SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14A-6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant toss.240.14a-11(c) orss.240.14a-12
Netsmart Technologies, Inc.
(Name of Registrant as Specified In Its Charter)
N.A.
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or Item
22(a)(2) of Schedule 14A.
[ ] $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:
................................................................
2) Aggregate number of securities to which transaction applies:
................................................................
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
................................................................
4) Proposed maximum aggregate value of transaction:
................................................................
5) Total fee paid:
................................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: ....................................
2) Form, Schedule or Registration Statement No.: ...............
3) Filing Party: ..............................................
4) Date Filed: ................................................
1
Netsmart Technologies, Inc.
3500 Sunrise Highway
Great River, NY 11739
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
May 13, 2004
NOTICE IS HEREBY GIVEN that an Annual Meeting of Stockholders of
Netsmart Technologies, Inc., will be held at the offices of Netsmart, 3500
Sunrise Highway, Great River, NY 11739 on Thursday, May 13, 2004, at 10:00 A.M.
local time. At the meeting, you will be asked to vote on:
(1) The election of seven directors to the board of directors;
(2) The approval of an increase in the number of shares available under
Netsmart's 2001 Long-Term Incentive Plan;
(3) The approval of an amendment to the automatic grant provisions of
Netsmart's 2001 Long-Term Incentive Plan;
(4) The approval of the selection of Marcum & Kliegman LLP as Netsmart's
independent certified public accountants for the year ending December
31, 2004; and
(5) The transaction of such other and further business as may properly
come before the meeting.
The board of directors has fixed the close of business on March 16, 2004
as the record date for the determination of stockholders entitled to notice of
and to vote at the annual meeting. A list of stockholders eligible to vote at
the annual meeting will be available for inspection during normal business hours
for purposes germane to the meeting during the ten days prior to the meeting at
3500 Sunrise Highway, Great River, New York 11739.
The enclosed proxy statement contains information pertaining to the
matters to be voted on at the annual meeting. A copy of Netsmart's Annual Report
on Form 10-K for 2003 is being mailed with this proxy statement.
By order of the Board of Directors
Anthony F. Grisanti
Secretary
Great River, New York
March 30, 2004
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, YOU ARE URGED TO
COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD IN THE ACCOMPANYING
PRE-ADDRESSED POSTAGE-PAID ENVELOPE AS DESCRIBED ON THE ENCLOSED PROXY CARD.
YOUR PROXY, GIVEN THROUGH THE RETURN OF THE ENCLOSED PROXY CARD, MAY BE REVOKED
PRIOR TO ITS EXERCISE BY FILING WITH OUR CORPORATE SECRETARY PRIOR TO THE
MEETING A WRITTEN NOTICE OF REVOCATION OR A DULY EXECUTED PROXY BEARING A LATER
DATE, OR BY ATTENDING THE MEETING AND VOTING IN PERSON.
2
NETSMART TECHNOLOGIES, INC.
3500 Sunrise Highway
Great River, NY 11739
--------------------------------------
PROXY STATEMENT
--------------------------------------
Annual Meeting of Stockholders
May 13, 2004
--------------------------------------
The accompanying proxy and this proxy statement have been prepared by
our management for the board of directors. Your proxy is being solicited by the
board of directors for use at our 2004 annual meeting of stockholders to be held
at our executive offices, 3500 Sunrise Highway, Great River, NY 11739 on
Thursday, May 13, 2004 at 10:00 A.M. or at any adjournment thereof. This proxy
statement contains information about the matters to be considered at the meeting
or any adjournments or postponements of the meeting and is first being mailed to
stockholders, together with the related proxy and a copy of our annual report on
Form 10-K for the year ended December 31, 2003, on or about March 30, 2004.
ABOUT THE MEETING
What is being considered at the meeting?
You will be voting for:
(1) the election of seven directors for a term of 1 year;
(2) the approval of an increase in the number of shares available under our 2001
Long-Term Incentive Plan;
(3) the approval of an amendment to the automatic grant provisions of our 2001
Long-Term Incentive Plan;
(4) the approval of the selection of Marcum & Kliegman LLP as our independent
certified public accountants for the year ending December 31, 2004; and
(5) the transaction of such other and further business as may properly come
before the meeting.
In addition, our management will report on our performance during
fiscal 2003 and respond to your questions.
Who is entitled to vote at the meeting?
You may vote if you owned stock as of the close of business on March
16, 2004. Each share of stock is entitled to one vote.
