees for reelection has had the same principal
occupation for the last five years.
Robert P. Vollono, age 48, has served as the Company's Senior Vice
President and Chief Financial Officer since April 1995 and as the Company's
Treasurer and a Director since October 1996. From 1988 to April 1995, Mr.
Vollono served as Vice President and Chief Financial Officer of Carey
International, Inc., a transportation services company. From 1986 to 1988, Mr.
Vollono served as Vice President and Chief Financial Officer of Commercial
Office Environments, Inc.
Peter M. Leger, age 46, has served as Director since December 1996. Since
March 1992, Mr. Leger has served in various capacities with ADP, Inc ("ADP"),
currently as President of ADP's Dealer Service Group. Prior to joining ADP, Mr.
Leger served in various capacities with Reuters Limited PLC, a worldwide
information provider and systems integrator in computer solutions and services
for the banking and brokerage community, most recently as President of Reuters
Systems Integration Division. Mr. Leger was elected to the Board of Directors
pursuant to the terms of an agreement between the Company and ADP.
INFORMATION REGARDING NONEMPLOYEE DIRECTORS WHO ARE NOT NOMINEES FOR REELECTION
AS DIRECTORS
Stephen X. Graham, age 44, has served as a Director since October 1996.
Since 1988, he has been the President and Chief Executive Officer of Graham,
Hamilton & Co., Inc., a private investment banking firm. From 1982 to 1988, Mr.
Graham was a Vice President of Kidder, Peabody & Co.
2
<PAGE> 5
John J. McDonnell, Jr., age 59, has served as a Director since November
1996. Mr. McDonnell has served as President, Chief Executive Officer and a
director of Transaction Network Systems, Inc., a nationwide communications
network company specializing in transaction-oriented data services, since
founding Transaction Network Systems, Inc. in 1990. From 1987 to 1989, Mr.
McDonnell served as President and Chief Executive Officer of Digital Radio
Networks, Inc., a local access bypass carrier for point-of-sale transactions.
Mr. McDonnell has previously served as Group Vice President for the Information
Technologies and Telecommunications Group of the Electronic Industries
Association (EIA); Vice President, International Operations and Vice President,
Sales, for Tymnet, Inc. with responsibility for both private network sales and
public network services; and Director of Technology and Telecommunications for
the National Commission on Electronic Funds Transfer. Mr. McDonnell was one of
the founding members and is currently Chairman of the Executive Committee of the
Board of Directors of the Electronics Funds Transfer Association.
COMMITTEES OF THE BOARD
The Audit Committee consists of Mr. Stephen X. Graham and Mr. John J.
McDonnell, Jr. and is responsible for recommending independent auditors,
reviewing the audit plan, the adequacy of internal controls, the audit report
and management letter, and performing such other duties as the Board of
Directors may from time to time prescribe.
The Compensation Committee consists of Mr. Stephen X. Graham and Mr. John
J. McDonnell, Jr. and is responsible for advising the Board of Directors on
issues concerning the Company's executive compensation policies for senior
officers. The Compensation Committee also administers various incentive
compensation, stock, and option plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Until December 1996, the Company did not have a Compensation Committee or
other committee of the Board of Directors performing similar functions and
decisions concerning executive officer compensation were made by the Board of
Directors. In December 1996, the Board of Directors appointed Messrs. Graham and
McDonnell to the Compensation Committee. Neither Mr. Graham nor Mr. McDonnell
has been an officer or employee of the Company at any time.
Mr. Graham is President and Chief Executive Officer of Graham, Hamilton &
Co., Inc. In connection with the Company's initial public offering of securities
and other matters, the Company paid Graham, Hamilton & Co., Inc. financial
advisory fees in an aggregate amount equal to $335,290 in 1996. The Company also
agreed to indemnify Graham, Hamilton & Co., Inc. against certain liabilities
resulting from the performance of its duties as financial advisor, subject to
certain limitations. According to the terms of the engagement, Graham, Hamilton
& Co., Inc. will continue to serve in an advisory capacity to the Company in
1997 resulting in additional fees being paid by the Company to Graham, Hamilton
& Co., Inc.
ATTENDANCE AT BOARD AND COMMITTEE MEETINGS
During 1996, the Board of Directors held two meetings and acted by
unanimous written consent once. During 1996, each Director attended all meetings
of the Board of Directors. Neither the Compensation Committee nor the Audit
Committee held any meetings during 1996.
COMPLIANCE WITH REPORTING REQUIREMENTS
Under the securities laws of the United States, the Company's Directors,
executive officers, and any persons holding more than ten percent of the
Company's Common Stock are required to report their ownership of the Company's
Common Stock and any changes in that ownership to the Securities and Exchange
Commission and the Nasdaq National Market Surveillance Department. Specific due
dates for these reports have been established and the Company is required to
report in this Proxy Statement any failure to file by these dates during 1996.
Based solely on its review of such forms received by it from such persons for
their 1996 transactions, the Company believes that all Directors, officers and
beneficial owners of more than ten percent of the Company's Common Stock were in
compliance with all such filing requirements.
3
<PAGE> 6
COMPENSATION OF DIRECTORS
Cash Compensation. Employee Directors do not currently receive a fee for
attending Board of Directors or committee meetings, but are reimbursed for
ordinary and necessary travel expenses related to such Director's attendance at
Board of Directors and committee meetings. Each non-employee Director is paid
$2,000 for each meeting of the Board of Directors or any committee thereof
attended.
Stock Option Grant. Pursuant to the Company's 1996 CMSI Non-Qualified
Stock Option Plan, each non-employee Director is automatically granted a
non-qualified stock option to purchase 5,000 shares of Common Stock upon such
Director's initial election to the Board of Directors and on each anniversary of
such election while still serving on the Board of Directors up to a maximum of
15,000 shares. Such options vest 50% six months from the date of grant and 50%
one year from the date of grant. See "Proposal 2 -- Approval of the Company's
1997 Stock Incentive Plan" for information concerning the Automatic Stock Option
Grant Program and Director Fee Option Grant Program under the 1997 Stock
Incentive Plan.
4
<PAGE> 7
EXECUTIVE COMPENSATION AND OTHER INFORMATION
EXECUTIVE OFFICERS
The following individuals were serving as executive officers of the Company
on March 31, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- --------------------------- --- ----------------------------------------------------------
<S> <C> <C>
James R. DeFrancesco....... 48 President and Chief Executive Officer
Scott L. Freiman........... 34 Executive Vice President
James C. Alsobrook, Jr. ... 42 Senior Vice President, Credit Connection
Miles H. Grody............. 40 Senior Vice President, Secretary and General Counsel
Charles F. Riordan......... 41 Senior Vice President, Software Sales
Robert P. Vollono.......... 48 Senior Vice President, Treasurer and Chief Financial
Officer
Nancy L. Weil.............. 52 Senior Vice President, Marketing
</TABLE>
INFORMATION CONCERNING EXECUTIVE OFFICERS WHO ARE NOT NOMINEES FOR REELECTION AS
DIRECTORS
James R. DeFrancesco, co-founder of the Company, has served as the
Company's President, Chief Executive Officer and Chairman of the Board of
Directors since 1987. From 1987 to 1992, Mr. DeFrancesco served as President of
Perpetual Leasing Services, Inc., the automobile leasing subsidiary of Perpetual
Savings Bank, FSB to which American Financial Corporation was sold. From 1976 to
1987, Mr. DeFrancesco founded and served as President and Chief Executive
Officer of American Financial Corporation, an automobile finance/leasing
company.
Scott L. Freiman, co-founder of the Company, has served as the Company's
Executive Vice President and a Director since 1987. From 1985 to 1987, Mr.
Freiman served as Technology Director of American Financial Corporation, an
automobile finance/leasing company, where he worked with Mr. DeFrancesco to
develop the Company's credit origination software. Prior to 1985, Mr. Freiman
served as a development engineer for IBM and AT&T Bell Laboratories.
James C. Alsobrook, Jr. has served as the Company's Senior Vice President,
Credit Connection since December 1994. From April 1994 to November 1994, Mr.
Alsobrook served as Director of Sales and Marketing of ILC Holding Corp., a
computer software company. From 1984 to February 1994, Mr. Alsobrook served in
several officer capacities for Disc Incorporated, a computer software company,
including Vice President North American Sales, Vice President Banking Sales and
Regional Manager, ACCESS Products Group. From 1979 to 1984, Mr. Alsobrook served
as Senior Account Manager for NCR Corporation, Data Processing Center Division.
Miles H. Grody has served as the Company's Senior Vice President and
General Counsel since June 1995, and as the Company's Secretary and a Director
since October 1996. From January 1993 to June 1995, Mr. Grody served as Chief
Operating Officer of Tomahawk II, Inc., a document imaging and conversion
services company. From January 1992 to January 1993, Mr. Grody was a partner in
the law firm of Rowan & Grody, P.C. From 1988 to January 1992, Mr. Grody served
as Corporate Counsel for Perot Systems Corporation.
Charles F. Riordan has served as the Company's Senior Vice President,
Software Sales since February 1989. From 1985 to February 1989, Mr. Riordan
served as Vice President, Sales Representative for MTech Corp/Electronic Data
System.
Nancy Weil has served as the Company's Senior Vice President, Marketing
since February 1994. From 1984 to February 1994, Ms. Weil served as Manager,
Product Marketing for Intelus Corp., a systems integration company. From 1981 to
1984, Ms. Weil served as Manager, Product Marketing Communications for the
Manufacturing Division of Martin Marietta Data Systems.
5
<PAGE> 8
SUMMARY COMPENSATION TABLE
The following table sets forth the annual and long-term compensation paid
by the Company during 1996 and 1995 to the Company's Chief Executive Officer and
the four other executive officers of the Company whose total compensation during
1996 exceeded $100,000 (collectively, the "Named Executive Officers"):
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
------------------------ ------------
OTHER SECURITIES ALL
ANNUAL UNDERLYING OTHER
FISCAL SALARY COMPENSATION OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) (#)(2) ($)
- ------------------------------------- ------ -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
James R. DeFrancesco................. 1996 $160,000 $ -- -- $
President and Chief Executive
Officer 1995 186,750 35,000(3) -- 5,941(4)
Scott L. Freiman..................... 1996 160,000 -- --
Executive Vice President 1995 187,300 17,500(5) -- 14,896(6)
Charles F. Riordan................... 1996 183,536 -- 405,980
Senior Vice President, Software
Sales 1995 157,376 -- --
Robert P. Vollono.................... 1996 117,231 -- 405,980 --
Senior Vice President, Treasurer 1995 76,937(7) -- -- --
and Chief Financial Officer
Miles H. Grody....................... 1996 114,923 -- 405,980 --
Senior Vice President, 1995 54,516(8) -- -- --
Secretary and General Counsel
</TABLE>
- ---------------
(1) Other compensation in the form of perquisites and other personal benefits
has been omitted as the aggregate amount of such perquisites and other
personal benefits constituted the lesser of $50,000 or 10% of the total
annual salary and bonus for the executive officer for such year.
(2) The Company did not grant any stock appreciation rights or make any
long-term incentive plan payments to any Named Executive Officers in 1996 or
1995.
(3) Consists of $35,000 distributed by the Company to Mr. DeFrancesco to fund
the payment of federal and state taxes owed by Mr. DeFrancesco in virtue of
the Company's status as a Subchapter S Corporation for federal and state
income tax purposes during 1995.
(4) Consists of $5,941 for premiums on health insurance for Mr. DeFrancesco's
benefit.
(5) Consists of $17,500 distributed by the Company to Mr. Freiman to fund the
payment of federal and state taxes owned by Mr. Freiman by virtue of the
Company's status as a Subchapter S Corporation for federal and state income
tax purposes during 1995.
(6) Consists of $10,096 for premiums on health insurance for Mr. Freiman's
benefit.
(7) Mr. Vollono joined the Company in April 1995.
(8) Mr. Grody joined the Company in June 1995.
STOCK OPTION PLAN
All of the stock option grants to Named Executive Officers in 1996 were
made pursuant to the Company's 1996 CMSI Non-Qualified Stock Option Plan (the
"Stock Option Plan") which was originally adopted by the Board of Directors and
approved by the Company's stockholders in June 1996. The Company has reserved
for issuance 2,750,000 shares of Common Stock pursuant to the terms and
conditions of the Stock Option Plan. See "Proposal 2 -- Approval of the
Company's 1997 Stock Incentive Plan" for information concerning the approval of
the Company's 1997 Stock Incentive Plan as the successor to the Stock Option
Plan.
The Stock Option Plan is being administered by the Compensation Committee
which has the authority to determine to whom options are granted, the number of
shares to be subject to such options, and the terms and conditions of such
options, provided, that, with respect to directors and executive officers, the
Compensation
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<PAGE> 9
Committee advises the Board of Directors with respect to the grant of options.
It is intended that options granted under the Stock Option Plan will not qualify
for favorable tax treatment to recipients pursuant to Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code").
OPTION GRANTS IN LAST FISCAL YEAR
The following table shows, with respect to the Named Executive Officers,
certain information concerning the grant of stock options in 1996. No stock
appreciation rights were granted during 1996.
