<PAGE>
THE PATHWAYS GROUP, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
JUNE 21, 1999
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders
of THE PATHWAYS GROUP, INC., a Delaware corporation, will be held at the Mark
Hopkins Intercontinental Hotel, 999 California Street, San Francisco, California
94108, on Monday, June 21, 1999, at 10:00 A.M., Pacific Daylight Time, for the
following purposes:
1. To elect five directors to serve staggered terms of one,
two and three years and until their respective successors
are elected and qualified;
2. To consider and vote upon a proposal to approve the
Company's Amended and Restated Stock Incentive Plan;
3. To consider and vote upon a proposal to approve the
Company's Directors Stock Option Plan;
4. To ratify the appointment of PricewaterhouseCoopers LLP as
the Company's independent auditors; and
5. To transact such other business as may be properly brought
before the meeting and all adjournments thereof.
Only stockholders of record at the close of business on May 4,
1999, will be entitled to notice of, and to vote at, the meeting and any
adjournment thereof.
THE BOARD OF DIRECTORS OF THE PATHWAYS GROUP, INC. HOPES THAT
YOU WILL FIND IT CONVENIENT TO ATTEND THE MEETING IN PERSON. IN ANY EVENT,
PLEASE MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY TO MAKE SURE THAT YOUR
SHARES ARE REPRESENTED AT THE MEETING. IF YOU ATTEND THE MEETING, YOU MAY REVOKE
THE PROXY YOU HAVE SENT IN AND VOTE YOUR STOCK PERSONALLY.
By Order of the Board of Directors,
Woodinville, Washington EDWARD L. MUELLER
May 7, 1999 Secretary
<PAGE>
THE PATHWAYS GROUP, INC.
PROXY STATEMENT
This Proxy Statement is furnished in connection with the
solicitation by the Board of Directors of The Pathways Group, Inc., a Delaware
corporation (the "Company"), of proxies to be voted at the Annual Meeting of
Stockholders of the Company to be held at the Mark Hopkins Intercontinental
Hotel, 999 California Street, San Francisco, California 94108, on Monday, June
21, 1999, at 10:00 A.M., Pacific Daylight Time, or at any adjournment or
adjournments thereof. Only stockholders of record at the close of business on
May 4, 1999, shall be entitled to notice of, and to vote at, the meeting. Shares
represented by duly executed proxies received by the Company will be voted in
accordance with the instructions contained therein and, in the absence of
specific instructions, will be voted as follows:
- FOR the election as directors of the persons who have been
nominated by the Board of Directors
- FOR the approval of the Company's Amended and Restated Stock
Incentive Plan
- FOR the approval of the Company's Directors Stock Option Plan
- FOR the ratification of PricewaterhouseCoopers LLP as the
Company's independent auditors, and
- Otherwise in accordance with the judgment of the person or
persons voting the proxies on any other matter that may
properly be brought before the meeting.
At this time, the Board of Directors knows of no other such
matters that will be presented for consideration at the Annual Meeting. The
execution of a proxy will in no way affect a stockholder's right to attend the
Annual Meeting and to vote in person. Any proxy executed and returned by a
stockholder in response to this Proxy Statement may be revoked at any time
thereafter except as to any matter or matters upon which, prior to such
revocation, a vote shall have been cast pursuant to the authority conferred by
such proxy.
The election of directors requires a plurality of the votes
cast. Each of the proposals to adopt the Amended and Restated Stock Incentive
Plan and the Directors Stock Option Plan requires the affirmative vote of a
majority of the votes cast at the Annual Meeting on each such proposal. The
ratification of independent auditors requires the affirmative vote of a majority
of the votes cast thereon. For purposes of determining the
<PAGE>
number of votes cast with respect to a particular matter, only those cast
"for" or "against" are included. Shares represented by proxies marked to
withhold authority to vote, and shares represented by proxies that indicate
that the broker or nominee stockholder thereof does not have discretionary
authority to vote them, will be counted only to determine the existence of a
quorum at the Annual Meeting.
This Proxy Statement and the accompanying proxy are being sent
on or about May 7, 1999, to stockholders entitled to vote at the Annual Meeting
of Stockholders. The cost of solicitation of the Company proxies will be borne
by the Company. In addition to the use of the mails, proxy solicitations may be
made by telephone, telecopier and personal interview by officers, directors and
employees of the Company. However, all proxies granted in response to this Proxy
Statement must be made in writing by signing the enclosed proxy card.
The Company will, upon request, reimburse brokerage houses and
persons holding shares in their names or in the names of their nominees for
their reasonable expenses in sending soliciting material to their principals.
The Company's executive offices are located at 14201 NE 200th Street,
Woodinville, Washington 98072. The Company's telephone number is (425) 483-3411.
VOTING SECURITIES AND SECURITY OWNERSHIP
Only stockholders of record at the close of business on May 4,
1999, will be entitled to vote at the Annual Meeting of Stockholders and any
adjournment thereof. At the close of business on May 4, 1999, there were
outstanding 13,565,662 shares of Common Stock, $.01 par value, of the Company.
Each of such shares is entitled to one vote. There was no other class of voting
securities outstanding at that date.
To the knowledge of the Company, as of May 4, 1999, no person
beneficially owned more than 5% of the outstanding shares of Common Stock of the
Company except as set forth in the table below. Each named person beneficially
owned, as of the dates set forth below, the number of shares of Common Stock
listed opposite its name, and, unless otherwise noted below, each such person
had sole voting and investment power over such shares.
2
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF PERCENTAGE
OF BENEFICIAL OWNER SHARES OWNED OF CLASS
- ------------------- ------------ --------
<S> <C> <C>
Allen & Company Incorporated (1) 2,780,932(2) 20.5%
711 Fifth Avenue
New York, New York 10022
Deferred Compensation Trust for 1,876,978(3) 13.8%
Carey F. Daly, II
1221 North Dutton Avenue
Santa Rosa, California 95401
</TABLE>
- --------------------------------
(1) Allen & Company Incorporated, a New York corporation, is wholly-owned by
Allen Holding Inc., a Delaware corporation of which members of the Allen
family are beneficial owners of a majority of the shares. The remaining
shares of Allen Holding Inc. are owned by officers of Allen actively
involved in its business.
(2) Excludes approximately 1,578,000 additional shares owned by persons
affiliated with Allen & Company Incorporated.
(3) Mr. Daly, President, Chief Executive Officer and Chairman of the Company,
has no voting power over or power to dispose of the shares held in the
trust. Mr. Edward L. Mueller, General Counsel and Secretary to the Company,
is the trustee.
The following table sets forth information as to the Common
Stock of the Company beneficially owned as of May 4, 1999, by each director,
nominee for director, each person named in the Summary Compensation Table under
Executive Compensation, and by all directors and executive officers as a group:
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT OF
BENEFICIAL COMMON
NAME OF BENEFICIAL OWNER OWNERSHIP STOCK
------------------------ --------- -----
<S> <C> <C>
Carey F. Daly, II..................................... 619,306 (1) 4.6%
Robert W. Haller...................................... 63,633 (2) *
Glenn A. Okun......................................... 511,303 (3) 3.8%
Joseph F. Schuler..................................... 33,334 (4) *
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT OF
BENEFICIAL COMMON
NAME OF BENEFICIAL OWNER OWNERSHIP STOCK
------------------------ --------- -----
<S> <C> <C>
Mark T. Schuur........................................ 28,334 (5) *
Monte P. Strohl....................................... 67,000 (6) *
Linda S. Wing......................................... 0 (7) *
All directors and executive officers
as a group............................................ 1,322,910 (8) 9.6%
</TABLE>
- --------------------------------
* Less than 1%.
(1) Includes options to acquire 133,334 shares, which options are currently
exercisable. Excludes (a) 119,000 shares owned by Mr. Daly's wife, (b)
options to acquire 66,666 shares, which options are not currently
exercisable and (c) 1,876,978 shares held in the Deferred Compensation
Trust for Carey F. Daly, II, over which Mr. Daly has no power to vote
or dispose.
(2) Includes options to acquire 15,000 shares, which options are currently
exercisable.
(3) Includes 75,000 shares owned by Mr. Okun jointly with his wife.
Excludes 149,955 shares held in an account of a client of Mr. Okun,
with respect to which Mr. Okun has the power to vote and discretion to
dispose, but as to which Mr. Okun disclaims beneficial ownership. Also
excludes options to acquire 10,000 shares, which options are not
currently exercisable, granted pursuant to the Directors Stock Option
Plan.
(4) Includes options to acquire 33,334 options, which options are currently
exercisable. Excludes options to acquire 66,666 options, which options
are not currently exercisable.
(5) Excludes options to acquire 6,666 shares, which options are not
currently exercisable.
(6) Excludes options to acquire 10,000 shares, which options are not
currently exercisable, granted pursuant to the Directors Stock Option
Plan.
(7) Excludes options to acquire 10,000 shares, which options are not
currently exercisable, granted pursuant to the Directors Stock Option
Plan.
4
<PAGE>
(8) Includes 181,668 shares issuable upon exercise of currently exercisable
options, over which executive officers and directors exercise sole
voting power.
For the purpose of the foregoing table, each of the directors
and executive officers is deemed to be the beneficial owner of shares which may
be acquired by him or her within 60 days through the exercise of options, if
any, and such shares are deemed to be outstanding for the purpose of computing
the percentage of the Company's Common Stock beneficially owned by him or her
and by the directors and executive officers as a group. Such shares, however,
are not deemed to be outstanding for the purpose of computing the percentage of
the Company's Common Stock beneficially owned by any other person.
Each of the persons named in the above table as beneficially
owning the shares set forth opposite his or her name has sole voting power (as
to outstanding shares) and sole investment power over such shares, except as
otherwise indicated.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
At the Annual Meeting of Stockholders on June 21, 1999, the
Company will elect directors to the staggered board as set forth in the
Company's Bylaws.
On May 6, 1997, after the Company had reincorporated in
Delaware from Washington and before there were any shares issued by the Delaware
Company, the original, three member Board of Directors amended the Bylaws
enacted by the Company's incorporators to provide that the Board of Directors be
separated into three classes and that the terms of each class be staggered. The
staggered Board structure provides that each class contains the same number of
directors; if the directors cannot be separated into three classes of equal
number, then the directors are allocated among the three classes in such a way
that the number of directors in any one class does not differ by more than one
from the number of directors in any other class.
The initial Board of Directors of the Delaware Company was
composed of the three directors from the Washington Company: Messrs. Daly,
Schuur and Okun. In April 1998, the Board of Directors increased the size of the
Board to five persons and elected Mr. Strohl and Ms. Wing to fill the vacancies.
To date, the directors of the Company have not been elected to their initial
terms as a staggered board.
Pursuant to the Bylaws, however, the current Board of
Directors has been separated into three classes: one class will serve an initial
term of one year, a second class will serve an initial term of two years, and
the third class will serve an initial term of three
5
<PAGE>
years. At the 1999 Annual Meeting, all directors of all classes will stand for
election to their initial terms. Upon the expiration of their initial terms,
each class will then be elected for a term of three years. After the 1999 Annual
Meeting, stockholders will only consider and vote upon one class of directors at
each annual meeting.
The table below sets forth the nominees for directors to serve
the initial staggered terms:
<TABLE>
<CAPTION>
YEAR FIRST
BECAME
NAME AGE DIRECTOR POSITIONS HELD
- ---- --- -------- --------------
<S> <C> <C> <C>
Nominees to serve until Annual
Meeting of Stockholders in 2000:
MARK T. SCHUUR...................................... 38 1996 Director, Senior Vice
President and Chief
Financial Officer
LINDA S. WING (b)................................... 54 1998 Director
Nominees to serve until Annual
Meeting of Stockholders in 2001:
GLENN A. OKUN (a)................................... 36 1996 Director
MONTE P. STROHL (b)................................. 47 1998 Director
Nominees to serve until Annual
Meeting of Stockholders in 2002:
CAREY F. DALY, II................................... 55 1993 Director, President
and Chief Executive
Officer
</TABLE>
- ------------------------------
(a) Member of the Compensation Committee
(b) Member of the Audit Committee
Unless otherwise specified, shares represented by the enclosed
proxy will be voted for the election of the nominees set forth above and until
their successors are elected and qualified. Each of the nominees is now a
director of the Company. Directors shall be elected by a plurality of the votes
cast, in person or by proxy, at the meeting.
6
<PAGE>
BIOGRAPHICAL SUMMARIES OF OFFICERS AND DIRECTORS
CAREY F. DALY, II is the President and Chief Executive Officer
of the Company, the Chairman of the Board of Directors and a Director of the
Company. Mr. Daly founded The Pathways Group, Inc. in October 1993. Mr. Daly is
also President of Pathways International, Ltd. and SPRINTICKET, Inc. Mr. Daly
has over 29 years of computer operating system, computer programming and design
experience. From 1968 to 1969, Mr. Daly served as an internal auditor and
Director of Financial Planning for American Standard, Baltimore, Maryland. He
also worked for major computer companies as a systems engineer in Baltimore,
Maryland from 1970 through 1973. He received an LLB degree in business law from
LaSalle University in 1974 and a BS degree in accounting as well as an AA in
computer science from Baltimore Business College in 1968.
Mr. Daly is the software engineering designer of the
SPRINTICKET product line, the Pathways Medical smart card system, the Pathways
E-Teller Transaction Processing System as well as several other commercial
software systems.
