CREDIT MANAGEMENT SOLUTIONS, INC.
135 National Business Parkway
Annapolis Junction, Maryland 20701
Notice of Annual Meeting of Stockholders
June 29, 2000
The Annual Meeting of Stockholders of Credit Management Solutions, Inc.
(the "Company") will be held at the Company's offices, 135 National Business
Parkway, Annapolis Junction, Maryland 20701 on June 29, 2000 at 9:00 a.m.
Eastern time for the following purposes:
(1) To elect one Director to serve until the 2003 Annual Meeting of
Stockholders or until his successor shall have been duly elected and
qualified;
(2) To approve an amendment to the Company's 1997 Stock Incentive Plan
which will (i) increases the number of shares of the Company's common stock
subject to options automatically granted annually to non-employee directors
under the Plan's Automatic Option Grant Program from 5,000 to 10,000 and
(ii) limit the maximum number of shares of common stock by which the Plan's
share reserve may increase annually to 100,000 shares;
(3) To ratify the selection of Ernst & Young LLP, independent public
accountants, as auditors of the Company for the fiscal year ending December
31, 2000; and
(4) To transact such other business as many properly come before the
Annual Meeting of Stockholders.
Only stockholders of record at the close of business on May 15, 2000 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 your 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/ Scott L. Freiman
Scott L. Freiman
Chief Executive Officer and President
May 31, 2000
IT IS IMPORTANT THAT THE ENCLOSED PROXY CARD BE
COMPLETED AND RETURNED PROMPTLY
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CREDIT MANAGEMENT SOLUTIONS, INC.
PROXY STATEMENT
May 31, 2000
This Proxy Statement is furnished to stockholders of record of Credit
Management Solutions, Inc. (the "Company") as of May 15, 2000 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 June 29, 2000 (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 (i) "FOR" the election of the named
nominee as a director of the Company, (ii) "FOR" the approval of the amendment
to the 1997 Stock Incentive Plan, (iii) "FOR" the ratification of Ernst & Young
LLP, independent public accountants, as auditors for the Company for the fiscal
year ending December 31, 2000, and (iv) 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 the quorum for the transactions 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 non-votes 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, 1999, is being distributed concurrently herewith to stockholders.
The mailing address of the principal executive offices of the Company is
135 National Business Parkway, Annapolis Junction, Maryland 20701. This Proxy
Statement and the accompanying form of proxy are being mailed to the
stockholders of the Company on or about May 31, 2000.
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 May 15, 2000
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 May 15, 2000, 7,820,598
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.
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PROPOSAL 1
ELECTION OF DIRECTOR
One director is to be elected at the Annual Meeting to serve as a Class I
Director until the 2003 Annual Meeting of Stockholders or until his respective
successor is duly elected and qualified. Unless otherwise instructed, the proxy
holders will vote the proxies received by them "FOR" the Company's nominee,
Robert P. Vollono. The 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 Mr. Vollono, whose term expires at the Annual Meeting of
Stockholders. Class II consists of Scott L. Freiman, Stephen X. Graham and Miles
H. Grody whose terms expire at the 2001 Annual Meeting of Stockholders. Class
III consists of James R. DeFrancesco and John J. McDonnell, Jr. whose terms
expire at the 2002 Annual Meeting of Stockholders. At each 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 the nominee is unable to be a candidate when the election takes place,
the shares represented by valid proxies will be voted in favor of any nominee
who may be designated by the present Board to fill the vacancy. The Board of
Directors has no reason to believe that the 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 director.
Information Regarding Nominee for Reelection as Director
The Board of Directors currently has six members. The following information
with respect to the principal occupation or employment, other affiliations and
business experience of the nominee during the last five years has been furnished
to the Company by such nominee. Except as indicated, the nominees for
re-election has had the same principal occupation for the last five years.
Robert P. Vollono, age 51, 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. Since February 2000, Mr. Vollono
has served as Chief Financial Officer of the Company's subsidiaries CMSI
Systems, Inc. and Credit Online, Inc. 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.
Information Regarding Nonemployee Directors Who are Not Nominees For Reelection
as Directors
Stephen X. Graham, age 47, has served as a director since October 1996.
Since 1998, he has been the President and Chief Executive Officer of Cross Hill
Financial Group, Inc., a private investment banking firm. From 1982 to 1988 Mr.
Graham was a Vice President of Kidder, Peabody & Co.
John J. McDonnell, Jr, age 62, has served as a Director since November
1996, and as Chairman of the Board since September 1999. Mr. McDonnell has
served as President and Chief Executive Officer of Paylinx Corporation, a
leading provider of internet payment solutions, since February 2000. Mr.
McDonnell served as President, Chief Executive Officer and a director of
Transaction Network System,
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Inc., a nationwide communications network company specializing in
transaction-oriented data services, from 1990 until its acquisition by PSInet,
Inc. in November 1999. From 1987 to 1989, Mr. McDonnell served as President and
Chief Executive Officer of Digital Radio Network, Inc., a local access 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 the responsibility
for both private network sales and public 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. Mr. McDonnell currently serves on the Board of Directors of
Intelidata Data Technologies Corp., a publicly-traded software company.
James R. DeFrancesco, age 51, a co-founder of the Company, has served as a
Director of the Company since 1987. Mr. DeFrancesco served as the Company's
Chief Executive Officer from 1987 to May 1999, as Chairman of the Board of
Directors from 1987 to September 1999 and as President from 1987 to 1998. Since
1989, Mr. DeFrancesco has served as the President of Businessliner, Inc., a
company which leases an airplane to the Company for business travel. From August
1997 to May 1999, Mr. DeFrancesco served as a Vice President of D & R
Investments, L.L.C., a company that leased an airplane to the Company for
business travel during that period. From 1987 to 1992, Mr. DeFrancesco served as
President of Perpetual Leasing Services, Inc., the automobile leasing subsidiary
of Perpetual Savings Bank, FSB. From 1976 to 1987, Mr. DeFrancesco founded and
served as President and Chief Executive Officer of American Financial
Corporation, an automobile finance/leasing company.
Information regarding directors who are employees of the Company is set
forth under "Executive Compensation and Other Information... Executive Officers"
on page 6.
Recommendation of the Board of Directors
The Board of Directors recommends that stockholders vote "FOR" the election
of the nominee listed above.
Committees of the Board
The Audit Committee consists of Mr. Graham and Mr. McDonnell 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. McDonnell and Mr. Graham 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
Neither Mr. McDonnell nor Mr. Graham has been an officer or employee of the
Company at any time. Mr. Graham is President and Chief Executive officer of
Cross Hill Financial Group, Inc. In 1999, the Company paid Cross Hill Financial
Group, Inc. financial advisory fees in an aggregate amount equal to $62,345. The
Company also agreed to indemnify Cross Hill Financial Group, Inc. against
certain liabilities resulting from the performance of its duties as financial
advisor, subject to certain limitations.