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE
-------------------------------------------------------- AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK
SECURITIES TOTAL OPTIONS INITIAL PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(1)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------------
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5% 10%
- -------------------------- ---------- -------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
James R. DeFrancesco...... -- -- -- -- -- --
Scott L. Freiman.......... -- -- -- -- -- --
Charles F. Riordan........ 405,980(2) 15.9% $5.00 6/30/06 $1,276,593 $3,235,138
Robert P. Vollono......... 405,980(2) 15.9 5.00 6/30/06 1,276,593 3,235,138
Miles H. Grody............ 405,980(2) 15.9 5.00 6/30/06 1,276,593 3,235,138
</TABLE>
- ---------------
(1) Potential realizable value is based on the assumption that the price per
share of the Common Stock appreciates at the assumed annual rate of stock
appreciation for the option term. The assumed 5% and 10% annual rates of
appreciation (compounded annually) over the term of the option are set forth
in accordance with the rules and regulations adopted by the Securities and
Exchange Commission and do not represent the Company's estimate of stock
price appreciation
(2) The options vest at the rate of 30% at the time of grant, 20% on each of the
first and second anniversaries of December 15, 1996 and 10% on each of the
third, fourth and fifth anniversaries of December 15, 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information with respect to the
Named Executive Officers regarding stock option exercises during 1996 and stock
option holdings as of December 31, 1996. No stock appreciation rights were
exercised by any Named Executive Officer during 1996 and no stock appreciation
rights were outstanding as of December 31, 1996.
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS AT OPTIONS AT
ON VALUE FISCAL YEAR-END (#) FISCAL YEAR END(1)
EXERCISE REALIZED ---------------------------- ----------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James R. DeFrancesco......... -- -- -- -- -- --
Scott L. Freiman............. -- -- -- -- -- --
Charles F. Riordan........... 20,000 $130,000 101,794 284,186 $ 967,043 $ 2,699,767
Robert P. Vollono............ 20,000 130,000 101,794 284,186 967,043 2,699,767
Miles H. Grody............... 20,000 130,000 101,794 284,186 967,043 2,699,767
</TABLE>
- ---------------
(1) Amounts calculated by subtracting the exercise price of the options from the
market value of the underlying Common Stock using the closing selling price
as reported on the Nasdaq National Market of $14.50 per share of Common
Stock on December 31, 1996.
7
<PAGE> 10
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors was formed in December
1996 and consists of two non-employee directors, Messrs. Graham and Leger. See
"Executive Compensation -- Compensation Committee Interlocks and Insider
Participation." Prior to the establishment of the Compensation Committee, all
decisions concerning executive officer compensation were made by the entire
Board of Directors of the Company as composed at the time. Until October 1996,
the Board consisted of Messrs. DeFrancesco and Freiman, each of whom was and
continues to be an executive officer of the Company. Beginning in October 1996,
the Board of Directors consisted of Messrs. DeFrancesco, Freiman, Grody, Vollono
and Graham, each of whom, with the exception of Mr. Graham, was and continues to
be an executive officer of the Company. In November 1996, Mr. McDonnell joined
the Board and, in December 1996, Mr. Leger joined the Board. Neither Mr. Graham
nor Mr. McDonnell has ever been an officer or employee of the Company. The
Compensation Committee has reviewed the compensation paid to executive officers
in 1996.
The Compensation Committee advises the Board of Directors on issues
concerning the Company's compensation philosophy and the compensation of
executive officers and other individuals compensated by the Company. The
Compensation Committee is responsible for the administration of the Stock Option
Plan and 1996 CMSI Long-Term Incentive Plan (collectively, the "1996 Plans")
under which option grants, stock appreciation rights, restricted awards and
performance awards may be made to employees of the Company and its subsidiaries.
With respect to any option grants, stock appreciation rights, restricted awards
and performance awards made to directors or executive officers of the Company,
the Compensation Committee serves in an advisory capacity to the Board of
Directors.
GENERAL COMPENSATION POLICY. The fundamental policy of the Compensation
Committee is to advise the Board of Directors on information which will aid the
Board of Directors in providing the Company's executive officers with
competitive compensation opportunities based upon their contribution to the
development and financial success of the Company and their personal performance.
It is the Compensation Committee's philosophy to advise the Board of Directors
that a portion of each executive officer's compensation should be contingent
upon the Company's performance as well as upon such executive officer's own
level of performance. Accordingly, the compensation package for each executive
officer should be comprised of two elements: (i) base salary which reflects
individual performance and is designed primarily to be competitive with salary
levels in the industry and (ii) long-term stock-based incentive awards which
strengthen the mutuality of interests between the executive officers and the
Company's stockholders.
FACTORS. The principal factors which the Compensation Committee considered
in reviewing the components of each executive officer's compensation package for
1996 are summarized below. The Compensation Committee may, however, in its
discretion apply entirely different factors in advising the Board of Directors
with respect to executive compensation for future years.
- BASE SALARY. The suggested base salary for each executive officer is
determined on the basis of the following factors: experience, personal
performance, the salary levels in effect for comparable positions within and
without the industry and internal base salary comparability considerations. The
weight given to each of these factors shall differ from individual to
individual, as the Compensation Committee deems appropriate.
While it is the general policy of the Compensation Committee to advise the
Board of Directors not to award performance-based cash bonuses, from time to
time, the Compensation Committee may advocate cash bonuses when such bonuses are
deemed to be in the best interest of the Company.
- LONG-TERM INCENTIVE COMPENSATION. Long-term incentives are provided
primarily through grants of stock options. The grants are designed to align the
interests of each executive officer with those of the stockholders and provide
each individual with a significant incentive to manage the Company from the
perspective of an owner with an equity stake in the Company. Each option grant
allows the individual to acquire shares of the Company's Common Stock at a fixed
price per share over a specified period of time. Each option generally becomes
exercisable in installments over a fixed period, contingent upon the executive
officer's continued employment with the Company. Accordingly, the option grant
will provide a return to the
8
<PAGE> 11
executive officer only if the executive officer remains employed by the Company
during the vesting period, and then only if the market price of the underlying
shares appreciates.
The number of shares subject to each option grant is set at a level
intended to create a meaningful opportunity for stock ownership based on the
executive officer's current position with the Company, the base salary
associated with that position, the size of comparable awards made to individuals
in similar positions within the industry, the individual's potential for
increased responsibility and promotion over the option term and the individual's
personal performance in recent periods. The Compensation Committee also intends
to consider the number of unvested options held by the executive officer in
order to advise the Board of Directors on how best to maintain an appropriate
level of equity incentive for that individual. However, the Compensation
Committee has not and will not adhere to any specific guidelines as to the
relative option holdings of the Company's executive officers when advising the
Board of Directors. There were 2,029,900 stock options granted to executive
officers in 1996 by the Board of Directors.
Through the Company's Employee Stock Purchase Plan, the Company offers
additional opportunities for equity ownership to executive officers under
certain circumstances.
CEO COMPENSATION. Regulations of the Securities and Exchange Commission
require the Board of Directors to disclose their basis for compensation reported
for Mr. DeFrancesco in 1996 and to discuss the relationship between the
Company's performance during the last fiscal year and Mr. DeFrancesco's
performance. In advising the Board of Directors with respect to the compensation
payable to the Company's Chief Executive Officer, the Compensation Committee
seeks to establish a level of base salary competitive with that paid by
companies within the industry which are of comparable size to the Company and by
companies outside of the industry with which the Company competes for executive
talent.
In reviewing Mr. DeFrancesco's base salary in 1996, the suggested base
salary established for Mr. DeFrancesco on the basis of the foregoing criteria
was intended to provide a level of stability and certainty. Accordingly, Mr.
DeFrancesco's compensation was not affected to any significant degree by Company
performance factors.
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(M). As a result of
Section 162(m) of the Internal Revenue Code of 1986, as amended, which was
enacted into law in 1993, the Company will not be allowed a federal income tax
deduction for compensation paid to certain executive officers, to the extent
that compensation exceeds $1 million per officer in any one year. This
limitation will apply to all compensation paid to the covered executive officers
which is not considered to be performance based. Compensation which does qualify
as performance-based compensation will not have to be taken into account for
purposes of this limitation. The 1996 Plans contain certain provisions which are
intended to assure that any compensation deemed paid in connection with the
exercise of stock options granted under that plan with an exercise price equal
to the market price of the option shares on the grant date will qualify as
performance-based compensation.
The Compensation Committee does not expect that the compensation to be paid
to the Company's executive officers for 1997 will exceed the $1 million limit
per officer. Further, in accordance with issued Treasury Regulations relating to
the new $1 million limitation, the Compensation Committee may in the future
determine to restructure one or more components of the compensation paid to the
executive officers so as to qualify those components as performance-based
compensation that will not be subject to the $1 million limitation.
THE COMPENSATION COMMITTEE
STEPHEN X. GRAHAM
MR. JOHN J. MCDONNELL, JR.
9
<PAGE> 12
PERFORMANCE GRAPH
Set forth below is a graph comparing the annual percentage change in the
Company's cumulative total stockholder return on its Common Stock from December
18, 1996 (the date public trading of the Company's stock commenced) to the last
day of the Company's last completed fiscal year (as measured by dividing (i) the
sum of (A) the cumulative amount of dividends for the measurement period,
assuming dividend reinvestment, and (B) the excess of the Company's share price
at the end over the price at the beginning of the measurement period, by (ii)
the share price at the beginning of the measurement period) with the cumulative
total return so calculated of the Nasdaq Stock Market -- US Index and a
line-of-business index consisting of the Nasdaq Computer and Date Processing
Index (SIC Code 737).
<TABLE>
<CAPTION>
Measurement Period Credit Management NASDAQ Stock NASDAQ Computer &
(Fiscal Year Covered) Solutions, Inc. Market -- US Data Processing
<S> <C> <C> <C>
12/18/96 100 100 100
12/31/96 126 100 99
</TABLE>
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, which might incorporate future filings made by
the Company under those statutes, the preceding Compensation Committee Report on
Executive Compensation and the Company Stock Performance Graph will not be
incorporated by reference into any of those prior filings, nor will such report
or graph be incorporated by reference into any future filings made by the
Company under those statutes.
10
<PAGE> 13
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 1, 1997 by (i) each Director
and nominee for Director, (ii) each of the Named Executive Officers and (iii)
all executive officers and Directors as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF PERCENTAGE OF
COMMON STOCK SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OUTSTANDING(1)(2)
- ---------------------------------------------------------- --------------------- -----------------
<S> <C> <C>
James R. DeFrancesco...................................... 3,073,400 42.63%
Scott L. Freiman.......................................... 1,536,700 21.31
Charles F. Riordan (3).................................... 101,794 1.39
Miles H. Grody (4)........................................ 101,794 1.39
Robert P. Vollono (5)..................................... 101,794 1.39
Stephen X. Graham......................................... -- *
John J. McDonnell, Jr..................................... -- *
Peter M. Leger............................................ -- *
James C. Alsobrook, Jr. (6)............................... 101,794 1.39
Nancy L. Weil (7)......................................... 101,794 1.39
All executive officers and Directors as a group (10
persons) (8)............................................ 5,119,070 66.32
</TABLE>
- ---------------
* Represents beneficial ownership of less than one percent of the Common
Stock.
(1) Gives effect to the shares of Common Stock issuable within 60 days of March
1, 1997 upon the exercise of all options and other rights beneficially owned
by the indicated stockholders on that date. Unless otherwise indicated, the
persons named in the table have sole voting and sole investment control with
respect to all shares beneficially owned. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission and
includes voting and investment power with respect to shares.
(2) Percent ownership is based upon 7,600,100 shares of Common Stock issued and
outstanding as of March 1, 1997.
(3) Consists of 101,794 shares of Common Stock issuable upon exercise of a stock
option.
(4) Consists of 101,794 shares of Common Stock issuable upon exercise of a stock
option.
(5) Consists of 101,794 shares of Common Stock issuable upon exercise of a stock
option.
(6) Consists of 101,794 shares of Common Stock issuable upon exercise of a stock
option.
(7) Consists of 101,794 shares of Common Stock issuable upon exercise of a stock
option.
(8) See Notes (3) through (7).
11
<PAGE> 14
CERTAIN TRANSACTIONS
On December 31, 1995, the Company borrowed $214,498 from James R.
DeFrancesco, the Company's President and Chief Executive Officer, pursuant to a
demand promissory note due on or after October 1, 1997. Interest on the note
accrues at the rate of 7% per annum. The Company believes that the interest rate
payable to Mr. DeFrancesco is comparable to the rate the Company would have
otherwise paid on comparable indebtedness from unaffiliated parties.
Mr. DeFrancesco owns 50% of the outstanding stock of Business Liner, Inc.,
a company which leases an airplane to the Company for business travel. The
Company pays an hourly fee for its use of the airplane and a portion of the
monthly cost of maintaining the airplane. The Company believes that the amounts
paid for the lease of the airplane are comparable to the amounts the Company
would have otherwise paid for comparable services from unaffiliated parties. For
the fiscal year ended December 31, 1996, the Company paid Business Liner, Inc.
$109,499 under this leasing arrangement.