ROBERT W. HALLER is the Executive Vice President. Mr. Haller
joined SPRINTICKET, Inc. as the Sales Manager in November 1991. Previously, he
was Sales Manager of QT, Inc. Mr. Haller served as Senior Vice President,
Marketing and Sales of the company since 1996, and became Executive Vice
President in December 1997. Mr. Haller has played a significant role in the
development of the Company's marketing plans and products. Mr. Haller received a
BS in human biology from the University of Washington in 1977.
GLENN A. OKUN has been a Director of the Company since the
fourth quarter of 1996. In April 1998, Mr. Okun became the Chairman and Chief
Executive Officer of Mitchum Jones & Templeton, Inc., an investment banking
firm. For more than five years prior to April 1998, Mr. Okun was a Director and
Vice President of Allen & Company Incorporated, an investment banking firm.
Allen & Company was a financial advisor to the Company from May 1995 to February
1999. Mr. Okun received a masters of business administration and a law degree
from Harvard University in 1989.
JOSEPH SCHULER has been Senior Vice President, Marketing
and Sales, of the Company since December 1997. From June 1996 through October
1997, Mr. Schuler was the Director of Sales and Marketing for Schlumberger
Smart Cards and Systems, where he was responsible for the development of a
sales and marketing program for smart cards. Mr. Schuler was the Senior Vice
President of New Business Development and Marketing for Stored Value Systems,
a National City Company, from September 1995 through May 1996. Prior to
September 1995, Mr. Schuler acted as an independent consultant for companies
in the smart card business. Mr. Schuler is a graduate of the Carlson School
of Management of the University of Minnesota.
7
<PAGE>
MARK T. SCHUUR is Senior Vice President and Chief Financial
Officer and a Director of the Company and has been with the Company since
September 1996. From May 1992 through September 1996, Mr. Schuur served as Chief
Financial Officer, Treasurer and a Director of Pizza Blends Inc., Western
Blending Inc. and Flavor Blends Inc., affiliated privately-held food
manufacturers based in Bellevue, Washington. Prior to that, Mr. Schuur was a
General Practice Manager at Coopers & Lybrand in Seattle, Washington. Mr. Schuur
received his B.A. degree in business administration (accounting emphasis) from
the University of Washington in 1983.
MONTE P. STROHL has been a Director of the Company since June
1998. Mr. Strohl is currently the president of MS Digital, which he founded in
1994 and has acted as President and Chief Executive Officer since that time. MS
Digital is a company specializing primarily in corporate communication and cable
broadcasting. MS Digital provides hardware and software solutions to companies
wishing to communicate over cable television (public or internal), or intranets.
MS Digital's clients include universities, municipalities and Fortune 500
companies. Before founding MS Digital, Mr. Strohl worked as Vice President of
sales for OMNI International, which sold video production solutions
internationally. Mr. Strohl is one of the original founders of Pathways
International, Ltd., the predecessor corporation of the Company.
LINDA S. WING has been a Director of the Company since June
1998. Since 1993, she has served as President and Chief Executive Officer of
Human Systems Design, an organizational development firm that assists management
of companies in developing their strategic planning. Ms. Wing currently teaches
a course in strategic management at Metro State University in Minneapolis,
Minnesota. She is also an editor of the journal "Empowerment in Organization,"
which is published by MCB University Press. She holds a masters of business
administration from the University of St. Thomas and several undergraduate
degrees from Mankato State University in finance and industrial relations. Ms.
Wing is presently working on obtaining her doctorate in organizational theory
from the Fielding Institute in Santa Barbara, California.
None of the directors has any family relationship with any
other director or with any executive officer of the Company.
The Company has no reason to believe that the nominees will be
unable or unwilling to serve as directors, if elected. If, however, the nominees
should decline or be unable to act as directors, the shares represented by the
enclosed proxy will be voted for such other person or persons as may be
nominated by the Board of Directors.
COMMITTEES AND MEETINGS
The Board of Directors has standing Audit and Compensation
8
<PAGE>
Committees.
The Audit Committee reviews the proposed scope of audit and
non-audit services and the fees proposed to be charged for such services,
reviews the reports and receives comments and recommendations from the Company's
internal audit function and the Company's independent auditors following
completion of the annual audit, and reviews with such auditors and management
the Company's accounting policies and the adequacy of the Company's internal
accounting controls. The Audit Committee also deals with special matters
relating to the Company's accounting practices and financial statements brought
to its attention by the Company's internal auditors, management or the Company's
independent auditors. The Company formed the Audit Committee in September 1998
after which it met two times during the fiscal year.
The Compensation Committee addresses executive compensation
issues generally and administers the Company's stock-based incentive plans,
including the Amended and Restated Stock Incentive Plan (the "Stock Incentive
Plan") with respect to options outstanding thereunder. The Compensation
Committee acted only by unanimous consent.
The Board of Directors held five meetings during 1998. No
director of the Company during the last fiscal year failed to attend any of the
meetings of the Company's Board of Directors and of all committees of the Board
on which he or she served.
COMPENSATION OF DIRECTORS
The directors of the Company do not receive annual
compensation for their services. Mr. Daly and Mr. Schuur are compensated for
their services to the Company, but they are compensated in their capacities as
officers of the Company and not as directors.
Non-employee directors of the Company participate in the
Directors Stock Option Plan (the "Directors Plan"), the approval of which will
be voted upon at the Annual Meeting of Stockholders. The Directors Plan, which
was adopted on December 4, 1998, provides for annual, non-discretionary grants
of ten-year options to purchase 5,000 shares of Common Stock (after an initial
grant to new directors participating in the Directors Plan of an option to
purchase 10,000 shares) at an exercise price per share equal to the fair market
value of a share of Common Stock on the date of grant, and which are exercisable
on a cumulative basis in three equal annual installments. On the date the
Directors Plan was adopted in December 1998, Messrs. Okun and Strohl and Ms.
Wing each received an initial grant of options to purchase 10,000 shares of
Common Stock under the Directors Plan.
9
<PAGE>
EXECUTIVE COMPENSATION
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors develops
and implements the Company's compensation policies. It has responsibility for,
among other things, reviewing and determining the cash compensation and other
benefits of the Company's executive officers. Glenn A. Okun is the only member
of the Compensation Committee. The disinterested members of the Board of
Directors have approved all awards under the 1996 Incentive Stock Option Plan
and the Amended and Restated Stock Incentive Plan to the Company's executive
officers and key employees (and participating directors, if any).
In 1998, the Committee received from the Company's Chief
Executive Officer recommendations with respect to compensation of the Company's
other executive officers and met with him to evaluate such executives'
performance and, at times, to discuss the bases for his recommendations. The
Committee evaluated the Chief Executive Officer's performance and ultimately
determined the compensation of all executive officers.
The Compensation Committee provides the following report.
COMPENSATION POLICY
The Company's executive compensation programs are designed to
attract and retain qualified leaders and motivate them to achieve the Company's
short and long-term business objectives. The Company believes that the key to
achieving such goals is to provide compensation that is competitive with the
compensation packages provided by comparable companies and of which a certain
proportion is "at risk" for performance, in the form of annual incentive bonuses
and long-term stock-based incentives.
FISCAL 1998 PERFORMANCE
Although the Company reported limited revenues in 1998, the
Company believes that it is positioned as a leader in the United States smart
card industry and is also positioned to capitalize on the expected development
and growth of the smart card market.
Some of the Company's achievements in 1998 include the
following:
- Entry into internet commerce through the Company's
relationship with Link Opp Marketing
- Development of the school lunch smart card system in Hawaii
and installation of a pilot program
10
<PAGE>
- Development and release of the Company's indoor kiosk product,
Tikitbox II, and upgrade of the outdoor version
- Affirmation of the Company's leadership role in the U.S. smart
card market through its alliance (via a letter of intent) with
Proton World International, the world's largest electronic
purse platform for smart cards
BASE SALARY
Base compensation for executive officers reflects both the
individual's responsibilities and experience and the competitive salary ranges
for executives in the same industry with similar responsibilities in
corporations with operations comparable to those of the Company. Base salaries
generally are modified annually as warranted by the performance of the Company
and/or by the performance of the executive officer or changes in his or her
responsibilities. Increases in the 1998 base salaries of the Company's executive
officers were competitive with increases at other similar-sized companies. The
1998 base salary for Mr. Daly, the President and Chief Executive Officer of the
Company, was $200,000, which has remained constant since 1996 pursuant to Mr.
Daly's employment agreement with the Company.
BONUSES
The annual cash bonus component of an executive officer's
compensation depends upon the officer's execution of his or her responsibilities
compared to the performance of the Company. Generally, the incentive bonuses of
certain officers are based primarily on performance goals for the operations for
which they are responsible and in part on the achievement of overall corporate
goals. The bonuses for the Company's executive officers with broad corporate
responsibilities, such as the Chief Executive Officer and the Chief Financial
Officer, are based on the financial performance of the Company overall, and also
on such officers' efforts to design and implement the Company's major
initiatives and corporate strategies and their success in so doing. The Company
believes that an executive officer's responsibility for the success of the
Company increases as his or her duties expand. Accordingly, a larger proportion
of a more senior executive officer's compensation generally will be variable,
performance-based incentive compensation, compared to that of other executive
officers.
The Committee also encourages its executives to invest in
shares of the Company's stock in order to align the interests of the executives
with those of the Company's stockholders. The Committee considers the ownership
level of each executive in its bonuses, and expects that a portion of bonuses
paid will ultimately be used to increase executives' ownership and capital "at
risk" through the exercise of stock options or purchase of shares on the open
market.
11
<PAGE>
Mr. Daly received a bonus for fiscal 1998 in the amount of
$363,526. In determining Mr. Daly's 1998 bonus, the Committee considered, in
addition to the Company's performance, the overall compensation of Mr. Daly in
comparison with other chief executives in technology companies. The Committee
believes that Mr. Daly's base salary, which has not been adjusted since 1996, is
relatively modest relative to other chief executives in the industry. The
Committee also considered that Mr. Daly has performed a wide variety of
responsibilities, such as acting as the Company's Chief Technology Officer for
the past two and a half years until the Company hired an executive in early 1999
and playing a major role in the Company's capital raising efforts and
development of strategic industry relationships.
Messrs. Schuur, Haller and Schuler received a bonus for fiscal
1998 in the amount of $97,663, $79,945 and $46,450, respectively. The factors
that influenced the Committee to award these bonuses were as follows:
- The overall compensation level of executives relative similar
to executives in the industry
- The role of each executive in advancing the Company as an
industry leader positioned to capitalize on the expected
growth of the smart card market
- The industry reputation and leadership of executives in
advancing and promoting electronic commerce through smart
cards
- The current stock ownership level of the executive
- The performance of each executive in their functional area of
responsibilities and contribution to the overall corporate
goals
STOCK-BASED INCENTIVES AND STOCK OWNERSHIP
The Company believes that stock options are a very important
component of executive compensation because they encourage an executive to
remain in the Company's employ and link long-term rewards to stock price
appreciation. The Compensation Committee recognizes that such long-term
incentives will motivate executives to balance pressures to manage for the
short-term with the steps necessary to assure the Company's future vitality.
In determining the size of a grant to an executive officer or
participating director under the stock option incentive program, the
Compensation Committee considers the number of shares that would be thought to
be a meaningful incentive for long-term performance, given the participant's
position, responsibilities, level of cash and stock-based incentive
compensation, and expected contributions. Based on a consideration of these
12
<PAGE>
factors, the Committee makes a recommendation to the Board of Directors, which
currently manages the Company's Amended and Restated Stock Incentive Plan.
REPRICING OF CERTAIN OPTIONS IN 1998
The Company repriced severely out-of-the-money options held by
Messrs. Schuur and Haller in 1998. Each of Mr. Schuur and Mr. Haller each held
options to acquire 15,000 shares of Common Stock at an exercise price of $24 per
share, which were repriced on December 4, 1998, to an exercise price of $14 3/8
per share. The vesting schedule and expiration date of the options remained
unchanged.
The Compensation Committee and Board of Directors believe that
the repricing was necessary and appropriate in light of competitive conditions
and other factors relevant to the Company's business and in order to provide the
Company's employees with a meaningful incentive compensation opportunity in
light of the trading prices of the Company's Common Stock.
The following table provides information regarding the
repricing of any stock options and SARs held by any executive officer since the
Company became subject to the reporting requirements of the Securities Exchange
Act of 1934 on August 19, 1998.
TEN YEAR OPTION/SAR REPRICING
<TABLE>
<CAPTION>
Number of
Securities Exercise Price Length of Original
Underlying Market Price of at Time Option/SAR-Term
Options/SARs Stock at Time Repricing or New Remaining at Date
Repriced or of Repricing or Amendment Exercise of Repricing or
Name and Position Date Amended (#) Amendment ($) ($) Price ($) Amendment
- ---------------------------------------- ------------------- ---------------------------------------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Mark T. Schuur, Senior 12-4-98 15,000 14 3/8 24 14 3/8 9 yrs
Vice President and
Chief Financial Officer
Robert W. Haller, 12-4-98 15,000 14 3/8 24 14 3/8 9 yrs
Executive Vice
President
</TABLE>
INTERNAL REVENUE CODE SECTION 162(m)
In 1993, the Internal Revenue Service enacted Section
162(m) of the Internal Revenue Code, which limits the deductibility of
executive compensation in excess of $1,000,000 per year. However, this
limitation does not apply to performance-based compensation, provided certain
conditions are satisfied. The Company's policy is generally to preserve the
federal income tax deductibility of compensation paid to its executives.
