<PAGE>
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
---
Filed by the registrant /XX/
---
---
Filed by a party other than the registrant / /
Check the appropriate box: ---
---
/XX/ Preliminary proxy statement
---
---
/ / Definitive proxy statement
---
---
/ / Definitive additional materials
---
---
/ / Soliciting material pursuant to Rule 14a-11(c) or
--- Rule 14a-12
Chancellor Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
Chancellor Corporation
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of filing fee (Check the appropriate box):
---
/XX/ $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), or
--- 14a-6(j)(2).
---
/ / $500 per each party to the controversy pursuant to Exchange
--- Act Rule 14a-6(i)(3).
---
/ / Fee computed on table below per Exchange Act Rules
--- 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction
applies:
------------------------------------------------------------
<PAGE>
(2) Aggregate number of securities to which
transaction applies:
-------------------------------------------------------
(3) Per unit price or other underlying value of
transaction computed pursuant to Exchange Act Rule 0-11.
--------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
--------------------------------------------------------
---
/ / Check box if any part of the fee is offset as provided
--- by Exchange Act Rule 0-11(a)(2) and identify the filing
for which the offsetting fee was paid previously.
Identify the previous filing by registration statement
number, or the form of schedule and the date of its
filing.
(1) Amount previously paid:
(2) Form schedule or registration statement no.:
- --------------------------------------------------------------------------
(3) Filing party:
- --------------------------------------------------------------------------
(4) Date filed:
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<PAGE>
CHANCELLOR CORPORATION
745 Atlantic Avenue
Boston, Massachusetts 02111
May __, 1996
To the Stockholders of
Chancellor Corporation:
Chancellor Corporation (the "Company") is pleased to send you the enclosed
notice of a Special Meeting in Lieu of Annual Meeting of Stockholders (the
"Meeting") to be held at 11:00 a.m. on Thursday, June 6, 1996 at the offices of
the Company.
Ordinary annual meeting business will be transacted at the Meeting,
including the election of directors. Two other actions will be submitted to the
stockholders at the Meeting: an amendment to the Company's charter to authorize
5 million shares of undesignated series preferred stock and the approval of an
amendment to the Company's 1994 Directors' Stock Option Plan. Approval of the
latter transaction is conditioned upon approval by the holders of a majority of
the shares voted at the Meeting other than shares held by the non-employee
directors and their affiliates.
Please review the Company's enclosed Proxy Statement and Annual Report on
Form 10-K carefully. If you have any questions, please do not hesitate to call
me or William J. Guthlein at (617) 728-8500.
Sincerely yours,
Stephen G. Morison
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING PLEASE COMPLETE THE ENCLOSED
PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED ENVELOPE IN ORDER TO ASSURE
REPRESENTATION OF YOUR SHARES AT THE MEETING.
<PAGE>
PRELIMINARY COPIES
CHANCELLOR CORPORATION
NOTICE OF SPECIAL MEETING IN LIEU OF
ANNUAL MEETING OF STOCKHOLDERS
June 6, 1996
A Special Meeting in Lieu of Annual Meeting of Stockholders (the "Meeting")
of Chancellor Corporation (the "Company") will be held on Tuesday, June 6, 1996,
at 11:00 a.m. at 745 Atlantic Avenue, 4th Floor, Boston, Massachusetts for the
following purposes:
(1) To fix the number of directors at seven for the coming year, subject to
further action by the Board of Directors as provided in the By-Laws
(including the subsequent election of two persons designated under the
terms of the Voting Agreement described in the accompanying Proxy
Statement), and to elect five directors to hold office until their
successors shall be elected and shall have qualified (subject to the
foregoing).
(2) To approve the amendment to the Directors' Stock Option Plan described
in the accompanying Proxy Statement.
(3) To approve the amendment described in the accompanying Proxy Statement
to the Company's Articles of Organization, authorizing 5,000,000 shares
of undesignated Series Preferred Stock having such terms as the Board
of Directors shall hereinafter approve.
(4) To transact such other business as may properly come before the meeting
or any adjournment thereof.
The Board of Directors has fixed the close of business on Thursday, April
25, 1996, as the record date for the determination of stockholders entitled to
notice of, and to vote and act at, the Meeting and only stockholders of record
at the close of business on the date are entitled to notice of, and to vote and
act at, the Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
David W. Parr, Clerk
Boston, Massachusetts
May __, 1996
<PAGE>
Preliminary Copies
CHANCELLOR CORPORATION
745 Atlantic Avenue
Boston, Massachusetts 02111
(617) 728-8500
____________________
PROXY STATEMENT
____________________
SPECIAL MEETING OF STOCKHOLDERS
IN LIEU OF ANNUAL MEETING
to be held June 6, 1996
INTRODUCTION
The Special Meeting
- -------------------
This Proxy Statement is being furnished to holders of shares of Common
Stock, $.01 par value (the "Common Stock"), of Chancellor Corporation, a
Massachusetts corporation ("Chancellor" or the "Company"), in connection with
the solicitation of proxies by the Board of Directors of the Company for use at
the Special Meeting in Lieu of Annual Meeting of Stockholders (the "Meeting") to
be held at the offices of the Company, 745 Atlantic Avenue, Boston,
Massachusetts 02111, on June 6, 1996 at 11:00 a.m., local time, and at any
adjournment or adjournments thereof.
Matters to be Considered at the Meeting
- ---------------------------------------
Business of types usually transacted at an Annual Meeting of Stockholders
will be acted upon at the Meeting. See "ELECTION OF DIRECTORS" and "APPROVAL OF
AMENDMENT TO 1994 DIRECTORS' STOCK OPTION PLAN." In addition, the stockholders
will be asked to approve an amendment to the Company's charter (the "Charter
Amendment") converting 5,000,000 shares of the Company's authorized Series A
Convertible Preferred Stock into a like number of shares of undesignated series
preferred stock. See "THE CHARTER AMENDMENT."
Recommendation of the Board of Directors
- ----------------------------------------
The Board unanimously recommends adoption of all the matters to be
submitted to the stockholders at the Meeting.
<PAGE>
Voting of Proxies; Revocation
- -----------------------------
All shares represented by the enclosed proxy will be voted in the manner
specified therein by the stockholder. If no specification is made, the proxy
will be voted FOR the matters to be acted upon and otherwise in the discretion
of the proxies. Any proxy may be revoked at any time prior to the voting
thereof by delivering to the Clerk of the Company a written revocation of a duly
executed proxy bearing a later date or by voting in person at the Meeting. The
expected date of the first mailing of this proxy statement and the enclosed
proxy is May __, 1996.
Beneficial Ownership of Securities and Voting Rights
- ----------------------------------------------------
As of the close of business on April 25, 1996, the record date for the
Meeting, there were outstanding 5,136,391 shares of Common Stock and 5,000,000
shares of Series AA Convertible Preferred Stock ("Outstanding Series AA
Preferred"). Stockholders of the Company are entitled to one vote for each
share of Common Stock or Outstanding Series AA Preferred held of record at the
close of business on the record date. At the same date, an additional 1,430,911
shares of Common Stock were issued and held of record by the Company as treasury
stock. For more information about the Company's outstanding stock, see "OTHER
INFORMATION -- Principal Stockholders."
Votes Required
- --------------
The affirmative vote of the holders of a plurality of the shares of the
Company's Common Stock present or represented at the Meeting is required for the
election of directors. A total of 7,313,508 shares which are covered by the
Voting Agreement described under "OTHER INFORMATION -- Principal Stockholders --
Voting Agreement," and which constitute a majority of all outstanding shares,
will be voted in favor of the election of Stephen G. Morison as a Class I
director for a two-year term and each of Bruce M. Dayton and Thomas W. Killilea
as a Class II director for a three-year term. The affirmative vote of the
holders of a majority of the shares of the Company's Common Stock present or
represented at the Meeting is required for the approval of the proposed
amendment (the "Directors' Plan Amendment") to the 1994 Directors' Stock Option
Plan (the "Directors' Option Plan") and for the ratification of auditors. The
affirmative vote of the holders of two thirds of the outstanding shares of the
Company's Common Stock and Outstanding Series AA Preferred, voting together as a
single class, is required for the adoption of the Charter Amendment.
-2-
<PAGE>
The non-employee directors and their affiliates, including Vestex, will
vote their shares (which together constitute 66.7% of all outstanding shares
entitled to vote) in favor of the Directors' Plan Amendment only if a majority
of the shares voted at the Meeting by stockholders other than the non-employee
directors and their affiliates, including Vestex, are voted in favor of such
amendment (the "Independent Vote Condition").
Shares of the Company's Common Stock represented by executed proxies
received by the Company will be counted for purposes of establishing a quorum at
the Meeting, regardless of how or whether such shares are voted on any specific
proposal. With respect to the required vote on any particular matter,
abstentions will be treated as votes cast or shares present and represented,
while votes withheld by nominee recordholders who did not receive specific
instructions from the beneficial owners of such shares will not be treated as
votes cast or as shares present or represented. Because the Charter Amendment
requires the approval of the holders of two thirds of the Company's outstanding
capital stock, voting together as a single class, abstentions or votes withheld
will have the effect of a vote against the Charter Amendment.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Introduction.............................................. 1
Table of Contents......................................... 3
Election of Directors..................................... 4
Approval of Amendment to
1994 Directors' Stock Option Plan....................... 22
The Charter Amendment..................................... 30
Other Information......................................... 35
</TABLE>
-3-
<PAGE>
ELECTION OF DIRECTORS
Introduction
- ------------
At the Meeting, the stockholders will be asked to set the number of
directors at seven for the ensuing year. The directors are classified into
three classes of directors, each class ordinarily to serve for a three-year
term. The stockholders will be asked to elect one Class I director for a two-
year term, to serve in such capacity until the 1998 Annual Meeting and until his
successor is duly elected and qualified, and two Class II directors for three-
year terms, to serve in such capacity until the 1999 Annual Meeting and until
his successor is duly elected and qualified, so that the Board will thereafter
consist of such Class I director, such two Class II directors and two Class III
directors whose terms will expire at the 1997 Annual Meeting. Pursuant to the
terms of the Voting Agreement described under "OTHER INFORMATION -- Principal
Stockholders -- Voting Agreement," the two resulting vacancies on the Board will
be reserved for a designee of Vestex Capital Corporation (together with its
affiliate, Vestex Corporation, "Vestex") and a designee of the Continuing
Directors (as hereinafter defined). Vestex and the Continuing Directors have
indicated to the Company that they have no intention at present to fill these
two seats, although they each reserve their right to do so in the future.
It is the intention of the persons named in the enclosed proxy to vote to
elect as a director Stephen G. Morison, who is an incumbent Class I director,
and Bruce M. Dayton and Thomas W. Killilea, each of whom is an incumbent Class
II director. Each such nominee has consented to serve if elected. In
accordance with the provisions of the Voting Agreement, a sufficient number of
votes will be cast for each of Messrs. Morison, Dayton and Killilea to ensure
their election. If some unexpected occurrence should make necessary, in the
discretion of the Board of Directors, the substitution of some other person for
any of the nominees, it is in the intention of the persons named in the proxy to
vote for the election of such other person as may be designated by those members
of the Board of Directors who are not affiliated with Vestex, in accordance with
the terms of the Voting Agreement.
Nominee, Directors and Executive Officers
- -----------------------------------------
The directors and executive officers of the Company are as follows:
-4-
<PAGE>
<TABLE>
<CAPTION>
Names Age Position(s) Held
----- --- ----------------
<S> <C> <C>
*Stephen G. Morison 53 Vice Chairman of the Board, Director,
President and Chief Executive Officer
Michael DeSantis, Jr. 45 Senior Vice President
William J. Guthlein 42 Vice President, Treasurer and Chief Financial
Officer
Gregory S. Harper 45 Vice President
David W. Parr 38 Vice President, General Counsel and Clerk
Brian M. Adley 33 Director
*Bruce M. Dayton 62 Director; Chairman of the Board
*Thomas W. Killilea 52 Director
Richard D. Rizzo 51 Director
</TABLE>
- -------------------
*Nominee for re-election as a director.
The directors are classified into three classes of directors, each class to
serve for a three-year term. Mr. Morison is a Class I director whose term will
next expire at the 1998 Annual Meeting, Messrs. Dayton and Killilea are Class II
directors whose terms will next expire at the 1999 Annual Meeting, and Messrs.
Adley and Rizzo are Class III directors whose terms will next expire at the 1997
Annual Meeting.
There are no family relationships between any director, executive officer
or person nominated or chosen to become a director or executive officer.
Business Experience of Executive Officers and Directors
- -------------------------------------------------------
Mr. Morison joined Chancellor in 1988 as President of Chancellor Asset
Corporation. He became a Senior Vice President of Chancellor Corporation in
February 1989 and an Executive Vice President of Chancellor Corporation in May
1989. He was subsequently elected Vice Chairman and Chief Executive Officer and
a director of the Company in September 1989 and was elected President in June
1990. Mr. Morison was President, Chief
-5-
<PAGE>
Executive Officer and a Director of Boston Leasing Group, Inc. from 1981 to 1988
and of Boston Leasing Group Ltd. during 1988. Previously, he was Vice President
and Chief Administrative Officer of New England Merchants Leasing Corporation.
Mr. Morison also spent nine years with IBM Corporation in a variety of sales,
staff and management positions.
Mr. DeSantis joined the Company in September 1989 as a Vice President in
charge of remarketing services. He was elected a Senior Vice President of
Chancellor in March 1990 and is currently in charge of Lease Marketing and
Remarketing Sales. Prior to joining the Company, he served as a partner at
Western Technology Investment from 1988 until 1989. He served as a Vice
President of Heller Financial, Inc. in 1985 and was later promoted to a Senior
Vice President. Mr. DeSantis was Vice President of First Chicago Credit
Corporation (which was acquired by Heller Financial, Inc.) from 1984 until 1985.