Mr. Graham is President and Chief Executive Officer of Graham, Hamilton &
Co., Inc. In connection with the Company's initial public offering of securities
and other matters, the Company paid Graham, Hamilton & Co., Inc. financial
advisory fees in an aggregate amount equal to $335,290 in 1996. The Company also
agreed to indemnify Graham, Hamilton & Co., Inc. against certain liabilities
resulting from the performance of its duties as financial advisor, subject to
certain limitations. According to the terms of the engagement, Graham, Hamilton
& Co., Inc. will continue to serve in an advisory capacity to the Company in
1997 resulting in additional fees being paid by the Company to Graham, Hamilton
& Co., Inc.
12
<PAGE> 15
PROPOSAL 2
APPROVAL OF THE COMPANY'S 1997 STOCK INCENTIVE PLAN
The Company's stockholders are being asked to approve the 1997 Stock
Incentive Plan (the "1997 Plan") as the successor to the Company's existing 1996
Plans (the "Predecessor Plans"). The 1997 Plan will become effective immediately
upon such stockholder approval, and all outstanding options under the
Predecessor Plans will be incorporated into the 1997 Plan at that time. The
Predecessor Plans will terminate, and no further option grants or share
issuances will be made under the Predecessor Plans. However, all outstanding
options under the Predecessor Plans will continue to be governed by the terms
and conditions of the existing option agreements for those grants.
The 1997 Plan was adopted by the Board in April 1997 and is to designed to
serve as a comprehensive equity incentive program to attract and retain the
services of individuals essential to the Company's long-term growth and
financial success. Accordingly, officers and other key employees, non-employee
Board members and consultants and other advisors in the service of the Company
or any subsidiary corporation will have the opportunity to acquire a meaningful
equity interest in the Company through their participation in the 1997 Plan.
The affirmative vote of a majority of the outstanding voting shares of the
Company present or represented and entitled to vote at the Annual Meeting is
required for approval of the 1997 Plan. Should such stockholder approval not be
obtained, then the 1997 Plan will not be implemented. The Company's Predecessor
Plans will, however, continue to remain in effect, and option grants and stock
issuances may continue to be made pursuant to the provisions of those plans
until the available reserve of Common Stock under such plans is issued.
The Board of Directors recommends that the stockholders vote "FOR" the
approval of the 1997 Plan. The Board believes that it is in the best interests
of the Company to implement a comprehensive equity incentive program for the
Company which will provide a meaningful opportunity for officers, employees,
non-employee Board members and consultants to acquire a substantial proprietary
interest in the enterprise and thereby encourage such individuals to remain in
the Company's service and more closely align their interests with those of the
stockholders.
The following is a summary of the principal features of the 1997 Plan. The
summary, however, does not purport to be a complete description of all the
provisions of the 1997 Plan. Any stockholder of the Company who wishes to obtain
a copy of the actual plan document may do so upon written request to the
Corporate Secretary at the Company's principal executive offices in Columbia,
Maryland.
EQUITY INCENTIVE PROGRAMS
The 1997 Plan contains five separate equity incentive programs: (i) a
Discretionary Option Grant Program, (ii) a Salary Investment Option Grant
Program, (iii) a Stock Issuance Program, (iv) an Automatic Option Grant Program
and (v) a Director Fee Option Grant Program. The principal features of these
programs are described below. The 1997 Plan (other than the Automatic Option
Grant and Director Fee Option Grant Programs) will be administered by the
Compensation Committee of the Board. This committee (the "Plan Administrator")
will have complete discretion (subject to the provisions of the 1997 Plan) to
authorize option grants and direct stock issuances to employees under the 1997
Plan. However, the Compensation Committee will serve solely in an advisory role
to the Board of Directors in connection with option grants and direct stock
issuances to directors and executive officers of the Company. Furthermore, all
grants under the Automatic Option Grant and Director Fee Option Grant Programs
will be made in strict compliance with the provisions of those programs, and no
administrative discretion will be exercised by the Plan Administrator with
respect to the grants made thereunder.
13
<PAGE> 16
SHARE RESERVE
3,400,000 shares of Common Stock have initially been reserved for issuance
over the ten year term of the 1997 Plan. This reserve is the number of shares of
Common Stock available for issuance under the Predecessor Plans as of the date
of adoption of the 1997 Plan by the Board and transferred to the 1997 Plan.
However, this share reserve will automatically be increased on the first trading
day of each calendar year, beginning with the 1998 calendar year, by a number of
shares equal to one percent (1%) of the total number of shares of Common Stock
outstanding on the last trading day in the immediately preceding calendar year.
In no event may any one participant in the 1997 Plan be granted stock options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 100,000 shares in any calendar year beginning with the 1997 calendar
year.
As of March 31, 1997, options for 2,462,800 shares of Common Stock were
outstanding under the Predecessor Plans, and 937,200 shares of Common Stock
remained available for future option grants.
In the event any change is made to the outstanding shares of Common Stock
by reason of any recapitalization, stock dividend, stock split, combination of
shares, exchange of shares or other change in corporate structure effected
without the Company's receipt of consideration, appropriate adjustments will be
made to the securities issuable (in the aggregate and to each participant) under
the 1997 Plan and to the securities and exercise price under each outstanding
option.
ELIGIBILITY
Officers and employees, non-employee Board members and consultants and
independent advisors in the service of the Company or any parent or subsidiary
corporation (whether now existing or subsequently established) will be eligible
to participate in the Discretionary Option Grant and Stock Issuance Programs,
and officers and other highly compensated employees will also be eligible to
participate in the Salary Investment Option Grant Program. Only non-employee
members of the Board will be eligible to participate in the Automatic Option
Grant and Director Fee Option Grant Programs.
As of April 1, 1997, approximately seven executive officers, 188 other
employees and three non-employee Board members were eligible to participate in
the 1997 Plan, and three non-employee Board members were eligible to participate
in the Automatic Option Grant and Director Fee Option Grant Programs.
VALUATION
The fair market value per share of Common Stock on any relevant date under
the 1997 Plan will be the closing selling price per share on that date as
reported on the Nasdaq National Market. On April 4, 1997, the closing selling
price per share was $11.75.
DISCRETIONARY OPTION GRANT PROGRAM
Options may be granted under the Discretionary Option Grant Program at an
exercise price per share not less than eighty five percent (85%) of the fair
market value per share of Common Stock on the option grant date. No granted
option will have a term in excess of ten years.
Upon cessation of service, the optionee will have a limited period of time
in which to exercise any outstanding option to the extent such option is
exercisable for vested shares. The Plan Administrator will have complete
discretion with respect to employees, and will advise the Board of Directors
with respect to directors and executive officers, to extend the period following
the optionee's cessation of service during which his or her outstanding options
may be exercised and/or to accelerate the exercisability or vesting of such
options in whole or in part. Such discretion may be exercised at any time while
the options remain outstanding, whether before or after the optionee's actual
cessation of service.
14
<PAGE> 17
The Plan Administrator is authorized with respect to employees, and will
advise the Board of Directors with respect to directors and executive officers,
to issue two types of stock appreciation rights in connection with option grants
made under the Discretionary Option Grant Program:
Tandem stock appreciation rights provide the holders with the right to
surrender their options for an appreciation distribution from the Company
equal in amount to the excess of (a) the fair market value of the vested
shares of Common Stock subject to the surrendered option over (b) the
aggregate exercise price payable for such shares. Such appreciation
distribution may, at the discretion of the Plan Administrator, be made in
cash or in shares of Common Stock.
Limited stock appreciation rights may be granted to officers of the
Company as part of their option grants. Any option with such a limited
stock appreciation right in effect may be surrendered to the Company upon
the successful completion of a hostile take-over of the Company. In return
for the surrendered option, the officer will be entitled to a cash
distribution from the Company in an amount per surrendered option share
equal to the excess of (a) the take-over price per share over (b) the
exercise price payable for such share.
The Plan Administrator will have the authority with respect to employees,
and will advise the Board of Directors with respect to directors and executive
officers, to effect the cancellation of outstanding options under the
Discretionary Option Grant Program which have exercise prices in excess of the
then current market price of Common Stock and to issue replacement options with
an exercise price based on the market price of Common Stock at the time of the
new grant.
STOCK ISSUANCE PROGRAM
Shares may be sold under the Stock Issuance Program at a price per share
not less than eighty five percent (85%) of fair market value per share of Common
Stock, payable in cash or through a promissory note payable to the Company.
Shares may also be issued solely as a bonus for past services.
The issued shares may either be immediately vested upon issuance or subject
to a vesting schedule tied to the performance of service or the attainment of
performance goals. The Plan Administrator will, however, have the discretionary
authority at any time to accelerate the vesting of any unvested shares held by
employees and will advise the Board of Directors with respect to the
acceleration of the vesting of any unvested shares held by directors and
executive officers.
SALARY INVESTMENT OPTION GRANT PROGRAM
The Plan Administrator will advise the Board of Directors with respect to
implementing the Salary Investment Option Grant Program for one or more calendar
years and in selecting the executive officers and other eligible individuals who
are to participate in the program for those years. As a condition to such
participation, each selected individual must, prior to the start of the calendar
year of participation, file with the Plan Administrator an irrevocable
authorization directing the Company to reduce his or her base salary for the
upcoming calendar year by a designated multiple of one percent (1%). However,
the salary reduction amount may not be less than Ten Thousand Dollars ($10,000)
and may not be more than Seventy-Five Thousand Dollars ($75,000). To the extent
the Plan Administrator advises the Board of Directors to approve the salary
reduction authorization, the individual who filed that authorization will be
granted an option under the Salary Investment Option Grant Program on or before
the last trading day in January of the calendar year for which that salary
reduction is to be in effect.
Each option will be subject to substantially the same terms and conditions
applicable to option grants made under the Discretionary Option Grant Program,
except for the following differences:
- The exercise price per share will be equal to one-third of the fair
market value per share of Common Stock on the option grant date, and the
number of option shares will be determined by dividing the total dollar
amount of the authorized reduction in the participant's base salary by
two-thirds of the fair market value per share of Common Stock on the
option grant date. As a result, the total spread on the
15
<PAGE> 18
option (the fair market value of the option shares on the grant date less
the aggregate exercise price payable for those shares) will equal the
dollar amount of the optionee's base salary invested in the option.
- The option will become exercisable for the option shares in a series of
twelve successive equal monthly installments upon the optionee's
completion of each calendar month of service in the calendar year for
which the salary reduction is in effect.
- Each option will remain outstanding for vested shares until the earlier
of (i) the expiration of the ten (10)-year option term or (ii) the
expiration of the three (3)-year period measured from the date the
optionee's service terminates.
AUTOMATIC OPTION GRANT PROGRAM
Under the Automatic Option Grant Program, each individual who first becomes
a non-employee Board member on or after the Annual Meeting, whether through
election by the stockholders or appointment by the Board, will receive, at the
time of such initial election or appointment, an automatic option grant for
5,000 shares of Common Stock. In addition, each non-employee Board member
(including individuals who first joined the Board prior to the Annual Meeting)
will automatically receive, each year beginning with 1997, an option grant for
5,000 shares on each anniversary of the date such non-employee Board member
initially joined the Board. There will be no limit on the number of such 5,000
share option grants any one nonemployee Board member may receive over his or her
period of Board service.
Each option will have an exercise price per share equal to 100% of the fair
market value per share of Common Stock on the option grant date and a maximum
term of ten years measured from the option grant date.
Each option will become exercisable with respect to 50% of the option
shares upon completion of six (6) months of Board service and with respect to
the balance of the option shares in six (6) equal successive monthly
installments upon completion of each additional month of Board service
thereafter.
The shares subject to each automatic option grant will immediately vest
upon the optionee's death or permanent disability or an acquisition of the
Company by merger or asset sale or a hostile change in control of the Company
(whether by successful tender offer for more than 50% of the outstanding voting
stock or by proxy contest for the election of Board members). In addition, upon
the successful completion of a hostile take-over, each automatic option grant
may be surrendered to the Company for a cash distribution per surrendered option
share in an amount equal to the excess of (a) the take-over price per share over
(b) the exercise price payable for such share.
DIRECTOR FEE OPTION GRANT PROGRAM
Each non-employee Board member will have the right to apply all or a
portion of his total retainer fee otherwise payable in cash each year, if any,
to the acquisition of a special option grant under the Director Fee Option Grant
Program. The grant will automatically be made on the first trading day in
January following the filing of the stock-in-lieu-of-cash election and will have
an exercise price per share equal to one-third of the fair market value of the
option shares on the grant date. The number of shares subject to the option will
be determined by dividing the amount of the retainer fee applied to the program
by two-thirds of the fair market value per share of Common Stock on the grant
date. As a result, the total spread on the option (the fair market value of the
option shares on the grant date less the aggregate exercise price payable for
those shares) will be equal to the portion of the retainer fee invested in that
option.
The option will become exercisable for fifty percent (50%) of the option
shares upon the optionee's completion of six (6) months of Board service in the
calendar year in which the option is granted, and the balance of the option
shares will become exercisable in a series of six (6) successive equal monthly
installments upon the optionee's completion of each additional month of Board
service during that calendar year. The option will remain exercisable for such
shares until the earlier of (i) the expiration of the ten (10)-
16
<PAGE> 19
year option term or (ii) the end of the three (3)-year period measured from the
date of the optionee's cessation of Board service. The option will become
immediately exercisable for all the option shares should the optionee die or
become permanently disabled while a Board member. In addition, upon the
successful completion of a hostile take-over, each option grant may be
surrendered to the Company for a cash distribution per surrendered option share
in an amount equal to the excess of (a) the take-over price per share over (b)
the exercise price payable for such share.