Attendance at Board and Committee Meetings
During 1999, the Board of Directors held four meetings and acted by
unanimous written consent on one occasion. The Compensation Committee held four
meetings during 1999 and did not act by unanimous written consent. The Audit
Committee held one meeting during 1999 and did not act by
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unanimous written consent. Each director attended or participated in 75% or more
of the aggregate of (i) the total number of meetings of the Board and (ii) the
total number of meetings held by all committees of the Board on which such
director served during 1999.
Section 16(a) Beneficial Ownership Reporting Compliance
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. 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 1999. Based solely on its review of such forms received by it
from such persons for their 1999 transactions, the Company believes that all
directors, officers and beneficial owners of more than 10 percent of the
Company's Common Stock were in compliance with all such filing requirements,
except for the following: (i) Mr. McDonnell failed to timely report two
purchases of Common Stock in November 1999, (ii) Mr. DeFrancesco failed to
timely report two sales of Common Stock in November and December 1999, (iii) Mr.
Freiman failed to timely report one sale of Common Stock in November 1999 and
(iv) Mr. Vollono failed to timely report one sale of Common Stock in September
1999.
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. Commencing in January 2000, each of Stephen Graham and John McDonnell
were granted annual retainers of $24,000. Both Messrs. Graham and McDonnell have
elected to apply 100% of their annual retainer fee to the acquisition of a
special stock option grant pursuant to the Director Fee Option Grant Program
under the 1997 Plan.
Stock Option Grant. Pursuant to the 1997 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. Such options vest 50% six months from the date of grant 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. Proposal Two contained in this Proxy Statement, if
approved by stockholders of the Company at the Annual Meeting, would increase to
10,000 the number of shares subject to stock options automatically granted
annually to non-employee directors. On October 11, 1999 Mr. Graham was granted
options to buy 5,000 shares of the Company's Common Stock at an option price of
$5.00 per share. On November 15, 1999 Mr. McDonnell was granted options to buy
5,000 shares of the Company's Common Stock at an option price of $5.25 per
share. These options vest 50% six months from the date of grant 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.
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EXECUTIVE COMPENSATION AND OTHER INFORMATION
Executive Officers
The following individuals were serving as executive officers of the Company on
May 15, 2000:
<TABLE>
<CAPTION>
Name Age Position with the Company
---- --- -------------------------
<S> <C> <C>
Scott L. Freiman 37 President and Chief Executive Officer
Miles H. Grody 43 Senior Vice President; President and CEO of CMSI
Systems, Inc.
Howard L. Tischler 46 Senior Vice President; President and CEO of Credit
Online, Inc.
Robert P. Vollono 51 Senior Vice President and Chief Financial Officer
</TABLE>
Information Concerning Executive Officers Who Are Not Nominees for Reelection as
Directors
Scott L. Freiman, a co-founder of the Company, has served as the Company's
President and Chief Executive Officer since September 1999, and as a director
since 1987. Mr. Freiman served as Executive Vice President of the Company from
1987 to September 1999. 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.
Miles H. Grody has served as the Company's Senior Vice President since June
1995, and President and Chief Executive Officer of the Company's subsidiary,
CMSI Systems, Inc., since February 2000. Mr. Grody served as the Company's
Senior Vice President and General Manager of the Company's Credit Decisioning
Systems division (predecessor to CMSI Systems, Inc.) from November 1998 to
February 2000. From June 1995 to November 1998, Mr. Grody served as the
Company's Secretary and General Counsel. He has been 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 service 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.
Howard L. Tischler has served since February 2000 as the Company's Senior
Vice President and as President and Chief Executive Officer of the Company's
subsidiary, Credit Online, Inc. From November 1999 to February 2000, Mr.
Tischler served as General Manager of the Company's e-Commerce division,
predecessor to Credit Online, Inc. From 1995 to 1999, Mr. Tischler was President
of SunGard Healthcare, a wholly owned subsidiary of SunGard Data Systems, Inc.
Mr. Tischler was President of the Healthcare Systems Group of Intelus
Corporation from 1993 until the acquisition of Intelus by SunGard Data Systems
in 1995. From 1986 to 1993, Mr. Tischler served as Executive Vice President and
Vice President, Operations, for Intelus Corporation.
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Summary Compensation Table
The following table provides certain summary information concerning the
compensation earned by each person who served as the Company's Chief Executive
Officer during the fiscal year ended December 31, 1999, and by each of the four
other most highly compensated executive officers of the Company whose salary and
bonus for such fiscal year was in excess of $100,000, for services rendered in
all capacities to the Company and its subsidiaries for the fiscal years ended
December 31, 1997, 1998 and 1999. The listed individuals shall be hereinafter
referred to as the "Named Executive Officers".
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
------------------------------------------------------------------------------------------------------------------------------
Name and Principal Position
--------------------------- Fiscal Salary Bonus Other annual Securities Underlying All Other
Year ($) ($) Compensation Options Compensation
------ ------ -------- ($) (1) (#) (2) ($) (3)
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Scott L. Freiman 1999 $190,307 -- -- 24,000 $ 6,000
Chief Executive Officer and President 1998 192,923 -- -- -- 6,000
1997 169,654 -- -- -- 5,500
------------------------------------------------------------------------------------------------------------------------------
James R. DeFrancesco 1999 187,787 -- -- -- 6,000
Chief Executive Officer (4) 1998 192,923 -- -- -- 6,000
1997 169,654 -- -- -- 5,500
------------------------------------------------------------------------------------------------------------------------------
Peter M. Leger 1999 206,721 -- -- -- 7,200
Chief Executive Officer (5) 1998 55,285 $150,000 -- -- 2,400
1997 -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------
Robert P. Vollono 1999 155,968 -- -- 24,000 --
Senior Vice President 1998 159,769 -- -- -- --
Treasurer and 1997 133,731 -- -- -- --
Chief Financial Officer
------------------------------------------------------------------------------------------------------------------------------
Miles H. Grody 1999 157,220 -- -- 24,000 --
Senior Vice President of CMSI 1998 158,654 -- -- -- --
and President and CEO of 1997 133,731 -- -- -- --
CMSI Systems, Inc
------------------------------------------------------------------------------------------------------------------------------
</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 $50,000 or 10% of the total
annual salary and bonus for the executive officer for such year.
(2) The Company did not grant any stock appreciation rights or make any
long-term incentive plan payments to any Named Executive Officers in 1999,
1998 or 1997.
(3) Consists of an automobile allowance.
(4) Mr. DeFrancesco resigned his position in May 1999.
(5) Mr. Leger served as Chief Executive Officer from May 1999 to September
1999.
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Option Grants in Last Fiscal Year
The following table provides information with respect to the stock option
grants made during the last fiscal year to the Named Executive Officers. No
stock appreciation rights were granted during 1999.