Mr. Guthlein joined the Company in July 1991 as Vice President and Chief
Financial Officer. He later was elected Treasurer of the Company. Prior to
joining Chancellor, Mr. Guthlein was Vice President-Finance and Treasurer of
Wang Credit Corporation, where he had been employed since 1984 in various
financial and management capacities.
Mr. Harper joined the Company in 1987 as a lease account executive and, in
1991, he became a Vice President for Strategic Planning in the Company's Lease
Marketing Department. In November 1992, he became head of the Company's Asset
Management Department. Prior to joining Chancellor, he was from 1981 to 1987
President of Capital Equipment Leasing Company, a full-service truck lessor.
Mr. Parr joined the Company in June 1990 as a Vice President, General
Counsel and Clerk. Prior to joining Chancellor, from 1986 until 1990 he served
as Associate General Counsel of American Finance Group, where he was elected a
Vice President in 1989. Mr. Parr was an associate attorney with the Boston law
firm of Widett, Slater & Goldman, P.C. from 1983 through 1986.
Mr. Adley has been Chairman and Chief Executive Officer of Vestex
Corporation, a private financial services firm, since its inception in 1994
("Vestex"). Mr. Adley previously served as Treasurer, Chief Financial Officer
and a director of Sanborn, Inc. ("Sanborn"), a designer and manufacturer of
industrial separation systems, from 1990 through 1993, having previously been
acting Chief Financial Officer of that company since 1989. Sanborn filed for
protection from its creditors under Chapter 11 of the Federal Bankruptcy Code on
January 24, 1994. From 1985 to 1989, Mr. Adley was a Senior Consultant at Price
Waterhouse [concentrating on small business development]. Mr. Adley was elected
a director of the Company on July 25, 1995.
-6-
<PAGE>
In a lawsuit brought in U.S. Bankruptcy Court for the Western District of
Massachusetts (Bankruptcy Cases 94-40207, 94-40281 and 94-40280) entitled In re
-----
Sanborn, Inc., In re Environmental Compliance Corporation and In re Centrifuge
- ------------------------------------------------------------------------------
Consultants, Inc., Unsecured Creditors Committee of the Above Named v. George
- -----------------------------------------------------------------------------
Sanborn, et al., Mr. Adley, as a former director and chief financial officer of
- --------------
Sanborn, was named as a defendant, together with virtually all other current and
recent former executive officers and directors of Sanborn. The complaint was
filed on December 1, 1994 [and the matter is at a preliminary stage]. The
complaint alleges violation of the Massachusetts unfair and deceptive trade
practices act, breach of fiduciary and other duties, mismanagement and waste of
corporate assets, unlawful self-dealing, misrepresentation or deceit, and other
unfair or deceptive acts and practices and, as to certain defendants other than
Mr. Adley, fraudulent conveyances or transfers. The complaint alleges that
Sanborn's executive officers, including Mr. Adley as chief financial officer,
caused the financial demise of Sanborn and rendered it unable to pay its
creditors by (among other things) grossly overstating and inflating assets on
Sanborn's books, failing to maintain Sanborn's books in a proper or prudent
manner, and falsely representing the sale and delivery of equipment to
affiliated entities. One of Sanborn's creditors, Ally Capital Corporation, has
brought similar causes of action arising from one type of transaction in a suit
filed in U.S. District Court for the District of Massachusetts on September 2,
1994 (Cr. No. 94-11779-REK) entitled Ally Capital Corporation v. Brian M. Adley.
------------------------------------------
Mr. Adley has informed the Company that he denies the allegations made in the
above-described complaints and intends to contest the matter vigorously. On
December 17, 1994, the Board of Directors gave further consideration, in the
specific context of the allegations against Mr. Adley set out in the above-
described complaints, to their previous recommendation that the Recapitalization
be approved and Mr. Adley elected as a director. Among other considerations,
the directors noted that Mr. Adley strongly denied the allegations against him
set out in the lawsuits and that personal assessments of Mr. Adley's character,
both from references received by the Company and those directors who had met
extensively with Mr. Adley in previous months, were inconsistent with the
allegations against him set out in the complaints. The directors also noted
Mr. Adley's statement that, based on Vestex's extensive due diligence, he
considers the Company to be well managed and that Vestex has expressed an
intention to keep the Company's current management in place for the foreseeable
future. Mr. Adley has further stated that, because he is devoting most of his
attention to the affairs of Vestex, he has no intention to involve himself in
the day-to-day administration of the Company or interest in assuming an
operating position or office with the Company and that he expects and
-7-
<PAGE>
intends that his primary role will be to serve as a director and to assist the
Company in its efforts to secure adequate equity and debt capital in the future.
The directors also considered again and reaffirmed that the sole viable
strategic course for the Company to produce any net proceeds to its stockholders
is to engage in a recapitalization with an acquirer willing to make a capital
infusion into the Company and that the Company had been unable to identify any
such prospective acquirer other than Vestex. In light of these considerations,
the directors then unanimously reaffirmed their recommendation of the
Recapitalization and Mr. Adley's election as a director. On January 19, 1996, an
adversary proceeding (No. 96-4024) was brought by Sanborn, Inc. in its
bankruptcy proceedings seeking to recover three payments totalling approximately
$50,000 made to Mr. Adley in the year prior to the filing of the bankruptcy
petition on the grounds that the payments were either preferential transfers or
fraudulent conveyances under bankruptcy law. Mr. Adley is vigorously defending
this action.
Mr. Dayton has been a director of the Company since 1980 and was elected
Chairman of the Board of Directors in 1990. From 1970 to 1990, he served as the
Chairman of the Board and Treasurer of Multi-Financial Services, Inc., an
investment advisor registered with the Securities and Exchange Commission, and
now part of the Wingate affiliated group of companies. Mr. Dayton, as senior
financial consultant at Wingate, holds Chartered Life Underwriters (CLU) and
Chartered Financial Consultants (ChFC) designations.
Mr. Killilea is a Senior Vice President of Oppenheimer & Co., Inc. Prior
to joining Oppenheimer, Mr. Killilea was a Senior Vice President of Kidder,
Peabody & Co., Inc., where he had been employed from 1968 to 1995. Mr.
Killilea has been a director of the Company since June 1990.
Mr. Rizzo is the founder of The Andover Capital Group, Inc., a private
capital and management consulting firm. Prior to founding Andover, from 1977
until 1989, Mr. Rizzo was President and Chief Executive Officer of Signal
Capital Corp. He also spent more than ten years with New England Merchants
Bank, Fleet/Norstar and C.I.T. in a variety of credit, administrative and
management positions. Mr. Rizzo was appointed a director of the Company on
January 11, 1996. Mr. Rizzo is also a director of Northmark Bank, Exeter
Hospital and First Capital Corporation.
Certain Transactions
- --------------------
The above-named nominees have indicated that neither they nor any of their
respective affiliates has any relationship with the Company that is required to
be disclosed pursuant to Item 404 of Regulation S-K promulgated under the
Securities Exchange Act of 1934 except for the transactions referred to under
"Compensation Committee Interlocks and Insider Participation".
-8-
<PAGE>
Committees; Attendance
- ----------------------
The Audit Committee of the Board was formed in 1983 and is currently
composed of Messrs. Killilea and Dayton. Mr. Killilea is Chairman of the Audit
Committee. The functions of the Audit Committee include recommending to the
Board of Directors the appointment of the independent auditors, reviewing the
independence of the auditors, meeting with the auditors to review the scope and
result of the annual audit, reviewing the Company's accounting procedures,
internal controls, and proposed changes in financial and accounting standards
and principles, and reviewing the scope of other services provided by the
auditors.
Messrs. Dayton, Adley and Killilea are the current members of the Company's
Resources and Compensation Committee. Mr. Dayton is Chairman of the Resources
and Compensation Committee. The Resources and Compensation Committee was formed
in 1983. Its functions include reviewing the total compensation paid to the
Company's directors and officers and the granting of stock options. Since March
24, 1992, a special Option Compensation Committee, consisting of at least two
directors who are "disinterested persons" for Federal securities law purposes,
has administered stock option plans in connection with the granting of stock
options to persons who are executive officers. Messrs. Dayton and Killilea
currently comprise the Option Compensation Committee.
The Nominating Committee is currently composed of Messrs. Rizzo, Adley and
Dayton. Mr. Rizzo is Chairman of the Nominating Committee. The functions of
the Nominating Committee are to recommend to the Board of Directors a slate of
directors for election at the Annual Meeting of Stockholders, subject to the
terms of the Voting Agreement; to review the qualifications of potential
candidates; and to make initial contact with such candidates to determine their
interest in serving as directors of the Company. Subject to the terms of the
Voting Agreement, the Nominating Committee will consider nominees recommended by
Stockholders of the Company. The names of any such nominees should be forwarded
to David W. Parr, Secretary, Chancellor Corporation, 745 Atlantic Avenue,
Boston, Massachusetts 02111, who will submit the names of the nominees to the
Nominating Committee for consideration.
Attendance. During the year ended December 31, 1995, the Board of
----------
Directors held 16 meetings, the Audit Committee had three meetings and the
Resources and Compensation Committee had two meetings. Each director attended
more than 75% of the meetings of the Board and of the committees of which he was
a member, except Mr. Adley, who was unable to attend two of the seven Board
-9-
<PAGE>
meetings held since he became director in July, 1995 and the meeting of the
Resources and Compensation Committee, of which he is a member, held in December,
1995.
Directors' Compensation and Indemnification
- -------------------------------------------
Historical Compensation. Directors' fees in the aggregate amount of
-----------------------
$56,633 were paid to or accrued for the directors with respect to services
rendered during the year ended December 31, 1995, excluding $9,350 of directors'
fees accrued with respect to prior fiscal periods that were paid during the year
ended December 31, 1995. Compensation is paid to non-employee directors only.
Prior to July 25, 1995, such compensation was paid at a rate of $3,000 per
quarter (except for directors employed by Bruncor, Inc. ("Bruncor") who served
as directors during such year, who received $2,000 per quarter pursuant to a
policy approved by the Resources and Compensation Committee on November 12,
1992) plus $650 per regular meeting for committee or board meetings or $225 for
participation in brief meetings by telephone. The Chairman of the Board
received an additional stipend of $300 per board meeting pursuant to a policy
approved by the Board of Directors in August 1990. From August 1990 to July 25,
1995, an hourly stipend of $125 (not to exceed $300 per meeting) was available
for attendance by invitation of non-member independent directors at committee
meetings but no amounts were paid pursuant to this policy.
Current and Prospective Compensation. Since July 25, 1995 each non-
------------------------------------
employee director has been entitled to receive compensation consisting of cash
fees and stock options under one of the individual compensation formulas
described under "Approval of Amendments to 1994 Directors' Stock Option Plan --
Formula for Grants to Directors." Under these formulas, the four incumbent non-
employee directors are currently entitled to receive, in the aggregate, cash
fees of $23,000 per year and 244,000 options over a two-year period, with an
additional 321,000 options available for up to five additional directors if
elected prior to the 1996 Annual Meeting. If the proposed Directors' Plan
Amendment is approved by the stockholders at the meeting, the total number of
options reserved for the four incumbent non-management directors will be
366,000, rather than 244,000, with 199,000 options reserved for additional
subsequently elected directors.
Certain Exchange Act Reporting Matters
- --------------------------------------
To the best of the Company's knowledge and belief, all Forms 3, 4 and 5
required of Company officers and directors to be filed by Section 16(b) of the
Securities Exchange Act of 1934 were timely filed.
-10-
<PAGE>
Executive Compensation
- ----------------------
The annual and long-term remuneration paid to or accrued for the Chief
Executive Officer and each of the other four most highly compensated executive
officers of the Company for services rendered during the year ended December 31,
1995, and the annual and long-term remuneration paid to or accrued for the
benefit of the same individuals, for services as executive officers of the
Company during the years ended December 31, 1993 and 1994, was as follows:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compen-
sation
Awards
---------- All
Annual Compensation Securities Other
------------------------------ Underlying Compen-
Name and Principal Salary Bonus(1) Options sation
Position Year ($) ($) (#) ($)
------------------ ---- ------ -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Stephen G. Morison 1995 225,000 32,250 435,500 1,036(-)(4)
Chief Executive Officer 1994 225,000 14,900 0 1,419(3)(4)
1993 225,000 26,565 48,050(2) 816(-)(4)
Michael DeSantis, Jr. 1995 130,000 43,389 175,000 1,108(3)(4)
Senior Vice President 1994 130,000 44,209 0 1,042(3)(4)
1993 148,000 13,106 23,600(2) 994(3)(4)
William J. Guthlein 1995 125,660 9,300 110,000 1,076(3)(4)
Vice President 1994 125,660 7,540 0 996(3)(4)
1993 125,660 11,128 23,600(2) 909(3)(4)
David W. Parr 1995 111,300 9,350 110,000 1,262(3)(4)
Vice President 1994 111,300 6,678 0 1,198(3)(4)
1993 111,300 9,857 23,600(2) 1,137(3)(4)
Gregory S. Harper 1995 90,000 24,490 110,000 1,053(3)(4)
Vice President 1994 90,000 10,385 0 965(3)(4)
1993 90,000 11,811 23,600(2) 885(3)(4)
- -----------------------
</TABLE>
(1) Includes commissions paid under the Company's incentive program for sales
personnel.