GENERAL PROVISIONS
ACCELERATION
In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not to
be assumed by the successor corporation or replaced with a comparable option to
purchase shares of the capital stock of the successor corporation will
automatically accelerate in full, and all unvested shares under the Stock
Issuance Program will immediately vest, except to the extent the Company's
repurchase rights with respect to those shares are to be assigned to the
successor corporation. The Plan Administrator will have complete discretion with
respect to employees, and will advise the Board of Directors with respect to
directors and executive officers, to grant one or more options under the
Discretionary Option Grant Program which will become fully exercisable for all
option shares in the event those options are assumed in the acquisition and the
optionee's service is involuntarily terminated within a designated period (not
to exceed 18 months) following such acquisition. The Plan Administrator will
have similar discretion with respect to employees, and will advise the Board of
Directors with respect to directors and executive officers, to grant options
which will become fully exercisable for all the option shares upon a hostile
change in control of the Company (whether by successful tender offer for more
than 50% of the outstanding voting stock or by proxy contest for the election of
Board members) or upon the subsequent termination of the individual's service
within a designated period (not to exceed 18 months). The Plan Administrator may
also provide with respect to employees, and will advise the Board of Directors
with respect to directors and executive officers, for the automatic vesting of
any outstanding shares under the Stock Issuance Program upon similar terms and
conditions. Each option outstanding under the Salary Investment Option Grant,
Automatic Option Grant and Director Fee Option Grant Programs will automatically
accelerate in the event of such an acquisition or hostile change in control of
the Company.
The acceleration of vesting in the event of a change in the ownership or
control of the Company may be seen as an anti-takeover provision and may have
the effect of discouraging a merger proposal, a takeover attempt or other
efforts to gain control of the Company.
FINANCIAL ASSISTANCE
The Plan Administrator may permit one or more participants to pay the
exercise price of outstanding options or the purchase price of shares under the
1997 Plan by delivering a promissory note payable in installments. The Plan
Administrator will determine the terms of any such promissory note. However, the
maximum amount of financing provided any participant may not exceed the cash
consideration payable for the issued shares plus all applicable taxes incurred
in connection with the acquisition of the shares. Any such promissory note may
be subject to forgiveness in whole or in part, at the discretion of the Plan
Administrator, over the participant's period of service.
SPECIAL TAX ELECTION
The Plan Administrator may provide one or more holders of options or
unvested shares with the right to have the Company withhold a portion of the
shares otherwise issuable to such individuals in satisfaction of the tax
liability incurred by such individuals in connection with the exercise of those
options or the vesting of those shares. Alternatively, the Plan Administrator
may allow such individuals to deliver previously acquired shares of Common Stock
in payment of such tax liability.
17
<PAGE> 20
AMENDMENT AND TERMINATION
The Board may amend or modify the 1997 Plan in any or all respects
whatsoever subject to any required stockholder approval. The Board may terminate
the 1997 Plan at any time, and the 1997 Plan will in all events terminate in
April 2007.
STOCK AWARDS
The table below shows, as to each of the Company's executive officers named
in the Summary Compensation Table and the various indicated individuals and
groups, the number of shares of Common Stock subject to options granted between
January 1, 1996 and April 7, 1997 under the Predecessor Plans together with the
weighted average exercise price payable per share.
OPTION TRANSACTIONS
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
NAME OPTION SHARES EXERCISE PRICE
- ------------------------------------------------------------------- ------------- --------------
<S> <C> <C>
James R. DeFrancesco............................................... -- $ --
President and Chief Executive Officer
Scott L. Freiman................................................... -- --
Executive Vice President
Charles F. Riordan................................................. 405,980 5.00
Senior Vice President, Software Sales
Miles H. Grody..................................................... 405,980 5.00
Senior Vice President, Secretary and General Counsel
Robert P. Vollono.................................................. 405,980 5.00
Senior Vice President, Treasurer and Chief Financial Officer
Stephen X. Graham.................................................. 5,000 9.60
Director
John M. McDonnell, Jr.............................................. 5,000 9.60
Director
Peter M. Leger..................................................... 5,000 9.60
Director
James C. Alsobrook, Jr............................................. 405,980 5.00
Senior Vice President, Credit Connection
Nancy L. Weil...................................................... 405,980 5.00
Senior Vice President, Marketing
All executive officers and Directors as a group (10 persons)....... 2,044,900 5.03
All non-employee directors as a group.............................. 15,000 9.60
All current executive officers as a group.......................... 2,029,980 5.00
</TABLE>
18
<PAGE> 21
FEDERAL INCOME TAX CONSEQUENCES
OPTION GRANTS
Options granted under the 1997 Plan may be either incentive stock options
which satisfy the requirements of Section 422 of the Code or non-statutory
options which are not intended to meet such requirements. The Federal income tax
treatment for the two types of options differs as follows:
Incentive Options. No taxable income is recognized by the optionee at
the time of the option grant, and no taxable income is generally recognized
at the time the option is exercised. The optionee will, however, recognize
taxable income in the year in which the purchased shares are sold or
otherwise disposed of. For Federal tax purposes, dispositions are divided
into two categories: (i) qualifying and (ii) disqualifying. A qualifying
disposition occurs if the sale or other disposition is made after the
optionee has held the shares for more than two years after the option grant
date and more than one year after the exercise date. If either of these two
holding periods is not satisfied, then a disqualifying disposition will
result.
If the optionee makes a disqualifying disposition of the purchased
shares, then the Company will be entitled to an income tax deduction, for
the taxable year in which such disposition occurs, equal to the excess of
(i) the fair market value of such shares on the option exercise date over
(ii) the exercise price paid for the shares. In no other instance will the
Company be allowed a deduction with respect to the optionee's disposition
of the purchased shares.
Non-Statutory Options. No taxable income is recognized by an optionee
upon the grant of a non-statutory option. The optionee will in general
recognize ordinary income, in the year in which the option is exercised,
equal to the excess of the fair market value of the purchased shares on the
exercise date over the exercise price paid for the shares, and the optionee
will be required to satisfy the tax withholding requirements applicable to
such income.
If the shares acquired upon exercise of the non-statutory option are
unvested and subject to repurchase by the Company in the event of the
optionee's termination of service prior to vesting in those shares, then
the optionee will not recognize any taxable income at the time of exercise
but will have to report as ordinary income, as and when the Company's
repurchase right lapses, an amount equal to the excess of (i) the fair
market value of the shares on the date the repurchase right lapses over
(ii) the exercise price paid for the shares. The optionee may, however,
elect under Section 83(b) of the Internal Revenue Code to include as
ordinary income in the year of exercise of the option an amount equal to
the excess of (i) the fair market value of the purchased shares on the
exercise date over (ii) the exercise price paid for such shares. If the
Section 83(b) election is made, the optionee will not recognize any
additional income as and when the repurchase right lapses.
The Company will be entitled to an income tax deduction equal to the amount
of ordinary income recognized by the optionee with respect to the exercised
non-statutory option. The deduction will in general be allowed for the taxable
year of the Company in which such ordinary income is recognized by the optionee.
STOCK APPRECIATION RIGHTS
An optionee who is granted a stock appreciation right will recognize
ordinary income in the year of exercise equal to the amount of the appreciation
distribution. The Company will be entitled to an income tax deduction equal to
the appreciation distribution for the taxable year in which the ordinary income
is recognized by the optionee.
DIRECT STOCK ISSUANCE
The tax principles applicable to direct stock issuances under the 1997 Plan
will be substantially the same as those summarized above for the exercise of
non-statutory option grants.
19
<PAGE> 22
ACCOUNTING TREATMENT
Option grants or stock issuances with exercise or issue prices less than
the fair market value of the shares on the grant or issue date will result in a
compensation expense to the Company's earnings equal to the difference between
the exercise or issue price and the fair market value of the shares on the grant
or issue date. Such expense will be accruable by the Company over the period
that the option shares or issued shares are to vest. Option grants or stock
issuances at 100% of fair market value will not result in any charge to the
Company's earnings. Whether or not granted at a discount, the number of
outstanding options may be a factor in determining the Company's earnings per
share on a fully-diluted basis. Under the new FASB release, footnote disclosure
will be required as to the impact the outstanding options under the 1997 Plan
would have upon the Company's reported earnings were those options appropriately
valued as compensation expense.
Should one or more optionees be granted stock appreciation rights which
have no conditions upon exercisability other than a service or employment
requirement, then such rights will result in a compensation expense to the
Company's earnings.
NEW PLAN BENEFITS
No options have been granted under the 1997 Plan. However, each
non-employee Board member will receive an option grant under the Automatic
Option Grant Program on the anniversary of the date on which such individual
first joined the Board; the exercise price of each such grant will be equal to
the closing selling price per share of Common Stock on the grant date as
reported on the Nasdaq National Market.
20
<PAGE> 23
PROPOSAL 3
INDEPENDENT PUBLIC ACCOUNTANTS
Upon the recommendation of the Audit Committee, the Board of Directors
appointed Ernst & Young LLP, independent public accountants and auditors of the
Company since the Company's inception, as auditors of the Company to serve for
the year ending December 31, 1997, subject to the ratification of such
appointment by the stockholders at the Annual Meeting. The affirmative vote of a
plurality of the Company's outstanding Common Stock present in person or by
proxy is required to ratify the appointment of the auditors. Unless otherwise
instructed, the proxy holders will vote the proxies received by them "FOR" the
ratification of Ernst & Young LLP to serve as the Company's auditors for the
year ending December 31, 1997. A representative of Ernst & Young LLP will attend
the Annual Meeting with the opportunity to make a statement if he or she so
desires and will also be available to answer inquiries.
STOCKHOLDER PROPOSALS
In accordance with regulations issued by the Securities and Exchange
Commission by certified mail-return receipt requested, stockholder proposals
intended for presentation at the 1998 Annual Meeting of Stockholders must be
received by the Secretary of the Company no later than December 8, 1997 if such
proposals are to be considered for inclusion in the Company's Proxy Statement
for the 1998 Annual Meeting of Stockholders.
OTHER MATTERS
Management knows of no matters that are to be presented for action at the
meeting other than those set forth above. If any other matters properly come
before the meeting, the persons named in the enclosed form of proxy will vote
the shares represented by proxies in accordance with their best judgment on such
matters.
Proxies will be solicited by mail and may also be solicited in person or by
telephone by some regular employees of the Company. The Company may also
consider the engagement of a proxy solicitation firm. Costs of the solicitation
will be borne by the Company.
By Order of the Board of Directors
/s/ James R. DeFrancesco
James R. DeFrancesco
Chief Executive Officer and President
Columbia, Maryland
April 11, 1997
21
<PAGE> 1
CREDIT MANAGEMENT SOLUTIONS, INC.
1997 STOCK INCENTIVE PLAN
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
This 1997 Stock Incentive Plan is intended to promote the
interests of Credit Management Solutions, Inc., a Delaware corporation, by
providing eligible persons with the opportunity to acquire a proprietary
interest, or otherwise increase their proprietary interest, in the Corporation
as an incentive for them to remain in the service of the Corporation.
Capitalized terms shall have the meanings assigned to such
terms in the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into five separate equity
programs:
(i) the Discretionary Option Grant
Program under which eligible persons may, at the discretion of the
Plan Administrator, be granted options to purchase shares of Common
Stock,
(ii) the Salary Investment Option Grant
Program under which eligible employees may elect to have a portion of
their base salary invested each year in options to purchase shares of
Common Stock,
(iii) the Stock Issuance Program under
which eligible persons may, at the discretion of the Plan
Administrator, be issued shares of Common Stock directly, either
through the immediate purchase of such shares or as a bonus for
services rendered the Corporation (or any Parent or Subsidiary),
(iv) the Automatic Option Grant Program
under which Eligible Directors shall automatically receive option
grants at periodic intervals to purchase shares of Common Stock, and
<PAGE> 2
(v) the Director Fee Option Grant
Program under which non-employee Board members may elect to have all or any
portion of their annual retainer fee otherwise payable in cash applied to a
special option grant.
B. The provisions of Articles One and Seven shall apply
to all equity programs under the Plan and shall accordingly govern the
interests of all persons under the Plan.
III. ADMINISTRATION OF THE PLAN
A. The Primary Committee shall have sole and exclusive
authority to administer the Discretionary Option Grant and Stock Issuance
Programs with respect to Section 16 Insiders and shall have sole and exclusive
authority to administer the Salary Investment Option Grant Program with respect
to all eligible individuals.
B. Administration of the Discretionary Option Grant and
Stock Issuance Programs with respect to all other persons eligible to
participate in those programs may, at the Board's discretion, be vested in the
Primary Committee or a Secondary Committee, or the Board may retain the power
to administer those programs with respect to all such persons.
C. Members of the Primary Committee or any Secondary
Committee shall serve for such period of time as the Board may determine and
may be removed by the Board at any time. The Board may also at any time
terminate the functions of any Secondary Committee and reassume all powers and
authority previously delegated to such committee.