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Rated of Stock Price
Appreciation of Option Term (1)
------------------------------------------------------------------------------------------------------------------------------------
Number of % of Total Exercise Expiration 5% 10%
Name Securities Options Price Date
---- Underlying Granted to ($/Share)
Options Employees in
Granted Fiscal Year
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Scott L. Freiman 24,000(2) 2.94 $ 4.538 11/11/09 $177,406 $282,490
------------------------------------------------------------------------------------------------------------------------------------
James R. DeFrancesco -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Peter M. Leger -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Robert P. Vollono 24,000(2) 2.94 4.125 11/11/09 161,261 256,781
------------------------------------------------------------------------------------------------------------------------------------
Miles H. Grody 24,000(2) 2.94 4.125 11/11/09 161,261 256,781
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) There can be no assurance provided to any executive officer or other holder
of the Company's securities that the actual stock price appreciation over
the ten-year option term will be at the assumed 5% or 10% levels or at any
other defined level. Unless the market price of the Common Stock
appreciates over the option term, no value will be realized from those
option grants which were made to the Named Executive Officers with an
exercise price equal to (or in the case of Scott Freiman, greater than) the
fair market value of the option shares on the grant date.
(2) These options were granted on November 11, 1999, and vest in four equal
installments on each of the first, second, third and fourth annual
anniversaries of the grant date.
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 holdings as of December 31,
1999. No stock options were exercised by any Named Executive Officer during
1999. No stock appreciation rights were exercised by any Named Executive Officer
during 1999 and no stock appreciation rights were outstanding as of December 31,
1999.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Name Number of Securities Underlying Value of Unexercised In-The-Money
---- Unexercised Options at Fiscal Year- Options at fiscal Year-End (1)
End (#)
------------------------------------------------------------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Scott L. Freiman .................................. -- 24,000 -- 95,088
------------------------------------------------------------------------------------------------------------------------------------
James R. DeFrancesco .............................. -- -- $ -- $ --
------------------------------------------------------------------------------------------------------------------------------------
Peter M. Leger .................................... -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Robert P. Vollono ................................. 304,784 105,196 1,066,744 389,186
------------------------------------------------------------------------------------------------------------------------------------
Miles H. Grody .................................... 304,784 105,196 1,066,744 389,186
------------------------------------------------------------------------------------------------------------------------------------
</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 $8.50 per share of
Common Stock on December 31, 1999.
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COMPENSATION COMMITTEE REPORT
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 1997 Plan
under which option grants, stock appreciation rights, restricted awards and
performance awards may be made to directors, executive officers and employees of
the Company and its subsidiaries.
The Compensation Committee believes that the compensation programs for the
Company's executive officers should reflect the Company's performance and the
value created for the Company's stockholders. In addition, the compensation
programs should support the short-term and long-term strategic goals and values
of the Company and should reward individual contribution to the Company's
success. The Company is engaged in a very competitive industry, and the
Company's success depends upon its ability to attract and retain qualified
executives through the competitive compensation packages it offers such
individuals.
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, and where
appropriate, a bonus plan which reflect individual performance and are 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
1999 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 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
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<PAGE>
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 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 relative option holdings of the Company's executive officers.
Through the Company's Employee Stock Purchase Plan, the Company offers
additional opportunities for 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. Freiman in 1999 and to discuss the relationship between the Company's
performance during the last fiscal year and Mr. Freiman'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. Freiman's base salary in 1999, the suggested base salary
established for Mr. Freiman on the basis of the foregoing criteria was intended
to provide a level of stability and certainty. Accordingly, Mr. Freiman'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 1997 Plan contains 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 2000 will exceed the $1 million limit
per officer. Further, in accordance with issued Treasury Regulations relating to
the new $1 million limitation, the 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 $1 million limitation.
THE COMPENSATION COMMITTEE
JOHN J. MCDONNELL, JR.
STEPHEN X. GRAHAM
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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 of the Company's initial public offering) 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 Services companies
index (SIC Code 7371).
COMPARISON OF 36 MONTH CUMULATIVE TOTAL RETURN*
AMONG CREDIT MANAGEMENT SOLUTIONS, INC. THE NASDAQ STOCK MARKET (U.S.)
INDEX AND THE NASDAQ COMPUTER & DATA PROCESSING INDEX
[THE FOLLOWING TABLE IS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
12/18/96 12/96 12/97 12/98 12/99
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Credit Management Solutions, Inc $100.00 $126.00 $113.00 $ 48.00 $ 74.00
NASDAQ Stock Market (U.S.) $100.00 $100.00 $123.00 $173.00 $312.00
NASDAQ Computer & Data Processing $100.00 $100.00 $123.00 $219.00 $464.00
---------------------------------------------------------------------------------------------------------------------
</TABLE>
----------
* Assumes $100 invested on 12/18/96 in stock or index, including reinvestment
of dividends. Fiscal year ending December 31.
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 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.
11
<PAGE>
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 April 21, 2000 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 Common Stock
Name of Beneficial Owner Beneficially Percentage of Shares
Owned (1) Outstanding (1) (2)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
James R. DeFrancesco 2,926,396 37.4
----------------------------------------------------------------------------------------------------------------
Scott L. Freiman (3) 1,396,160 17.9
----------------------------------------------------------------------------------------------------------------
Cumberland Associates (4) 708,594 9.1
----------------------------------------------------------------------------------------------------------------
Dolphin Offshore Partners, L.P. (5) 643,659 8.2
----------------------------------------------------------------------------------------------------------------
Jon D. Gruber (6) 488,400 6.2
----------------------------------------------------------------------------------------------------------------
J. Patterson McBaine (6) 462,000 5.9
----------------------------------------------------------------------------------------------------------------
Eric B. Swergold (6) 433,000 5.5
----------------------------------------------------------------------------------------------------------------
Gruber & McBaine Capital Management, LLC (6) 429,000 5.5
----------------------------------------------------------------------------------------------------------------
Thomas O. Lloyd-Butler (6) 429,000 5.5
----------------------------------------------------------------------------------------------------------------
Miles H. Grody (7) 304,784 3.9
----------------------------------------------------------------------------------------------------------------
Robert P. Vollono (8) 304,809 3.9
----------------------------------------------------------------------------------------------------------------
Stephen X. Graham (9) 15,000 *
----------------------------------------------------------------------------------------------------------------
John J. McDonnell, Jr. (10) 240,400 3.1
----------------------------------------------------------------------------------------------------------------
All executive officers and Directors as a group (8 persons) (11) 5,187,549 66.3
----------------------------------------------------------------------------------------------------------------
</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 April
21, 2000 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 7,819,407 shares of Common Stock issued and
outstanding as of April 21, 2000.
(3) Includes an aggregate of 69,476 shares held by Mr. Freiman's spouse and
children.
(4) Pursuant to a Schedule 13G filed February 14, 2000 with the Securities and
Exchange Commission, Cumberland Associates LLC reported that as of that
date it had sole voting power and sole dispositive power with respect to
632,800 of the shares and shared voting and dispositive power with respect
to the remaining 68,800 shares.
(5) Pursuant to a Schedule 13D filed on February 10, 2000 with the Securities
and Exchange Commission, Peter E. Salas, as general partner of Dolphin
Offshore Partners, L.P. ("DOP"), reported that as of that date he, as
general partner of DOP, had sole voting and dispositive power with respect
to all 643,659 shares.