However, notwithstanding the Company's general policy, the Compensation
Committee retains the authority to authorize compensation that may not be
deductible if
13
<PAGE>
they believe that it is in the interest of the Company to do so. Other
elements of compensation, including perquisites and cash and other bonuses,
even those based on performance, may also cause a covered executive officer's
income to exceed deductible limits.
COMPENSATION COMMITTEE
Glenn A. Okun, Chairman
SUMMARY COMPENSATION TABLE
The following table shows compensation for services rendered
to the Company during the fiscal years ended December 31, 1998, 1997 and 1996,
respectively, by the President and Chief Executive Officer, the Senior Vice
President and Chief Financial Officer, the Executive Vice President and the
Senior Vice President, Sales and Marketing. Each executive officer serves under
the authority of the Board of Directors. No other executive officer of the
Company received cash compensation that exceeded $100,000 during the fiscal
years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
-------------------------------------- ----------------------------------------
Award Payouts
--------------------------- -----------
All
Other Annual Restricted Securities Other
Compen- Stock Underlying LTIP Compen-
Name and Principal Bonus sation Award(s) Options/SARs Payouts sation
Position Year Salary ($) ($)(c) ($) ($) (#) ($) ($)
- ---------------------------- ------ ------------ ---------- -------------- ------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Carey F. Daly, II, 1998 $200,000 $363,526 $ 0 $0 0/0 0 0
President, Chief 1997 200,000 220,000 8,333 (a) 0 0/0 0 0
Executive Officer and 1996 200,000 0 12,500 (a) 0 200,000/0 0 0
Chairman of the Board
- ---------------------------- ------ ------------ ---------- -------------- ------------- ----------------- ----------- -----------
Mark T. Schuur, Senior 1998 $124,005 $97,663 $0 $0 15,000/0 (e) 0 0
Vice President and Chief 1997 112,916 0 0 0 15,000/0 0 0
Financial Officer 1996 35,333(b) 0 0 0 20,000/0 0 0
- ---------------------------- ------ ------------ ---------- -------------- ------------- ----------------- ----------- -----------
Robert W. Haller, 1998 $ 89,943 $ 79,945 $0 $0 15,000/0 (e) 0 0
Executive Vice 1997 69,376 23,717 0 0 15,000/0 0 0
President 1996 45,099 52,383 0 0 0/0 0 0
- ---------------------------- ------ ------------ ---------- -------------- ------------- ----------------- ----------- -----------
Joseph F. Schuler, 1998 $107,000 $46,450 $0 $0 0/0 0 0
Senior Vice President, 1997 10,000(d) 0 0 0 100,000/0 0 0
Sales and Marketing 1996 - - - - - 0 0
- ---------------------------- ------ ------------ ---------- -------------- ------------- ----------------- ----------- -----------
</TABLE>
(a) Represents payment for accrued vacation benefits.
(b) Mr. Schuur's employment with the Company commenced in September 1996.
14
<PAGE>
(c) The Company has no set bonus policy. Bonuses are awarded by the
Compensation Committee of the Board, which is currently comprised of
Mr. Okun, an independent director of the Board.
(d) Mr. Schuler's employment with the Company commenced in December 1997.
(e) The Company repriced Mr. Schuur's and Mr. Haller's stock options on
December 4, 1998.
EMPLOYMENT CONTRACTS
The Company has an agreement with Mr. Daly pursuant to which
Mr. Daly receives a base salary of $200,000 per year. The agreement, which
expires on October 31, 1999, permits the Company to terminate Mr. Daly's
employment for cause or upon 90 days' notice. The termination of Mr. Daly's
employment is conditioned upon the Company obtaining releases from the Company's
creditors from any security granted by Mr. Daly personally on behalf of the
Company. Upon termination, Mr. Daly is entitled to severance pay in an amount
equal to 50% of his base salary for the remainder of the term.
The Company's agreement with Mr. Schuur provides that Mr.
Schuur receives a base salary of $100,000, subject to an annual merit increase;
the agreement also provides that Mr. Schuur may receive an annual discretionary
bonus. The Company may terminate Mr. Schuur's employment at any time with or
without cause. If Mr. Schuur's employment is terminated without cause, Mr.
Schuur is entitled to receive his compensation for an additional six months. The
Company's agreement with Mr. Schuur also expires on October 31, 1999.
The Company also has an agreement with Mr. Schuler, which
provides that Mr. Schuler receives a base salary of $100,000 which is increased
annually to reflect any increase in the consumer price index. Mr. Schuler also
receives compensation equal to 3% of the Company's gross sales other than
processing revenue. The Company may terminate Mr. Schuler's employment with or
without cause; if the Company terminates Mr. Schuler's employment without cause,
Mr. Schuler is entitled to receive as severance pay his salary for a period of
twelve months after termination.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides certain information with
respect to options granted to each person named in the Summary Compensation
Table during fiscal 1998. In addition, in accordance with Securities and
Exchange Commission rules, there are shown hypothetical gains that would
exist for the options granted, based on assumed rates of annual compound
stock price appreciation of 5% and 10% from the date the options were granted
over the full option term. The named officers will realize no gain on these
options
15
<PAGE>
unless the price of the Common Stock increases above the
exercise price for such options, which will benefit all stockholders
proportionately. No stock appreciation rights have been awarded by the Company.
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------------
Percent of Potential Realizable Value at
Total Assumed Annual Rates of
Options/ Options/ Stock
SARS SARS Price Appreciation for
Granted in Granted to Exercise Option Term
Fiscal Employees in or base Expiration
Name Year(#) Fiscal Year Price ($/SH) Date 5%($) 10%($)
---- ------- ----------- ------------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Carey F. Daly, II - - - - - -
Mark T. Schuur 15,000 (a) 17.6% $14 3/8 12/22/07 $135,605 $343,651
Robert W. Haller 15,000 (a) 17.6% $14 3/8 12/22/07 $135,605 $343,651
Joseph F. Schuler - - - - - -
</TABLE>
(a) The Board of Directors approved the repricing of Mr. Schuur's and Mr.
Haller's options on December 4, 1998. The options to both Mr. Schuur
and Mr. Haller became exercisable on December 23, 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
The following table sets forth as to each person named in the
Summary Compensation Table the specified information with respect to option
exercises during fiscal 1998 and the status of their options at the end of
fiscal 1998.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In--The--Money (2)
Number of Options/SARS at Fiscal Options/SARS at
Shares Value Year-End Fiscal Year-End ($)(3)
Acquired on Realized ---------- ----------------------
Name Exercise ($)(1) Exercisable Nonexercisable Exercisable Nonexercisable
---- -------- -------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Carey F. Daly, II -- -- 133,334 66,666 $1,875,076 $937,524
Robert W. Haller -- -- 15,000 533,340 $ 40,320 $ 0
Mark T. Schuur 6,667 $86,204 15,000 6,666 $ 40,320 $106,609
Joseph F. Schuler -- -- 33,334 66,666 $ 68,768 $137,532
</TABLE>
(1) The "value realized" represents the difference between the exercise
price of the option shares and the market price of the option shares on
the date the option was
16
<PAGE>
exercised. The value realized was determined without considering any
taxes which may become payable in respect of the sale of any such
shares.
(2) "In-the-money" options are options whose exercise price was less than
the market price of Common Stock at December 31, 1998.
(3) Based on a stock price of $17 1/16 per share, which was the closing
price of a share of Common Stock reported on the Nasdaq SmallCap Market
on December 31, 1998.
17
<PAGE>
PERFORMANCE GRAPH
The SEC requires the Company to present a line graph comparing
cumulative, five-year stockholder returns on an indexed basis with a major index
and a nationally-recognized industry standard or a group of peer companies
selected by the Company. The Company has selected the Russell 2000 Index as its
major index and the Standard & Poor's Data Processing Services Index as the
Company's nationally recognized industry standard for purposes of this
performance comparison. The graph assumes that $100 was invested on August 11,
1997 (when trading of the Company's Common Stock commenced on the Nasdaq
over-the-counter market) in the Common Stock and that $100 was invested on July
31, 1997 (the date closest to August 11, 1997 for which data is available) in
the Russell 2000 Index and the S&P Data Processing Services Index, and that all
dividends were reinvested.
COMPARISON OF 16 MONTH CUMULATIVE TOTAL RETURN*
AMONG THE PATHWAYS GROUP, INC., THE RUSSELL 2000 INDEX
AND THE S&P SERVICES (DATA PROCESSING) INDEX
(Comparison Chart)
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
-----------------------------------------------------------------
8/11/97 9/97 12/97 3/98 6/98 9/98 12/98
<S> <C> <C> <C> <C> <C> <C> <C>
THE PATHWAYS GROUP, INC. 100 342 400 413 319 267 284
RUSSELL 2000 100 110 106 117 113 91 105
S & P SERVICES (DATA PROCESSING) 100 93 96 106 102 93 104
</TABLE>
* $100 INVESTED ON 8/11/97 IN STOCK OR ON 7/31/97
IN INDEX - INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING DECEMBER 31.
18
<PAGE>
TRANSACTIONS WITH MANAGEMENT
Mr. Carey F. Daly, II, the President and Chief Executive
Officer of the Company and Chairman of the Board of Directors, has personally
guaranteed various debts of the Company and its subsidiaries for the benefit of
the Company in a principal amount equal to $1,292,500. In May 1995, April 1996
and September 1996, the Company issued an aggregate of 646,250 shares of its
Common Stock to Mr. Daly in consideration for his entering into such guaranties.
In 1996, the Company issued to Allen & Company Incorporated, a
former financial advisor to the Company, 300,000 shares of its Common Stock in
payment for $300,000 in fees owed by the Company to Allen & Company for
financial consulting services. Allen & Company purchased shares of Common Stock
of the Company (including the 1996 fee for services issuance) in connection with
a series of transactions at a weighted average price per share of $0.70. Mr.
Glenn Okun, a director of the Company, was also a Director and Vice President of
Allen & Company until April 1998.
In connection with the Company's private offering of Common
Stock pursuant to Rule 506 of Regulation D of the Securities Act, commenced in
July 1998 and completed in August 1998, the Company entered into a Placement
Agency Agreement with Allen & Company Incorporated, whereby the Company agreed
to pay Allen & Company Incorporated a placement fee of 5% of the aggregate
amount of Common Stock purchased by a subscriber. The Company paid Allen &
Company Incorporated an aggregate amount of $349,974 as its placement fee. In
addition, Mitchum Jones & Templeton, Inc. ("Mitchum Jones"), an investment
banking firm for whom Mr. Okun is now a principal, received a 5% placement fee
in connection with a subscription for Common Stock of the Company by one of that
firm's clients. Mitchum Jones received $100,000 as its placement fee for that
purchase. Allen & Company Incorporated did not receive a placement fee in
connection with the subscription by Mitchum Jones' client.
In connection with the Company's agreement with Scrip
Advantage, a customer of the Company, Scrip Advantage has agreed to elect a
Company designee to its Board of Directors. Initially, Carey F. Daly II, the
President and Chief Executive Officer of the Company, will be elected to such
Board. The Company has advanced $50,000 to Scrip Advantage in exchange for a
demand promissory note. The note is convertible into equity of Scrip Advantage
at the Company's sole option.
The Company believes that the terms of the transactions with
affiliates of the Company are fair and reasonable in light of prevailing market
conditions at the time when such arrangements were implemented and in light of
the circumstances under which such arrangements were made. The disinterested
members of the Board of Directors will continue to review any ongoing
relationships with such affiliates to assure that such
19
<PAGE>
transactions are consistent with the fiduciary duties of the directors to the
stockholders of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Okun, who is currently the only member of the Compensation
Committee, was formerly a director and vice president of Allen & Company
Incorporated, and is currently the Chairman and Chief Executive Officer of
Mitchum Jones & Templeton, Inc. As noted above, both firms received placement
agent fees in connection with the Company's 1998 private placement of Common
Stock while Mr. Okun has been a director. In addition, Allen & Company received
shares of Common Stock of the Company as payment for financial consulting
services. See "Transactions with Management" above.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires
the Company's directors, executive officers and persons who own beneficially
more than ten percent of the Company's outstanding Common Stock to file with the
SEC initial reports of beneficial ownership and reports of changes in beneficial
ownership of Common Stock and other securities of the Company on Forms 3, 4 and
5, and to furnish the Company with copies of all such forms they file. Based on
a review of copies of such reports, all of the Company's directors and officers
timely filed all reports required with respect to fiscal 1998, except that the
Initial Statements of Beneficial Ownership of Securities on Form 3 for the
Deferred Compensation Trust for Carey F. Daly, II and its trustee, Edward L.
Mueller, were inadvertently filed more than ten days after the trust became a
reporting person and Mr. Mueller's Statement of Changes in Beneficial Ownership
on Form 4 for the month ended December 31, 1998, was inadvertently filed more
than 10 days after December 31, 1998. The Form 4 reported a sale by Mr. Mueller
in his individual capacity of shares of Common Stock of the Company.
CERTAIN LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
PROPOSAL NO. 2
PROPOSAL TO APPROVE THE
AMENDED AND RESTATED STOCK INCENTIVE PLAN
In August 1996, the Board of Directors of the Company
established the 1996 Stock Incentive Plan (the "Original Plan") to aid the
Company in attracting, retaining and motivating key employees and officers of
the Company by providing them with incentives
20
<PAGE>
for making significant contributions to the growth and profitability of the
Company. The Plan is designed to accomplish the goal of attracting and
maintaining key employees and officers by offering stock options and other
incentive awards, thereby providing participants with a proprietary interest
in growth, profitability and success of the Company. On December 16, 1997,
the Board amended the Original Plan and approved the Amended and Restated
Stock Incentive Plan (the "Amended Plan"), which is being submitted to the
stockholders for approval at the Annual Meeting. Except as noted herein, the
provisions of the Amended Plan do not materially differ from the provisions
of the Original Plan.