(2) Terminated in July 1995 in connection with the substitution of new options
under the 1994 Stock Option Plan; numbers adjusted to
-11-
<PAGE>
reflect the inclusion of a dividend declared in 1994 on the Company's
outstanding Common Stock payable on shares held of record on January 6,
1995 in the form of shares of such Common Stock at the rate of 0.475 new
shares for each outstanding share.
(3) Includes $500 paid by the Company during the fiscal year with respect to
the Company's 401-K plan.
(4) Except as otherwise indicated for those individuals covered by note (3),
this amount is the dollar value of insurance premiums paid by the Company
during the fiscal year with respect to term life insurance for the benefit
of the named executive officer. This amount excludes amounts paid by the
Company with respect to group life policies.
OPTION GRANTS IN LAST FISCAL YEAR
---------------------------------
Individual Grants
----------------------------------
<TABLE>
<CAPTION>
% of Total
Options Potential
Granted Realizable
Number of to Value of Assumed
Securities Employ- Rates of Stock
Underlying ees Exercise Price Appreciation
Options in or Base for Option Term
Granted Fiscal Price Expiration ---------------
Name (#) Year ($/sh) Date 5%(%)(1) 10%($)(1)
- ----------------------- ---------- ------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Stephen G. Morison 219,013(2) 15.09 .1250 7/26/2005 28,382 61,411
216,487(2) 14.92 .1875 7/26/2005 14,525 47,172
Michael DeSantis, Jr. 88,007(2) 6.07 .1250 7/26/2005 11,405 24,677
86,993(2) 6.00 .1875 7/26/2005 5,836 18,955
William J. Guthlein 55,319(3) 3.81 .1250 7/26/2005 7,169 15,511
54,681(4) 3.77 .1875 7/26/2005 3,668 11,915
David W. Parr 55,319(3) 3.81 .1250 7/26/2005 7,169 15,511
54,681(4) 3.77 .1875 7/26/2005 3,668 11,915
Gregory S. Harper 55,319(2) 3.81 .1250 7/26/2005 7,169 15,511
54,681(2) 3.77 .1875 7/26/2005 3,668 11,915
</TABLE>
(1) The valuations listed below are based on hypothetical rates of appreciation
in the Company's stock price and are included here in response to specific
requirements of the Securities and Exchange Commission. The Company makes
no representation that its stock will
-12-
<PAGE>
perform similarly or show similar appreciation. If the Company's stock does
in fact appreciate as shown, approximately 15% of the overall appreciation
in the Company's stock would be for the benefit of all optionees in the
aggregate while the remaining 85% would benefit the Company's stockholders
other than optionees.
(2) Vested and exercisable at July 26, 1995.
(3) Vested and exercisable at July 26, 1996.
(3) Vested and exercisable at July 26, 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-OPTION VALUES
<TABLE>
<CAPTION>
Number Value of
of Securities Unexercised
Underlying Unex- In-the-Money
Shares exercised Options Options
Acquired at FY-End (1) At FY-End ($)
on Value ------------------ -------------------
Exercise Realized Exer- Unexer- Exer- Unexer-
Name (#) ($) cisable cisable cisable cisable
-------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Stephen G.
Morison 0 0 435,500 -- 6,855 --
Michael
DeSantis, Jr. 0 0 175,000 -- 2,754 --
William J.
Guthlein 0 0 -- 110,000 -- 1,731
David W.
Parr 0 0 -- 110,000 -- 1,731
Gregory S.
Harper 0 0 110,000 -- 1,731 --
- -------------------
</TABLE>
(1) Adjusted to reflect the inclusion of a dividend declared on December 17,
1994 on the Company's outstanding Common Stock payable on shares held of
record on January 6, 1995 in the form of shares of such Common Stock at the
rate of 0.475 new shares for each outstanding share.
Effective January 1, 1997, the Company's severance benefit policy
covering the Company's executive officers and other employees will
terminate. Employment agreements between the Company and Messrs. Morison,
DeSantis and Harper which were
-13-
<PAGE>
entered into in connection with the July 1995 Vestex transaction will expire
January 25, 1997. The current guidelines for the granting of severance benefits
to salaried employees of the Company terminated without cause provide for salary
continuation for variable lengths of time after an employee's termination,
depending upon the employee's effective date of employment with a new employer.
For the Company's Chairman, Vice Chairman and President, salary continuation is
for a maximum period of fifty-two weeks; for Vice Presidents, salary
continuation is for a maximum period of twenty-six weeks; for employees below
the level of Vice President, maximum salary continuation is for two weeks for
employees with less than one year of service, four weeks for employees with
between one and two years of service, and four weeks plus an additional week's
salary continuation for each year or partial year of service in excess of two
years. The Company's Chairman, Vice Chairman and President are also eligible for
outplacement assistance of up to $20,000, and Vice Presidents are entitled to
outplacement assistance of up to $10,000. The Company's President, Mr. Morison,
would receive severance benefits of approximately $245,000 based on current
salary, plus outplacements assistance, if he were terminated.
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
None of the members of the Company's Resources and Compensation Committee
(which at the time of certain of its 1995 deliberations consisted of Messrs.
Allingham and Dayton, and at the time of its report contained herein consists of
Messrs. Adley, Dayton and Killilea) has ever been an officer or employee of the
Company or any of its subsidiaries or has any relationship with the Company that
is required to be disclosed pursuant to Item 404 of Regulation S-K promulgated
under the Securities Exchange Act of 1934, as amended except as described in
this paragraph. In July 1995, Bruncor sold 2,270,015 shares of Common Stock
to the Company (1,023,739 of which shares were subsequently awarded to
employees) and 1,600,000 shares to Vestex and satisfied approximately $4.4
million of bank indebtedness of the Company in return for a cash payment of
$550,000 from the Company to Bruncor ($400,000 of which was provided by Vestex)
and a $200,000 subordinated promissory note (collectively, such transactions are
hereinafter referred to as the "1995 Common Stock Transactions"). In April
1996, the Company issued all 5,000,000 shares of outstanding Series AA Preferred
to Vestex for $1,350,000 in cash (less reimbursement of $312,500 of due
diligence and other transactional costs by the Company). In connection with the
1995 Common Stock Transactions, the Company and Vestex entered into a consulting
agreement which provides for the payment of fees to Vestex under certain
circumstances in exchange for Vestex's assistance in analyzing the Company's
financial alternatives and in structuring and negotiating certain equity or debt
-14-
<PAGE>
transactions. Under the agreement, if the Company raises at least $2.5 million
of debt or equity capital prior to July 25, 1997, Vestex will receive a fee
equal to 1.5% of new debt capital raised (inclusive of any third-party brokerage
or similar fees) and 7.5% of new equity capital raised (which shall be reduced
to 2.5% if any third-party brokerage or similar fees are payable in connection
with the transaction). In 1995, the Company paid Vestex $10,000 under a
provision of the agreement which was deleted from the agreement pursuant to an
April 1996 amendment. Pursuant to consulting agreements between the Company and
Mr. Rizzo entered into in 1993, the Company paid Mr. Rizzo a total of $51,289
(including expense reimbursements) for services rendered by Mr. Rizzo in 1993
and 1994 in connection with evaluating the Company's strategic alternatives and
capital needs and in structuring and negotiating the original Vestex
recapitalization agreement. Of the $51,289 paid to Mr. Rizzo, $16,099 was paid
in 1993, $20,190 was paid in 1994 and $15,000 was paid in 1996. No further
amounts are or will be payable to Mr. Rizzo by the Company under the consulting
agreement. No executive officer of the Company has served as a director or
member of the Resources and Compensation Committee (or other committee serving
an equivalent function) of any other entity any of whose executive officers
served as a director of the Company or member of the Company's Resources and
Compensation Committee.
REPORT OF THE COMPENSATION COMMITTEE
The Committee and the Company's Process for Determining Executive Compensation
At the date of this report, the Company's Resources and Compensation
Committee (the "Committee") consists of three directors (Messrs. Adley, Dayton
and Killilea) who are not officers or employees of the Company. The Committee
met in December 1995 to review the Company's overall compensation structure,
assess the performance of key executives, and determine year-end bonuses and
1996 salary adjustments. All of the Committee's recommendations were
subsequently adopted by the Board of Directors.
The Company's Option Compensation Committee consists of Messrs. Dayton and
Killilea. Messrs. Dayton, Killilea and their successors are eligible to receive
stock option awards only as provided in the formulas approved by the
stockholders in January 1995 and as such formulas may be amended with
stockholder approval at the Meeting or thereafter. This committee met in July
1995 to decide upon the option grants that would be made after the requisite
stockholder approval was obtained. In accordance with applicable regulations
under the Securities Exchange Act of 1934, as amended, the Option Compensation
Committee's awards are not subject to review by the Board of Directors.
-15-
<PAGE>
The Resources and Compensation Committee solicits the views of the
Company's CEO, Mr. Morison, in regard to the performance of the other executive
officers and their compensation, but Mr. Morison takes no part in the
Committee's deliberations or decisions.
The Company's Executive Officers and their Mission
Since late 1989 and early 1990, when the Company experienced financial
difficulties due to previous management policies and practices as well as
industry-wide economic trends, the Company's executives have been charged by the
Board with the task of stabilizing the Company in a difficult economic
environment. This has included supervising the downsizing of the Company's
assets and personnel, improving its operations, negotiating appropriate
agreements with the Company's lender group, participating in the Company's
search for additional equity capital and generally preserving or augmenting
shareholder values. Mr. Morison was appointed CEO in September 1989. Mr.
Harper joined the Company in 1987, Mr. DeSantis in 1989, Mr. Parr in 1990, and
Mr. Guthlein in 1991.
Compensation Elements and Executive Incentives
The executive officers' overall compensation package is designed both (1)
to reflect the Committee's assessment of the officers' efforts to date to carry
out the stated policy of stabilizing the Company, and (2) to offer incentives to
the officers to succeed in maximizing shareholder values. This involves a
combination of base salary (reviewed and adjusted annually), year-end cash
bonuses, and, sometimes, stock options. The executive officers' original base
salaries were negotiated at arm's length when each officer joined the Company.
The Committee believes the executive officers' current total compensation to be
generally within the middle range of salaries prevailing within the industry
according to the most recent wage and compensation survey published by the
Equipment Leasing Association of America. While it is the Committee's general
policy to maintain the Company's position within this middle range, unusually
good or bad performance by officers could lead the Committee to depart from this
general policy. Salary adjustments and bonuses are determined by the Committee
in its discretion on an annual basis in light of the Committee's assessment of
the officers' efforts as well as other factors. Stock options and stock awards
offer a longer-term incentive and are granted as described below. As
optionholders and stockholders, the Company's executive officers have a personal
financial interest in maximizing shareholder values. This tends to align
management's interests with those of other shareholders, which the Committee
believes is particularly important in a financial turn-around situation such as
the Company's.
-16-
<PAGE>
Criteria for Making Compensation Decisions
The Committee bases its annual compensation decisions on a number of
factors. These include the Committee's assessment of the quantity and quality
of each executive officer's efforts towards achieving the Company's mission of
stabilizing its financial situation and preserving shareholder values; the
Company's overall performance in that regard; and general economic trends (such
as the current low rate of inflation). These factors are not assigned any
predetermined weightings, and the Committee is free to use its discretion in
each year in assessing such factors. The Committee also considered the fact
that none of the Company's executive officers had received salary increases
since January 1992. In light of these factors, as well as the Company's
determination to make substantial equity awards to key executives, the Committee
has concluded that the 1996 base salaries of Messrs. Morison and DeSantis should
remain at 1995 levels and that the 1996 base salaries of Messrs. Harper,
Guthlein and Parr should be increased between 11% and 2%. Other employees also
received salary increases.
In December 1995 the Committee established an overall year-end compensation
pool of $125,000, allocable by the Committee to the five executive officers
named above as a one-time distribution and/or salary increase and to virtually
all other employees as raises. Other officers and employees who participate in
commission programs established by the Company received commissions pursuant to
those programs rather than participating in the compensation pool.
In assessing the Company's financial performance, the Committee has been
mindful of the constraints on the scope of the Company's operations that are
imposed by its agreements with its lender group. The Committee has also
disregarded losses resulting from write-downs of certain assets that reflect
management decisions made in periods prior to 1989 rather than the performance
of current management.
CEO Compensation
As CEO, Mr. Morison has overall authority over all areas of the Company's
operations, unlike the other executive officers, who are primarily responsible
for specific line or staff functions. As a result, the Committee accords greater
weight in Mr. Morison's case to the Company's overall achievement of its mission
including its overall financial results. In 1993, the Committee paid particular
attention to Mr. Morison's leadership in reorganizing the Company's operating
structure and negotiating with its lender group. In 1994 and 1995, the Committee
paid particular attention
-17-
<PAGE>
to Mr. Morison's activities in connection with the Company's search for new
equity capital and relief from the Company's indebtedness to BNS and Bruncor, as
well as his continuing role in negotiating with the senior lender group, which
led to the conversion of the Company's remaining obligations to the group to the
status of a term loan in January 1996.
The Committee does not base Mr. Morison's bonus on the attainment of
predetermined financial results or other quantitative benchmarks, but on its
assessment of year-end results in light of year-end economic conditions, and
such other important factors as its assessment of Mr. Morison's judgment,
initiative and ability to manage and inspire and to negotiate and close
transactions. That the Company has survived, transformed its operations and
achieved considerable efficiencies in difficult economic times is, the Committee
believes, largely a result of the restructuring of the Company and the Company-
wide rededication of effort that Mr. Morison has led.
Stock Option Awards, Stock Awards and Employee Stock Purchase Plan
The Option Compensation Committee has discretion as to when to award
options or stock, which executives to include in the awards and how many options
or shares of stock to award.