(6) Pursuant to a Schedule 13D filed on February 10, 2000 with the Securities
and Exchange Commission, Gruber & McBaine Capital Management, L.L.C.
("G&MCM") reported that as of December 7, 1999 it shared voting and
dispositive power with respect to the 429,000 shares beneficially owned by
it. Jon D. Gruber ("Gruber") and J. Patterson McBaine ("McBaine"), as
managers of G&MCM,reported that they shared voting and dispositive powers
with respect to the
12
<PAGE>
same 429,000 shares. In addition, Gruber reported having sole voting and
dispositive power with respect to an additional 59,400 shares and McBaine
reported having sole voting and dispositive power with respect to an
additional 33,000 shares. Thomas Lloyd-Butler and Eric B. Swergold
("Swergold"), members of G&MCM, reported having shared voting and
dispositive power with respect to the 429,000 shares. In addition, Swergold
reported having sole voting and dispositive power with respect to an
additional 4,000 shares.
(7) Consists of 304,784 shares of Common Stock issuable upon exercise of a
stock option.
(8) Includes 25 shares held by Mr. Vollono's spouse and 324,784 shares of
Common Stock issuable upon exercise of a stock option.
(9) Consists of 15,000 shares of Common Stock issuable upon exercise of stock
options.
(10) Includes 15,000 shares of Common Stock issuable upon exercise of stock
options.
(11) See Notes (3) and (7) through (10).
13
<PAGE>
CERTAIN TRANSACTIONS
Mr. DeFrancesco owns 50% of the outstanding stock, and is the President, of
Business Liner, Inc. and owns 50% of the outstanding stock, and is the Vice
President, of D&R Investments, L.L.C. These companies lease airplanes 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 leases of the airplanes are
comparable to the amounts the Company would have other wise paid for comparable
services from unaffiliated parties. For the fiscal year ended December 31, 1999,
the Company paid Business Liner, Inc. $45,781 and D&R Investments, L.L.C.
$24,200 under this leasing arrangement.
Mr. Graham is President and Chief Executive Officer of Cross Hill Financial
Group, Inc. In connection with the Company's initial public offering of
securities and other matters, the Company paid Cross Hill Financial Group, Inc.
financial advisory fees in an aggregate amount equal to $62,345 in 1999. The
Company also agreed to indemnify Cross Hill Financial Group, Inc. against
certain liabilities resulting from the performance of its duties as financial
advisor, subject to certain limitations.
In addition, the information set forth under "Employment Contracts,
Termination of Employment and Change in Control Arrangements" below is
incorporated herein by reference.
Employment Contracts, Termination of Employment and Change in Control
Arrangements
In April 2000, the Company entered into employment agreements with each of
Scott Freiman and Robert Vollono, pursuant to which they are employed as
President and Chief Executive Officer and Chief Financial Officer, respectively,
of the Company. The agreements provide for the payment of a minimum annual
salary of $220,000 to Mr. Freiman and $175,000 to Mr. Vollono, subject to
increase at the discretion of the Company. Both agreements provide for the
payment of bonuses in the Company's sole discretion, based upon criteria
determined by the Company. In addition, under each agreement the applicable
executive is entitled to participate in all employee benefit plans provided by
the Company from time to time, to receive 184 hours of paid leave per year of
employment (two-thirds of which is considered to be vacation time), to be
provided term life insurance with benefits equal to the executive's annual
salary (up to a maximum of $400,000), a monthly automobile allowance of $500,
and reimbursement for all reasonable out-of-pocket expenses. If at any time the
executive's employment under the agreement is terminated by the Company for any
reason other than for cause or the executive resigns for good reason, then such
executive will become entitled to the following severance benefits: (i)
continued payment of his full salary for six months, (ii) continued medical,
life and disability coverage for a period of six months, and (iii) immediate
vesting of all of his outstanding stock options. If such termination or
resignation occurs within 18 months after a change in control of the Company or
an affiliate of the Company which employs the executive, whether by merger,
asset sale, tender or exchange offer for more than 50% of the outstanding voting
securities of the Company or such affiliate, adoption by the Board (or the board
of directors of such affiliate) of a plan of liquidation or a change in the
majority of the Board (or the board of directors of such affiliate) by one or
more contested elections, then the executive would instead become entitled to
the following: (i) a lump sum payment equal to 2.99 times his average annual
cash compensation during the previous five years (or such shorter period as he
shall have been employed by the Company), (ii) upon his surrender of all rights
to vested and unvested stock options granted to him by the Company, a lump sum
payment equal to the difference between the exercise price of such options and
the greater of the fair market value of the Common Stock on the date of the
termination or the highest effective price paid for the Common Stock by any
acquirer in connection with the change in control, (iii) continued medical, life
and disability coverage for 12 months (or until he receives comparable coverage
from a new employer, if sooner), and (iv) immediate vesting of all accrued
retirement and deferred compensation plans. The Company's obligation to provide
any such severance benefits is contingent upon the executive executing and
delivering to the Company a general release of all claims against the Company.
The term "cause" is defined under the agreements to include continued failure by
the executive to perform his duties, conviction of a felony, willful or reckless
misconduct which is injurious to the Company or any affiliate or the commission
of fraud or malfeasance. The term "good reason" is defined to include a
reduction in annual salary, the Company's failure to provide fringe benefits
comparable to those offered to other executives, the failure of any successor to
the Company to assume the Company's obligations under the employment
14
<PAGE>
agreements or a relocation of the executive's worksite to a location which
increases the distance from his home to his worksite by more than 50 miles.
The Company had been a party to an employment agreement with Peter Leger
dated October 1998. Such agreement terminated upon Mr. Leger's resignation as an
executive officer of the Company in September 1999.
The Company does not have any existing employment agreements with any other
executive officer named in the Summary Compensation Table. The Company expects
to enter into an employment agreement with Miles Grody and Howard Tischler
containing terms and conditions substantially similar to those described above.
Following James DeFrancesco's resignation from his position as Chief
Executive Officer of the Company in May 1999, the Company continued to pay Mr.
DeFrancesco his salary, and to provide his employment benefits, through December
31, 1999, as severance benefits. Mr. DeFrancesco continued to consult with and
otherwise assist the Company during that period with respect to strategic
planning, transactions and relationships and certain other matters. Effective as
of January 1, 2000, the Company entered into a consulting arrangement with Mr.
DeFrancesco, pursuant to which Mr. DeFrancesco was retained as a consultant, on
an independent contractor basis, to continue to provide such services through
December 31, 2000, for an annual fee of $213,200, payable bi-weekly. The
consulting arrangement may be extended thereafter upon mutual written agreement
of the parties. The Company expects to enter into a consulting agreement with
Mr. DeFrancesco to formalize such terms in the near future.