Set forth below is a brief description of the principal
features of the Amended Plan. Such description is qualified in its entirety by
the full text of the Amended Plan, a copy of which is attached hereto as Exhibit
A. Reference to such exhibit should be made for a more complete description of
the Amended Plan.
GENERAL TERMS
The Amended Plan authorizes the Company to grant awards in the
form of stock options, both incentive stock options (within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code")) and non-qualified stock options, stock appreciation rights
("SARs") and awards payable in stock, restricted stock or cash. All of such
awards may be granted singly, in combination or in tandem. The Original Plan
only contemplated the granting of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code. The Company believes that the broad
array of compensation options provided by the Amended Plan enables the Company
to design the appropriate incentive compensation package for each participant.
In addition, the Amended Plan permits the Company to extend dividend equivalency
rights to awards made thereunder; the Original Plan did not provide such rights.
The payment or exercise of any awards, including stock options, under the
Amended Plan may be conditioned on the satisfaction of various criteria, such as
the achievement of specific business objectives, attainment of growth rates and
other comparable measurements of the Company's performance. While some or all of
the other types of awards referred to above may be made from time to time, the
Company has to date only granted stock options under the Amended Plan.
The Amended Plan terminates on December 31, 2007. The number
of shares authorized for issuance thereunder is 2,000,000; the Original Plan
authorized 350,000 shares for issuance. Shares related to awards (or portions
thereof) under the Amended Plan that are forfeited, cancelled or terminated,
expire unexercised, are surrendered in exchange for other awards, or are settled
in cash in lieu of shares or in any other manner such that shares covered by an
award are not and will not be issued, will be restored to the total number of
shares available for issuance pursuant to awards granted under the Amended Plan.
The aggregate number of shares issuable pursuant to options, or which may be
used as a basis for SARs, granted to any individual participant under the
21
<PAGE>
Amended Plan is limited to 200,000 shares during any fiscal year. The
Original Plan prohibited granting options in excess of an amount that would
permit a participant to acquire shares valued at an amount in excess of
$100,000, as determined on the date of grant of the options. To date, the
Board of Directors has granted options to acquire an aggregate of 446,666
shares to key employees and officers of the Company under the Amended Plan.
The table below sets forth the number of options granted to date under the
Original Plan and the Amended Plan:
<TABLE>
<CAPTION>
Number of
Securities Terminat
Underlying ion-Date
Date of Options/SARs Exercise of
Name and Position Grant Granted (#) Price-($) Vesting Schedule Option
- --------------------------------- ------------------------------------------------------------------------- -------------
<S> <C> <C> <C> <C> <C>
Carey F. Daly, II, President, 12-1-96 200,000 3.00 Three equal annual 12-1-01
Chief Executive Officer and installments
Chairman of the Board (1)
Mark T. Schuur, Senior Vice 9-5-96 20,000 1.07 Three equal annual 9-5-06
President and Chief Financial installments
Officer (2)
12-22-97 15,000 24.00 Fully exercisable after 12-22-07
first anniversary
Robert W. Haller, Executive 12-22-97 15,000 24.00 Fully exercisable after 12-22-07
Vice President (3) first anniversary
Joseph F. Schuler, 10-28-97 100,000 15.00 Three equal annual 10-28-07
Senior Vice President, installments
Sales and Marketing (4)
12-22-97 15,000 24.00 Fully exercisable after 12-22-07
first anniversary
All current executive officers - 365,000 - - -
as a group
All employees, other than the - 81,666 - - -
executive officers listed
above, as a group
</TABLE>
- ----------------------------------
(1) Mr. Daly received options to acquire 200,000 shares of Common Stock of
Company pursuant to the Original Plan.
(2) Mr. Schuur received options to acquire 20,000 shares of Common Stock of
the Company pursuant to the Original Plan and options to 15,000 shares
of Common Stock pursuant to the Amended Plan.. Mr. Schuur is a nominee
for election as a director of the Company.
22
<PAGE>
(3) Mr. Haller received options to acquire 15,000 shares of Common Stock of
the Company pursuant to the Amended Plan.
(4) Mr. Schuler received options to acquire 100,000 shares of Common Stock
of the Company pursuant to the Original Plan and options to acquire
15,000 shares of Common Stock pursuant to the Amended Plan.
The Amended Plan provides that, in the event of a stock split,
stock dividend, combination or reclassification of shares, recapitalization,
merger, consolidation or similar event, proportional adjustments will be made in
(a) the number of shares of the Company's Common Stock (i) reserved for issuance
under the Amended Plan, (ii) available for options or other awards and for
issuance pursuant to options, or upon which SARs may be based, for individual
participants, and (iii) covered by outstanding awards; (b) the prices related to
outstanding awards; and (c) the appropriate fair market value and other price
determinations for such awards. In addition, equitable adjustments will be made
in the event of any other change affecting the Company's Common Stock or any
distribution (other than normal cash dividends) to stockholders of the Company.
The Amended Plan provides that it shall be administered by the
Board of Directors or a Committee designated by the Board of Directors (the
"Committee"), consisting of at least two directors who are not officers or
employees of the Company or any of its subsidiaries. The Committee has the sole
authority, among other things, to: grant awards; determine the terms,
conditions and limitations of awards (including any applicable performance
criteria); establish rules, procedures, regulations and guidelines relating to
the Amended Plan generally; interpret the Amended Plan and award agreements
entered into pursuant to the Amended Plan; and grant waivers of Amended Plan
restrictions. The Original Plan did not provide for a Committee to administer
the Original Plan; only the Board of Directors was authorized to administer the
Plan. To date, the Board of Directors has administered the Amended Plan.
Officers, key employees and directors who are also officers or
employees of the Company or its subsidiaries or who have been designated by the
Board of Directors of the Company as eligible to receive awards under the
Amended Plan and consultants who have been so designated, are eligible to
participate in the Amended Plan. Key employees are those employees who hold
positions of responsibility and/or whose performance, in the judgment of the
Committee, can have a significant effect on the growth and profitability of the
Company. The number of persons who are currently participate in the Amended Plan
is 19. The Original Plan did not include consultants and other persons
designated by the Board of Directors as eligible participants.
Generally, an Amended Plan participant may exercise or receive
payment of an award only while employed by or associated with the Company or a
subsidiary of the
23
<PAGE>
Company, except that, under some circumstances, and subject to restrictions
and limitations imposed by the Committee, the Committee may permit exercise
by, or payment to, participants who have retired or become disabled, or who
otherwise have had their employment or association with the Company or a
subsidiary thereof terminated. The Original Plan, which only contemplated the
grant of incentive stock options under Section 422 of the Internal Revenue
Code, permitted the exercise of an option within three months after the
employee's termination of employment and did not permit the exercise of any
options after the three month period. In addition, if a participant dies
while still employed or associated with the Company or a subsidiary thereof,
the estate, heirs or beneficiaries of the deceased participant may, subject
to restrictions and limitations imposed by the Committee, exercise or receive
payment in respect of awards held by the participant at the time of death. In
general, awards granted under the Amended Plan are not assignable or
transferable by a participant, except under the limited circumstances
contemplated by the Amended Plan.
The Amended Plan provides that awards granted under the
Amended Plan may be subject to acceleration or vesting in the event of a change
in control of the Company as provided in any agreements with participants or as
set forth under the Amended Plan. A change of control may be deemed to have
occurred if a person or group becomes the beneficial owner of securities of the
Company representing more than 50.1% of the combined voting power of the then
outstanding securities of the Company or a change of more than 25% of the
composition of the Board occurs within a two-year period, unless two-thirds of
the previous directors approved such a change in composition. Under the Original
Plan, unless the terms of any option grant provided for the acceleration of
exercisability or vesting upon a merger of consolidation or liquidation or
dissolution, the options would not accelerate.
The exercise price of an option granted under the Amended Plan
will be not less than the fair market value of the Company's Common Stock on the
date of grant, as defined in the Amended Plan. (The closing sales price of a
share of the Company's Common Stock was $8 3/4 on May 4, 1999, as reported on
the Nasdaq SmallCap Market.) The exercise price of an option must be paid in
full in cash, or arrangements, satisfactory to the Committee, for payment in
full in cash made, at the time of exercise, or, if permitted by the Committee,
may be paid in whole or in part by (a) tendering shares of Common Stock or
surrendering another award granted under the Amended Plan or another benefit
plan of the Company, (b) delivering a promissory note issued by the participant
to the Company in a form determined by the Committee, or (c) any other means
acceptable to the Committee. In order to enable the Company to satisfy any tax
payment obligations resulting from any exercise of, or other payment on, an
award under the Amended Plan, the Company has the right, among other things, to
withhold an appropriate amount from such payment or to with hold an appropriate
number of shares of the Company's Common Stock receivable by the participant,
for payment thereof.
24
<PAGE>
The Board may amend, modify, suspend or terminate the
Amended Plan, or adopt subplans under the Amended Plan, (a) for the purpose
of meeting or addressing any changes in any applicable tax, securities or
other laws, rules or regulations or (b) for any other purpose permitted by
law. Except as otherwise required by applicable law, no amendment to this
Plan or any subplan established hereunder will require stockholder approval;
provided, however, that the Amended Plan may not be amended in a manner that
would alter, impair, amend, modify, suspend or terminate any rights of a
Participant or obligation of the Company under any Awards theretofore
granted, in any manner adverse to any such affected Participant, without the
consent of such affected Participant. Under the Original Plan, the Board of
Directors was only authorized to amend the Original Plan without stockholder
approval to the extent necessary under applicable law; all other amendments
required stockholder approval.
FEDERAL INCOME TAX CONSEQUENCES
Under current federal tax laws and regulations and judicial
interpretations thereof, which are subject to change at any time, the following
are the federal income tax consequences generally arising with respect to awards
granted under the Amended Plan. The grant of a stock option or SAR will create
no tax consequences for the participant or the Company. The participant will
have no taxable income upon exercising an incentive stock option (except that
the alternative minimum tax may apply), and the Company will not receive a
deduction when an incentive stock option is exercised. Upon exercising an SAR or
a non-qualified stock option, the participant must recognize ordinary income in
an amount equal to the difference between the exercise price and the fair market
value of the stock on the exercise date. At such time, the Company will receive
a deduction for the same amount (assuming the applicable requirements of Section
162(m) of the Internal Revenue Code have been met).
With respect to other awards granted under the Amended Plan
that are settled in cash or stock that is either transferable or not subject to
a substantial risk of forfeiture, the participant must recognize ordinary income
in an amount equal to the cash or the fair market value of the shares received,
when received. The Company will receive a deduction for the same amount,
provided that, at the time the income is recognized, the participant either is
not a covered employee or does not have total compensation in excess of
$1,000,000 for the year of recognition (other than compensation that otherwise
meets the requirements of Section 162(m) of the Internal Revenue Code). With
respect to other awards granted under the Amended Plan that are settled in stock
that is subject to restrictions as to transferability and subject to a
substantial risk of forfeiture, the participant must recognize ordinary income
in an amount equal to the fair market value of the shares received on the date
the shares first become transferable or not subject to a substantial risk of
forfeiture, whichever occurs earlier. At such time, the Company will receive a
deduction for the same amount, subject to the proviso set forth above in this
paragraph.
25
<PAGE>
The tax treatment upon disposition of shares acquired under
the Amended Plan will depend on how long the shares have been held. In the
case of shares acquired through exercise of a stock option, the tax treatment
will also depend on whether or not the shares were acquired by exercising an
incentive stock option. There will be no tax consequences to the Company upon
the disposition of shares acquired under the Amended Plan except that the
Company may receive a deduction in the case of the disposition of shares
acquired under an incentive stock option before the applicable incentive
stock option holding period has been satisfied.
RECOMMENDATION
The Board of Directors of the Company believes that it is in
the best interests of the Company and its stockholders, in the current
competitive business environment, that the Amended Plan be approved, so that the
Company can continue to attract, retain and motivate key employees to make
significant contributions to the Company. The Amended Plan will permit certain
stock-based incentive compensation to be tailored to support corporate and
business objectives and allow the Company to respond to competitive compensation
practices. Accordingly, the Board of Directors has adopted, and recommends that
the stockholders approve, the Amended Plan.
Approval requires the affirmative vote of a majority of the
votes cast at the meeting, in person or by proxy, on such proposal, provided
that the total vote cast represents over 50% of all shares entitled to vote on
the proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSAL TO
APPROVE THE AMENDED AND RESTATED STOCK INCENTIVE PLAN.
26
<PAGE>
PROPOSAL NO. 3
PROPOSAL TO APPROVE THE DIRECTORS STOCK OPTION PLAN
In December 1998, the Board of Directors approved the
Directors Stock Option Plan (the "Directors Plan"), subject to the approval of
the stockholders. The Directors Plan is now being submitted to the stockholders
for approval.
The Board of Directors recommends approval of the Directors
Plan. The purpose of the Directors Plan is to aid the Company in attracting,
retaining and motivating its non-employee directors by providing them with
incentives to make significant contributions to the growth and profitability of
the Company. The Directors Plan is designated to accomplish this goal by the
granting of stock options, thereby providing participants with a proprietary
interest in the growth, profitability and success of the Company.
Set forth below is a brief description of the principal
features of the Directors Plan. Such description is qualified in its entirety by
the full text of the Directors Plan, a copy of which is attached hereto as
Exhibit B. Reference to such exhibit should be made for a complete description
of the Directors Plan.