As part of the original terms of the original Recapitalization Agreement,
Vestex insisted that substantially all outstanding employee stock options (most
of which had exercise prices of $1.25 per share) be cancelled and new options
granted under a new Stock Option Plan. After negotiations between Vestex and
Chancellor, it was agreed that a total of 1,207,000 options would be made
available to employees under the new Plan. It was also agreed that all
1,207,000 options would be granted to employees by the Option Compensation
Committee, at exercise prices which approximated the current trading price range
of the Company's Common Stock at the time of the grant, after the Plan was
approved by Stockholders in January 1995, with no remaining options to be
reserved for future grants to employees except to the extent that some of the
1,207,000 options may be subsequently lapse unexercised.
The Committee considered the prospective benefits to the Company and the
continuing holders of common stock of giving key executives incentives to
maximize the value of the common stock following the Recapitalization, and
approved the grants, including grants to executive officers that are described
above under "OPTION GRANTS IN LAST FISCAL YEAR."
-18-
<PAGE>
At the suggestion of Vestex, the Committee also considered in 1994 the
benefits of an employee stock purchase plan that would entitle all employees of
the Company to purchase Common Stock at a discount from prevailing trading
prices. Such a plan permits participation on the part of all employees, not
merely key executives, and was approved by stockholders in January 1995,
although no options to purchase common stock under such plan have yet been
granted. Later in 1995, at Vestex's suggestion, the Committee considered the
benefits of awarding to employees, as a further equity incentive, instead of
transferring to Vestex, 1,023,739 of the 3,870,315 shares formerly held by
Bruncor. The Committee approved these awards in July 1995.
Other Compensation Elements
The Company has chosen to make provision for its employees' retirements
through a voluntary, contributory 401(k) plan, in which employees decide
individually whether, and how much of their compensation, to invest in a variety
of professionally managed tax-deferred investment portfolios selected by the
plan trustees. The Company matches each employee's contributions up to a
maximum of $500 per year for each individual. The Committee believes that such
a voluntary employee savings plan addresses the varying needs of its employees
better than a mandatory company-funded plan or a plan whose future benefits are
determined in advance rather than determined by investment performance.
The Company's former severance policy was developed primarily to provide
Company employees with a measure of financial benefits in the event they were
displaced by the industry-wide downsizing trend in which the Company has been a
vigorous participant. In the case of executive officers, the Committee believes
that the severance policy also made it possible for the Company to attract and
hire qualified personnel on a termination-at-will basis. The ability to make
immediate personnel changes (including changes in executives) was important to
the Company, in the Committee's estimation, in order to address the challenges
that confront the Company's operations. After discussions with Vestex, the
Committee concluded that it was appropriate to eliminate the Company's severance
benefits, effective for terminations occurring on or after January 1, 1997. It
was pointed out that, when coupled with the adoption of the 1994 Stock Option
Plan, the 1994 Employee Stock Purchase Plan and the 1995 stock awards, the
elimination of the severance policy would lessen the "downside" protection of
employees at a time when their "upside" equity incentives were being increased
in a company which was about to experience a substantial capital infusion.
-19-
<PAGE>
Compliance With Internal Revenue Code Section 162(m)
Section 162(m) of the Internal Revenue Code, enacted in 1993, generally
disallows a tax deduction to public companies for compensation over $1 million
paid to the corporation's Chief Executive Officer or any of its four other most
highly compensated executive officers. Qualifying performance-based
compensation will not be subject to the deduction limit if certain requirements
are met. This new limitation is unlikely to affect the Company because none of
its executive officers currently receives cash compensation over $300,000 and
none holds or expects to receive stock options except options which meet the
requirements of Section 162(m). The Company's 1994 Stock Option Plan is
intended to comply generally with Section 162(m) but there can be no assurance
that every future option grant to every employee will have no potential for
disallowance of deductibility inasmuch as the Plan grants the Committee
discretion to make grants with exercise prices that are less than fair market
value.
Respectfully submitted,
Bruce M. Dayton
Thomas W. Killilea
STOCK PERFORMANCE GRAPH
The chart which appears below sets forth the percentage change, on an
annual basis, in the cumulative total return on the Company's common stock since
December 31, 1990 (the last trading day of 1990) through December 29, 1995 (the
last trading day of 1995). For comparative purposes, changes in the cumulative
total return on three indices of publicly traded stocks (the "Indices") are also
set forth on the chart. The CRSP Total Return Index for the Nasdaq National
Market (U.S. Companies) reflects the total return of approximately 4,000 stocks
in all industries which are traded on the Nasdaq National Market ("NNM"). The
Company's stock is traded on the Electronic Bulletin Board at present. Stocks
on the Electronic Bulletin Board have lower average capitalization than stocks
on the NNM. The other two Indices are described in note (1) below.
The chart begins with an equal base value of $100 for the Company's stock
and for each of the Indices on December 31, 1990, and reflects year-end trading
prices and dividends paid. The chart assumes full reinvestment of dividends.
Information about the Indices has been obtained from sources believed to be
reliable, but neither the accuracy nor the completeness of such information is
guaranteed by the Company.
-20-
<PAGE>
Comparison of Five Year Cumulative Total Return* Among Chancellor
Corporation, CRSP Total Return Index for the Nasdaq National Market (U.S.
Companies), Nasdaq Financial Stocks and Nasdaq Trucking & Transportation
Stocks**/(1)/
[Graph Appears Here]
Performance Graph
- -----------------
<TABLE>
<CAPTION>
Chancellor Total U.S. Finance Cos. Trucking & Trans.
<S> <C> <C> <C> <C>
1990 100 100 100 100
1991 91.67 160.56 154.74 145.37
1992 266.66 186.87 221.31 177.9
1993 166.67 214.51 257.22 216.13
1994 25 209.69 257.83 196.16
1995 66.67 296.3 375.64 223.11
</TABLE>
Assumes $100 invested on December 31, 1990 in each of the listed indices.
____________________
* Total Return Assumes Reinvestment of Dividends
** Fiscal Year Ending December 31
/(1)/ Chancellor's business has similarities with both the non-bank finance
industry and the trucking and transportation industry. As a leasing
company with a portfolio of leased assets and an underwriting and
syndication function, Chancellor is comparable with other finance
companies. Chancellor's performance is also substantially influenced by
the trucking and transportation industry since the Company's primary
focus is leasing transportation equipment. Strong demand for trucking and
transportation equipment will increase the Company's opportunities for
new business syndication. Furthermore, strong demand for new vehicles
will tend to bolster used equipment prices which improves the Company's
revenues for off lease equipment. Consequently, both a Finance Company
index and a Trucking and Transportation index are provided for comparison
purposes.
-21-
<PAGE>
APPROVAL OF AMENDMENT TO 1994 DIRECTORS' STOCK OPTION PLAN
Introduction
- ------------
On January 20, 1995, the Company's stockholders approved the 1994
Directors' Stock Option Plan (the "Directors' Option Plan") which had previously
been adopted, subject to stockholder approval, by the Board of Directors on
August 12, 1994. Options to purchase a total of 565,000 shares of Common Stock
may be granted under the Directors' Option Plan to directors who are not
employees. The stockholders approved certain formulas, set forth in the Proxy
Statement for the Company's January 20, 1995 Annual Meeting, for determining the
number of options to be granted to each director individually (depending on the
mix of such director's overall compensation between options and cash fees) and
the per-share exercise prices of such options. In light of prevailing trading
prices of the Company's stock following the 0.475-for-1 stock dividend which
occurred on January 6, 1995 and of the unexpected delays in consummating the
recapitalization transactions, which in turn have likely delayed any future
appreciation in the value of the Company's Common Stock, the Board is proposing
an amendment to the Directors' Option Plan revising these formulas (the
"Directors' Plan Amendment"). See "-- Revised Formula for Grants to Directors"
and the table below captioned "New Plan Benefits." The Directors' Plan
Amendment also extends the last date on which options may be granted under the
Directors' Option Plan from December 31, 1996 to December 31, 2004 and effects
various other modifications in the Directors' Option Plan as described below.
Revised Formula for Grants to Directors
- ---------------------------------------
The Directors' Plan Amendment would effect the following changes in the
formula for determining the number of options to be granted and the per-share
exercise prices of such options. Options would be granted to non-employee
directors under the Directors' Option Plan as a component of one of four revised
compensation formulas: (A) in the case of Thomas W. Killilea, a grant of 50,000
fully vested options, exercisable immediately at an exercise price of $.25 per
share, a grant of 50,000 options, exercisable commencing July 26, 1996, provided
he is still serving as a director on such date, at an exercise price of $.25 per
share (rather than $.375 per share), a grant of 50,000 (rather than zero)
options, exercisable commencing July 26, 1997, provided he is still serving as a
director on such date, at an exercise price of $.25 per share, and an annual
director's fee of $1,000, payable quarterly; (B) in the case of Bruce M. Dayton,
a grant of 7,500 options, exercisable immediately at an exercise price of $.25
per share, a grant of 7,500 options, exercisable commencing July 26, 1996,
provided he is still serving as a director on such date, at
-22-
<PAGE>
an exercise price of $.25 per share (rather than $.375 per share), a grant of
7,500 (rather than zero) options, exercisable commencing on July 26, 1996,
provided he is still serving as a director on such date, at an exercise price of
$.25 per share and an annual director's fee of $15,000 payable quarterly; (C) in
the case of Richard D. Rizzo, a grant of 27,000 fully vested options,
exercisable immediately at an exercise price of $.25 per share, a grant of
27,000 options, exercisable commencing January 11, 1997, provided he is still a
director on such date, at an exercise price of $.25 per share (rather than $.375
per share), a grant of 27,000 (rather than zero) options, exercisable commencing
January 11, 1998, provided he is still a director on such date, at an exercise
price of $.375 per share, and an annual director's fee of $6,000 payable
quarterly; (D) in the case of Brian M. Adley, a grant of 37,500 fully vested
options, exercisable immediately at an exercise price of $.25 per share, a grant
of 37,500 options, exercisable commencing July 26, 1996, provided he is still
serving as a director on such date, at an exercise price of $.25 per share
(rather than $.375 per share), a grant of 37,500 (rather than zero) options,
exercisable commencing July 26, 1996, provided he is still serving as a director
on such date, at an exercise price of $.25 per share and an annual director's
fee of $1,000, payable quarterly, and (E) in the case of any other non-employee
directors elected prior to December 31, 2004 (rather than the 1996 Annual
Meeting of Stockholders), grants (subject to the availability of an adequate
number of shares of Common Stock reserved for issuance under the Plan) and an
annual directors' fee based on any of the foregoing formulae, in the direction
of the Option Compensation Committee.
All options will be exercisable until July 26, 2005. The Directors' Plan
Amendment would eliminate the provision of the Directors' Option Plan, currently
in effect, which requires the number of options to be granted to any director
elected after the 1996 Annual Meeting of Stockholders to be reduced by 10
options for each day which elapses between such date and such person's election
as a director. Pursuant to the Directors' Plan Amendment, options may be
granted until December 31, 2004. The Directors' Plan Amendment would also
increase the number of Options which may be granted to any individual over the
life of the Directors' Option Plan from 100,000 to 150,000. The exercise price
of options to be granted to any such subsequently elected directors will in no
event be less than the fair market value of Common Stock on the date of grant.
If the proposed Directors' Plan Amendment is adopted, the following numbers
of new options ("Substituted Options") will be granted to the following persons
and group of persons in substitution for outstanding options, and the following
numbers of new options ("Additional Options") will be granted to such persons:
-23-
<PAGE>
NEW PLAN BENEFITS
1994 Directors' Stock Option Plan
<TABLE>
<CAPTION>
Number of Number of Number of
Common Shares Common Shares Common Shares
Underlying Underlying Underlying
Substituted Additional Unchanged
Name and Position Options Options Options
- ----------------- ----------- ---------- ----------
<S> <C> <C> <C>
Brian M. Adley 37,500 37,500 37,500
Bruce M. Dayton 7,500 7,500 7,500
Thomas W. Killilea 50,000 50,000 50,000
Richard D. Rizzo 27,000 27,000 27,000
Non-employee directors,
as a group (4 persons)/(1)/ 122,000 122,000 122,000
</TABLE>
- ------------------------
(1) Does not include options to purchase a total of 199,000 shares which are
reserved for possible grant to future directors, if any.
At April 17, 1996, the average of the bid and asked prices of the Company's
Common Stock, as reported on the Electronic Bulletin Board, was .21875 per
share, so that on that date all 366,000 shares of stock underlying the options
referred to above had a market value, calculated on such basis, of $80,063.
These values are market values of the stock underlying the options, not values
of the options themselves.
Further information in regard to the proposed option grants and
cancellations for the persons named in the above table, and for all non-employee
directors as a group, is as follows:
-24-
<PAGE>
OPTION REPRICINGS
1994 Directors' Stock Option Plan
---------------------------------
<TABLE>
<CAPTION>
Market Length of
Price of Exercise Original
Number of Stock at Price at Option
Options Time of Time of New Remaining
Repriced Repricing Repricing Exer- Date of
or or Amend- or Amend- cise Repricing
Name Date Amended(#) ment ($) ment Price Amendment
- ---- ---- ---------- --------- --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
Brian M. Adley 6/6/96 37,500 (1) $.375 $.25 9 years(2)
Director
Bruce M. Dayton 6/6/96 7,500 (1) $.375 $.25 9 years(2)
Director
Thomas W. 6/6/96 50,000 (1) $.375 $.25 9 years(2)
Killilea
Director
Richard D. 6/6/96 27,000 (1) $.375 $.25 9 years(2)
Rizzo
Director
Non-employee 6/6/95 122,000(3) (1) $.375 $.25 9 years(2)
directors
as a group
(4 persons)
</TABLE>
- ---------------------------------------
(1) To be determined on the basis of the average of the closing bid prices on
the 20 trading days preceding the date of the Meeting.