PROPOSAL 2
APPROVAL OF THE AMENDMENT TO THE 1997 STOCK INCENTIVE PLAN
The Company's stockholders are being asked to approve an amendment to the
1997 Plan, which will (i) increase the number of shares of the Company's common
stock subject to options automatically granted to non-employee Board members
under the Automatic Option Grant Program of the Plan at the time of initial
election to the Board and on each anniversary thereafter from 5,000 shares to
10,000 shares; and (ii) limit the maximum number of shares of common stock by
which the share reserve may increase annually to 100,000 shares.
The Board believes the amendment to the Automatic Option Grant Program is
necessary to bring the option grants to non-employee Board members in line with
industry averages. Equity incentives play a significant role in the Company's
efforts to remain competitive in the market for talented individuals to serve as
non-employee Board members, and the Company relies on such incentives as means
to attract and retain these highly qualified individuals vital to the Company's
success. The amendment to the automatic annual share reserve increase feature of
the Plan will allow the Company to grant incentive stock options with respect to
all or any portion of the amount of shares added to the Plan as a result of that
automatic annual increase feature consistent with recent interpretations of the
federal tax regulations.
The following is a summary of the principal features of the Plan, as most
recently amended. Any stockholder who wishes to obtain a copy of the actual plan
document may do so upon written request to the Company at 135 National Business
Parkway, Annapolis Junction, Maryland 20701.
The amendment was adopted by the Board of Directors effective as of May
2000, subject to stockholder approval at the Annual Meeting.
Equity Incentive Programs
15
<PAGE>
The Plan consists of five (5) separate equity incentive programs: (i) the
Discretionary Option Grant Program, (ii) the Salary Investment Option Grant
Program, (iii) the Stock Issuance Program, (iv) the Automatic Option Grant
Program for non-employee Board members and (v) the Director Fee Option Grant
Program for non-employee Board Members. The principal features of each program
are described below. The Compensation Committee of the Board has the exclusive
authority to administer the Discretionary Option Grant and Stock Issuance
Programs with respect to option grants and stock issuances made to the Company's
executive officers and non-employee Board members and also has the authority to
make option grants and stock issuances under those programs to all other
eligible individuals. However, the Board may at any time appoint a secondary
committee of one or more Board members to have separate but concurrent authority
with the Compensation Committee to make option grants and stock issuances under
those two programs to individuals other than the Company's executive officers
and non-employee Board members. The Compensation Committee has complete
discretion to determine the calendar year or years in which the Salary
Investment Option Grant and Director Fee Option Grant Programs will be in effect
and to select the individuals who are to participate in the Salary Investment
Option Grant Program. All grants made to the participants in the Salary
Investment Option Grant and Director Fee Option Grant Programs are governed by
the express terms of those programs. Neither the Compensation Committee nor any
secondary committee exercises any administrative discretion under the Automatic
Option Grant Program or Director Fee Option Grant Program. All grants under
those programs are made in strict compliance with the express provisions of each
such program.
The term Plan Administrator, as used in this summary, will mean the
Compensation Committee and any secondary committee, to the extent each such
entity is acting within the scope of its administrative jurisdiction under the
Plan.
Share Reserve
3,629,547 shares of the Company's common stock has been reserved for
issuance over the term of the Plan. In addition, on the first trading day of
each fiscal year, the number of shares of common stock available for issuance
under the Plan will automatically increase by an amount equal to one percent
(1%) of the shares of the Company's common stock outstanding on the last trading
day of the immediately preceding fiscal year, but in no event will the annual
increase exceed 100,000 shares.
As of December 31, 1999, 3,240,668 shares of Common Stock were subject to
outstanding options under the Plan, 24,960 shares of Common Stock had been
issued under the Plan, and 388,879 shares of Common Stock remained available for
future issuance, assuming stockholder approval of this Proposal.
No participant in the Plan may receive option grants, separately
exercisable stock appreciation rights or direct stock issuances for more than
100,000 shares of Common Stock in the aggregate per calendar year. Stockholder
approval of this Proposal will also constitute a reapproval of the 100,000-share
limitation for purposes of Internal Revenue Code Section 162(m).
The shares of Common Stock issuable under the Plan may be drawn from shares
of the Company's authorized but unissued shares of such common stock or from
shares of such common stock reacquired by the Company, including shares
repurchased on the open market.
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 per participant) under the
Plan and the securities and the exercise price per share in effect under each
outstanding option.
16
<PAGE>
Eligibility
Officers and employees, non-employee Board members and independent
consultants in the service of the Company or its parent and subsidiaries
(whether now existing or subsequently established) are eligible to participate
in the Discretionary Option Grant and Stock Issuance Programs. Executive
officers and other highly paid employees are also eligible to participate in the
Salary Investment Option Grant Program. Participation in the Automatic Option
Grant and Director Fee Option Grant Programs is limited to non-employee members
of the Board.
As of May 15, 2000, four (4) executive officers, three (3) non-employee
Board members and approximately one hundred seventy (170) other employees and
consultants were eligible to participate in the Discretionary Option Grant and
Stock Issuance Programs. The four (4) executive officers were also eligible to
participate in the Salary Investment Option Grant Program, and the three (3)
non-employee Board members were also 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 Plan will be deemed to be equal to the closing selling price per share on
that date on the Nasdaq National Market. On May 26, 2000 the fair market value
per share determined on such basis was $4.00.
Discretionary Option Grant Program
The Plan Administrator has complete discretion under the Discretionary
Option Grant Program to determine which eligible individuals are to receive
option grants, the time or times when those grants are to be made, the number of
shares subject to each such grant, the status of any granted option as either an
incentive stock option or a non-statutory option under the federal tax laws, the
vesting schedule (if any) to be in effect for the option grant and the maximum
term for which any granted option is to remain outstanding.
Each granted option will have an exercise price per share determined by the
Plan Administrator, but the exercise price will not be less than eighty-five
percent (85%) of the fair market value of the shares on the grant date. No
granted option will have a term in excess of ten (10) years, and the option will
generally become exercisable in one or more installments over a specified period
of service measured from the grant date. However, one or more options may be
structured so that they will be immediately exercisable for any or all of the
option shares; the shares acquired under those options will be subject to
repurchase by the Company, at the exercise price paid per share, if the optionee
ceases service with the Company prior to vesting in those shares.
Upon cessation of service, the optionee will have a limited period of time
in which to exercise any outstanding option to the extent exercisable for vested
shares. The Plan Administrator will have complete discretion 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.
The Plan Administrator is authorized to issue tandem stock appreciation
rights under the Discretionary Option Grant Program, which provide the holders
with the right to surrender their options for an appreciation distribution from
the Company equal to the excess of (i) the fair market value of the vested
shares of Common Stock subject to the surrendered option over (ii) 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.
The Plan Administrator also has the authority to effect the cancellation of
any or all options outstanding under the Discretionary Option Grant Program and
to grant, in substitution therefor, new
17
<PAGE>
options covering the same or a different number of shares of Common Stock but
with an exercise price per share based upon the fair market value of the option
shares on the new grant date.