GENERAL TERMS
The persons ("Eligible Directors") eligible to receive grants
of stock options pursuant to the Directors Plan are directors of the Company who
are not officers or employees of the Company or any subsidiary thereof (a
"Non-employee Director") and who (i) have not been designated by the Company's
Board of Directors within 30 days after becoming a director of the Company as
being eligible to receive awards under the Amended and Restated Stock Incentive
Plan or (ii) having been eligible to participate in the Amended and Restated
Stock Incentive Plan, have ceased to be so eligible as a result of a
determination by the Board of Directors. The eligibility of any such director to
participate in the Directors Plan shall cease if such director is subsequently
designated as being eligible to receive awards under the Amended and Restated
Stock Incentive Plan for as long as he or she remains so eligible. All of the
directors of the Company, other than Messrs. Daly and Schuur, are currently
participants in the Directors Plan.
The total number of shares of the Company's Common Stock
available for issuance pursuant to stock options granted under the Directors
Plan is 100,000. Shares related to options (or portions thereof) that are
forfeited, cancelled or terminated, expire unexercised, are surrendered in
exchange for other options or are otherwise settled in such manner that all or
some of the shares covered by an option are not and will not be issued will be
restored to the total number of shares available for issuance pursuant to
options granted under the Directors Plan. In the event of any change in the
number of shares of
27
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outstanding Common Stock of the Company by reason of a stock split, stock
dividend, combination or reclassification of shares, recapitalization, merger,
consolidation or similar event, proportional adjustments will be made in the
number of shares of the Company's Common Stock (a) reserved for issuance
pursuant to the Directors Plan, (b) for which stock options shall be granted,
and (c) covered by outstanding stock options, as well as in the exercise price
of such outstanding options. In addition, equitable adjustments will be made in
the event of any other change affecting the Company's Common Stock or any
distribution (other than normal cash dividends) to stockholders of the Company.
To date, the Company has granted options to acquire 10,000 shares to each of
Glenn A. Okun, Linda Wing and Monte Strohl; these options represent the initial
grant to each of these non-employee directors on the date the Board of Directors
approved the Plan.
Under the Directors Plan, non-qualified stock options to
purchase shares of the Company's Common Stock are granted automatically to
Eligible Directors at the times specified in the Directors Plan. In general, an
Eligible Director will receive an initial option to purchase 10,000 shares of
the Company's Common Stock on the date on which he or she first becomes eligible
to participate in the Directors Plan. Thereafter, as long as the Eligible
Director remains eligible to participate in the Directors Plan, he or she will
receive annually, on the date of the Annual Meeting of Stockholders, an option
to purchase 5,000 shares of the Company's Common Stock, beginning on the date
specified in the Directors Plan. Notwithstanding the foregoing, no stock option
shall be granted to any person whose service as a director of the Company ends
on the date on which the option would otherwise be granted.
The Directors Plan is administered by the Company's Board of
Directors or a committee composed of not less than two members thereof not
eligible to participate in the Directors Plan as may be designated from time to
time by all such members. The Board or such committee administers the Directors
Plan, but has no discretion regarding the grant, amount, timing, terms and
conditions of stock options granted under the Directors Plan.
The exercise price of any stock option granted pursuant to the
Directors Plan is the fair market value of the Company's Common Stock on the
date of grant. Each stock option is exercisable, cumulatively, as to one-third
of the shares after the first anniversary of the date of grant and as an
additional one-third after each of the second and third anniversaries of the
date of grant. Each option is exercisable for a period of ten years from the
date of grant.
The price at which shares of the Company's Common Stock may be
purchased upon exercise of an option must be paid in full in cash at the time of
exercise or by (i) tendering shares of the Company's Common Stock or
surrendering another stock option, (ii) delivering a promissory note issued by
the participant to the Company in a form
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determined by the Board or the committee, or (iii) any other means acceptable to
the Board or the committee.
In order to enable the Company to satisfy any tax payment
obligations resulting from any exercise of a stock option under the Directors
Plan, the Company has the right, among other things, to withhold from the shares
of the Company's Common Stock receivable by a participant an appropriate number
of shares for payment thereof. In addition, participants may elect to have the
Company deduct applicable taxes by withholding an appropriate number of shares
of the Company's Common Stock or to elect to tender to the Company other shares
of the Company's Common Stock held by the participant for the purpose of
satisfying tax payment obligations.
Except as described below, if a participant's association with
the Company terminates, any unexercised stock option (or portion thereof) shall,
to the extent it is exercisable pursuant to the terms of such option on the date
of such termination, remain exercisable for a period of three months following
the date of termination or until the stated expiration of the stock option, if
earlier. If a participant dies, or ceases to be associated with the Company
because he (i) is disabled, (ii) retires at age 62 or thereafter or (iii)
assumes a position with a governmental, charitable or educational agency or
institution, any stock option granted under the Directors Plan then held by such
participant shall become fully exercisable as of the date on which such
participant dies or ceases to be associated with the Company, and shall be
exercisable through the expiration date specified in the applicable option
agreement.
Stock options granted under the Directors Plan are subject to
acceleration of exercisability in the event of a change in control of the
Company, as set forth in agreements between the Company and certain of its
directors which provide for certain protections and benefits in the event of a
change of control (as defined in such agreements), or as provided in applicable
option agreements. In general, awards granted under the Directors Plan are not
assignable or transferable by a participant, except under the limited
circumstances contemplated by the Directors Plan.
The Board or the committee may amend, suspend or terminate the
Directors Plan for the purpose of meeting or addressing any changes in any
applicable tax, securities or other law. In addition, the Directors Plan may
not, without the approval of the stockholders, as set forth therein, be amended
to (i) increase materially the aggregate number of shares of the Company's
Common Stock that may be issued under the Directors Plan (except for adjustments
due to stock split, stock dividend, combination or classification of shares,
recapitalization, merger, consolidation or similar event), (ii) materially
increase the benefits accruing to participants, or (iii) modify materially the
eligibility requirements of the Directors Plan. Nor may the Directors Plan be
changed in such a way as to alter, impair, amend, modify, suspend or terminate
any rights of a participant or any obligations of the Company under any stock
options theretofore granted
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in any manner adverse to such participant, without the consent of such
participant. The Directors Plan terminates on December 4, 2008.
FEDERAL INCOME TAX CONSEQUENCES
The federal income tax consequences to the participants and
the Company of the issuance and exercise of stock options that would be granted
pursuant to the Directors Plan are the same as for the issuance and exercise of
stock options that would be granted under the Amended Plan. See "Proposal to
Approve the Amended and Restated Stock Incentive Plan -- Federal Income Tax
Consequences" above.
RECOMMENDATION
The Board of Directors of the Company believes that it is in
the best interests of the Company and its stockholders to offer the long-term
incentives available under the Directors Plan to directors of the Company. The
Board of Directors believes that the future success of the Company will depend
in large part on its ability to attract, retain and motivate directors through,
among other things, such incentive programs. Accordingly, the Board of Directors
has adopted, and recommends that the stockholders approve the Directors Plan.
Approval requires the affirmative vote of a majority of the
votes cast at the meeting in person or by proxy on such proposal, provided that
the total votes cast represent over 50% of all shares entitled to vote on the
proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSAL TO
AMEND THE DIRECTORS PLAN.
PROPOSAL NO. 4
RATIFICATION OF INDEPENDENT AUDITORS
The Board of Directors of the Company has appointed the firm
of PricewaterhouseCoopers LLP ("PWC") as its independent auditors for the 1999
fiscal year. While it is not required to do so, the Company is submitting the
appointment of PWC to the stockholders for ratification. PWC has been serving
the Company in this capacity since 1996. A representative from PWC will be
present at the Meeting and will be given the opportunity to make a statement if
the representative desires to do so. The representative is expected to be
available to respond to appropriate questions. If the appointment of PWC is not
ratified by the stockholders of the Company, the Board of Directors will
reconsider the appointment of PWC.
The Board of Directors intends that the appointment of the
independent auditors be ratified by a majority of the votes cast.
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SUBMISSION OF STOCKHOLDER PROPOSALS
In order for a stockholder proposal to be eligible for
inclusion in the Company's proxy material relating to its 2000 Annual Meeting it
must be in writing and received by the Secretary of the Company prior to
February 22, 2000. Stockholders wishing to bring any matter before a meeting
should consult the Company's Bylaws with respect to any applicable notice or
other procedural requirements.
ANNUAL REPORT
All stockholders of record on May 4, 1999, have been sent, or
are concurrently being sent, a copy of the Company's 1998 Annual Report on Form
10-K, which contains certified financial statements of the Company for the
fiscal year ended December 31, 1998.
ANY PERSON WHO WAS A STOCKHOLDER OF THE COMPANY AT THE CLOSE
OF BUSINESS ON MAY 4, 1999, MAY OBTAIN ADDITIONAL COPIES OF THE COMPANY'S 1998
ANNUAL REPORT ON FORM 10-K AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION,
WITHOUT CHARGE, BY WRITTEN REQUEST TO THE COMPANY, 14201 NE 200TH STREET,
WOODINVILLE, WASHINGTON 98072, ATTENTION: INVESTOR RELATIONS.
ACCOUNTANTS
The Company's independent auditors, selected by the Board of
Directors, are PricewaterhouseCoopers LLP, certified public accountants.
PricewaterhouseCoopers LLP has served as the Company's auditors since 1996.
Representatives of PricewaterhouseCoopers are expected to be
present at the Annual Meeting of Stockholders, and will have the opportunity to
make a statement if they desire to do so and are expected to be available to
respond to appropriate questions at the meeting.
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OTHER MATTERS
As of the date of this Proxy Statement, the Company knows of
no matter other than those set forth herein which will be presented for
consideration at the Annual Meeting of Stockholders. If any other matter or
matters are properly brought before the meeting or any adjournment thereof, it
is the intention of the person named in the accompanying proxy to vote, or
otherwise act, on such matters in accordance with his judgment.
EDWARD L. MUELLER
Secretary
Woodinville, Washington
May 7, 1999
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Exhibit A
Amended and Restated as of
December 16, 1997
THE PATHWAYS GROUP, INC.
AMENDED AND RESTATED STOCK INCENTIVE PLAN
1. PURPOSE. The purpose of this Amended and Restated Stock
Incentive Plan (the "Plan") is to aid the Company in attracting, retaining and
motivating officers, consultants, key employees and directors of the Company by
providing them with incentives for making significant contributions to the
growth and profitability of the Company. The Plan is designed to accomplish this
goal by offering stock options and other incentive awards, thereby providing
Participants with a proprietary interest in the growth, profitability and
success of the Company.
2. DEFINITIONS.
(a) AWARD. Any form of stock option, stock appreciation right,
stock or cash award granted under the Plan, whether granted singly, in
combination or in tandem, pursuant to such terms, conditions and limitations as
the Board or the Committee may establish in order to fulfill the objectives, and
in accordance with the terms and conditions, of the Plan.
(b) AWARD AGREEMENT. An agreement between the Company and a
Participant setting forth the terms, conditions and limitations applicable to an
Award.
(c) BOARD. The Board of Directors of The Pathways Group, Inc.
(d) CODE. The Internal Revenue Code of 1986, as amended from
time to time.
(e) COMMITTEE. Such committee of the Board as may be
designated from time to time by the Board to administer the Plan or any subplan
under the Plan. Any such committee shall consist of not less than two members of
the Board who are not officers or employees of the Company, PROVIDED that,
unless the Board otherwise determines, each such non-employee director member of
such committee shall meet the requirements of Section 16(a) of the Securities
Exchange Act of 1934, as amended, and Section 162(m) of the Code.
(f) COMPANY. The Pathways Group, Inc. and its direct and
indirect subsidiaries.
(g) FAIR MARKET VALUE. If the Stock is listed on the New York
Stock Exchange (or other national exchange), the closing price of the Stock as
reported on the such exchange for the date on which Fair Market Value is to be
determined or, if the Stock is not
<PAGE>
listed on a national exchange, the last quoted sale price or, if not so
quoted, the average of the high bid and low asked prices for a share of the
Stock in the over-the-counter market, as reported by the National Association
of Securities Dealers through its Automated Quotation System or otherwise, in
either case for the date in question; PROVIDED that if no transactions in the
Stock are reported for that date, the average of the high and low sale prices
or last quoted sale price or, if not so quoted, the average of the high bid
and low asked prices as so reported for the preceding day on which
transactions in the Stock were effected, and PROVIDED, FURTHER, that if no
transactions in the Stock were effected within 10 business days preceding
such relevant date, or if otherwise deemed appropriate by the Board or the
Committee, the fair market value of the Stock shall be as determined by the
Board or the Committee.
(h) GOVERNING LAW. The laws of the Sate of incorporation of
Pathways.
(i) PARTICIPANT. An officer, consultant, key employee or
director of the Company to whom an Award has been granted.
(j) PATHWAYS. The Pathways Group, Inc.
(k) STOCK. Authorized and issued or unissued shares of Common
Stock, par value $.01 per share, of Pathways or any security issued in exchange
or substitution therefor.
3. ELIGIBILITY. Only officers, key employees, and directors
who are also officers or employees of the Company or who have been designated by
the Board as eligible to receive Awards and consultants who have been so
designated by the Board or the Committee are eligible to receive Awards under
the Plan. Key employees are those employees who hold positions of
responsibility or whose performance, in the judgment of the Board or the
Committee, can have a significant effect on the growth and profitability of the
Company.