(2) Vests on July 26, 1996; substituted and additional options will vest on
July 26, 1996; the underlying Common Stock may not be resold until January
26, 1997; substituted and additional options will expire on July 26, 2005.
(3) See note 1 to preceding table.
On July 26, 1995, pursuant to a proposal approved by the Company's
stockholders at the January 20, 1995 Annual Meeting, the Company repriced
certain outstanding stock options and substituted new options, as
described in the following table. Otherwise, the Company has not
previously repriced outstanding stock options or substituted new options
for old options during the past ten years.
-25-
<PAGE>
INFORMATION IN REGARD TO PREVIOUS
REPRICING AND SUBSTITUTION OF OPTIONS
IN JULY 1995
1994 Stock Option Plan and
1994 Directors' Stock Option Plan
<TABLE>
<CAPTION>
Number of Number of
Common Shares Common Shares
Underlying Underlying
Substituted Additional
Name and Position Options Options
- ----------------- ------------- -------------
<S> <C> <C>
Stephen G. Morison 68,000 372,000
Chief Executive Officer
Michael DeSantis, Jr. 34,000 141,000
Senior Vice President
William J. Guthlein 30,000 80,000
Vice President
David W. Parr 30,000 80,000
Vice President
Gregory S. Harper 21,250 88,750
Vice President
Executive officers, 183,250 761,750
as a group (5 persons,
consisting of those
named above)
All other employees, 53,650 208,350
as a group (30 persons)
Non-employee directors, 0 415,000
as a group (6 persons)(1)
</TABLE>
____________________
(1) Includes two directors who may be designated in the future by Vestex and by
the Continuing Directors, respectively.
Further information in regard to the previous option grants and
cancellations for the Company's Chief Executive Officer and each of the other
four most highly compensated executive officers of the Company is as follows:
-26-
<PAGE>
PREVIOUS OPTION REPRICINGS
IN JULY 1995
1994 Stock Option Plan
<TABLE>
<CAPTION>
Market Length of
Price of Exercise Original
Number of Stock at Price at Option
Options Time of Time of New Remaining
Repriced Repricing Repricing Exer- Date of
or or Amend- or Amend- cise Repricing
Name Date Amended(#) ment ($) ment Price Amendment
- ---- ---- ---------- --------- --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
Stephen G. 7/26/95 38,000 (1) 1.25 (2) 7 years(3)
Morison 10,000 (1) 1.50 (2) 6 years(3)
Chief Executive 10,000 (1) 1.00 (2) 6 years(3)
Officer 10,000 (1) .50 (2) 6 years(3)
Michael 7/26/95 16,000 (1) 1.25 (2) 7 years(3)
DeSantis, Jr. 6,000 (1) 1.50 (2) 6 years(3)
Senior Vice 6,000 (1) 1.00 (2) 6 years(3)
President 6,000 (1) .50 6 years(3)
William J. 7/26/95 16,000 (1) 1.25 (2) 7 years(3)
Guthlein 4,666 (1) 1.50 (2) 6 years(3)
Vice President 4,667 (1) 1.00 (2) 6 years(3)
4,667 (1) .50 (2) 6 years(3)
David W. Parr 7/26/95 16,000 (1) 1.25 (2) 7 years(3)
Vice President 4,666 (1) 1.50 (2) 6 years(3)
4,667 (1) 1.00 (2) 6 years(3)
4,667 (1) .50 (2) 6 years(3)
Gregory S. 7/26/95 16,000 (1) 1.25 (2) 7 years(3)
Harper 1,750 (1) 1.50 (2) 6 years(3)
Vice President 1,750 (1) 1.00 (2) 6 years(3)
1,750 (1) .50 (2) 6 years(3)
- ----------------------------
</TABLE>
(1) At January 20, 1995 (the date of stockholder approval, when the new
exercise prices were determined) and July 26, 1995 (the date of the option
grants, which were conditioned upon consummation of the 1995 Common Stock
Transactions), the average of the bid and asked prices of the Company's
Common Stock, as reported on the Electronic Bulletin Board, was $.2032 and
$.15625 per share, respectively, so that on those dates all 183,250 shares
of stock underlying the options referred to above had a market value of
approximately $37,236 and $28,633, respectively. These values are market
values of the stock underlying the options, not values of the options
themselves.
-27-
<PAGE>
(2) All options had an exercise price equal to the greater of (i) the closing
bid price on the date of grant (July 26, 1995) ($.125 per share) and (ii)
$.125 per share, in the case of 50.3% of such options and $.1875 per share,
in the case of 49.7% of such options.
(3) Fully vested at the date of repricing; substituted and additional options
were fully vested; the underlying Common Stock may not be resold until
January 26, 1997; substituted and additional options will expire on July
26, 2005.
Future Grants. Because future option grants under the Directors' Option
-------------
Plan will only be made either pursuant to the formulas for non-employee
directors described above or at the discretion of the Option Compensation
Committee upon the lapse of options which have already been granted, the Company
cannot now determine the number of options to be granted to any particular
individual or group other than those set forth in the first table above. Besides
the 366,000 options to be granted to the four current non-employee directors, a
total of 199,000 options is authorized under the Plan. This number will be
sufficient for at least one additional or successor directors elected prior to
December 31, 2004.
Description of the Directors' Option Plan
-----------------------------------------
Options on 565,000 shares may be awarded under the Directors' Option
Plan to directors who are not employees. Not more than 100,000 shares may
currently be issued to any individual under the Directors' Option Plan
during the life of the Directors' Option Plan (this number will increase to
150,000 if the Directors' Plan amendment is approved). The Directors'
Option Plan provides for the grant of options which are not Incentive Stock
Options under Section 422A of the Internal Revenue Code of 1986, as amended
(the "Code")("Non-Statutory Stock Options"). Members of the Company's Board
of Directors may be granted Non-Statutory Stock Options.
The Option Compensation Committee of the Board of Directors,
consisting of at least two directors who are "disinterested persons" for
federal securities law purposes and "outside directors" for purposes of
Section 162(m) of the Code, will administer the Director's Option Plan,
select the persons to whom options are granted and fix the terms of such
options. In order to comply with certain rules under Section 16(b) of the
Securities Exchange Act of 1934, option grants are not subject to approval
by the full Board of Directors.
The exercise date of an option granted under the Directors' Option
Plan will be fixed by the Committee, but may not be later than ten years
from the date of grant. Options may be granted under the Directors' Option
Plan through December 28, 1996 and, if the Directors' Plan Amendment is
adopted, through December 31, 2004. Options may be exercised in such
installments as are fixed by the Committee.
-28-
<PAGE>
Options under the Directors' Option Plan will not be transferable by the
optionee other than by will or the laws of descent and distribution, although
they may be exercised during the optionee's lifetime by his legal representative
if he becomes incapacitated. All options must be exercised within three months
after termination of the optionee's affiliation with the Company, except that
options shall remain outstanding for their entire term following termination due
to death or for one year following termination due to permanent disability.
Pursuant to the Directors' Plan Amendment, the exercise price of options
granted to directors will be $.25 per share.
The Directors' Option Plan provides for automatic adjustment to the number
of shares of Common Stock issuable upon exercise of options granted under the
Directors' Option Plan to reflect stock dividends, stock splits,
reorganizations, mergers and various other transactions occurring after the date
of grant. Payment for shares purchased upon exercise of an option must be made
in cash or, at the Committee's discretion, by delivery of shares of Common Stock
of the Company, or by a combination of such methods.
The Company's Board of Directors may at any time amend or revise the terms
of the Directors' Option Plan, except that no such amendment or revision may be
made without the approval of the holders of a majority of the Company's
outstanding capital stock, voting together as a single class, if such amendment
or revision would (a) materially increase the number of shares which may be
issued under the Directors' Option Plan (other than changes due to changes in
capitalization), (b) increase the maximum term of options, (c) decrease the
minimum option price, (d) permit the granting of options to anyone not included
within the Plan's eligible categories, (e) extend the term of the Plan or (f)
materially increase the benefits accruing to eligible individuals under the
Plan.
Federal Income Tax Consequences
- -------------------------------
Non-Statutory options granted under the 1994 Stock Option Plan will not
qualify as "Incentive Stock Options," as defined in Section 422 of the Code.
An optionee will not recognize any taxable income at the time he is granted
a Non-Statutory Option. However, upon its exercise, the optionee will recognize
ordinary income for tax purposes measured by the excess of the then fair market
value of the shares over the option price. In certain circumstances, where the
shares are subject to a substantial risk of forfeiture when acquired or when the
optionee is an officer, director or 10% stockholder of
-29-
<PAGE>
the Company, the date of taxation may be deferred unless the optionee files an
election within 30 days of exercising the option with the Internal Revenue
Service under Section 83(b) of the Code. The income recognized by an optionee
who is also an employee of the Company will be subject to tax withholding by the
Company by payment in cash, or by means of withholding shares which would
otherwise be received by the optionee or out of the current earnings paid to the
optionee. Upon resale of such shares by the optionee, any difference between the
sales price and the exercise price increased by amounts recognized as ordinary
income as provided above, will be treated as capital gain or loss.
The Company will be entitled to a tax deduction in the same amount as the
ordinary income recognized by the optionee with respect to shares acquired upon
exercise of a Non-Statutory Option.
The foregoing is only a summary of the effect of federal income tax upon
the optionee and the Company with respect to the grant and exercise of options
under the Directors' Option Plan, does not purport to be complete, and does not
discuss the income tax laws of any municipality, state or foreign country in
which an optionee may reside.
Accounting Treatment
- --------------------
The cancellation, re-issuance and repricing of the outstanding options will
have no accounting impact. The Company is following EITF 87-33 including its
provision that compensation is measured using current market prices and current
exercise prices.
Recommendation of the Board of Directors
- ----------------------------------------
The Company's Board of Directors unanimously recommends that stockholders
rate FOR the Directors' Plan Amendment.
THE CHARTER AMENDMENT
Summary
- -------
Under the terms of the proposed Charter Amendment, the Board of Directors
will be authorized, subject to any limitations prescribed by law, without
further stockholder approval, to issue from time to time up to an aggregate of
5,000,000 shares of Preferred Stock, $.01 par value per share, in one or more
series ("Undesignated Series Preferred"). Each such series of Undesignated
Series Preferred will have such number of shares, designations, preferences,
voting powers, qualifications and special or relative rights or privileges as
shall be determined by
-30-
<PAGE>
the Board of Directors, which may include, among others, dividend rights, voting
rights, redemption and sinking fund provisions, liquidation preferences,
conversion rights and preemptive rights.
The stockholders of the Company are being asked to grant the Board of
Directors authority to issue the Preferred Stock and to determine its rights and
preferences in order to eliminate delays associated with a stockholder vote on
specific authorizations and issuances. The rights of the holders of Common
Stock and the Outstanding Series AA Preferred will be subject to the rights of
holders of any Undesignated Series Preferred issued in the future.
The issuance of Undesignated Series Preferred, while providing desirable
flexibility in connection with possible acquisitions, financings and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from attempting to
acquire, a majority of the outstanding voting stock of the Company. The Company
has no present plans to designate the rights of, or issue, any shares of
Undesignated Series Preferred or to list such shares on any national securities
exchange or on Nasdaq.
Background
- ----------
On January 20, 1995, the Company's stockholders approved an amendment to
the Company's Articles of Organization authorizing a total of 10,000,000 shares
of Preferred Stock, $.01 par value per share. 5,000,000 of such shares were
designated in the charter as Series A Convertible Preferred Stock, having
specified rights, preferences and limitations determined by negotiations with
Vestex in connection with a proposed investment in the Company by Vestex. These
included, among other things, mandatory dividends, a liquidation preference and
special voting rights, as described in more detail. The remaining 5,000,000
shares were Undesignated Series Preferred. Subsequently, the Board of Directors
(with Mr. Adley's abstention) negotiated with Vestex a set of modifications to
the original terms of the Series A Convertible Preferred Stock. Rather than
delay consummation of Vestex's investment in the Company by up to several months
in order to solicit stockholder approval of the modifications, the Board made
use of the 5,000,000 shares of Undesignated Series Preferred to consummate the
Vestex investment (the "Recapitalization") by designating such shares of
Undesignated Series Preferred as Series AA Convertible Preferred Stock and
giving such shares the modified terms agreed to between the Board and Vestex.
As a result of the designation of the original 5,000,000 shares of
Undesignated Series Preferred by the Board as Series AA Convertible Preferred
Stock and the issuance of such shares to Vestex, the Company currently has
authorized and outstanding the
-31-
<PAGE>
5,000,000 shares of Outstanding Series AA Preferred that have been issued to
Vestex and 5,000,000 authorized but unissued shares of Series A Convertible
Preferred Stock whose specified terms make such shares too inflexible to be
useful in connection with future financings or acquisitions.
The adoption of the Charter Amendment would have the effect of
substantially returning the Company's capitalization to its status as of January
20, 1995, with 5,000,000 shares of Preferred Stock having terms negotiated
between the Board of Directors and Vestex and 5,000,000 shares of Undesignated
Series Preferred available for future designation and issuance by the Board of
Directors.