Salary Investment Option Grant Program
The Compensation Committee has complete discretion in 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 Compensation Committee an irrevocable
authorization directing the Company to reduce his or her base salary for the
upcoming calendar year by a specified dollar amount not less than $10,000 nor
more than $75,000 and to apply that amount to the acquisition of a special
option grant under the program.
Each selected individual who files such a timely election will
automatically be granted a non-statutory option on or before the last trading
day in January of the calendar year for which that salary reduction is to be in
effect.
The number of shares subject to each such option will be determined by
dividing the salary reduction amount by two-thirds of the fair market value per
share of Company Common Stock on the grant date, and the exercise price will be
equal to one-third of the fair market value of the option shares on the grant
date. As a result, the total spread on the option shares at the time of grant
(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 amount by which
the optionee's salary is to be reduced for the calendar year. In effect, the
salary reduction serves as a immediate prepayment, as of the time of the option
grant, of two thirds of the then current market price of the shares of common
stock subject to the option.
The option will become exercisable in a series of twelve equal monthly
installments upon the optionee's completion of each month of service in the
calendar year for which such salary reduction is in effect and will become
immediately exercisable for all the option shares on an accelerated basis should
the Company experience certain changes in ownership or control. Each option will
remain exercisable for any vested shares until the earlier of (i) the expiration
of the ten-year option term or (ii) the end of the three (3)-year period
measured from the date of the optionee's cessation of service.
The Company has not yet implemented the Salary Investment Option Grant
Program.
Stock Issuance Program
Shares of Common Stock will be issued under the Stock Issuance Program at a
price per share determined by the Plan Administrator, but the purchase price
will not be less than eighty-five percent (85%) of the fair market value of the
shares on the issuance date. Shares will be issued for such valid consideration
as the Plan Administrator deems appropriate, including cash and promissory
notes. The shares may also be issued as a bonus for past services without any
cash outlay required of the recipient. The shares issued may be fully vested
upon issuance or may vest upon the completion of a designated service period or
the attainment of pre-established performance goals. The Plan Administrator
will, however, have the discretionary authority at any time to accelerate the
vesting of any and all unvested shares outstanding under the Stock Issuance
Program.
Automatic Option Grant Program
Under the Automatic Option Grant Program, eligible non-employee Board
members receive a series of option grants over their period of Board service.
Each non-employee Board member will, at the time of his or her initial election
or appointment to the Board, receive an option grant for 10,000 shares of Common
Stock. In addition, on the anniversary of the date that each individual first
joined the Board, each individual who continues to serve as a non-employee Board
member will automatically be granted an option to purchase 10,000 shares of
Common Stock. There will be no limit on the number of such 10,000-
18
<PAGE>
share option grants any one eligible non-employee Board member may receive over
his or her period of continued Board service.
Stockholder approval of this Proposal will also constitute pre-approval of
each option granted under the Automatic Option Grant Program on or after the
date of the Annual Stockholders Meeting and the subsequent exercise of that
option in accordance with the terms of the program summarized below.
Each automatic grant will have an exercise price per share equal to the
fair market value per share of Common Stock on the grant date and will have a
maximum term of 10 years, subject to earlier termination following the
optionee's cessation of Board service. Each automatic option will become
exercisable for fifty percent (50%) of the option shares upon completion of six
(6) months of Board service measured from the grant date and with respect to the
balance of the option shares in a series of six (6) successive equal monthly
installments over the optionee's completion of each additional month of Board
service thereafter. However, each outstanding automatic option grant will
automatically accelerate and become immediately exercisable for any or all of
the option shares as fully-vested shares upon certain changes in control or
ownership of the Company or upon the optionee's death or disability while a
Board member. Following the optionee's cessation of Board service for any
reason, each option will remain exercisable for a 12-month period and may be
exercised during that time for any or all shares in which the optionee is vested
at the time of such cessation of Board service.
Director Fee Option Grant Program
The Compensation Committee has complete discretion in implementing the
Director Fee Option Grant Program for one or more calendar years in which
non-employee Board members may participate. As a condition to such
participation, each non-employee Board member must, prior to the start of the
calendar year of participation, file with the Compensation Committee an
irrevocable authorization directing the Company to apply all or a portion of his
or her cash retainer fee for the upcoming calendar year to the acquisition of a
special option grant under the program.
Each non-employee Board member who files such a timely election will
automatically be granted a non-statutory option on the first trading day in
January of the calendar year for which that retainer fee election is to be in
effect.
The number of shares subject to each such option will be determined by
dividing the amount of the retainer fee for the calendar year to be applied to
the program by two-thirds of the fair market value per share of Company Common
Stock on the grant date, and the exercise price will be equal to one-third of
the fair market value of the option shares on the grant date. As a result, the
total spread on the option shares at the time of grant (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 that optionee
has elected to be applied to the program. In effect, the portion of the annual
retainer fee otherwise payable in cash serves as an immediate prepayment, as of
the time of the option grant, of two thirds of the then current market price of
the shares of common stock subject to the option.
The option will become exercisable for fifty percent (50%) of the option
shares upon optionee's completion of the first six (6) months of Board service
in the calendar year for which the retainer fee election is in effect, and with
respect to the balance of the option shares in a series of six (6) successive
equal monthly installments over the optionee's completion of each additional
month of Board service during that calendar year. The option will become
immediately exercisable for all the option shares on an accelerated basis should
the Company experience certain changes in ownership or control. Each option will
remain exercisable for any vested shares until the earlier of (i) the expiration
of the ten-year option term or (ii) the end of the three (3)-year period
measured from the date of the optionee's cessation of service.
Commencing in January 2000, each of Messrs. Graham and McDonnell were
granted annual retainers of $24,000 and elected to apply 100% of their annual
retainer fee to the acquisition of a special stock option grant pursuant to the
Director Fee Option Grant Program. Accordingly, on January 3, 2000,
19
<PAGE>
each of Messrs. Graham and McDonnell were granted options to purchase 4,721
shares at an exercise price of $2.542 per 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 that is not to
be assumed or replaced by the successor corporation or otherwise continued in
effect will automatically accelerate in full, and all unvested shares
outstanding under the Discretionary Option Grant and Stock Issuance Programs
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 or
otherwise continued in effect.
The Plan Administrator will have the authority under the Discretionary
Option Grant Program to provide that those options will automatically vest in
full (i) upon an acquisition of the Company, whether or not those options are
assumed or replaced, (ii) upon a hostile change in control of the Company
effected through a tender offer for more than 50% of the Company's outstanding
voting stock or by proxy contest for the election of Board members, or (iii) in
the event the individual's service is terminated, whether involuntarily or
through a resignation for good reason, within a designated period (not to exceed
18 months) following an acquisition in which those options are assumed or
replaced upon a hostile change in control. The vesting of outstanding shares
under the Stock Issuance Program may be accelerated upon similar terms and
conditions. The options granted under the Salary Investment Option Grant
Program, the Automatic Option Grant Program and the Director Fee Option Grant
Program will automatically accelerate and become exercisable in full upon any
acquisition or change in control transaction.