4. STOCK AVAILABLE FOR AWARDS. Subject to Section 14
hereof, a total of 2,000,000 shares of Stock shall be available for issuance
pursuant to Awards granted under the Plan; PROVIDED, HOWEVER, that the
aggregate number of shares of Stock subject to options and upon which stock
appreciation rights are based pursuant to Awards hereunder shall not exceed
200,000 shares for any Participant during any fiscal year; and, PROVIDED,
FURTHER, that the Board or the Committee shall have the power to grant Awards
to a Participant exceeding such annual maximum amount, but such Awards shall
not qualify as "performance based" for purposes of Section 162(m) of the Code
to the extent of such excess. From time to time, the Board and appropriate
officers of Pathways shall file such documents with governmental authorities
and, if the Stock is listed on the New York Stock Exchange (or other national
exchange), with such stock exchange, as are required to make shares of Stock
available for issuance pursuant to Awards and publicly tradeable. Shares of
Stock related to Awards, or portions of Awards, that are forfeited, canceled
or terminated, expire unexercised, are surrendered in exchange for other
Awards, or are settled in cash in lieu of Stock or in such manner that all or
some of the shares of Stock covered by an Award are not and will not be
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issued to a Participant, shall be restored to the total number of shares of
Stock available for issuance pursuant to Awards.
5. ADMINISTRATION.
(a) GENERAL. The Plan shall be administered by the Board or,
to the extent determined by the Board, by the Committee, which shall have full
and exclusive power to (i) authorize and grant Awards to persons eligible to
receive Awards under the Plan; (ii) establish the terms, conditions and
limitations of each Award or class of Awards, including terms, conditions and
limitations governing the extent (if any) to which the Award may be assigned or
transferred, PROVIDED that awards shall not be assignable or transferable to any
person who is not at the time of transfer a member of the Participant's
immediate family or to any entity that is not established for the benefit of, or
wholly-owned by, the Participant or a member or members of the Participant's
immediate family; (iii) construe and interpret the Plan and all Award
Agreements; (iv) grant waivers of Plan restrictions; (v) adopt and amend such
rules, procedures, regulations and guidelines for carrying out the Plan as it
may deem necessary or desirable; and (vi) take any other action necessary for
the proper operation and administration of the Plan, all of which powers shall
be exercised in a manner consistent with the objectives, and in accordance with
the terms and conditions, of the Plan. The powers of the Board or the Committee,
as applicable, shall include, but shall not be limited to, the authority to (A)
adopt such subplans as may be necessary or appropriate (1) to provide for the
authorization and granting of Awards to promote specific goals or for the
benefit of specific classes of Participants, (2) to provide for grants of Awards
by means of formulae, standardized criteria or otherwise, or (3) for any other
purposes as are consistent with the objectives of the Plan, and to segregate
shares of Stock available for issuance under the Plan generally as being
available specifically for the purposes of one or more subplans, and (B) subject
to Section 11 hereof, adopt modifications, amendments, rules, procedures,
regulations, subplans and the like as may be necessary or appropriate (1) to
comply with provisions of the laws of other countries in which the Company may
operate in order to assure the effectiveness of Awards granted under the Plan
and to enable Participants employed in such other countries to receive
advantages and benefits under the Plan and such laws, (2) to effect the
continuation, acceleration or modification of Awards under certain
circumstances, including events which might constitute a Change in Control (as
set forth in Section 7 hereof) of Pathways, or (3) for any other purposes as are
consistent with the objectives of the Plan. All such modifications, amendments,
rules, procedures, regulations and subplans shall be deemed to be a part of the
Plan as if stated herein.
(b) COMMITTEE ACTIONS. All actions of the Committee with
respect to the Plan shall require the vote of a majority of its members or,
if there are only two members, by the vote of both. Any action of the
Committee may be taken by a written instrument signed by a majority (or both
members) of the Committee, and any action so taken shall be as effective as
if it had been taken by a vote at a meeting. All determinations and acts of
the Committee as to any matters concerning the Plan, including
interpretations or constructions of the Plan and any
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Award Agreement, shall be conclusive and binding on all Participants and on
any parties validly claiming through any Participants.
6. DELEGATION OF AUTHORITY. The Board or the Committee may
delegate to the Chief Executive Officer of Pathways and to other executive
officers of the Company certain of its administrative duties under the Plan,
pursuant to such conditions or limitations as the Board or the Committee may
establish, except that neither the Board nor the Committee may delegate its
authority with respect to (a) the selection of eligible persons as Participants
in the Plan, (b) the granting or timing of Awards, (c) establishing the amount,
terms and conditions of any such Award, (d) interpreting the Plan, any subplan
or any Award Agreement or (e) amending or otherwise modifying the terms or
provisions of the Plan, any subplan or any Award Agreement.
7. AWARDS. Subject to Sections 4 and 19 hereof, the Board or
the Committee shall determine the types and timing of Awards to be made to each
Participant and shall set forth in the related Award Agreement the terms,
conditions and limitations applicable to each Award. Awards may include, but are
not limited to, those listed below in this Section 7. Awards may be granted
singly, in combination or in tandem, or in substitution for Awards previously
granted under the Plan. Awards may also be made in combination or in tandem
with, in substitution for, or as alternatives to, grants or rights under any
other benefit plan of the Company, including any such plan of any entity
acquired by, or merged with or into, the Company. Any such Awards made in
substitution for, or as alternatives to, grants or rights under a benefit plan
of an entity acquired by, or merged with or into, the Company in order to give
effect to the transaction shall be deemed to be issued in accordance with the
terms and conditions of the Plan. Awards shall be effected through Award
Agreements executed by the Company in such forms as are approved by the Board or
the Committee from time to time.
All or part of any Award may be subject to conditions
established by the Board or the Committee and set forth in the Award Agreement,
which conditions may include, without limitation, achievement of specific
business objectives, increases in specified indices, attainment of growth rates
and other measurements of Company performance.
The Board or the Committee may determine to make any or all of
the following Awards:
(a) STOCK OPTIONS. A grant of a right to purchase a specified
number of shares of Stock, at an exercise price not less than 100% of the Fair
Market Value of the Stock on the date of grant, during a specified period, all
as determined by the Board or the Committee. Without limitation, a stock option
may be in the form of (i) an incentive stock option which, in addition to being
subject to such terms, conditions and limitations as are established by the
Board or the Committee, complies with Section 422 of the Code or (ii) a
non-qualified stock option subject to such terms, conditions and limitations as
are established by the Board or the Committee.
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(b) STOCK APPRECIATION RIGHTS. A right to receive a payment,
in cash or Stock, equal to the excess of the Fair Market Value (or other
specified valuation) of a specified number of shares of Stock on the date the
stock appreciation right ("SAR") is exercised over the Fair Market Value (or
other specified valuation) on the date of grant of the SAR, except that if an
SAR is granted in tandem with a stock option, valuations on the grant and
exercise dates shall be no less than as determined on the basis of Fair Market
Value. The eventual amount, vesting or issuance of an SAR may be subject to
future service, performance standards and such other restrictions and conditions
as may be established by the Board or the Committee.
(c) STOCK AWARDS. An Award made in Stock or denominated in
units of Stock. The eventual amount, vesting or issuance of a Stock Award may be
subject to future service, performance standards and such other restrictions and
conditions as may be established by the Board or the Committee. Stock Awards may
be based on Fair Market Value or another specified valuation.
(d) CASH AWARDS. An Award made or denominated in cash. The
eventual amount of a cash Award may be subject to future service, performance
standards and such other restrictions and conditions as may be established by
the Board or the Committee.
Dividend equivalency rights, on a current or deferred basis,
may be extended to and be made part of any Award denominated in whole or in part
in Stock or units of Stock, subject to such terms, conditions and restrictions
as the Board or the Committee may establish.
Notwithstanding the provisions of the paragraphs of this
Section 7, Awards may be subject to acceleration of exercisability or vesting
in the event of a Change in Control of Pathways (i) as set forth in
agreements between Pathways and certain of its officers, directors and key
employees which provide for certain protections and benefits in the event of
a change in control (as defined in such agreements) or (ii) as may otherwise
be determined by the Board or the Committee under and in accordance with the
terms and conditions of the Plan. "Change in Control" for purposes of the
Plan shall mean a change in control of Pathways under such circumstances as
shall be specified by (x) the Board or the Committee or (y) where applicable
to any Awards granted under the Plan, by such agreements between Pathways and
a Participant as (1) may have been entered into prior to the effective date
of the Plan or (2) shall be entered into after the effective date of the Plan
with, to the extent such an agreement is applicable to an Award, the approval
of the Board or the Committee. A "Change in Control" may, without limitation,
be deemed to have occurred if (A) any "person" or "group" of persons (as the
terms "person" and "group" are used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended, and the rules thereunder) is or
becomes the beneficial owner, directly or indirectly, of securities of
Pathways representing 50.1% or more of the combined voting power of the then
outstanding securities of Pathways, or (B) a change of more than 25% in the
composition of the Board occurs within a two-year period, unless such change
in composition was approved in advance by at least two-thirds of the previous
directors.
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8. PAYMENT UNDER AWARDS. Payment by the Company pursuant to
Awards may be made in the form of cash, Stock or combinations thereof and may be
subject to such restrictions as the Board or the Committee determines,
including, in the case of Stock, restrictions on transfer and forfeiture
provisions. Stock subject to transfer restrictions or forfeiture provisions is
referred to herein as "Restricted Stock". The Board or the Committee, in its
discretion, may, but is not obligated to, provide for payments to be deferred,
such future payments to be made in installments or by lump-sum payment. The
Board or the Committee may permit selected Participants to elect to defer
payments of some or all types of Awards in accordance with procedures
established by the Board or the Committee to assure that such deferrals comply
with applicable requirements of the Code.
The Board or the Committee may also establish rules and
procedures for the crediting of interest on deferred cash payments and of
dividend equivalencies on deferred payments to be made in Stock or units of
Stock.
At the discretion of the Board or the Committee, a Participant
may be offered an election to substitute an Award for another Award or Awards,
or for awards made under any other benefit plan of the Company, of the same or
different type.
9. STOCK OPTION EXERCISE. The price at which shares of
Stock may be purchased upon exercise of a stock option shall be paid in full
at the time of the exercise, in cash or, if permitted by the Board or the
Committee, by (a) tendering Stock or surrendering such option or another
Award, including Restricted Stock, or an option or other award granted under
another benefit plan of the Company, in each case valued at, or on the basis
of, Fair Market Value on the date of exercise, (b) delivery of a promissory
note issued by a Participant to the Company in a form determined by the Board
or the Committee, or (c) any other means acceptable to the Board or the
Committee. The Board or the Committee shall determine acceptable methods for
tendering Stock or surrendering options or other Awards or grants and may
impose such conditions on the use of Stock or other Awards or grants to
exercise a stock option as it deems appropriate. If shares of Restricted
Stock are tendered as consideration for the exercise of a stock option, the
Board or the Committee may require that the number of shares issued upon
exercise of the stock option equal to the number of shares of Restricted
Stock used as consideration therefor be subject to the same restrictions as
the Restricted Stock so tendered and any other restrictions as may be imposed
by the Board or the Committee. The Board or the Committee may also permit
Participants to exercise stock options and simultaneously sell some or all of
the shares of Stock so acquired pursuant to a brokerage or similar
arrangement which provides for the payment of the exercise price
substantially concurrently with the delivery of such shares.
10. TAX WITHHOLDING. Unless otherwise expressly provided under
the terms of any Award Agreement, the Company shall have the right to deduct
applicable taxes from any Award payment or shares of Stock receivable under an
Award and to withhold an appropriate number of shares of Stock for payment of
taxes required by law or to take such
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other action as may be necessary in the opinion of the Company to satisfy all
tax withholding obligations. In addition, the Board or the Committee may
permit Participants to elect to (a) have the Company deduct applicable taxes
resulting from any Award payment to, or exercise of an Award by, such
Participant by withholding an appropriate number of shares of Stock for
payment of tax obligations or (b) tender to the Company for the purpose of
satisfying tax payment obligations other Stock held by the Participant. If
the Company withholds shares of Stock to satisfy tax payment obligations, the
value of such Stock in general shall be its Fair Market Value on the date of
the Award payment or the date of exercise of an Award, as the case may be. If
a Participant tenders shares of Stock pursuant to clause (b) above to satisfy
tax payment obligations, the value of such Stock shall be the Fair Market
Value on the date the Participant tenders such Stock to the Company.
11. AMENDMENT, MODIFICATION, SUSPENSION OR TERMINATION OF THE
PLAN. The Board may amend, modify, suspend or terminate the Plan, or adopt
subplans under the Plan, (a) for the purpose of meeting or addressing any
changes in any applicable tax, securities or other laws, rules or regulations or
(b) for any other purpose permitted by law. Except as otherwise required by
applicable law, no amendment to this Plan or any subplan established hereunder
will require stockholder approval; PROVIDED, HOWEVER, that the Plan may not be
amended in a manner that would alter, impair, amend, modify, suspend or
terminate any rights of a Participant or obligation of the Company under any
Awards theretofore granted, in any manner adverse to any such affected
Participant, without the consent of such affected Participant.
12. TERMINATION OF EMPLOYMENT. Except as otherwise set forth
in an applicable Award Agreement or determined by the Board or the Committee,
or as otherwise provided in paragraph (a) or (b) of this Section 12, if a
Participant's employment or association with the Company terminates, all
unexercised, deferred and unpaid Awards (or portions of Awards) shall be
canceled immediately.