Common Stock
- ------------
Holders of the Company's Common Stock are entitled to one vote for each
share held on all matters submitted to a vote of stockholders and do not have
cumulative voting rights. Holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared by the Board of Directors out
of funds legally available therefor, subject to preferential dividend rights, if
any, of any outstanding series of Preferred Stock. Upon the liquidation,
dissolution or winding-up of the Company, holders of Common Stock are entitled
to receive ratably the net assets of the Company available for distribution
after the payment of all debts and other liabilities of the Company, subject to
the rights of any outstanding series of Preferred Stock. Holders of Common
Stock have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of Common Stock are fully paid and nonassessable. The
rights, preferences and privileges of holders of Common Stock are subject to,
and may be adversely affected by, the rights of holders of shares of Outstanding
Series AA Preferred and any other series of Preferred Stock that the Company may
designate and issue in the future.
Terms of the Outstanding Series AA Preferred
- --------------------------------------------
Subject to the powers, preferences, rights, qualifications, limitations and
restrictions of any other class or series of preferred stock that may be issued,
the holder of each of the 5,000,000 shares of Outstanding Series AA Preferred is
entitled to the following preferences and rights:
Dividends: The Outstanding Series AA Preferred is entitled to receive
---------
dividends (if any) paid from time to time on the Common Stock, on a pari passu
basis. If, within five years after the issuance of the Outstanding Series AA
Preferred, the Company issues additional equity securities (other than upon the
exercise of certain warrants or options or debt convertible into equity
-32-
<PAGE>
securities of the Company) for cash consideration in excess of $7,500,000
("Additional Equity Investment"), then there shall be paid to the holders of any
Outstanding Series AA Preferred which is thereafter converted, in addition to
any declared but unpaid dividends on the Outstanding Series AA Preferred, an
amount per share at a rate of (i) $.035 per annum, if the Additional Equity
Investment is consummated and the shares are converted within one year after
their issuance; (ii) $.03 per annum, if the Additional Equity Investment is
consummated and the shares are converted within two years after their issuance;
(iii) $.025 per annum, if the Additional Equity Investment is consummated and
the shares are converted within three years after their issuance; (iv) $.02 per
annum, if the Additional Equity Investment is consummated and the shares are
converted within four years after their issuance; or (v) $.015 per annum, if the
Additional Equity Investment is consummated and the shares are converted within
five years after the issuance. After April 11, 1998, such dividends ("Special
Dividends") may, at the Company's election, be paid in the form of shares of
Common Stock of the Company, valued for this purpose at one-half their then
prevailing trading price determined under a formula.
Liquidation Preference: a payment of $.50 per share plus any accumulated
----------------------
and unpaid dividends thereon, and no more, upon any voluntary or involuntary
liquidation, dissolution or winding up of the Company, payable out of funds
legally available for the purpose, after payment of debts and expenses and
subject to the rights of any senior class or series (as defined) of preferred
stock, but in preference to the payment of any amounts to the holders of junior
stock (as defined) including Common Stock.
In the event of any consolidation or merger of the Company with or into
another entity, any sale or transfer to another entity of all or substantially
all of its assets or the voluntary or involuntary dissolution and winding up of
the Company, the holder of each share of Outstanding Series AA Preferred then
outstanding will have the right to elect to receive its liquidation preference
or to convert each such share into the kind and amount of securities and
property receivable upon or deemed to be held following such consolidation,
merger, sale, transfer or dissolution by a holder of the number of shares of
Common Stock into which such shares of Outstanding Series AA Preferred might
have been converted immediately prior to such consolidation, merger, sale,
transfer or dissolution.
Conversion Rights: each share of Outstanding Series AA Preferred is
-----------------
convertible at any time into shares of Common Stock at an initial conversion
rate of one share of Common Stock per share of Outstanding Series AA Preferred.
The conversion rate is subject to adjustment in certain events, including stock
-33-
<PAGE>
dividends, stock splits, reverse stock splits, subdivisions, combinations and
reclassifications of Common Stock, but is not subject to adjustment upon the
issuance of Common Stock or options, rights or warrants to purchase Common Stock
at a price lower than the conversion price as in effect from time to time.
Fractional Common Shares will not be issued upon conversion but, in lieu
thereof, the Company will pay a cash adjustment based on the conversion price of
the Common Stock.
Retirement: at any time after April 11, 1999, the Company may elect to
----------
cause all outstanding shares of Outstanding Series AA Preferred to be retired by
paying any amounts that would be due upon conversion and converting such shares
into Common Stock at the then effective conversion rate.
Voting Rights: as may votes per share of Outstanding Series AA Preferred
-------------
as the number of shares of Common Stock into which each such share of
Outstanding Series AA Preferred is convertible (initially, one vote per share),
with the Common Stock and all outstanding preferred stock voting together as a
single class on all matters except as otherwise expressly provided in the
Company's Articles of Organization or prescribed by law.
Without the favorable vote or consent of the holders of a majority of the
issued and outstanding shares of the Outstanding Series AA Preferred, voting as
a class, the Company is not authorized to amend, alter or repeal any of the
preferences or rights of the Outstanding Series AA Preferred so as to materially
adversely affect such preferences and rights, increase the authorized number of
shares of preferred stock, create any new class of shares having preference over
or ranking on a parity with the Outstanding Series AA Preferred, cause any
purchase of stock other than from employees, cause a dividend to be paid on the
Common Stock, effect a merger to which the Company is a party or a sale of the
Company's assets, or amend the Company's Articles of Organization or By-Laws.
Terms of the Series A Convertible Preferred Stock
- -------------------------------------------------
The rights, priorities and limitations of the authorized Series A
Convertible Preferred Stock are generally identical with those of the
Outstanding Series AA Preferred with the following exceptions: the Series A
Convertible Preferred Stock (a) has mandatory dividends in specified amounts;
(b) has special voting rights in the event of a default on dividend payments;
(c) is ordinarily entitled to elect a majority of the members of the Board of
Directors; (d) is not subject to retirement; and (e) must have all Special
Dividends paid in cash.
Recommendation of the Board of Directors
- ----------------------------------------
The Company's Board of Directors unanimously recommends that stockholders
vote FOR the Charter Amendment.
-34-
<PAGE>
OTHER INFORMATION
Proxy Solicitation
- ------------------
All costs of solicitation of proxies will be borne by the Company. In
addition to solicitation by mail, the officers and regular employees of the
Company may solicit proxies personally or by telephone.
Other Business
- --------------
The Board of Directors knows of no other matter to be presented at the
meeting. If any additional matter should properly come before the meeting, it
is the intention of the persons named in the enclosed proxy to vote such proxy
in accordance with their judgment on any such matters.
Principal Stockholders
- ----------------------
As of the close of business on April 25, 1996, the record date for the
meeting, there were 5,135,261 shares of Common Stock outstanding and 5,000,000
shares of Series AA Convertible Preferred Stock outstanding. Stockholders of
the Company are entitled to one vote for each share held of record at the close
of business on the record date. An additional 1,430,911 shares were issued and
held of record by the Company as treasury shares.
The number of shares of Common Stock beneficially owned by the persons or
entities known by management to be the beneficial owners of more than 5% of the
outstanding shares, the number of shares beneficially owned by each director,
each nominee for election or re-election as a director and each executive
officer, the number of shares beneficially owned by all directors and officers
as a group, as of the record date, as "beneficial ownership" has been defined
under rules promulgated by the Securities and Exchange Commission, and the
actual sole or shared voting power of such persons, as of the record date, are
set forth in the following table. Additional information is given as to the pro
forma stock ownership and voting power at future Annual Meetings of Stockholders
of such persons in the event that the Company consummates a private offering of
Common Stock to a select group of nonaffiliated accredited investors which it
announced on April 16, 1996 (the "Common Stock Offering").
-35-
<PAGE>
Preliminary Copies
<TABLE>
<CAPTION>
Voting Power(1)
Percentage of ---------------------------------------------
Common Stock Shares Outstanding Percentage
Name and Address of Beneficially ------------------------ -------------------------
Beneficial Owner Owned Actual Pro Forma(2) Shares Actual Pro Forma(2)
- ---------------- ------------- ------ ------------ ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C>
Vestex Capital
Corporation (3) 6,600,000 (4) 65.1% 46.7% 6,600,000 (4)(5)(6) 62.6% 46.7%
Brian M. Adley (3) 6,637,500 (4)(7)(8) 65.2% 47.0% 6,600,000 (4)(5)(6)(7) 62.6% 46.7%
Stephen G. Morison (9) 984,812 (8) 9.3% 6.8% 549,312 (5) 5.2% 3.9%
Bruce M. Dayton (9) 46,321 (8) * * 38,821 (5) * *
Thomas W. Killilea (11) 175,375 (8) 1.7% 1.2% 125,375 (5) 1.2% *
Michael DeSantis, Jr.(9) 361,595 (8) 3.5% 2.5% 186,595 1.7% 1.3%
William J. Guthlein (9) 70,325 * * 70,325 * *
Gregory S. Harper (9) 219,867 (8) 2.1% 1.5% 109,867 1.0% *
David W. Parr (9) 119,750 1.2% * 119,750 1.1% *
Richard D. Rizzo (9) 27,000 (8)(11) * * 0 (5)(11) * *
Directors and Executive
Officers as a group
(9 persons) 8,641,334 (4)(7)(8) 75.9% 57.7% 7,795,045 (4)(7)(8) 77.0% 55.2%
</TABLE>
-----------------------------
* Less than one percent (1.0%)
The notes to this table appear on page 38.
-37-
<PAGE>
Notes to Beneficial Ownership Table
-----------------------------------
(1) Number of votes which each person is entitled to cast expressed as a number
and as a percentage of all votes which all stockholders are entitled to
cast at the Meeting (or, in the case of the pro forma column, would be
entitled to cast at future Annual Meeting of Stockholders); assumes no
exercise of stock options.
(2) Pro forma as if the additional 4,000,000 shares of Common Stock being
offered in the Common Stock Offering had been issued and outstanding at
April 25, 1996; assumes no exercise of stock options.
(3) This stockholder's address is 12 Waltham Street, Lexington, MA 02173.
(4) Assumes conversion of 5,000,000 shares of Outstanding Series AA Preferred
into a like number of shares of Common Stock.
(5) All shares owned by this stockholder must be voted for the election of
directors as required by the provisions of the Voting Agreement summarized
below. See "-- Voting Agreement."
(6) Between 1,001,989 of these shares (if an additional 4,000,000 shares are
sold by the Company in the Common Stock Offering) and 2,585,989 of these
shares (if no additional shares are sold by the Company in the Common Stock
Offering) will be voted, as to all matters other than the election of
directors, as specified by Richard D. Rizzo or his successor pursuant to
the provisions of the Voting Agreement.
(7) Includes all shares owned by Vestex Capital Corporation reported above.
Mr. Adley has sole or shared voting power as to all such shares.
(8) Includes 37,500, 435,500, 7,500, 50,000, 175,000, 110,000 and 27,000 shares
which Messrs. Adley, Morison, Dayton, Killilea, DeSantis, Harper and Rizzo
are entitled to acquire, respectively, through the exercise of outstanding
stock options within the next 60 days.
(9) Each of these persons maintains a business address c/o the Company.
(10) This person maintains a business address at Oppenheimer & Co., Inc., One
Federal Street, Boston, MA 02110.
-38-
<PAGE>
(11) Excludes up to 2,585,989 shares owned by Vestex Capital Corporation as to
which this person will have voting power with respect to all matters other
than the election of directors. See "-- Voting Agreement."
The foregoing table assumes between 10,136,391 and 14,136,391 shares of
Common Stock to be outstanding, on the assumptions set forth above, depending on
whether all or any or none of the 4,000,000 additional shares being offered in
the Common Stock Offering are sold.
Voting Agreement. The Voting Agreement entered into by the Company, Vestex
----------------
and the Company's directors on April 11, 1996 (the "Voting Agreement") provides
for the election of a Board of seven Directors, two of whom will be nominated by
Vestex and five of whom (the "Continuing Directors") will be nominated by the
Company's continuing directors other than nominees of Vestex, subject to
election by the stockholders other than Vestex ("Minority Stockholders"). The
Voting Agreement also requires that, until April 11, 1998, certain issuances of
stock, mergers, charter and by-law amendments and other transactions, in which
Vestex has an interest which conflicts with or is distinct from that of the
Company, will be subject to approval by the Continuing Directors or the Minority
Stockholders ("Minority Approval").
The Voting Agreement also provides that Mr. Rizzo, a new Continuing
Director (or a successor jointly appointed by Vestex and the Company, or,
failing such appointment, a successor selected by the Board of Directors of the
Company) will be authorized to vote, in accordance with all applicable
requirements of the Voting Agreement and otherwise at his discretion, that
number of shares owned by Vestex which from time to time exceed 39.6% of all
shares of capital stock of the Company then outstanding, in regard to all
matters other than the election of directors.
Continuing Directors. Stephen G. Morison, Bruce M. Dayton, Thomas W.
--------------------
Killilea and Richard D. Rizzo will be the four initial Continuing Directors.
Mr. Morison will be subject to re-election in 1996 and 1998, Mr. Rizzo in 1997
and 2000 and Messrs. Dayton and Killilea in 1996 and 1999. The Voting Agreement
provides that, at all elections of directors prior to the Annual Meeting of
Stockholders to be held in the year 2001, the Company will nominate each of the
initial Continuing Directors for re-election or, if any such Continuing Director
does not choose to stand for re-election, a nominee designated by a majority of
the Continuing Directors then in office. Vestex has agreed to vote all of its
outstanding stock in favor of such nominees if they are unopposed. If any such
nominee is opposed, Vestex will vote all of its outstanding stock in favor of
the candidate who receives a
-39-
<PAGE>
plurality of the votes cast by the Minority Stockholders. Vacancies which occur
among the Continuing Directors will be filled as designated by the remaining
Continuing Directors.