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.
Limited Stock Appreciation Rights
Each option granted under the Salary Investment Option Grant Program, the
Automatic Option Grant Program and the Director Fee Option Grant Program will
include a limited stock appreciation right so that upon the successful
completion of a hostile tender offer for more than fifty percent (50%) of the
Company's outstanding voting securities or a change in a majority of the Board
as a result of one or more contested elections for Board membership, the option
may be surrendered to the Company in return for a cash distribution from the
Company. The amount of the distribution per surrendered option share will be
equal to the excess of (i) the fair market value per share at the time the
option is surrendered or, if greater, the tender offer price paid per share in
the hostile take-over over (ii) the exercise price payable per share under such
option. In addition, the Plan Administrator may grant such rights to officers of
the Company as part of their option grants under the Discretionary Option Grant
Program.
Stockholder approval of this Proposal will also constitute pre-approval of
each limited stock appreciation right granted under the Salary Investment Option
Grant Program, the Automatic Option Grant Program and Director Fee Option Grant
Program and the subsequent exercise of those rights in accordance with the
foregoing terms.
Financial Assistance
The Plan Administrator may institute a loan program to assist one or more
participants in financing the exercise of outstanding options under the
Discretionary Option Grant Program or the purchase of shares under the Stock
Issuance Program through full-recourse interest-bearing promissory
20
<PAGE>
notes. However, the maximum amount of financing provided any participant may not
exceed the cash consideration payable for the issued shares plus all applicable
withholding taxes incurred in connection with the acquisition of those shares.
Special Tax Election
The Plan Administrator may provide one or more holders of non-statutory
options or unvested share issuances under the Plan with the right to have the
Company withhold a portion of the shares otherwise issuable to such individuals
in satisfaction of the withholding taxes to which such individuals become
subject 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
withholding tax liability.
Amendment and Termination
The Board may amend or modify the Plan at any time, subject to any required
stockholder approval pursuant to applicable laws and regulations. Unless sooner
terminated by the Board, the Plan will terminate on the earliest of (i) April 8,
2007, (ii) the date on which all shares available for issuance under the Plan
have been issued as fully-vested shares or (iii) the termination of all
outstanding options in connection with certain changes in control or ownership
of the Company.
Stock Awards
The table below shows, as to Company's Chief Executive Officer ("CEO"), the
four other most highly compensated executive officers of the Company (with base
salary and bonus for the past fiscal year in excess of $100,000) and the other
individuals and groups indicated, the number of shares of Common Stock subject
to option grants made under the Plan from January 1, 1999 through May 15, 2000,
together with the weighted average exercise price payable per share. The Company
has not made any direct stock issuances to date under the Plan.
<TABLE>
<CAPTION>
OPTION TRANSACTIONS
---------------------------------------------------------- --------------------------------- ------------------------------------
NUMBER OF SHARES UNDERLYING WEIGHTED AVERAGE
NAME AND POSITION OPTIONS GRANTED (#) EXERCISE PRICE PER SHARE ($)
---------------------------------------------------------- --------------------------------- ------------------------------------
<S> <C> <C>
Scott L. Freiman
President and Chief Executive Officer and Director 24,000 $4.538
---------------------------------------------------------- --------------------------------- ------------------------------------
James R. DeFrancesco
Chief Executive Officer (Note 1)
-- --
---------------------------------------------------------- --------------------------------- ------------------------------------
Peter M. Leger
Chief Executive Officer (Note 2)
-- --
---------------------------------------------------------- --------------------------------- ------------------------------------
Miles H. Grody
Senior Vice President; President and CEO of
CMSI Systems, Inc. and Director 24,000 4.125
---------------------------------------------------------- --------------------------------- ------------------------------------
Robert P. Vollono
Senior Vice President, Treasurer, Chief
Financial Officer and Director Nominee 24,000 4.125
---------------------------------------------------------- --------------------------------- ------------------------------------
All current executive officers as a group (3) 72,000 $4.26
---------------------------------------------------------- --------------------------------- ------------------------------------
All current non-employee directors as a group (2) 10,000 5.13
---------------------------------------------------------- --------------------------------- ------------------------------------
All employees, including current officers who are not
executive officers, as a group (43).......... 597,560 4.21
---------------------------------------------------------- --------------------------------- ------------------------------------
</TABLE>
(Note 1) Mr. DeFrancesco resigned his position in May 1999.
(Note 2) Mr. Leger served as Chief Executive Officer from May 1999 to September
1999.
21
<PAGE>
Federal Income Tax Consequences
Option Grants
Options granted under the Plan may be either incentive stock options which
satisfy the requirements of Section 422 of the Internal Revenue 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 (2) years after the option grant date and more than one (1) 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,
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. If the optionee makes a qualifying disposition, the Company will not
be entitled to any income tax deduction.
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.
22
<PAGE>
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
No taxable income is recognized upon receipt of a stock appreciation right.
The holder will recognize ordinary income, in the year in which the stock
appreciation right is exercised, in an amount equal to the appreciation
distribution. The Company will be entitled to an income tax deduction equal to
the appreciation distribution in the taxable year in which such ordinary income
is recognized by the optionee.
Direct Stock Issuances
The tax principles applicable to direct stock issuances under the Plan will
be substantially the same as those summarized above for the exercise of
non-statutory option grants.
Deductibility of Executive Compensation
The Company anticipates that any compensation deemed paid by it in
connection with the disqualifying dispositions of incentive stock option shares
or the exercise of non-statutory options with exercise prices equal to the fair
market value of the option shares on the grant date will qualify as
performance-based compensation for purposes of Code Section 162(m) and will not
have to be taken into account for purposes of the $1 million limitation per
covered individual on the deductibility of the compensation paid to certain
executive officers of the Company. Accordingly, all compensation deemed paid
with respect to those options will remain deductible by the Company without
limitation under Code Section 162(m).
Accounting Treatment
Option grants under the Discretionary Option Grant and Automatic Option
Grant Programs with exercise prices equal to the fair market value of the option
shares on the grant date will not result in any direct charge to the Company's
reported earnings. However, the fair value of those options is required to be
disclosed in the notes to the Company's financial statements, and the Company
must also disclose, in footnotes to the Company's financial statements, the
pro-forma impact those options would have upon the Company's reported earnings
were the fair value of those options at the time of grant treated as a
compensation expense. In addition, the number of outstanding options may be a
factor in determining the Company's earnings per share on a fully-diluted basis.
Option grants or stock issuances made under the Plan with exercise or issue
prices less than the fair market value of the shares on the grant or issue date
will result in a direct compensation expense to the Company in an amount equal
to the excess of such fair market value over the exercise or issue price. The
expense must be amortized against the Company's earnings over the period that
the option shares or issued shares are to vest.