(a) RETIREMENT, RESIGNATION OR OTHER TERMINATION. If a
Participant's employment or association with the Company terminates by reason
of the Participant's retirement or resignation, or for any other reason (other
than the Participant's death or disability), the Board or the Committee may,
under circumstances in which it deems an exception from the provisions of the
first sentence of this Section 12 to be appropriate to carry out the objectives
of the Plan and to be consistent with the best interests of the Company, permit
Awards to continue in effect and be exercisable or payable beyond the date of
such termination, up until the expiration date specified in the applicable Award
Agreement and otherwise in accordance with the terms of the applicable Award
Agreement, and may accelerate the exercisability or vesting of any Award, in
either case, in whole or in part.
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(b) DEATH OR DISABILITY.
(i) In the event of a Participant's death, the
Participant's estate or beneficiaries shall have a period, not
extending beyond the expiration date specified in the applicable Award
Agreement (except as otherwise provided in such Award Agreement),
within which to exercise any outstanding Award held by the Participant,
as may be specified in the Award Agreement or as may otherwise be
determined by the Board or the Committee. All rights in respect of any
such outstanding Awards shall pass in the following order: (A) to
beneficiaries so designated in writing by the Participant; or if none,
then (B) to the legal representative of the Participant; or if none,
then (C) to the persons entitled thereto as determined by a court of
competent jurisdiction. Awards so passing shall be exercised or paid at
such times and in such manner as if the Participant were living, except
as otherwise provided in the applicable Award Agreement or as deter
mined by the Board or the Committee.
(ii) If a Participant ceases to be employed by or
associated with the Company because the Participant is deemed by the
Company to be disabled, outstanding Awards held by the Participant may
be paid to or exercised by the Participant, if legally competent, or by
a committee or other legally designated guardian or representative if
the Participant is legally incompetent, for a period, not extending
beyond the expiration date specified in the applicable Award Agreement
(except as otherwise provided in such Award Agreement), following the
termination of his employment or association with the Company, as may
be specified in the Award Agreement or as may otherwise be determined
by the Board or the Committee.
(iii) After the death or disability of a Participant,
the Board or the Committee may at any time (A) terminate restrictions
with respect to Awards held by the Participant, (B) accelerate the
vesting or exercisability of any or all installments and rights of the
Participant in respect of Awards held by the Participant and (C)
instruct the Company to pay the total of any accelerated payments under
the Awards in a lump sum to the Participant or to the Participant's
estate, beneficiaries or representatives, notwithstanding that, in the
absence of such termination of restrictions or acceleration of
payments, any or all of the payments due under the Awards might
ultimately have become payable to other beneficiaries.
(iv) In the event of uncertainty as to the
interpretation of, or controversies concerning, paragraph (b) of this
Section 12, the Board's or the Committee's determinations shall be
binding and conclusive on all Participants and any parties validly
claiming through them.
-8-
<PAGE>
13. NONASSIGNABILITY.
(a) Except as provided for in paragraphs (a) and (b) of
Section 12 hereof and paragraph (b) of this Section 13, and except as may
otherwise be determined by the Board or the Committee (subject to paragraph
(a)(ii) of Section 5 hereof and set forth in the applicable Award Agreement), no
Award or any other benefit under the Plan, or any right with respect thereto,
shall be assignable or transferable, or payable to or exercisable by, anyone
other than the Participant to whom it is granted.
(b) If a Participant's employment or association with the
Company terminates in order for such Participant to assume a position with a
governmental, charitable or educational agency or institution, and the
Participant retains Awards pursuant to paragraph (a) of Section 12 hereof, the
Board or the Committee, in its discretion and to the extent permitted by law,
may authorize a third party (including, without limitation, the trustee of a
"blind" trust), acceptable to the applicable authorities, the Participant and
the Board or the Committee, to act on behalf of the Participant with respect to
such Awards.
14. ADJUSTMENTS. In the event of any change in the outstanding
Stock by reason of a stock split, stock dividend, combination or
reclassification of shares, recapitalization, merger or similar event, the Board
or the Committee shall adjust proportionally (a) the number of shares of Stock
(i) reserved under the Plan, (ii) available for options or other Awards and
available for issuance pursuant to options, or upon which SARs may be based, for
individual Participants and (iii) covered by outstanding Awards denominated in
Stock or units of Stock; (b) the prices related to outstanding Awards; and (c)
the appropriate Fair Market Value and other price determinations for such
Awards. In the event of any other change affecting the Stock or any distribution
(other than normal cash dividends) to holders of Stock, such adjustments as may
be deemed equitable by the Board or the Committee, including adjustments to
avoid fractional shares, shall be made to give proper effect to such event. In
the event of a corporate merger, consolidation, acquisition of property or
stock, separation, reorganization or liquidation, the Board or the Committee
shall be authorized to issue or assume stock options or other awards, whether or
not in a transaction to which Section 424(a) of the Code applies, by means of
substitution of new stock options or Awards for previously issued options or
awards or an assumption of previously issued stock options or awards.
15. NOTICE. Any written notice to Pathways required by any of
the provisions of the Plan shall be addressed to the Board, c/o the Secretary of
Pathways, and shall become effective when received by the Secretary.
16. UNFUNDED PLAN. Insofar as the Plan provides for Awards of
cash or Stock, the Plan shall be unfunded unless and until the Board or the
Committee otherwise determines. Although bookkeeping accounts may be established
with respect to Participants who are entitled to cash, Stock or rights thereto
under the Plan, any such accounts shall be used merely as a bookkeeping
convenience. Unless the Board otherwise determines, (a) the
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<PAGE>
Company shall not be required to segregate any assets that may at any time be
represented by cash, Stock or rights thereto, nor shall the Plan be construed
as providing for such segregation, nor shall the Company, the Board or the
Committee be deemed to be a trustee of any cash, Stock or rights thereto to
be granted under the Plan; (b) any liability of the Company to any
Participant with respect to a grant of cash, Stock or rights thereto under
the Plan shall be based solely upon any contractual obligations that may be
created by the Plan and an Award Agreement; (c) no such obligation of the
Company shall be deemed to be secured by any pledge or other encumbrance on
any property of the Company; and (d) neither the Company, the Board nor the
Committee shall be required to give any security or bond for the performance
of any obligation that may be created by or pursuant to the Plan.
17. PAYMENTS TO TRUST. Notwithstanding the provisions of
Section 16 hereof, the Board or the Committee may cause to be established one or
more trust agreements pursuant to which the Board or the Committee may make
payments of cash, or deposit shares of Stock, due or to become due under the
Plan to Participants.
18. NO RIGHT TO EMPLOYMENT. Neither the adoption of the Plan
nor the granting of any Award shall confer on any Participant any right to
continued employment or association with the Company or in any way interfere
with the Company's right to terminate the employment or association of any
Participant at any time, with or without cause, and without liability therefor.
Awards, payments and other benefits received by a Participant under the Plan
shall not be deemed a part of the Participant's regular, recurring compensation
for any purpose, including, without limitation, for the purposes of any
termination indemnity or severance pay law of any jurisdiction.
19. GOVERNING LAW. The Plan and all determinations made and
actions taken pursuant hereto, to the extent not otherwise governed by the Code
or the securities laws of the United States, shall be governed by and construed
under the Governing Law. No Award shall be made under the Plan which is other
than in conformity with the Governing Law and, in the event of a conflict
between any for of Award Agreement and any provision of the Governing Law, the
Award Agreement shall be deemed modified to the extent necessary to comply with
the Governing Law.
20. EFFECTIVE AND TERMINATION DATES. This Plan, and any
amendment hereof requiring stockholder approval, shall become effective as of
the date of its approval by the stockholders of Pathways by the affirmative vote
of the number of shares required by the Governing Law at a stockholders' meeting
at which the approval of the Plan (or any such amendment) is considered. The
Plan shall terminate on December 31, 2007, subject to earlier termination by the
Board pursuant to Section 11 hereof, except as to Awards then outstanding.
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<PAGE>
Exhibit B
THE PATHWAYS GROUP, INC.
DIRECTORS STOCK OPTION PLAN
1. PURPOSE. The purpose of the Directors Stock Option Plan
(the "Plan") is to aid the Company in attracting, retaining and motivating
directors by providing them with incentives for making significant contributions
to the growth and profitability of the Company. The Plan is designed to
accomplish this goal by the granting of stock options, thereby providing
Participants with a proprietary interest in the growth, profitability and
success of the Company.
2. DEFINITIONS.
(a) BOARD. The Board of Directors of the Company.
(b) CODE. The Internal Revenue Code of 1986, as amended from
time to time.
(c) COMMITTEE. The members of the Board who are not eligible
to participate in the Plan, or a committee composed of such members (consisting
of not less than two persons) as may be designated from time to time by all such
members, who shall administer the Plan.
(d) COMPANY. The Pathways Group, Inc.
(e) FAIR MARKET VALUE. If the Stock is listed on the New York
Stock Exchange (or other national exchange), the average of the high and low
sale prices as reported on the New York Stock Exchange (or such other exchange)
or, if the Stock is not listed on a national exchange, the average of the high
and low sale prices of the Stock in the over-the-counter market, as reported by
the National Association of Securities Dealers through its Automated Quotation
System or otherwise, in either case for the date in question, PROVIDED that if
no transactions in the Stock are reported for that date, the average of the high
and low sale prices as so reported for the preceding day on which transactions
in the Stock were effected.
(f) NON-EMPLOYEE DIRECTORS. Directors of the Company who are
not officers or employees of the Company or any direct or indirect subsidiary of
the Company.
(g) OPTION. A non-qualified stock option to purchase shares of
Stock granted pursuant to the terms and conditions of the Plan.
(h) OPTION AGREEMENT. An agreement between the Company and a
Participant setting forth the terms, conditions and limitations applicable to an
Option.
<PAGE>
(i) PARTICIPANT. A director of the Company to whom an Option
has been granted.
(j) STOCK. Authorized and issued or unissued shares of Common
Stock of the Company or any security issued in exchange or substitution
therefor.
3. ELIGIBILITY. Only the following persons are eligible to
participate in the Plan: Non-Employee Directors who (i) have not been designated
by the Board within 30 days after becoming a director as being eligible to
receive Awards under the Amended and Restated Stock Incentive Plan, or (ii)
having been eligible to participate in the Amended and Restated Stock Incentive
Plan, have ceased to be so eligible as a result of a determination by the Board.
The eligibility of any such director to participate in the Plan shall cease if
such director is subsequently designated as being eligible to receive Awards (as
defined in the Amended and Restated Stock Incentive Plan) under the Amended and
Restated Stock Incentive Plan.
4. STOCK AVAILABLE FOR OPTIONS. Subject to Section 8 hereof, a
total of 100,000 shares of Stock shall be available for issuance pursuant to
options granted under the Plan. From time to time, the Board and appropriate
officers of the Company shall file such documents with governmental authorities
and, if the Stock is listed on the New York Stock Exchange (or other national
exchange), with such stock exchange, as are required to make shares of Stock
available for issuance pursuant to Options and publicly tradeable. Shares of
Stock related to Options, or portions of Options, that are forfeited, canceled
or terminated, expire unexercised, are surrendered in exchange for other
Options, or in such manner that all or some of the shares covered by an Option
are not and will not be issued to a Participant, shall be restored to the total
number of shares of Stock available for issuance pursuant to Options.
5. ADMINISTRATION. The Plan shall be administered by the
Committee, which shall have full and exclusive power to (a) construe and
interpret the Plan and all Option Agreements, (b) adopt and amend such rules,
procedures, regulations and guidelines for carrying out the Plan as it may
deem necessary or desirable and (c) take any other action necessary for the
proper operation and administration of the Plan, all of which powers shall be
exercised in a manner consistent with the objectives, and in accordance with
the terms and conditions, of the Plan; PROVIDED, HOWEVER, that no discretion
regarding the grant, amount, timing, terms and conditions of Options granted
under the Plan (which are established by the Plan), shall be afforded to the
Committee. All actions of the Committee with respect to the Plan shall
require the vote of a majority of its members or, if there are only two
members, by the vote of both. Any action of the Committee may be taken by a
written instrument signed by a majority (or both) of such members and any
action so taken shall be as effective as if it had been taken by a vote of
such members at a meeting. All determinations and acts of the Committee as to
any matters concerning the Plan, including interpretations or constructions
of the Plan and any Award Agreement, shall be conclusive and binding on all
Participants and on any parties validly claiming through any Participants.
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<PAGE>
6. GRANTING OF OPTIONS.
(a) On the date the Plan becomes effective, each director who
at such date is eligible to participate in the Plan shall automatically be
granted an Option to purchase 10,000 shares of Stock.
(b) On the date that any Non-Employee Director (other than a
director who received a grant pursuant to subparagraph (a) of this Section 6)
first becomes eligible to participate in the Plan, such Non-Employee Director
shall automatically be granted an Option to purchase 10,000 shares of Stock.
(c) Commencing on the date of the Annual Meeting of
Stockholders of the Company (i) on or next preceding the second anniversary of
the date on which a Participant becomes eligible to participate in the Plan, in
the case of a Participant who is granted an Option pursuant to subparagraph (b)
of this Section 6, or (ii) on or next preceding the first anniversary of the
date on which a Non-Employee Director becomes eligible to participate in the
Plan, in the case of a Non-Employee Director who is not granted an Option
pursuant to subparagraph (b) of this Section 6, and, in each case, on the date
of each succeeding Annual Meeting of Stockholders, any such Participant, if
remaining a director and eligible to participate in the Plan, shall
automatically be granted an Option to purchase 5,000 shares of Stock.