Minority Approval. Until April 11, 1998, the following types of
-----------------
transactions will be subject to approval by either a majority of the Continuing
Directors then in office or the holders of a majority of the shares of common
stock held by Minority Stockholders: (i) any issuance or transfer by the
Company of any stock or other securities of the Company to Vestex (other than
the issuance of common stock pursuant to the conversion of Outstanding Series AA
Preferred), (ii) any merger, consolidation or sale of assets involving the
Company and Vestex, (iii) any action taken by the Company which results in a
going private transaction subject to Rule 13e-3 under the Securities Exchange
Act of 1934, or (iv) the payment to Vestex of any fee or other similar type of
benefit (other than as contemplated in the consulting agreement described under
"ELECTION OF DIRECTORS -- Compensation Committee Interlocks and Insider
Participation"). Vestex has agreed not to attempt to commence or effect any of
such transactions without first obtaining the necessary approval. The foregoing
does not apply to any transaction in which Vestex does not have a conflict of
interest, such as the issuance of securities to an unrelated purchaser
(notwithstanding that Vestex would be entitled to receive a fee in connection
with such transaction).
Deadline for Submission of Stockholder Proposals
- ------------------------------------------------
Stockholders may present proposals for inclusion in the 1997 Proxy
Statement provided that such proposals are received by the Clerk of the Company
no later than January 7, 1997 and are otherwise in compliance with applicable
Securities and Exchange Commission regulations.
Additional Information; Incorporation by Reference
- --------------------------------------------------
Accompanying this Proxy Statement are copies of Parts I, II and IV of the
Company's Annual Report on Form 10-K for the year ended December 31, 1995. Such
portions of the Annual Report on Form 10-K constitute the Company's Annual
Report to its Stockholders for purposes of Rule 14a-3 under the Securities
Exchange Act of 1934.
The following sections of the Company's Annual Report on Form 10-K are
hereby specifically incorporated by reference into this Proxy Statement: Item
5, Market for the Company's Common Equity and Related Stockholders' Matters;
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations; and Item 14, Financial Statements.
-40-
<PAGE>
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 and in accordance therewith files reports, proxy statements
and other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy statements and other information are
available for inspection and copying at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, DC 20549 at the following regional offices of the Commission:
500 West Madison, 14th Floor, Chicago, Illinois 60661-2511 and 7 World Trade
Center, New York, New York 10048. Copies of such material may be obtained upon
payment of the Commission's customary charges by writing to the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, DC 20549.
Stockholders who have questions in regard to any aspect of the matters
discussed in this Proxy Statement should contact Stephen G. Morison or William
J. Guthlein of the Company at (617) 728-8500.
By Order of the Board of Directors
David W. Parr, Clerk
May __, 1995
THE BOARD OF DIRECTORS HOPES THAT STOCKHOLDERS WILL ATTEND THE MEETING.
WHETHER OR NOT YOU PLAN TO ATTEND, YOU ARE URGED TO COMPLETE, DATE, SIGN AND
RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE. PROMPT RESPONSE WILL
GREATLY FACILITATE ARRANGEMENTS FOR THE MEETING AND YOUR COOPERATION WILL BE
APPRECIATED.
-41-
<PAGE>
PLEASE MARK VOTES
X AS IN THIS EXAMPLE
- -
With-
For hold
1. Fixing the number of directors at seven for the
coming year and electing the Class I nominee ________ _______
and two Class II nominees listed below.
Stephen G. Morison
Bruce M. Dayton
Thomas W. Killilea
For Against Abstain
2. Adoption of amendment to the
Company's 1994 Director Stock __________ ___________ ___________
Option Plan.
For Against Abstain
3. Approval of amendment to the Company's
charter converting 5,000,000 shares of
Series A Convertible Preferred Stock __________ ___________ ___________
into a like number of shares of
undesignated series preferred stock.
For Against Abstain
4. In their discretion, such other matters
as may properly come before the meeting
or any adjournment thereof. __________ ___________ ___________
RECORD DATE SHARES:
Please be sure to sign and date this Proxy. Date
Shareholder sign here Co-owner sign here
Mark box at right if comments or address
change have been noted on the reverse of _____________
this card.
DETACH CARD
CHANCELLOR CORPORATION
Dear Shareholder:
Please take note of the important information enclosed with this Proxy
Ballot. There are a number of issues related to the management and
operation of your Company that require your immediate attention and
approval. These are discussed in detail in the proxy materials that have
been sent to stockholders.
Your vote counts, and you are strongly encouraged to exercise your right to
vote your shares.
Please mark the boxes on the proxy card to indicate how your shares shall
be voted. Then sign the card, detach it and return your proxy vote in the
enclosed postage paid envelope.
Your vote must be received prior to the Annual Meeting of Shareholders,
June 6, 1996.
Thank you in advance for your prompt consideration of these matters.
Sincerely,
Chancellor Corporation
<PAGE>
CHANCELLOR CORPORATION
745 Atlantic Avenue Boston, MA 02111
Special Meeting of Stockholders, June 6, 1996
The undersigned hereby appoints Stephen G. Morison and Bruce M. Dayton, and each
or either of them, with full power of substitution, as proxies and attorneys in
fact, to vote and act at the Special Meeting in lieu of the Annual Meeting (the
"Meeting") of Stockholders of Chancellor Corporation (the Company), to be held
June 6, 1996, at 745 Atlantic Avenue, Boston, Massachusetts and at any
adjournment thereof, in respect of all shares of common stock, par value $.01
per share, of the Company with respect to which the undersigned would be
entitled to vote and act if personally present.
The undersigned hereby acknowledges receipt of the Notice of the Meeting and the
accompanying Proxy Statement and hereby directs said proxies, or their
substitutes, to vote and act on the following matters set forth in such Notice
and Proxy Statement as specified by the undersigned. You may revoke this Proxy
by submitting a proxy bearing a latter date or by voting in person if you
attend the meeting.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF CHANCELLOR CORPORATION AND
WILL BE VOTED AS DIRECTED, IF NO CHOICE IS INDICATED, IT WILL BE VOTED "FOR" ALL
ITEMS AND IN THE DISCRETION OF THE PROXIES AS TO ANY OTHER MATTER WHICH MAY
PROPERLY COME BEFORE THIS MEETING.
_________________________________________________________________________
PLEASE VOTE, DATE, AND SIGN ON OTHER SIDE AND RETURN PROMPTLY IN ENCLOSED
________
ENVELOPE
Please sign this proxy exactly as your name appears on the books of the Company.
Joint owners should each sign personally. Trustees and other fiduciaries should
indicate the capacity in which they sign, and where more than one name appears,
a majority must sign. If a corporation, this signature should be that of an
authorized officer who should state his or her title.
________________________________________________________________________________
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
________________________________ _________________________________________
________________________________ _________________________________________
________________________________ ____________________________________CNRCM
<PAGE>
CHANCELLOR CORPORATION
1994 DIRECTORS' STOCK OPTION PLAN
September 30, 1994
1. Purpose.
-------
The purpose of this plan (the "Plan") is to secure for Chancellor
Corporation (the "Company") and its shareholders the benefits arising from
capital stock ownership by non-employee directors of the Company who are
expected to contribute to the Company's future growth and success. The term
"Company" means Chancellor Corporation itself and shall not include any parents
or subsidiaries of the Company.
2. Type of Options and Administration.
----------------------------------
(a) Types of Options. Options granted pursuant to the Plan shall be
----------------
Non-Statutory Options which are not intended to meet the requirements of Section
422 of the Code ("Non-Statutory Options").
(b) Administration.
--------------
(i) The Plan will be administered by the Board of Directors of the
Company, whose construction and interpretation of the terms and provisions of
the Plan shall be final and conclusive. The Board of Directors shall cause
options to purchase shares of the Company's Common Stock ("Common Stock") to be
granted pursuant to the automatic formula set forth in Section 3(b) and shall
issue shares upon exercise of such options as provided in the Plan. The Board
shall have authority, subject to the express provisions of the Plan, to construe
the respective option agreements and the Plan, to prescribe, amend and rescind
rules and regulations relating to the Plan, to determine the terms and
provisions of the respective option agreements, which need not be identical, and
to make all other determinations which are, in the judgment of the Board of
Directors, necessary or desirable for the administration of the Plan. The Board
of Directors may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or in any option agreement in the manner and to the
extent it shall deem expedient to carry the Plan into effect and it shall be the
sole and final judge of such expediency. No director or person acting pursuant
to authority delegated by the Board of Directors shall be liable for any action
or determination under the Plan made in good faith.
(ii) The Board of Directors may, to the full extent permitted by or
consistent with applicable laws or regulations and Section 3(b) of this Plan
delegate any or all of its powers under
<PAGE>
the Plan to a committee (the "Committee") appointed by the Board of Directors,
and if the Committee is so appointed all references to the Board of Directors in
the Plan shall mean and relate to such Committee.
(c) Applicability of Rule 16b-3. Those provisions of the Plan which make
---------------------------
express reference to Rule 16b-3 promulgated under the Securities Exchange Act of
1934 (the "Exchange Act"), or any successor rule ("Rule 16b-3"), or which are
required in order for certain option transactions to qualify for exemption under
Rule 16b-3, shall apply only to such persons as are required to file reports
under Section 16(a) of the Exchange Act (a "Reporting Person").
3. Eligibility.
-----------
(a) General. Options shall be granted to persons who are directors of the
-------
Company but who are not employees of the Company ("Non-Employee Directors").
Subject to adjustment as provided in Section 14 below, the maximum number of
shares with respect to which options may be granted to any employee under the
Plan shall not exceed 100,000 shares of common stock during the term of the
Plan. For the purpose of calculating such maximum number, (a) an option shall
continue to be treated as outstanding notwithstanding its repricing,
cancellation or expiration and (b) the repricing of an outstanding option or the
issuance of a new option in substitution for a cancelled option shall be deemed
to constitute the grant of a new additional option separate from the original
grant of the option that is repriced or cancelled.
(b) Grant of Options to Directors. On the date of adoption of this Plan
-----------------------------
by the Company's stockholders, each Non-Employee Director who is serving in such
capacity on such date (including persons who are elected directors on such date
by the Company's stockholders or by the Board of Directors) shall automatically
receive (i) in the case of Thomas W. Killilea, an immediate grant of 50,000
fully vested options, exercisable immediately at an exercise price of $.25 per
share and, on the first anniversary of such initial grant date (provided he is
still serving as a director on such first anniversary date) a grant of 50,000
fully vested options, exercisable commencing on such first anniversary date at
an exercise price of $.375 per share; (ii) in the case of Bruce M. Dayton, an
immediate grant of 7,500 fully vested options, exercisable immediately at an
exercise price of $.25 per share and, on the first anniversary of such initial
grant date (provided he is still serving as a director on such first anniversary
date) a grant of 7,500 fully vested options, exercisable commencing on such
first anniversary date at an exercise price of $.375 per share; and (iii) in the
case of all other Non-Employee Directors, an immediate grant of 37,500 fully
vested options, exercisable immediately at any exercise price of $.25 per share
and, on the
-2-
<PAGE>
first anniversary of such initial grant date (provided he is still serving as a
director on such first anniversary date), a grant of 37,500 fully vested
options, exercisable commencing on such first anniversary date at an exercise
price of $.375 per share. All options will be exercisable until September __,
2004.
Thereafter, each person who is elected a Non-Employee Director of the
Company prior to the Company's 1996 Annual Meeting of Stockholders shall
automatically receive a grant of options as provided in clause (iii)above,
except that (x) the number of options initially granted upon such election shall
be reduced by 10 options for each day which elapses between the date of
stockholder approval of this Plan and such person's date of election, (y) the
number of options subsequently granted upon such election (if it occurs after
the first anniversary of the date of stockholder approval) shall be reduced by
10 options for each day (if any) in excess of 365 which elapses between the
date of stockholder approval of this Plan and such person's date of election,
and (z) in no event shall the exercise price of any of such options be less
than the fair market value of the Common Stock on the date of grant.
4. Stock Subject to Plan.
---------------------
Subject to adjustment as provided in Section 14 below, the maximum number
of shares of Common Stock which may be issued and sold under the Plan is
[565,000] shares. If an option granted under the Plan shall expire or terminate
for any reason without having been exercised in full, the unpurchased shares
subject to such option shall again be available for subsequent option grants
under the Plan. If shares issued upon exercise of any option under the Plan are
tendered to the Company in payment of the exercise price of an option granted
under the Plan, such tendered shares shall again be available for subsequent
option grants under the Plan; provided, that in no event shall such shares be
made available for issuance to Reporting Persons.
5. Forms of Option Agreements.
--------------------------
As a condition to the grant of an option under the Plan, each recipient of
an option shall execute an option agreement in such form not inconsistent with
the Plan as may be approved by the Board of Directors. Such option agreements
may differ among recipients.
6. Purchase Price.
--------------
(a) General. The purchase price per share of stock deliverable upon the
-------
exercise of an option shall be determined pursuant to Section 3(b).
-3-
<PAGE>
(b) Payment of Purchase Price. Options granted under the Plan may provide
-------------------------
for the payment of the exercise price by delivery of cash or a check to the
order of the Company in an amount equal to the exercise price of such options,
or, to the extent provided in the applicable option agreement, (i) by delivery
to the Company of shares of Common Stock of the Company already owned by the
optionee having a fair market value equal in amount to the exercise price of the
options being exercised or (ii) by any other means (including, without
limitation, by delivery of a promissory note of the optionee payable on such
terms as are specified by the Board of Directors) which the Board of Directors
determines are consistent with the purpose of the Plan and with applicable laws
and regulations (including, without limitation, the provisions of Regulation T
promulgated by the Federal Reserve Board). The fair market value of any shares
of the Company's Common Stock or other non-cash consideration which may be
delivered upon exercise of an option shall be determined by the Board of
Directors.