D. Each Plan Administrator shall, within the scope of
its administrative functions under the Plan, have full power and authority to
establish such rules and regulations as it may deem appropriate for proper
administration of the Discretionary Option Grant and Stock Issuance Programs
and to make such determinations under, and issue such interpretations of, the
provisions of such programs and any outstanding options or stock issuances
thereunder as it may deem necessary or advisable. Decisions of the Plan
Administrator within the scope of its administrative functions under the Plan
shall be final and binding on all parties who have an interest in the
Discretionary Option Grant or Stock Issuance Program under its jurisdiction or
any option or stock issuance thereunder.
E. Service on the Primary Committee or the Secondary
Committee shall constitute service as a Board member, and members of each such
committee shall accordingly be entitled to full indemnification and
reimbursement as Board members for their service on such committee. No member
of the Primary Committee or the Secondary Committee shall be liable for any act
or omission made in good faith with respect to the Plan or any option grants or
stock issuances under the Plan.
2.
<PAGE> 3
F. Administration of the Automatic Option Grant and
Director Fee Option Grant Programs shall be self-executing in accordance with
the terms of those programs, and no Plan Administrator shall exercise any
discretionary functions with respect to option grants made under those
programs.
IV. ELIGIBILITY
A. The persons eligible to participate in the
Discretionary Option Grant and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or
the board of directors of any Parent or Subsidiary, and
(iii) consultants and other independent
advisors who provide services to the Corporation (or any Parent or
Subsidiary).
B. Only Employees who are Section 16 Insiders or other
highly compensated individuals shall be eligible to participate in the Salary
Investment Option Grant Program.
C. Each Plan Administrator shall, within the scope of
its administrative jurisdiction under the Plan, have full authority (subject to
the provisions of the Plan) to determine, (i) with respect to the option grants
under the Discretionary Option Grant Program, which eligible persons are to
receive option grants, the time or times when such option grants are to be
made, the number of shares to be covered by each such grant, the status of the
granted option as either an Incentive Option or a Non-Statutory Option, the
time or times at which each option is to become exercisable, the vesting
schedule (if any) applicable to the option shares and the maximum term for
which the option is to remain outstanding and (ii) with respect to stock
issuances under the Stock Issuance Program, which eligible persons are to
receive stock issuances, the time or times when such issuances are to be made,
the number of shares to be issued to each Participant, the vesting schedule (if
any) applicable to the issued shares and the consideration to be paid for such
shares.
D. The Plan Administrator shall have the absolute
discretion either to grant options in accordance with the Discretionary Option
Grant Program or to effect stock issuances in accordance with the Stock
Issuance Program.
E. The individuals eligible to participate in the
Automatic Option Grant Program shall be limited to (i) those individuals who
are serving as non-employee Board members on the Underwriting Date, (ii) those
individuals who first become non-employee Board members on or after the
Underwriting Date, whether through appointment by the Board or election by the
Corporation's stockholders, and (iii) those individuals who are to
3.
<PAGE> 4
continue to serve as non-employee Board members after one or more Annual
Stockholders Meetings held after the Underwriting Date. A non-employee Board
member who has previously been in the employ of the Corporation (or any Parent
or Subsidiary) shall not be eligible to receive an initial option grant under
the Automatic Option Grant Program on the Underwriting Date or (if later) at
the time he or she first becomes a non-employee Board member, but such
individual shall be eligible to receive periodic option grants under the
Automatic Option Grant Program upon his or her continued service as a
non-employee Board member after one or more Annual Stockholders Meetings.
F. All non-employee Board members shall be eligible to
participate in the Director Fee Option Grant Program.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares
repurchased by the Corporation on the open market. The maximum number of
shares of Common Stock initially reserved for issuance over the term of the
Plan shall not exceed 3,400,000 shares. Such authorized share reserve is the
number of shares which remain available for issuance, as of the Plan Effective
Date, under the Predecessor Plans as last approved by the Corporation's
shareholders, including the shares subject to the outstanding options to be
incorporated into the Plan and the additional shares which would otherwise be
available for future grant.
B. The number of shares of Common Stock available for
issuance under the Plan shall automatically increase on the first trading day
of each fiscal year during the term of the Plan, beginning with the 1998 fiscal
year, by an amount equal to one percent (1%) of the shares of Common Stock
outstanding on the last trading day of the immediately preceding fiscal year.
No Incentive Options may be granted on the basis of the additional shares of
Common Stock resulting from such annual increases.
C. No one person participating in the Plan may receive
options, separately exercisable stock appreciation rights and direct stock
issuances for more than 100,000 shares of Common Stock per calendar year
beginning with the 1997 calendar year.
D. Shares of Common Stock subject to outstanding options
shall be available for subsequent issuance under the Plan to the extent (i) the
options expire or terminate for any reason prior to exercise in full or (ii)
the options are cancelled in accordance with the cancellation-regrant
provisions of Article Two. Unvested shares issued under the Plan and
subsequently repurchased by the Corporation at the original issue price paid
per share pursuant to the Corporation's repurchase rights under the Plan shall
be added back to the number of shares of Common Stock reserved for issuance
under the Plan and shall accordingly be available for reissuance through one or
more subsequent option grants or direct stock issuances under the Plan.
However, should the exercise price of an
4.
<PAGE> 5
option under the Plan be paid with shares of Common Stock or should shares of
Common Stock otherwise issuable under the Plan be withheld by the Corporation
in satisfaction of the withholding taxes incurred in connection with the
exercise of an option or the vesting of a stock issuance under the Plan, then
the number of shares of Common Stock available for issuance under the Plan
shall be reduced by the gross number of shares for which the option is
exercised or which vest under the stock issuance, and not by the net number of
shares of Common Stock issued to the holder of such option or stock issuance.
E. Should any change be made to the Common Stock by
reason of any stock split, stock dividend, recapitalization, combination of
shares, exchange of shares or other change affecting the outstanding Common
Stock as a class without the Corporation's receipt of consideration,
appropriate adjustments shall be made to (i) the maximum number and/or class of
securities issuable under the Plan, (ii) the number and/or class of securities
for which any one person may be granted options, separately exercisable stock
appreciation rights and direct stock issuances per calendar year, (iii) the
number and/or class of securities for which automatic option grants are to be
made subsequently per Eligible Director under the Automatic Option Grant
Program and (iv) the number and/or class of securities and the exercise price
per share in effect under each outstanding option in order to prevent the
dilution or enlargement of benefits thereunder. The adjustments determined by
the Plan Administrator shall be final, binding and conclusive.
5.
<PAGE> 6
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the
form approved by the Plan Administrator; provided, however, that each such
document shall comply with the terms specified below. Each document evidencing
an Incentive Option shall, in addition, be subject to the provisions of the
Plan applicable to such options.
A. Exercise Price.
1. The exercise price per share shall not be
less than eighty-five percent (85%) of the Fair Market Value per share of
Common Stock on the option grant date unless otherwise determined by the Plan
Administrator.
2. The exercise price shall become immediately
due upon exercise of the option and shall, subject to the provisions of Section
I of Article Seven and the documents evidencing the option, be payable in one
or more of the forms specified below:
(i) cash or check made payable to the
Corporation,
(ii) in shares of Common Stock held for
the requisite period necessary to avoid a charge to the Corporation's
earnings for financial reporting purposes and valued at Fair Market
Value on the Exercise Date, or
(iii) to the extent the option is
exercised for vested shares, through a special sale and remittance
procedure pursuant to which the Optionee shall concurrently provide
irrevocable written instructions to (a) a Corporation-designated
brokerage firm to effect the immediate sale of the purchased shares
and remit to the Corporation, out of the sale proceeds available on
the settlement date, sufficient funds to cover the aggregate exercise
price payable for the purchased shares plus all applicable Federal,
state and local income and employment taxes required to be withheld by
the Corporation by reason of such exercise and (b) the Corporation to
deliver the certificates for the purchased shares directly to such
brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is
utilized, payment of the exercise price for the purchased shares must be made
on the Exercise Date.
6.
<PAGE> 7
B. Exercise and Term of Options. Each option shall be
exercisable at such time or times, during such period and for such number of
shares as shall be determined by the Plan Administrator and set forth in the
documents evidencing the option. However, no option shall have a term in
excess of ten (10) years measured from the option grant date.
C. Effect of Termination of Service.
1. The following provisions shall govern the
exercise of any options held by the Optionee at the time of cessation of
Service or death:
(i) Any option outstanding at the time
of the Optionee's cessation of Service for any reason shall remain
exercisable for such period of time thereafter as shall be determined
by the Plan Administrator and set forth in the documents evidencing
the option, but no such option shall be exercisable after the
expiration of the option term. If such period is not specified in the
documents evidencing the option, then the option shall remain
exercisable for a period of ninety (90) days following the Optionee's
cessation of Service.
(ii) Any option exercisable in whole or
in part by the Optionee at the time of death may be exercised
subsequently by the personal representative of the Optionee's estate
or by the person or persons to whom the option is transferred pursuant
to the Optionee's will or in accordance with the laws of descent and
distribution.
(iii) During the applicable post-Service
exercise period, the option may not be exercised in the aggregate for
more than the number of vested shares for which the option is
exercisable on the date of the Optionee's cessation of Service. Upon
the expiration of the applicable exercise period or (if earlier) upon
the expiration of the option term, the option shall terminate and
cease to be outstanding for any vested shares for which the option has
not been exercised. However, the option shall, immediately upon the
Optionee's cessation of Service, terminate and cease to be outstanding
to the extent the option is not otherwise at that time exercisable for
vested shares.
(iv) Should the Optionee's Service be
terminated for Misconduct, then all outstanding options held by the
Optionee shall terminate immediately and cease to be outstanding.
2. The Plan Administrator shall have the
discretion, exercisable either at the time an option is granted or at any time
while the option remains outstanding, to:
7.
<PAGE> 8
(i) extend the period of time for which
the option is to remain exercisable following the Optionee's cessation
of Service from the period otherwise in effect for that option to such
greater period of time as the Plan Administrator shall deem
appropriate, but in no event beyond the expiration of the option term,
and/or
(ii) permit the option to be exercised,
during the applicable post-Service exercise period, not only with
respect to the number of vested shares of Common Stock for which such
option is exercisable at the time of the Optionee's cessation of
Service but also with respect to one or more additional installments
in which the Optionee would have vested under the option had the
Optionee continued in Service.
D. Stockholder Rights. The holder of an option shall
have no stockholder rights with respect to the shares subject to the option
until such person shall have exercised the option, paid the exercise price and
become a holder of record of the purchased shares.
E. Repurchase Rights. The Plan Administrator shall have
the discretion to grant options which are exercisable for unvested shares of
Common Stock. Should the Optionee cease Service while holding such unvested
shares, the Corporation shall have the right to repurchase, at the exercise
price paid per share, any or all of those unvested shares. The terms upon
which such repurchase right shall be exercisable (including the period and
procedure for exercise and the appropriate vesting schedule for the purchased
shares) shall be established by the Plan Administrator and set forth in the
document evidencing such repurchase right.
F. Limited Transferability of Options. During the
lifetime of the Optionee, Incentive Options shall be exercisable only by the
Optionee and shall not be assignable or transferable other than by will or by
the laws of descent and distribution following the Optionee's death. However,
a Non-Statutory Option may, in connection with the Optionee's estate plan, be
assigned in whole or in part during the Optionee's lifetime to one or more
members of the Optionee's immediate family or to a trust established
exclusively for the benefit of one or more such family members. The assigned
portion may only be exercised by the person or persons who acquire a
proprietary interest in the option pursuant to the assignment. The terms
applicable to the assigned portion shall be the same as those in effect for the
option immediately prior to such assignment and shall be set forth in such
documents issued to the assignee as the Plan Administrator may deem
appropriate.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Five shall be applicable to Incentive
Options. Options which are specifically designated as
8.
<PAGE> 9
Non-Statutory Options when issued under the Plan shall not be subject to the
terms of this Section II.
A. Eligibility. Incentive Options may only be granted
to Employees.
B. Exercise Price. The exercise price per share shall
not be less than one hundred percent (100%) of the Fair Market Value per share
of Common Stock on the option grant date.
C. Dollar Limitation. The aggregate Fair Market Value
of the shares of Common Stock (determined as of the respective date or dates of
grant) for which one or more options granted to any Employee under the Plan (or
any other option plan of the Corporation or any Parent or Subsidiary) may for
the first time become exercisable as Incentive Options during any one (1)
calendar year shall not exceed the sum of One Hundred Thousand Dollars
($100,000). To the extent the Employee holds two (2) or more such options
which become exercisable for the first time in the same calendar year, the
foregoing limitation on the exercisability of such options as Incentive Options
shall be applied on the basis of the order in which such options are granted.