(d) Notwithstanding the foregoing, no Option shall be granted
to any person whose service as a director ends at the Annual Meeting of
Stockholders on the date of which the Option would otherwise be granted.
(e) The number of shares of Stock for which Options shall be
granted under this Section 6 is subject to adjustment as set forth in Section
7(l) hereof.
7. OPTIONS. Each Option granted pursuant to, or otherwise to
be governed by the terms and conditions of, the Plan shall have the following
terms and conditions:
(a) Each Option shall have an exercise price equal to the Fair
Market Value of a share of Stock on the date of grant.
(b) The price at which shares of Stock may be purchased upon
exercise of an Option shall be paid in full at the time of exercise, in
cash or by (i) tendering Stock or surrendering another stock option,
valued at, or on the basis of, the Fair Market Value of the Stock on
the date of exercise, (ii) delivery of a promissory note issued by a
Participant to the Company in a form determined by the Committee, or
(iii) other means acceptable to the Committee. The Committee shall
determine acceptable methods for tendering Stock or surrendering other
stock options. Participants may also exercise Options and
simultaneously sell some or all of the shares of Stock so acquired
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<PAGE>
pursuant to a brokerage or similar arrangement which provides for the
payment of the Option exercise price substantially concurrently with
the delivery of such shares.
(c) Each Option shall be exercisable for a period of ten years
from the date of grant.
(d) Each Option shall be exercisable as to one-third of the
shares of Stock subject to such Option on and after the first
anniversary of the date of grant of such Option, as to an additional
one-third, on and after the second anniversary thereof, and as to the
remaining one-third, on and after the third anniversary thereof.
(e) The Company shall have the right to deduct applicable
taxes resulting from any exercise of or other payment on an Option and
to withhold an appropriate number of shares of Stock for payment of
tax withholding obligations, if any, or to take such other action as
may be necessary in the opinion of the Company to satisfy any tax
withholding obligations. In addition, Participants may elect to (i)
have the Company deduct applicable taxes by withholding an appropriate
number of shares of Stock for payment of taxes required by law or (ii)
tender to the Company for the purpose of satisfying tax payment
obligations other Stock held by the Participant. If the Company
withholds shares of Stock to satisfy tax payment obligations, the value
of such Stock shall be its Fair Market Value on the date the Option is
exercised. If a Participant tenders shares of Stock pursuant to clause
(ii) above to satisfy tax payment obligations, the value of such Stock
shall be the Fair Market Value on the date the Participant tenders such
Stock to the Company.
(f) Except as otherwise set forth in the applicable Option
Agreement or as otherwise provided in paragraphs (g), (h), (i) and (j)
of this Section 7, if a Participant's association with the Company
terminates, any unexercised Option (or portion thereof) shall, to the
extent it is exercisable pursuant to the terms of such Option on the
date of such termination, remain exercisable for a period of three
months following the date of termination or until the stated expiration
date of the Option, if earlier.
(g) If a Participant dies, any outstanding Option then held by
the Participant shall become fully exercisable as of the date of the
Participant's death. Any such Option shall be exercisable by the
Participant's estate or beneficiaries following the Participant's death
through the expiration date specified in the applicable Option
Agreement and in such manner as if the Participant were living. Rights
with respect to any such Option shall pass in the following order: (i)
to beneficiaries so designated in writing by the Participant; or if
none, then (ii) to the Participant's legal representatives; or if none,
then (iii) to the persons entitled thereto as determined by a court of
competent jurisdiction.
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<PAGE>
(h) If a Participant ceases to be associated with the Company
because the Participant is deemed by the Company to be disabled, any
Option held by the Participant may be exercised by the Participant, if
legally competent, or by a committee or other legally designated
guardian or representative if the Participant is legally incompetent,
through the expiration date specified in the applicable Option
Agreement. Any such Option shall become fully exercisable as of the
date of the Participant's termination of his or her association with
the Company by virtue of such disability.
(i) If a Participant's association with the Company terminates
in order that such Participant may assume a position with a
governmental, charitable or educational agency or institution, such
Participant's Options, to the extent permitted by law, shall continue
in effect and be exercisable beyond the date of termination, up until
the expiration date specified in the applicable Option Agreement. Any
such Option shall become fully exercisable as of the date of the
Participant's termination. To the extent permitted by law, the
Participant may authorize a third party (including, without limitation,
the trustee of a "blind" trust), acceptable to the applicable
authorities, the Participant and the Committee, to act on behalf of the
Participant with respect to such Options.
(j) If a Participant's association with the Company terminates
by reason of the Participant's retirement at 62 years of age or
thereafter, any outstanding Option then held by the Participant shall
become fully exercisable as of the date of the Participant's
retirement. Any such Option shall be exercisable through the expiration
date specified in the applicable Option Agreement.
(k) An Option shall not be assignable or transferable to, or
exercisable by, anyone other than the Participant to whom it is
granted, except as provided in subparagraphs (g), (h), (i) and (j) of
this Section 7.
(l) In the event of any change in the number of shares of
outstanding Stock by reason of a stock split, stock dividend,
combination or reclassification of shares, recapitalization, merger,
consolidation or similar event, the Committee shall adjust
proportionally the number of shares of Stock covered by each
outstanding Option and the exercise price thereof. In the event of any
other change affecting the Stock or any distribution (other than normal
cash dividends) to holders of Stock, such adjustments as may be deemed
equitable by the Committee, including adjustments to avoid fractional
shares, shall be made to give proper effect to such event.
(m) Notwithstanding the provisions of paragraph (d) of this
Section 7, Options shall be subject to acceleration of exercisability
in the event of a Change in Control of the Company, as provided in
agreements between the Company and certain of its officers and
directors which provide for certain protections and benefits in the
event of a Change in Control (as defined in such agreements), or as
shall be provided in
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<PAGE>
applicable Option Agreements. "Change in Control" for purposes of the
Plan and any Options shall mean a change in control of the Company
under such circumstances as shall be specified (i) where applicable
to any Options by any such agreement between the Company and a
Participant as (A) may have been entered into prior to the effective
date of the Plan or (B) shall be entered into after the effective
date of the Plan upon such terms and conditions, to the extent
applicable to any Options, as are substantially the same as those
contained in earlier prior agreements with certain officers and
directors, or (ii) in the applicable Option Agreement. For the
purposes of the Plan or any Option, a "Change in Control" may,
without limitation, be deemed to have occurred if (U) a change in
control of the Company of a nature that would be required to be
reported in response to Item 6(e) of Schedule 14A of Regulation 14A
under the Exchange Act occurs; (V) any "person" or "group" of
persons (as the terms "person" and "group" are used in Section 13(d)
and 14(d) of the Exchange Act and the rules thereunder) is or
becomes the beneficial owner, directly or indirectly, of securities
of the Company representing 30% or more of the combined voting power
of the then outstanding securities of the Company; (W) the Company
consummates a merger, consolidation, share exchange, division or
other reorganization of the Company with any other corporation or
entity, unless the stockholders of the Company immediately prior to
such transaction beneficially own, directly or indirectly, (1) if
the Company is the surviving corporation in such transaction, 60% or
more of the combined voting power of the Company's outstanding
voting securities as well as 60% or more of the total market value
of the Company's outstanding equity securities, (2) if the Company
is not the surviving corporation, 80% or more of the combined voting
power of the surviving entity's outstanding voting securities as
well as 80% or more of the total market value of such entity's
outstanding equity securities, or (3) in the case of a division, 80%
or more of the combined voting power of the outstanding voting
securities of each entity resulting from the division as well as 80%
or more of the total market value of each such entity's outstanding
equity securities, in each case in substantially the same proportion
as such stockholders owned shares of the Company prior to such
transaction; (X) the Company adopts a plan of complete liquidation
or winding-up of the Company; (Y) the stockholders of the Company
approve an agreement for the sale or disposition (in one transaction
or a series of transactions) of all or substantially all of the
Company's assets; or (Z) a change of more than 25% in the
composition of the Board occurs within a two-year period unless such
change was approved in advance by at least two-thirds of the
previous directors.
8. ADJUSTMENTS. In the event of any change in the outstanding
Stock by reason of a stock split, stock dividend, combination or
reclassification of shares, recapitalization, merger, consolidation or similar
event, the Committee shall adjust proportionally the number of shares of Stock
(a) reserved for issuance pursuant to the Plan and (b) available for Options.
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<PAGE>
9. AMENDMENT OR TERMINATION. The Committee may amend,
modify, suspend or terminate the Plan for the purpose of (a) meeting or
addressing any changes in any applicable tax, securities or other laws, rules
or regulations or (b) for any other purpose permitted by law. Subject to
changes in law or other legal requirements which would permit otherwise, the
Plan may not be amended without stockholder approval to (i) materially
increase the aggregate number of shares of Stock that may be issued under the
Plan (except for any increase resulting from adjustments pursuant to Section
7(l) or 8 hereof) or (ii) materially increase the benefits accruing to
Participants or (iii) materially modify the requirements as to eligibility
for participation in the Plan. Further, the Plan may not be amended in a
manner that would alter, impair, amend, modify, suspend or terminate any
rights of a Participant or obligation of the Company under any Options
theretofore granted, in any manner adverse to such affected Participant, with
out the consent of such affected Participant.
10. NOTICE. Any written notice to the Company required by any
of the provisions of the Plan shall be addressed to the Committee, c/o the
Secretary of the Company, and shall become effective when received by the
Secretary.
11. GOVERNING LAW. The Plan and all determinations made and
actions taken pursuant hereto, to the extent not otherwise governed by the Code
or the securities laws of the United States, shall be governed by and construed
under the laws of the State of Delaware.
12. EFFECTIVE AND TERMINATION DATES. The Plan, and any
amendment hereof requiring stockholder approval, shall become effective as of
the date of its approval by the stockholders of the Company by the affirmative
vote of a majority of the votes cast at a stockholders' meeting at which the
approval of the Plan (or any such amendment) is considered, PROVIDED that the
total vote cast represents over 50% of all shares entitled to vote on the
proposal. The Plan shall terminate ten years after its initial effective date,
subject to earlier termination by the Board pursuant to Section 9 hereof, except
as to Options then outstanding.
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<PAGE>
Appendix
THE PATHWAYS GROUP, INC.
PROXY - ANNUAL MEETING OF STOCKHOLDERS - JUNE 21, 1999
PROXY SOLICITED BY THE BOARD OF DIRECTORS
The undersigned, a stockholder of THE PATHWAYS GROUP, INC., a Delaware
corporation (the "Company"), does hereby appoint CAREY F. DALY, II, MARK T.
SCHUUR and EDWARD L. MUELLER, and each of them, the true and lawful attorneys
and proxies, with full power of substitution, for and in the name, place and
stead of the undersigned, to vote, as designated below, all of the shares of
stock of the Company which the undersigned would be entitled to vote if
personally present at the Annual Meeting of Stockholders of the Company to be
held at the Mark Hopkins Intercontinental Hotel, 999 California Street, San
Francisco, California 94108, on June 21, 1999, at 10:00 A.M., Pacific Daylight
Time, and at any adjournment or adjournments thereof.
|X| Please mark
votes as in
this example
UNLESS OTHERWISE DIRECTED, THIS PROXY WILL BE VOTED IN
ACCORDANCE WITH THE RECOMMENDATIONS OF THE BOARD OF
DIRECTORS.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NOMINEES AND "FOR"
PROPOSALS 2, 3 AND 4.
1. ELECTION OF DIRECTORS
NOMINEES: To serve until the Annual Meeting of Stockholders in
2000: Mark T. Schuur
To serve until the Annual Meeting of Stockholders in
2001: Carey F. Daly, II and Linda Wing
To serve until the Annual Meeting of Stockholders in
2002: Glenn A. Okun and Monte P. Strohl
FOR ALL |_| WITHHELD |_|
NOMINEES FROM ALL
NOMINEES
For, except vote withheld from the following nominee(s):
|_|
----------------------------------------
<PAGE>
2. PROPOSAL TO APPROVE THE AMENDED AND RESTATED STOCK
INCENTIVE PLAN.
FOR |_| AGAINST |_| ABSTAIN |_|
3. PROPOSAL TO APPROVE THE DIRECTORS STOCK OPTION PLAN
FOR |_| AGAINST |_| ABSTAIN |_|
4. PROPOSAL TO RATIFY INDEPENDENT AUDITORS.
FOR |_| AGAINST |_| ABSTAIN |_|
5. To vote with discretionary authority with respect to all other matters
which may come before the meeting.
The undersigned hereby revokes any proxy or proxies heretofore given
and ratifies and confirms that all the proxies appointed hereby, or any
of them, or their substitutes, may lawfully do or cause to be done by
virtue hereof. All of said proxies or their substitutes who shall be
present and act at the meeting, or if only one is present and acts,
then that one, shall have and may exercise all of the powers hereby
granted to such proxies. The undersigned hereby acknowledges receipt of
a copy of the Notice of Annual Meeting and Proxy Statement, both dated
May 6, 1999, and a copy of the Annual Report for the fiscal year ended
December 31, 1998.
|_| MARK HERE FOR ADDRESS CHANGE AND INDICATE CHANGE:
Signature: Date
Signature: Date
NOTE: Your signature should appear the same as your name appears
hereon. In signing as attorney, executor, administrator,
trustee or guardian, please indicate the
<PAGE>
capacity in which signing. When signing as joint tenants, all
parties in the joint tenancy must sign. When a proxy is given
by a corporation, it should be signed by an authorized officer
and the corporate seal affixed. No postage is required if
returned in the enclosed envelope and mailed in the United
States.