On March 31, 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, which is an interpretation of APB Opinion No. 25
governing the accounting principles applicable to equity incentive plans. Under
the Interpretation, option grants made to consultants (but not non-employee
Board members) after December 15, 1998 will result in a direct charge to the
Company's reported earnings based upon the fair value of the option measured
initially as of the grant date and then subsequently on the vesting date of each
installment of the underlying option shares. Such charge will accordingly
include the appreciation in the value of the option shares over the period
between the grant date of the option (or, if later, the July 1, 2000 effective
date of the Interpretation) and the vesting date of each installment of the
option shares. In addition, if the proposed interpretation is adopted, any
options which are repriced after
23
<PAGE>
December 15, 1998 will also trigger a direct charge to the Company's earnings
measured by the appreciation in the value of the underlying shares over the
period between the grant date of the option (or, if later, the July 1, 2000
effective date of the Interpretation) and the date the option is exercised for
those shares.
Should one or more individuals be granted tandem stock appreciation rights
under the Plan, then such rights would result in a compensation expense to be
charged against the Company's reported earnings. Accordingly, at the end of each
fiscal quarter, the amount (if any) by which the fair market value of the shares
of common stock subject to such outstanding stock appreciation rights has
increased from the prior quarter-end would be accrued as compensation expense,
to the extent such fair market value is in excess of the aggregate exercise
price in effect for those rights.
New Plan Benefits
Messrs. McDonnell, Graham and DeFrancesco each will receive an option grant
for 10,000 shares on November 15, 2001; October 10, 2001; and October 1, 2001,
respectively at an exercise price equal to the fair market value per share of
Common Stock on each of the respective dates.
Stockholder Approval
The affirmative vote of at least a majority of the outstanding shares of
Common Stock present in person or by proxy at the Annual Meeting and entitled to
vote is required for approval of the amendment to the Plan. Should such
stockholder approval not be obtained, then the increase in the number of shares
underlying options granted pursuant to the Automatic Option Grant Program will
not be implemented, and there will be no limit on the number of shares subject
to the annual share increase feature. The Plan will, however, continue in
effect, and option grants and direct stock issuances may continue to be made
under the Plan until all the shares available for issuance under the Plan have
been issued pursuant to such option grants and direct stock issuances.
Recommendation of the Board of Directors
The Board of Directors deems this proposal to be in the best interests of
the Company and its stockholders and recommends a vote "FOR" the approval of
such proposal. Unless authority to do so is withheld, the person(s) named in
each proxy will vote the shares represented thereby "FOR" the approval of the
amendment to the 1997 Stock Incentive Plan.
24
<PAGE>
PROPOSAL 3
RATIFICATION 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, 2000, subject to the ratification of such
appointment by the stockholder 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, 2000. 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.
Recommendations of the Board of Directors
The Board of Directors recommends that stockholders vote "FOR" the
ratification of the selection of Ernst & Young LLP to serve as the Company's
independent public accountants for the fiscal year ended December 31, 2000.
STOCKHOLDER PROPOSALS
Stockholder proposals intended for presentation at the 2001 Annual Meeting
of Stockholders must be received by the Secretary of the Company no later than
February 28, 2001 if such proposals are to be considered for inclusion in the
Company's Proxy Statement for the 2001 Annual Meeting of Stockholders. In
addition, the proxy solicited by the Board of Directors for the 2001 Annual
Meeting will confer descretionary authority to vote on any stockholder proposal
presented at that meeting, unless the Company receives notice of such proposal
no later than April 14, 2001.
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.
A copy of the Annual Report of the Company for the 1999 fiscal year has
been mailed concurrently with this Proxy Statement to all stockholders entitled
to notice of and to vote at the Annual Meeting. The Annual Report is not
incorporated into this Proxy Statement and is not considered proxy solicitation
material.
By Order by the Board of Directors
/s/ Scott L. Freiman
Scott L. Freiman
Chief Executive Officer and President
Annapolis Junction, Maryland
May 31, 2000
25
<PAGE>
APPENDIX
[NOT INCLUDED IN PRINTED MATERIAL]
CREDIT MANAGEMENT SOLUTIONS, INC.
1997 STOCK INCENTIVE PLAN
(Amended and Restated as of May 15, 2000)
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
(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.
<PAGE>
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.
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
2
<PAGE>
(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 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
reserved for issuance over the term of the Plan shall not exceed 3,629,547
shares. Such authorized share reserve is comprised of (i) the number of shares
which remain available for issuance, as of the Plan
3
<PAGE>
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, plus (ii) increases of 76,155 shares
effected on January 2, 1998; 76,498 shares effected on January 4, 1999; and
76,898 shares effected on January 3, 2000, respectively, pursuant to Section
VII.B., below.
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. Beginning with the 2001
fiscal year, in no event shall such annual increase exceed one hundred thousand
(100,000) shares.
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 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.
4
<PAGE>
DISCRETIONARY OPTION GRANT PROGRAM
VI. 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.
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.
5
<PAGE>
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.
(v) 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:
(vi) 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
(vii) 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
6
<PAGE>
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.
VII. 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 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
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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.
VIII. 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.
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).
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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 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.
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IX. 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.
X. 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:
(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.
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(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 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.
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ARTICLE TWO
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):
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
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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 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.
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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.
IV. 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.
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ARTICLE THREE
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 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
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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 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
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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.
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ARTICLE FOUR
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 2000 Annual Stockholders Meeting
shall automatically be granted, on the date of such initial election or
appointment, a Non-Statutory Option to purchase 10,000 shares of Common
Stock.
2. Each individual who continues to serve as an Eligible Director,
shall automatically be granted, each year (beginning with 2001) on the
anniversary of the date such individual first joined the Board, a
Non-Statutory Option to purchase an additional 10,000 shares of Common
Stock. There shall be no limit on the number of such 10,000-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.
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
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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).
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
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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.
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ARTICLE FIVE
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
B is the Fair Market Value per share of Common Stock on the option
grant date.
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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.
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
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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.
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ARTICLE SIX
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 Withholding 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
Withholding Taxes (not to exceed one hundred percent (100%)) designated by
the holder.
(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
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Withholding Taxes) with an aggregate Fair Market Value equal to the
percentage of the Withholding 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 and became effective
upon stockholder approval of the Plan at the 1997 Annual Stockholders Meeting.
B. The Plan serves as the successor to the Predecessor Plans, and no
further option grants or direct stock issuances have been or will 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 were
incorporated into the Plan at that time and are 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 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
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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.
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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
(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.
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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 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.
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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.
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
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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. Predecessor Plans shall mean the 1996 Credit Management Solutions, Inc.
Long Term Incentive Plan and the 1996 Credit Management Solutions, Inc.
Non-Qualified Stock Option Plan.
AA. 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.
BB. Salary Investment Option Grant Program shall mean the salary investment
grant program in effect under the Plan.
CC. 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.
DD. 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.
EE. 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.
FF. Stock Exchange shall mean either the American Stock Exchange or the New
York Stock Exchange.
GG. 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.
HH. Stock Issuance Program shall mean the stock issuance program in effect
under the Plan.
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II. 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.
JJ. 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.
KK. 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).
LL. Withholding Taxes shall mean the Federal, state and local income and
employment withholding 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.
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