7. Option Period.
-------------
Each option and all rights thereunder shall expire on such date as shall be
set forth in the applicable option agreement, except that options shall be
subject to earlier termination as provided in the Plan.
8. Exercise of Options.
-------------------
Each option granted under the Plan shall be exercisable either in full or
in installments at such time or times and during such period as shall be set
forth in the agreement evidencing such option, subject to the provisions of the
Plan.
9. Nontransferability of Options.
-----------------------------
Options shall not be assignable or transferable by the person to whom they
are granted, either voluntarily or by operation of law, except by will or the
laws of descent and distribution, and, during the life of the optionee, shall be
exercisable only by the optionee; provided, however, that options may be
transferred pursuant to a qualified domestic relations order (as defined in Rule
16b-3).
10. Effect of Termination of Employment or Other Relationship.
---------------------------------------------------------
Subject to the provisions of the Plan, the Board of Directors shall
determine the period of time during which an optionee may exercise an option
following (i) the termination of the optionee's relationship with the Company or
(ii) the death or disability of the optionee. Such periods shall be set forth
in the agreement evidencing such option.
-4-
<PAGE>
11. Additional Provisions.
---------------------
(a) Additional Option Provisions. The Board of Directors may, in its sole
discretion, include additional provisions in option agreements covering options
granted under the Plan, including without limitation restrictions on transfer,
repurchase rights, commitments to pay cash bonuses, to make, arrange for or
guaranty loans or to transfer other property to optionees upon exercise of
options, or such other provisions as shall be determined by the Board of
Directors; provided that such additional provisions shall not be inconsistent
-------- ----
with any other term or condition of the Plan.
(b) Acceleration, Extension, Etc. The Board of Directors may, in its sole
----------------------------
discretion, (i) accelerate the date or dates on which all or any particular
option or options granted under the Plan may be exercised or (ii) extend the
dates during which all, or any particular, option or options granted under the
Plan may be exercised.
12. General Restrictions.
--------------------
(a) Investment Representations. The Company may require any person to
--------------------------
whom an option is granted, as a condition of exercising such option, to give
written assurances in substance and form satisfactory to the Company to the
effect that such person is acquiring the Common Stock subject to the option for
his or her own account for investment and not with any present intention of
selling or otherwise distributing the same, and to such other effects as the
Company deems necessary or appropriate in order to comply with federal and
applicable state securities laws, or with covenants or representations made by
the Company in connection with any public offering of its Common Stock.
(b) Compliance With Securities Laws. Each option shall be subject to the
-------------------------------
requirement that if, at any time, counsel to the Company shall determine that
the listing, registration or qualification of the shares subject to such option
upon any securities exchange or under any state or federal law, or the consent
or approval of any governmental or regulatory body, or that the disclosure of
non-public information or the satisfaction of any other condition is necessary
as a condition of, or in connection with, the issuance or purchase of shares
thereunder, such option may not be exercised, in whole or in part, unless such
listing, registration, qualification, consent or approval, or satisfaction of
such condition shall have been effected or obtained on conditions acceptable to
the Board of Directors. Nothing herein shall be deemed to require the Company
to apply for or to obtain such listing, registration or qualification, or to
satisfy such condition.
-5-
<PAGE>
13. Rights as a Shareholder.
-----------------------
The holder of an option shall have no rights as a shareholder with respect
to any shares covered by the option (including, without limitation, any rights
to receive dividends or non-cash distributions with respect to such shares)
until the date of issue of a stock certificate to him or her for such shares. No
adjustment shall be made for dividends or other rights for which the record date
is prior to the date such stock certificate is issued.
14. Adjustment Provisions for Recapitalizations and Related Transactions.
--------------------------------------------------------------------
(a) General. If, through or as a result of any merger, consolidation, sale
-------
of all or substantially all of the assets of the Company, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split or other similar transaction, (i) the outstanding shares of Common Stock
are increased, decreased or exchanged for a different number or kind of shares
or other securities of the Company, or (ii) additional shares or new or
different shares or other securities of the Company or other non-cash assets are
distributed with respect to such shares of Common Stock or other securities, an
appropriate and proportionate adjustment may be made in (x) the maximum number
and kind of shares reserved for issuance under the Plan, (y) the number and kind
of shares or other securities subject to any then outstanding options under the
Plan, and (z) the price for each share subject to any then outstanding options
under the Plan, without changing the aggregate purchase price as to which such
options remain exercisable.
(b) Board Authority to Make Adjustments. Any adjustments under this
-----------------------------------
Section 14 will be made by the Board of Directors, whose determination as to
what adjustments, if any, will be made and the extent thereof will be final,
binding and conclusive. No fractional shares will be issued under the Plan on
account of any such adjustments.
15. Merger, Consolidation, Asset Sale, Liquidation, etc.
---------------------------------------------------
In the event of a consolidation or merger or sale of all or substantially
all of the assets of the Company in which outstanding shares of Common Stock are
exchanged for securities, cash or other property of any other corporation or
business entity or in the event of a liquidation of the Company, the Board of
Directors of the Company, or the board of directors of any corporation assuming
the obligations of the Company, may, in its discretion, take any one or more of
the following actions, as to outstanding options: (i) provide that such options
shall be assumed, or equivalent options shall be substituted, by the
-6-
<PAGE>
acquiring of succeeding corporation (or an affiliate thereof), (ii) upon written
notice to the optionees, provide that all unexercised options will terminate
immediately prior to the consummation of such transaction unless exercised by
the optionee within a specified period following the date of such notice, (iii)
in the event of a merger under the terms of which holders of the Common Stock of
the Company will receive upon consummation thereof a cash payment for each share
surrendered in the merger (the "Merger Price"), make or provide for a cash
payment to the optionees equal to the difference between (A) the Merger Price
times the number of shares of Common Stock subject to such outstanding options
(to the extent then exercisable at prices not in excess of the Merger Price) and
(B) the aggregate exercise price of all such outstanding options in exchange for
the termination of such options, and (iv) provide that all or any outstanding
options shall become exercisable in full immediately prior to such event.
16. Amendment of the Plan.
---------------------
(a) The Board of Directors may at any time, and from time to time, modify
or amend the Plan in any respect, except that if at any time the approval of the
shareholders of the Company is required under Rule 16b-3, the Board of Directors
may not effect such modification or amendment without such approval.
(b) The termination or any modification or amendment of the Plan shall
not, without the consent of an optionee, affect his or her rights under an
option previously granted to him or her. With the consent of the optionee
affected, the Board of Directors may amend outstanding option agreements in a
manner not inconsistent with the Plan. The Board of Directors shall have the
right to amend or modify the terms and provisions of the Plan and of any
outstanding option to the extent necessary to ensure the qualification of the
Plan under Rule 16b-3.
17. Withholding.
-----------
(a) The Company shall have the right to deduct from payments of any kind
otherwise due to the optionee any federal, state or local taxes of any kind
required by law to be withheld with respect to any shares issued upon exercise
of options under the Plan. Subject to the prior approval of the Company, which
may be withheld by the Company in its sole discretion, the optionee may elect to
satisfy such obligations, in whole or in part, (i) by causing the Company to
withhold shares of Common Stock otherwise issuable pursuant to the exercise of
an option or (ii) by delivering to the Company shares of Common Stock already
owned by the optionee. The shares so delivered or withheld shall have a fair
market value equal to such withholding obligation. The fair market value of the
shares used to satisfy such withholding obligation shall be determined by the
Company as of the date that
-7-
<PAGE>
the amount of tax to be withheld is to be determined. An optionee who has made
an election pursuant to this Section 17(a) may only satisfy his or her
withholding obligation with shares of Common Stock which are not subject to any
repurchase, forfeiture, unfulfilled vesting or other similar requirements.
(b) Notwithstanding the foregoing, in the case of a Reporting Person, no
election to use shares for the payment of withholding taxes shall be effective
unless made in compliance with any applicable requirements of Rule 16b-3 (unless
it is intended that the transaction not qualify for exemption under Rule 16b-3).
18. Cancellation and New Grant of Options, Etc.
------------------------------------------
The Board of Directors shall have the authority to effect, at any time
and from time to time, with the consent of the affected optionees, (i) the
cancellation of any or all outstanding options under the Plan and the grant in
substitution therefor of new options under the Plan covering the same or
different numbers of shares of Common Stock and having an option exercise price
per share which may be lower or higher than the exercise price per share of the
cancelled options or (ii) the amendment of the terms of any and all outstanding
options under the Plan to provide an option exercise price per share which is
higher or lower than the then-current exercise price per share of such
outstanding options.
19. Effective Date and Duration of the Plan.
---------------------------------------
(a) Effective Date. The Plan shall become effective when adopted by the
--------------
Board of Directors, but no option granted under the Plan shall become
exercisable unless and until the Plan shall have been approved by the Company's
shareholders. If such shareholder approval is not obtained within twelve months
after the date of the Board's adoption of the Plan, options previously granted
under the Plan shall not vest and shall terminate and no options shall be
granted thereafter. Amendments to the Plan not requiring shareholder approval
shall become effective when adopted by the Board of Directors; amendments
requiring shareholder approval (as provided in Section 16) shall become
effective when adopted by the Board of Directors, but no option granted after
the date of such amendment shall become exercisable (to the extent that such
amendment to the Plan was required to enable the Company to grant such option to
a particular person) unless and until such amendment shall have been approved by
the Company's shareholders. If such shareholder approval is not obtained within
twelve months of the Board's adoption of such amendment, any options granted on
or after the date of such amendment shall terminate to the extent that such
amendment was required to enable the Company to grant such option to a
particular optionee. Subject to this limitation,
-8-
<PAGE>
options may be granted under the Plan at any time after the effective date and
before the date fixed for termination of the Plan.
(b) Termination. Unless sooner terminated in accordance with Section
-----------
15, the Plan shall terminate upon the close of business on the day next
preceding the second anniversary of the date of its adoption by the Board of
Directors. Options outstanding on such date shall continue to have force and
effect in accordance with the provisions of the instruments evidencing such
options.
20. Provision for Foreign Participants.
----------------------------------
The Board of Directors may, without amending the Plan, modify awards or
options granted to participants who are foreign nationals or employed outside
the United States to recognize differences in laws, rules, regulations or
customs of such foreign jurisdictions with respect to tax, securities, currency,
employee benefit or other matters.
Adopted by the Board of Directors on
August 12, 1994.
Adopted by the Stockholders on
__________, 1994.
-9-
<PAGE>
CHANCELLOR CORPORATION
Amendment to 1994 Directors Stock Option Plan
---------------------------------------------
EFFECTIVE June 6, 1996, subject to requisite stockholder approval, the 1994
Directors' Stock Option Plan (the "Plan") of Chancellor Corporation, a
Massachusetts corporation (the "Company") is hereby amended as follows:
1. The word "$150,000" is hereby substituted for the word "$100,000" in
the sixth line of Section 3(a).
2. Section 3(b) is hereby amended to read in its entirety as follows:
(b) Grant of Options to Directors. On the date of adoption of the amendment
-----------------------------
to this Plan dated June 6, 1996, each Non-Employee Director who is serving
in such capacity on such date shall automatically receive, in substitution
for any previously granted options: (i) in the case of Thomas W. Killilea,
a grant of 50,000 fully vested options, exercisable immediately at an
exercise price of $.25 per share, a grant of 50,000 options, exercisable
commencing July 26, 1996, provided he is still serving as a director on
such date, at an exercise price of $.25 per share, and a grant of 50,000
options, exercisable commencing July 26, 1997, provided he is still serving
as a director on such date, at an exercise price of $.25 per share; (ii) in
the case of Bruce M. Dayton, a grant of 7,500 options, exercisable
immediately at an exercise price of $.25 per share, a grant of 7,500
options, exercisable commencing July 26, 1996, provided he is still serving
as a director on such date, at an exercise price of $.25 per share, and a
grant of 7,500 options, exercisable commencing on July 26, 1996, provided
he is still serving as a director on such date, at an exercise price of
$.25 per share; (iii) in the case of Richard D. Rizzo, a grant of 27,000
fully vested options, exercisable immediately at an exercise price of $.25
per share, a grant of 27,000 options, exercisable commencing January 11,
1997, provided he is still a director on such date, at an exercise price of
$.25 per share, and a grant of 27,000 options, exercisable commencing
January 11, 1998, provided he is still a director on such date, at an
exercise price of $.375 per share; (iv) in the case of Brian M. Adley, a
grant of 37,500 fully vested options, exercisable immediately at an
exercise price of $.25 per share, a grant of 37,500 options, exercisable
commencing July 26,
<PAGE>
1996, provided he is still serving as a director on such date, at an
exercise price of $.25 per share, and a grant of 37,500 options,
exercisable commencing July 26, 1996, provided he is still serving as a
director on such date, at an exercise price of $.25 per share, and (v) in
the case of any other non-employee directors elected prior to December 31,
2004, grants (subject to the availability of an adequate number of shares
of Common Stock reserved for issuance under the Plan) based on any of the
foregoing formulae, in the direction of the Option Compensation Committee;
provided, that in no event shall the exercise price of any of such options
under this clause (v) be less than the fair market value of the Company's
Common Stock on the date of grant. All options will be exercisable until
July 26, 2005.
3. The words "December 31, 2004" are hereby substituted for the words
"the day next preceding the second anniversary of the date of its adoption by
the Board of Directors" in the third and fourth lines of Section 19(b).
4. In all other respects the Plan, as heretofore in effect, is approved,
ratified and confirmed.
Adopted by Board of Directors on _______, 1996
Adopted by Stockholders on _______, 1996
-2-