D. 10% Stockholder. If any Employee to whom an
Incentive Option is granted is a 10% Stockholder, then the exercise price per
share shall not be less than one hundred ten percent (110%) of the Fair Market
Value per share of Common Stock on the option grant date, and the option term
shall not exceed five (5) years measured from the option grant date.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each
outstanding option shall automatically accelerate so that each such option
shall, immediately prior to the effective date of the Corporate Transaction,
become fully exercisable for all of the shares of Common Stock at the time
subject to such option and may be exercised for any or all of those shares as
fully-vested shares of Common Stock. However, an outstanding option shall NOT
so accelerate if and to the extent: (i) such option is, in connection with the
Corporate Transaction, either to be assumed by the successor corporation (or
parent thereof) or to be replaced with a comparable option to purchase shares
of the capital stock of the successor corporation (or parent thereof), (ii)
such option is to be replaced with a cash incentive program of the successor
corporation which preserves the spread existing on the unvested option shares
at the time of the Corporate Transaction and provides for subsequent payout in
accordance with the same vesting schedule applicable to such option or (iii)
the acceleration of such option is subject to other limitations imposed by the
Plan Administrator at the time of the option grant. The determination of
option comparability under clause (i) above shall be made by the Plan
Administrator, and its determination shall be final, binding and conclusive.
9.
<PAGE> 10
B. All outstanding repurchase rights shall also
terminate automatically, and the shares of Common Stock subject to those
terminated rights shall immediately vest in full, in the event of any Corporate
Transaction, except to the extent: (i) those repurchase rights are to be
assigned to the successor corporation (or parent thereof) in connection with
such Corporate Transaction or (ii) such accelerated vesting is precluded by
other limitations imposed by the Plan Administrator at the time the repurchase
right is issued.
C. Notwithstanding Section III.A. and Section III.B. of
this Article Two, the Plan Administrator shall have the discretion, exercisable
either at the time the option is granted or at any time while the option
remains outstanding, to provide for the automatic acceleration of one or more
outstanding options (and the automatic termination of one or more outstanding
repurchase rights with the immediate vesting of the shares of Common Stock
subject to those rights) upon the occurrence of a Corporate Transaction,
whether or not those options are to be assumed or replaced (or those repurchase
rights are to be assigned) in the Corporate Transaction. The Plan
Administrator shall also have the discretion to grant options which do not
accelerate whether or not such options are assumed (and to provide for
repurchase rights that do not terminate whether or not such rights are
assigned) in connection with a Corporate Transaction.
D. Immediately following the consummation of the
Corporate Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
E. Each option which is assumed in connection with a
Corporate Transaction shall be appropriately adjusted, immediately after such
Corporate Transaction, to apply to the number and class of securities which
would have been issuable to the Optionee in consummation of such Corporate
Transaction had the option been exercised immediately prior to such Corporate
Transaction. Appropriate adjustments shall also be made to (i) the number and
class of securities available for issuance under the Plan following the
consummation of such Corporate Transaction, (ii) the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
payable for such securities shall remain the same and (iii) the maximum number
of securities and/or class of securities for which any one person may be
granted stock options, separately exercisable stock appreciation rights and
direct stock issuances under the Plan.
F. The Plan Administrator shall have the discretion,
exercisable at the time the option is granted or at any time while the option
remains outstanding, to provide for the automatic acceleration of any options
which are assumed or replaced in a Corporate Transaction and do not otherwise
accelerate at that time (and the termination of any of the Corporation's
outstanding repurchase rights which do not otherwise terminate at the time of
the Corporate Transaction) in the event the Optionee's Service should
subsequently terminate by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of such Corporate Transaction. Any options so accelerated shall remain
exercisable for fully-vested shares until the earlier
10.
<PAGE> 11
of (i) the expiration of the option term or (ii) the expiration of the one
(1)-year period measured from the effective date of the Involuntary
Termination.
G. The Plan Administrator shall have the discretion,
exercisable either at the time the option is granted or at any time while the
option remains outstanding, to (i) provide for the automatic acceleration of
one or more outstanding options (and the automatic termination of one or more
outstanding repurchase rights with the immediate vesting of the shares of
Common Stock subject to those rights) upon the occurrence of a Change in
Control or (ii) condition any such option acceleration (and the termination of
any outstanding repurchase rights) upon the subsequent Involuntary Termination
of the Optionee's Service within a designated period (not to exceed eighteen
(18) months) following the effective date of such Change in Control. Any
options accelerated in connection with a Change in Control shall remain fully
exercisable until the expiration or sooner termination of the option term.
H. The portion of any Incentive Option accelerated in
connection with a Corporate Transaction or Change in Control shall remain
exercisable as an Incentive Option only to the extent the applicable One
Hundred Thousand Dollar ($100,000) limitation is not exceeded. To the extent
such dollar limitation is exceeded, the accelerated portion of such option
shall be exercisable as a Non-Statutory Option under the Federal tax laws.
I. The grant of options under the Discretionary Option
Grant Program shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at
any time and from time to time, with the consent of the affected option
holders, the cancellation of any or all outstanding options under the
Discretionary Option Grant Program and to grant in substitution new options
covering the same or different number of shares of Common Stock but with an
exercise price per share based on the Fair Market Value per share of Common
Stock on the new grant date.
V. STOCK APPRECIATION RIGHTS
A. The Plan Administrator shall have full power and
authority to grant to selected Optionees tandem stock appreciation rights
and/or limited stock appreciation rights.
B. The following terms shall govern the grant and
exercise of tandem stock appreciation rights:
11.
<PAGE> 12
(i) One or more Optionees may be granted
the right, exercisable upon such terms as the Plan Administrator may
establish, to elect between the exercise of the underlying option for
shares of Common Stock and the surrender of that option in exchange
for a distribution from the Corporation in an amount equal to the
excess of (a) the Fair Market Value (on the option surrender date) of
the number of shares in which the Optionee is at the time vested under
the surrendered option (or surrendered portion thereof) over (b) the
aggregate exercise price payable for such shares.
(ii) No such option surrender shall be
effective unless it is approved by the Plan Administrator, either at
the time of the actual option surrender or at any earlier time. If
the surrender is so approved, then the distribution to which the
Optionee shall be entitled may be made in shares of Common Stock
valued at Fair Market Value on the option surrender date, in cash, or
partly in shares and partly in cash, as the Plan Administrator shall
in its sole discretion deem appropriate.
(iii) If the surrender of an option is
rejected by the Plan Administrator, then the Optionee shall retain
whatever rights the Optionee had under the surrendered option (or
surrendered portion thereof) on the option surrender date and may
exercise such rights at any time prior to the later of (a) five (5)
business days after the receipt of the rejection notice or (b) the
last day on which the option is otherwise exercisable in accordance
with the terms of the documents evidencing such option, but in no
event may such rights be exercised more than ten (10) years after the
option grant date.
C. The following terms shall govern the grant and
exercise of limited stock appreciation rights:
(i) One or more Section 16 Insiders may
be granted limited stock appreciation rights with respect to their
outstanding options.
(ii) Upon the occurrence of a Hostile
Take-Over, each such individual holding one or more options with such
a limited stock appreciation right shall have the unconditional right
(exercisable for a thirty (30)-day period following such Hostile
Take-Over) to surrender each such option to the Corporation, to the
extent the option is at the time exercisable for vested shares of
Common Stock. In return for the surrendered option, the Optionee
shall receive a cash distribution from the Corporation in an amount
equal to the excess of (a) the Take-Over Price of the shares of Common
Stock which are at the time vested under each surrendered option (or
surrendered portion thereof) over (b) the aggregate exercise price
payable for
12.
<PAGE> 13
such shares. Such cash distribution shall be paid within five (5)
days following the option surrender date.
(iii) Neither the approval of the Plan
Administrator nor the consent of the Board shall be required in
connection with such option surrender and cash distribution.
(iv) The balance of the option (if any)
shall continue in full force and effect in accordance with the
documents evidencing such option.
13.
<PAGE> 14
ARTICLE THREE
SALARY INVESTMENT OPTION GRANT PROGRAM
I. OPTION GRANTS
The Primary Committee shall have the sole and exclusive
authority to determine the calendar year or years (if any) for which the Salary
Investment Option Program is to be in effect and to select the Employees
eligible to participate in the Salary Investment Option Grant Program for those
calendar year or years. Each selected Employee who elects to participate in
the Salary Investment Option Grant Program must, prior to the start of each
calendar year of participation, file with the Plan Administrator (or its
designate) an irrevocable authorization directing the Corporation to reduce his
or her base salary for that calendar year by a designated percentage (in
multiples of one percent (1%)). However, the amount of such salary reduction
must be not less than Ten Thousand Dollars ($10,000.00) and must not be more
than Seventy-Five Thousand Dollars ($75,000.00). Each individual who files a
proper salary reduction authorization shall automatically be granted an option
under this Salary Investment Option Grant Program on or before the last trading
day in January of the calendar year for which that salary reduction is to be in
effect.
II. OPTION TERMS
Each option shall be a Non-Statutory Option evidenced by one
or more documents in the form approved by the Plan Administrator; provided,
however, that each such document shall comply with the terms specified below.
A. EXERCISE PRICE.
1. The exercise price per share shall be
thirty-three and one-third percent (33-1/3%) of the Fair Market Value per share
of Common Stock on the option grant date.
2. The exercise price shall become immediately
due upon exercise of the option and shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made
on the Exercise Date.
B. NUMBER OF OPTION SHARES. The number of shares of
Common Stock subject to the option shall be determined pursuant to the
following formula (rounded down to the nearest whole number):
14.
<PAGE> 15
X = A / (B x 66-2/3%), where
X is the number of option shares,
A is the dollar amount of the Optionee's base
salary reduction for the calendar year, and
B is the Fair Market Value per share of Common
Stock on the option grant date.
C. EXERCISE AND TERM OF OPTIONS. The option shall
become exercisable in a series of twelve (12) successive equal monthly
installments upon the Optionee's completion of each calendar month of Service
in the calendar year for which the salary reduction is in effect. Each option
shall have a maximum term of ten (10) years measured from the option grant
date.
D. EFFECT OF TERMINATION OF SERVICE. Should the
Optionee cease Service for any reason while holding one or more options under
this Article Three, then each such option shall remain exercisable, for any or
all of the shares for which the option is exercisable at the time of such
cessation of Service, until the earlier of (i) the expiration of the ten
(10)-year option term or (ii) the expiration of the three (3)-year period
measured from the date of such cessation of Service. Should the Optionee die
while holding one or more options under this Article Three, then each such
option may be exercised, for any or all of the shares for which the option is
exercisable at the time of the Optionee's cessation of Service (less any shares
subsequently purchased by the Optionee prior to death), by the personal
representative of the Optionee's estate or by the person or persons to whom the
option is transferred pursuant to the Optionee's will or in accordance with the
laws of descent and distribution. Such right of exercise shall lapse, and the
option shall terminate, upon the earlier of (i) the expiration of the ten
(10)-year option term or (ii) the three (3)-year period measured from the date
of the Optionee's cessation of Service. However, the option shall, immediately
upon the Optionee's cessation of Service for any reason, terminate and cease to
remain outstanding with respect to any and all shares of Common Stock for which
the option is not otherwise at that time exercisable.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction while the
Optionee remains in Service, each outstanding option held by such Optionee
under this Salary Investment Option Grant Program shall automatically
accelerate so that each such option shall, immediately prior to the effective
date of the Corporate Transaction, become fully exercisable for all of the
shares of Common Stock at the time subject to such option and may be exercised
for any or all of those shares as fully-vested shares of Common Stock. Each
such outstanding option shall be assumed by the successor corporation (or
parent thereof) in the Corporate Transaction and shall remain exercisable for
the fully-vested
15.
<PAGE> 16
shares until the earlier of (i) the expiration of the option term or (ii) the
expiration of the three (3)-year period measured from the date of Optionee's
cessation of Service.
B. In the event of a Change in Control while the
Optionee remains in Service, each outstanding option held by such Optionee
under this Salary Investment Option Grant Program shall automatically
accelerate so that each such option shall immediately become fully exercisable
for all of the shares of Common Stock at the time subject to such option and
may be exercised for any or all of such shares as fully-vested shares of Common
Stock. The option shall remain so exercisable until the earlier of (i) the
expiration of the option term or (ii) the expiration of the three (3)-year
period measured from the date of Optionee's cessation of Service.
C. The grant of options under the Salary Investment
Option Grant Program shall in no way affect the right of the Corporation to
adjust, reclassify, reorganize or otherwise change its capital or business
structure or to merge, consolidate, dissolve, liquidate or sell or transfer all
or any part of its business or assets.
III. REMAINING TERMS
The remaining terms of each option granted under the Salary
Investment Option Grant Program shall be the same as the terms in effect for
option grants made under the Discretionary Option Grant Program.
16.
<PAGE> 17
ARTICLE FOUR
STOCK ISSUANCE PROGRAM
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance
Program through direct and immediate issuances without any intervening option
grants. Each such stock issuance shall be evidenced by a Stock Issuance
Agreement which complies with the terms specified below.
A. PURCHASE PRICE.
1. The purchase price per share shall be fixed
by the Plan Administrator, but shall not be less than eighty-five percent (85%)
of the Fair Market Value per share of Common Stock on the issuance date.
2. Subject to the provisions of Section I of
Article Seven, shares of Common Stock may be issued under the Stock Issuance
Program for any of the following items of consideration which the Plan
Administrator may deem appropriate in each individual instance:
(i) cash or check made payable to the
Corporation, or
(ii) past services rendered to the Corporation
(or any Parent or Subsidiary).
B. VESTING PROVISIONS.
1. Shares of Common Stock issued under the Stock
Issuance Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified performance
objectives. The elements of the vesting schedule applicable to any unvested
shares of Common Stock issued under the Stock Issuance Program shall be
determined by the Plan Administrator and incorporated into the Stock Issuance
Agreement.
2. Any new, substituted or additional securities
or other property (including money paid other than as a regular cash dividend)
which the Participant may have the right to receive with respect to the
Participant's unvested shares of Common Stock by reason of any stock dividend,
stock split, recapitalization, combination of shares, exchange
17.
<PAGE> 18
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration shall be issued subject to
(i) the same vesting requirements applicable to the Participant's unvested
shares of Common Stock and (ii) such escrow arrangements as the Plan
Administrator shall deem appropriate.
3. The Participant shall have full shareholder
rights with respect to any shares of Common Stock issued to the Participant
under the Stock Issuance Program, whether or not the Participant's interest in
those shares is vested. Accordingly, the Participant shall have the right to
vote such shares and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in
Service while holding one or more unvested shares of Common Stock issued under
the Stock Issuance Program or should the performance objectives not be attained
with respect to one or more such unvested shares of Common Stock, then those
shares shall be immediately surrendered to the Corporation for cancellation,
and the Participant shall have no further shareholder rights with respect to
those shares. To the extent the surrendered shares were previously issued to
the Participant for consideration paid in cash or cash equivalent (including
the Participant's purchase-money indebtedness), the Corporation shall repay to
the Participant the cash consideration paid for the surrendered shares and
shall cancel the unpaid principal balance of any outstanding purchase-money
note of the Participant attributable to the surrendered shares.
5. The Plan Administrator may in its discretion
waive the surrender and cancellation of one or more unvested shares of Common
Stock which would otherwise occur upon the cessation of the Participant's
Service or the non-attainment of the performance objectives applicable to those
shares. Such waiver shall result in the immediate vesting of the Participant's
interest in the shares as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant's cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. All of the Corporation's outstanding
repurchase/cancellation rights under the Stock Issuance Program shall terminate
automatically, and all the shares of Common Stock subject to those terminated
rights shall immediately vest in full, in the event of any Corporate
Transaction, except to the extent (i) those repurchase/cancellation rights are
to be assigned to the successor corporation (or parent thereof) in connection
with such Corporate Transaction or (ii) such accelerated vesting is precluded
by other limitations imposed in the Stock Issuance Agreement.
B. The Plan Administrator shall have the discretionary
authority, exercisable either at the time the unvested shares are issued or any
time while the Corporation's repurchase/cancellation rights remain outstanding
under the Stock Issuance
18.
<PAGE> 19
Program, to provide that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights
shall immediately vest, in the event the Participant's Service should
subsequently terminate by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of any Corporate Transaction in which those repurchase/cancellation rights
are assigned to the successor corporation (or parent thereof).
C. The Plan Administrator shall have the discretionary
authority, exercisable either at the time the unvested shares are issued or any
time while the Corporation's repurchase/cancellation rights remain outstanding
under the Stock Issuance Program, to provide that those rights shall
automatically terminate in whole or in part, and the shares of Common Stock
subject to those terminated rights shall immediately vest, upon the occurrence
of a Change in Control or condition any such termination of the
repurchase/cancellation rights upon the subsequent Involuntary Termination of
the Participant's Service within a designated period (not to exceed eighteen
(18) months) following the effective date of such Change in Control.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion,
be held in escrow by the Corporation until the Participant's interest in such
shares vests or may be issued directly to the Participant with restrictive
legends on the certificates evidencing those unvested shares.
19.
<PAGE> 20
ARTICLE FIVE
AUTOMATIC OPTION GRANT PROGRAM
I. OPTION TERMS
A. GRANT DATES. Option grants shall be made on the
dates specified below:
1. Each individual who is first elected or
appointed as a non-employee Board member on or after the date of the 1997
Annual Stockholders Meeting shall automatically be granted, on the date of such
initial election or appointment, a Non-Statutory Option to purchase 5,000
shares of Common Stock.
2. Each individual who continues to serve as an
Eligible Director, shall automatically be granted, each year (beginning with
1997) on the anniversary of the date such individual first joined the Board, a
Non-Statutory Option to purchase an additional 5,000 shares of Common Stock.
There shall be no limit on the number of such 5,000-share option grants any one
Eligible Director may receive over his or her period of Board service.
B. EXERCISE PRICE.
1. The exercise price per share shall be equal
to one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.
2. The exercise price shall be payable in one or
more of the alternative forms authorized under the Discretionary Option Grant
Program. Except to the extent the sale and remittance procedure specified
thereunder is utilized, payment of the exercise price for the purchased shares
must be made on the Exercise Date.
C. OPTION TERM. Each option shall have a term of ten
(10) years measured from the option grant date.
D. EXERCISE AND VESTING OF OPTIONS. Each option shall
become exercisable with respect to fifty percent (50%) of the option shares
upon completion of six (6) months of Board service measured from the option
grant date and with respect to the balance of the shares in a series of six (6)
successive equal monthly installments over the Optionee's completion of each
additional month of Board service thereafter.
20.
<PAGE> 21
E. EFFECT OF TERMINATION OF BOARD SERVICE. The
following provisions shall govern the exercise of any options held by the
Optionee at the time the Optionee ceases to serve as a Board member:
(i) The Optionee (or, in the event of Optionee's
death, the personal representative of the Optionee's estate or the
person or persons to whom the option is transferred pursuant to the
Optionee's will or in accordance with the laws of descent and
distribution) shall have a twelve (12)-month period following the date
of such cessation of Board service in which to exercise each such
option.
(ii) During the twelve (12)-month exercise period,
the option may not be exercised in the aggregate for more than the
number of vested shares of Common Stock for which the option is
exercisable at the time of the Optionee's cessation of Board service.
(iii) Should the Optionee cease to serve as a Board
member by reason of death or Permanent Disability, then all shares at
the time subject to the option shall immediately vest so that such
option may, during the twelve (12)-month exercise period following
such cessation of Board service, be exercised for all or any portion
of those shares as fully-vested shares of Common Stock.
(iv) In no event shall the option remain
exercisable after the expiration of the option term. Upon the
expiration of the twelve (12)-month exercise period or (if earlier)
upon the expiration of the option term, the option shall terminate and
cease to be outstanding for any vested shares for which the option has
not been exercised. However, the option shall, immediately upon the
Optionee's cessation of Board service for any reason other than death
or Permanent Disability, terminate and cease to be outstanding to the
extent the option is not otherwise at that time exercisable for vested
shares.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. Each option outstanding at the time of any Corporate
Transaction, to the extent not otherwise fully exercisable, shall automatically
accelerate in full so that each such option shall, immediately prior to the
effective date of the Corporate Transaction, become fully exercisable for all
of the shares of Common Stock at the time subject to such option and may be
exercised for all or any portion of those shares as fully-vested shares of
Common Stock. Immediately following the consummation of the Corporate
Transaction, each automatic option grant shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
21.
<PAGE> 22
B. In connection with any Change in Control, each
outstanding option shall, to the extent not otherwise fully exercisable,
automatically accelerate in full so that each such option shall, immediately
prior to the effective date of the Change in Control, become fully exercisable
for all of the shares of Common Stock at the time subject to such option and
may be exercised for all or any portion of those shares as fully-vested shares
of Common Stock. Each such option shall remain exercisable for such
fully-vested option shares until the expiration or sooner termination of the
option term or the surrender of the option in connection with a Hostile
Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the
Optionee shall have a thirty (30)-day period in which to surrender to the
Corporation each of his or her outstanding automatic option grants. The
Optionee shall in return be entitled to a cash distribution from the
Corporation in an amount equal to the excess of (i) the Take-Over Price of the
shares of Common Stock at the time subject to each surrendered option (whether
or not the option is otherwise at the time exercisable for those shares) over
(ii) the aggregate exercise price payable for such shares. Such cash
distribution shall be paid within five (5) days following the surrender of the
option to the Corporation. No approval or consent of the Board or any Plan
Administrator shall be required in connection with such option surrender and
cash distribution.
D. Each option which is assumed in connection with a
Corporate Transaction shall be appropriately adjusted, immediately after such
Corporate Transaction, to apply to the number and class of securities which
would have been issuable to the Optionee in consummation of such Corporate
Transaction had the option been exercised immediately prior to such Corporate
Transaction. Appropriate adjustments shall also be made to the exercise price
payable per share under each outstanding option, provided the aggregate
exercise price payable for such securities shall remain the same.
E. The grant of options under the Automatic Option Grant
Program shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
22.
<PAGE> 23
ARTICLE SIX
DIRECTOR FEE OPTION GRANT PROGRAM
I. OPTION GRANTS
Each non-employee Board member may elect to apply all or any
portion of the annual retainer fee otherwise payable in cash for his or her
service on the Board to the acquisition of a special option grant under this
Director Fee Option Grant Program. Such election must be filed with the
Corporation's Chief Financial Officer prior to the first day of the calendar
year for which the annual retainer fee which is the subject of that election is
otherwise payable. Each non-employee Board member who files such a timely
election shall automatically be granted an option under this Director Fee
Option Grant Program on the first trading day in January in the calendar year
for which the annual retainer fee which is the subject of that election would
otherwise be payable.
II. OPTION TERMS
Each option shall be a Non-Statutory Option governed by the
terms and conditions specified below.
A. EXERCISE PRICE.
1. The exercise price per share shall be equal
to thirty-three and one-third percent (33-1/3%) of the Fair Market Value per
share of Common Stock on the option grant date.
2. The exercise price shall become immediately
due upon exercise of the option and shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made
on the Exercise Date.
B. NUMBER OF OPTION SHARES. The number of shares of
Common Stock subject to the option shall be determined pursuant to the
following formula (rounded down to the nearest whole number):
X = A / (B x 66-2/3%), where
X is the number of option shares,
A is the portion of the annual retainer fee subject
to the non-employee Board member's election, and
23.
<PAGE> 24
B is the Fair Market Value per share of Common Stock
on the option grant date.
C. EXERCISE AND TERM OF OPTIONS. The option shall
become exercisable for fifty percent (50%) of the option shares upon the
Optionee's completion of the first six (6) months of Board service in the
calendar year for which his or her election under this Director Fee Option
Grant Program is in effect, and the balance of the option shares shall become
exercisable in a series of six (6) successive equal monthly installments upon
the Optionee's completion of each additional month of Board service during that
calendar year. Each option shall have a maximum term of ten (10) years
measured from the option grant date.
D. TERMINATION OF BOARD SERVICE. Should the Optionee
cease Board service for any reason (other than death or Permanent Disability)
while holding one or more options under this Director Fee Option Grant Program,
then each such option shall remain exercisable, for any or all of the shares
for which the option is exercisable at the time of such cessation of Board
service, until the earlier of (i) the expiration of the ten (10)-year option
term or (ii) the expiration of the three (3)-year period measured from the date
of such cessation of Board service. However, each option held by the Optionee
under this Director Fee Option Grant Program at the time of his or her
cessation of Board service shall immediately terminate and cease to remain
outstanding with respect to any and all shares of Common Stock for which the
option is not otherwise at that time exercisable.
E. DEATH OR PERMANENT DISABILITY. Should the Optionee's
service as a Board member cease by reason of death or Permanent Disability,
then each option held by such Optionee under this Director Fee Option Grant
Program shall immediately become exercisable for all the shares of Common Stock
at the time subject to that option, and the option may be exercised for any or
all of those shares as fully-vested shares until the earlier of (i) the
expiration of the ten (10)-year option term or (ii) the expiration of the three
(3)-year period measured from the date of such cessation of Board service.
Should the Optionee die after cessation of Board service but
while holding one or more options under this Director Fee Option Grant Program,
then each such option may be exercised, for any or all of the shares for which
the option is exercisable at the time of the Optionee's cessation of Board
service (less any shares subsequently purchased by Optionee prior to death), by
the personal representative of the Optionee's estate or by the person or
persons to whom the option is transferred pursuant to the Optionee's will or in
accordance with the laws of descent and distribution. Such right of exercise
shall lapse, and the option shall terminate, upon the earlier of (i) the
expiration of the ten (10)-year option term or (ii) the three (3)-year period
measured from the date of the Optionee's cessation of Board service.
24.
<PAGE> 25
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction while the
Optionee remains a Board member, each outstanding option held by such Optionee
under this Director Fee Option Grant Program shall automatically accelerate so
that each such option shall, immediately prior to the effective date of the
Corporate Transaction, become fully exercisable with respect to the total
number of shares of Common Stock at the time subject to such option and may be
exercised for any or all of those shares as fully-vested shares of Common
Stock. Each such outstanding option shall be assumed by the successor
corporation (or parent thereof) in the Corporate Transaction and shall remain
exercisable for the fully-vested shares until the earlier of (i) the expiration
of the ten (10)-year option term or (ii) the expiration of the three (3)-year
period measured from the date of the Optionee's cessation of Board service.
B. In the event of a Change in Control while the
Optionee remains in Service, each outstanding option held by such Optionee
under this Director Fee Option Grant Program shall automatically accelerate so
that each such option shall immediately become fully exercisable with respect
to the total number of shares of Common Stock at the time subject to such
option and may be exercised for any or all of those shares as fully-vested
shares of Common Stock. The option shall remain so exercisable until the
earlier or (i) the expiration of the ten (10)-year option term or (ii) the
expiration of the three (3)-year period measured from the date of the
Optionee's cessation of Service.
C. Upon the occurrence of a Hostile Take-Over, the
Optionee shall have a thirty (30)-day period in which to surrender to the
Corporation each of his or her outstanding option grants. The Optionee shall
in return be entitled to a cash distribution from the Corporation in an amount
equal to the excess of (i) the Take-Over Price of the shares of Common Stock at
the time subject to each surrendered option (whether or not the Optionee is
otherwise at the time vested in those shares) over (ii) the aggregate exercise
price payable for such shares. Such cash distribution shall be paid within
five (5) days following the surrender of the option to the Corporation. No
approval or consent of the Board or any Plan Administrator shall be required in
connection with such option surrender and cash distribution.
D. The grant of options under the Director Fee Option
Grant Program shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
IV. REMAINING TERMS
The remaining terms of each option granted under this Director
Fee Option Grant Program shall be the same as the terms in effect for option
grants made under the Discretionary Option Grant Program.
25.
<PAGE> 26
ARTICLE SEVEN
MISCELLANEOUS
I. FINANCING
A. The Plan Administrator may permit any Optionee or
Participant to pay the option exercise price under the Discretionary Option
Grant Program or the purchase price for shares issued under the Stock Issuance
Program by delivering a full-recourse, interest bearing promissory note payable
in one or more installments. The terms of any such promissory note (including
the interest rate and the terms of repayment) shall be established by the Plan
Administrator in its sole discretion. In all events, the maximum credit
available to the Optionee or Participant may not exceed the sum of (i) the
aggregate option exercise price or purchase price payable for the purchased
shares plus (ii) any Federal, state and local income and employment tax
liability incurred by the Optionee or the Participant in connection with the
option exercise or share purchase.
B. The Plan Administrator may, in its discretion,
determine that one or more such promissory notes shall be subject to
forgiveness by the Corporation in whole or in part upon such terms as the Plan
Administrator may deem appropriate.
II. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of
Common Stock upon the exercise of options or upon the issuance or vesting of
such shares under the Plan shall be subject to the satisfaction of all
applicable Federal, state and local income and employment tax withholding
requirements.
B. The Plan Administrator may, in its discretion,
provide any or all holders of Non-Statutory Options or unvested shares of
Common Stock under the Plan (other than the options granted or the shares
issued under the Automatic Option Grant or Director Fee Option Grant Program)
with the right to use shares of Common Stock in satisfaction of all or part of
the Taxes incurred by such holders in connection with the exercise of their
options or the vesting of their shares. Such right may be provided to any such
holder in either or both of the following formats:
(i) Stock Withholding: The election to
have the Corporation withhold, from the shares of Common Stock
otherwise issuable upon the exercise of such Non-Statutory Option or
the vesting of such shares, a portion of those shares with an
aggregate Fair Market Value equal to the percentage of the Taxes (not
to exceed one hundred percent (100%)) designated by the holder.
26.
<PAGE> 27
(ii) Stock Delivery: The election to
deliver to the Corporation, at the time the Non-Statutory Option is
exercised or the shares vest, one or more shares of Common Stock
previously acquired by such holder (other than in connection with the
option exercise or share vesting triggering the Taxes) with an
aggregate Fair Market Value equal to the percentage of the Taxes (not
to exceed one hundred percent (100%)) designated by the holder.
III. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board on April 9, 1997.
The Plan shall become effective upon stockholder approval of the Plan at the
1997 Annual Stockholders Meeting. If such stockholder approval is not
obtained, the Plan shall terminate.
B. The Plan shall serve as the successor to the
Predecessor Plans, and no further option grants or direct stock issuances shall
be made under the Predecessor Plans after the date of the 1997 Annual
Stockholders Meeting. All options outstanding under the Predecessor Plans on
that date shall be incorporated into the Plan at that time and shall be treated
as outstanding options under the Plan. However, each outstanding option so
incorporated shall continue to be governed solely by the terms of the documents
evidencing such option, and no provision of the Plan shall be deemed to affect
or otherwise modify the rights or obligations of the holders of such
incorporated options with respect to their acquisition of shares of Common
Stock.
C. The Plan shall terminate upon the earliest of (i)
April 8, 2007, (ii) the date on which all shares available for issuance under
the Plan shall have been issued as fully-vested shares or (iii) the termination
of all outstanding options in connection with a Corporate Transaction. Upon
such Plan termination, all outstanding options and unvested stock issuances
shall continue to have force and effect in accordance with the provisions of
the documents evidencing such options or issuances.
IV. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and
authority to amend or modify the Plan in any or all respects. However, no such
amendment or modification shall adversely affect any rights and obligations
with respect to options, stock appreciation rights or unvested stock issuances
at the time outstanding under the Plan unless the Optionee or the Participant
consents to such amendment or modification. In addition, amendments to the
Plan shall be subject to approval of the Corporation's stockholders to the
extent required by applicable laws or regulations.
B. Options to purchase shares of Common Stock may be
granted under the Discretionary Option Grant Program and shares of Common Stock
may be issued under the Stock Issuance Program that are in each instance in
excess of the number of shares then
27.
<PAGE> 28
available for issuance under the Plan, provided any excess shares actually
issued under those programs are held in escrow until there is obtained
stockholder approval of an amendment sufficiently increasing the number of
shares of Common Stock available for issuance under the Plan. If such
stockholder approval is not obtained within twelve (12) months after the date
the first such excess grants or issuances are made, then (i) any unexercised
options granted on the basis of such excess shares shall terminate and cease to
be outstanding and (ii) the Corporation shall promptly refund to the Optionees
and the Participants the exercise or purchase price paid for any excess shares
issued under the Plan and held in escrow, together with interest (at the
applicable Short Term Federal Rate) for the period the shares were held in
escrow, and such shares shall thereupon be automatically cancelled and cease to
be outstanding.
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any
option or stock appreciation right under the Plan and the issuance of any
shares of Common Stock (i) upon the exercise of any option or stock
appreciation right or (ii) under the Stock Issuance Program shall be subject to
the Corporation's procurement of all approvals and permits required by
regulatory authorities having jurisdiction over the Plan, the options and stock
appreciation rights granted under it and the shares of Common Stock issued
pursuant to it.
B. No shares of Common Stock or other assets shall be
issued or delivered under the Plan unless and until there shall have been
compliance with all applicable requirements of Federal and state securities
laws and all applicable listing requirements of any stock exchange (or the
Nasdaq National Market, if applicable) on which Common Stock is then listed for
trading.
VII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the
Participant any right to continue in Service for any period of specific
duration or interfere with or otherwise restrict in any way the rights of the
Corporation (or any Parent or Subsidiary employing or retaining such person) or
of the Optionee or the Participant, which rights are hereby expressly reserved
by each, to terminate such person's Service at any time for any reason, with or
without cause.
28.
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APPENDIX
The following definitions shall be in effect under the Plan:
A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option
grant program in effect under the Plan.
B. BOARD shall mean the Corporation's Board of Directors.
C. CHANGE IN CONTROL shall mean a change in ownership or control
of the Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly, by
any person or related group of persons (other than the Corporation or
a person that directly or indirectly controls, is controlled by, or is
under common control with, the Corporation), of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities pursuant to a tender
or exchange offer made directly to the Corporation's stockholders,
which the Board does not recommend such stockholders to accept, or
(ii) a change in the composition of the Board over
a period of thirty-six (36) consecutive months or less such that a
majority of the Board members ceases, by reason of one or more
contested elections for Board membership, to be comprised of
individuals who either (A) have been Board members continuously since
the beginning of such period or (B) have been elected or nominated for
election as Board members during such period by at least a majority of
the Board members described in clause (A) who were still in office at
the time the Board approved such election or nomination.
D. CODE shall mean the Internal Revenue Code of 1986, as amended.
E. COMMON STOCK shall mean the Corporation's common stock.
F. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities are transferred to a
person or persons different from the persons holding those securities
immediately prior to such transaction; or
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(ii) the sale, transfer or other disposition of
all or substantially all of the Corporation's assets in complete
liquidation or dissolution of the Corporation.
G. CORPORATION shall mean Credit Management Solutions, Inc., a
Delaware corporation, and any corporate successor to all or substantially all
of the assets or voting stock of Credit Management Solutions, Inc. which shall
by appropriate action adopt the Plan.
H. DISCRETIONARY OPTION GRANT PROGRAM shall mean the
discretionary option grant program in effect under the Plan.
I. DIRECTOR FEE OPTION GRANT PROGRAM shall mean the special stock
option grant in effect for non-employee Board members under Article Five of the
Plan.
J. ELIGIBLE DIRECTOR shall mean a non-employee Board member
eligible to participate in the Automatic Option Grant Program in accordance
with the eligibility provisions of Article One.
K. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
L. EXERCISE DATE shall mean the date on which the Corporation
shall have received written notice of the option exercise.
M. FAIR MARKET VALUE per share of Common Stock on any relevant
date shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on
the Nasdaq National Market, then the Fair Market Value shall be the
closing selling price per share of Common Stock on the date in
question, as such price is reported by the National Association of
Securities Dealers on the Nasdaq National Market or any successor
system. If there is no closing selling price for the Common Stock on
the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation
exists.
(ii) If the Common Stock is at the time listed on
any Stock Exchange, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question on the
Stock Exchange determined by the Plan Administrator to be the primary
market for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no
closing selling price for the
A-2.
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Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which
such quotation exists.
N. HOSTILE TAKE-OVER shall mean the acquisition, directly or
indirectly, by any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is controlled by,
or is under common control with, the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange offer
made directly to the Corporation's stockholders which the Board does not
recommend such stockholders to accept.
O. INCENTIVE OPTION shall mean an option which satisfies the
requirements of Code Section 422.
P. INVOLUNTARY TERMINATION shall mean the termination of the
Service of any individual which occurs by reason of:
(i) such individual's involuntary dismissal or
discharge by the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation
following (A) a change in his or her position with the Corporation
which materially reduces his or her level of responsibility, (B) a
reduction in his or her level of compensation (including base salary,
fringe benefits and participation in corporate-performance based bonus
or incentive programs) by more than fifteen percent (15%) or (C) a
relocation of such individual's place of employment by more than fifty
(50) miles, provided and only if such change, reduction or relocation
is effected by the Corporation without the individual's consent.
Q. MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of
the Corporation (or any Parent or Subsidiary), or any other intentional
misconduct by such person adversely affecting the business or affairs of the
Corporation (or any Parent or Subsidiary) in a material manner. The foregoing
definition shall not be deemed to be inclusive of all the acts or omissions
which the Corporation (or any Parent or Subsidiary) may consider as grounds for
the dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).
R. 1934 ACT shall mean the Securities Exchange Act of 1934, as
amended.
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S. NON-STATUTORY OPTION shall mean an option not intended to
satisfy the requirements of Code Section 422.
T. OPTIONEE shall mean any person to whom an option is granted
under the Discretionary Option Grant, Automatic Option Grant or Director Fee
Option Grant Program.
U. PARENT shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
V. PARTICIPANT shall mean any person who is issued shares of
Common Stock under the Stock Issuance Program.
W. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the
inability of the Optionee or the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of
twelve (12) months or more. However, solely for the purposes of the Automatic
Option Grant and Director Fee Option Grant Programs, Permanent Disability or
Permanently Disabled shall mean the inability of the non-employee Board member
to perform his or her usual duties as a Board member by reason of any medically
determinable physical or mental impairment expected to result in death or to be
of continuous duration of twelve (12) months or more.
X. PLAN shall mean the Corporation's 1997 Stock Incentive Plan,
as set forth in this document.
Y. PLAN ADMINISTRATOR shall mean the particular entity, whether
the Primary Committee, the Board or the Secondary Committee, which is
authorized to administer the Discretionary Option Grant and Stock Issuance
Programs with respect to one or more classes of eligible persons, to the extent
such entity is carrying out its administrative functions under those programs
with respect to the persons under its jurisdiction.
Z. PRIMARY COMMITTEE shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders.
AA. SALARY INVESTMENT OPTION GRANT PROGRAM shall mean the salary
investment grant program in effect under the Plan.
A-4.
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AB. SECONDARY COMMITTEE shall mean a committee of two (2) or more
Board members appointed by the Board to administer the Discretionary Option
Grant and Stock Issuance Programs with respect to eligible persons other than
Section 16 Insiders.
AC. SECTION 16 INSIDER shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
AD. SERVICE shall mean the performance of services to the
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided in
the documents evidencing the option grant or stock issuance.
AE. STOCK EXCHANGE shall mean either the American Stock Exchange
or the New York Stock Exchange.
AF. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into
by the Corporation and the Participant at the time of issuance of shares of
Common Stock under the Stock Issuance Program.
AG. STOCK ISSUANCE PROGRAM shall mean the stock issuance program
in effect under the Plan.
AH. SUBSIDIARY shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
AI. TAKE-OVER PRICE shall mean the greater of (i) the Fair Market
Value per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.
AJ. TAXES shall mean the Federal, state and local income and
employment tax liabilities incurred by the holder of Non-Statutory Options or
unvested shares of Common Stock in connection with the exercise of those
options or the vesting of those shares.
AK. 10% STOCKHOLDER shall mean the owner of stock (as determined
under Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
A-5.