How do I vote?
You can vote in two ways:
(1) By attending the meeting; or
3
(2) By completing, signing and returning the enclosed proxy card.
Can I change my mind after I vote?
Yes, you may change your mind at any time before the polls close at the
meeting. You can do this by (1) signing another proxy with a later date and
returning it to us prior to the meeting, or (2) voting again at the meeting.
What if I return my proxy card but do not include voting instructions?
Proxies that are signed and returned but do not include voting
instructions will be voted FOR the election of the nominee directors, the
increase in the number of shares under our 2001 Long-Term Incentive Plan and
the other proposed amendments to our 2001 Long-Term Incentive Plan.
What does it mean if I receive more than one proxy card?
It means that you have multiple accounts with brokers and/or our
transfer agent. Please vote all of these shares. We recommend that you contact
your broker and/or our transfer agent to consolidate as many accounts as
possible under the same name and address. Our transfer agent is American Stock
Transfer & Trust Company, 718-921-8000.
Will my shares be voted if I do not provide my proxy?
Yes, if they are held in a brokerage account. Your shares may be voted
under certain circumstances if they are held in the name of the brokerage firm.
Brokerage firms generally have the authority to vote customers unvoted shares,
which are called "broker non-votes," on certain routine matters. Shares
represented by broker non-votes will be counted as voted by the brokerage firm
in the election of directors. When a brokerage firm votes its customer's
unvoted shares, these shares are also counted for purposes of establishing a
quorum.
If you hold your shares directly in your own name, they will not be
voted if you do not provide a proxy.
How many votes must be present to hold the meeting?
Your shares are counted as present at the meeting if you attend the
meeting and vote in person or if you properly return a proxy by mail. In order
for us to conduct our meeting, a majority of our outstanding shares as of March
16, 2004, must be present at the meeting. This is referred to as a quorum. On
March 16, 2004, we had 5,335,200 shares issued and outstanding, excluding
treasury shares.
What vote is required to elect directors?
Directors are elected by a plurality of the votes cast. Abstentions
will have no effect on the voting outcome with respect to the election of
directors.
What vote is required to approve the increase in the number of shares under our
2001 Long-Term Incentive Plan?
The proposal to approve the amendment to our 2001 Long-Term Incentive
Plan requires the approval of a majority of the shares of common stock present
and voting, provided that a quorum is present.
4
What vote is required to approve the amendments to our 2001 Long-Term Incentive
Plan?
The proposal to approve the amendments to our 2001 Long-Term Incentive
Plan requires the approval of a majority of the shares of common stock present
and voting, provided that a quorum is present.
What vote is required to approve the selection of our independent certified
public accountants?
The proposal to approve the selection of Marcum & Kliegman LLP as our
independent accountant requires the approval of a majority of the shares of
common stock present and voting, provided that a quorum is present.
PROPOSAL 1 -
ELECTION OF DIRECTORS
Our directors are elected annually by the stockholders to serve until
the next annual meeting of stockholders and until their respective successors
are duly elected. Our bylaws provide that the number of directors comprising the
whole board shall be determined from time to time by resolution of the board of
directors. Our board of directors has determined that it is advisable, in light
of recently-adopted Nasdaq governance rules, to establish the size of the board
for the ensuing year at seven directors and is therefore recommending that seven
of our incumbent directors be re-elected. If any nominee becomes unavailable for
any reason, a situation which is not anticipated, a substitute nominee may be
proposed by the board of directors, and any shares represented by proxy will be
voted for any substitute nominee, unless the board reduces the number of
directors.
The board of directors is presently comprised of eight individuals,
Messrs. James L. Conway, Edward D. Bright, John F. Phillips, Gerald O. Koop,
Joseph G. Sicinski, Francis J. Calcagno, John S.T. Gallagher and Dr. Yacov
Shamash. It has been determined that Mr. Bright will not seek re-election.
The following table sets forth certain information concerning the
nominees for director:
Name Age Position with the Company Director Since
James L. Conway 56 Chief Executive Officer and Director 1996
Gerald O. Koop 65 President and Director 1998
John F. Phillips 66 Vice President and Director 1994
Joseph G. Sicinski(1) 71 Director 1998
Francis J. Calcagno(1,2) 54 Director 2001
John S.T. Gallagher(1,2) 73 Director 2002
Dr. Yacov Shamash(2) 54 Director 2004
---------------
(1) Member of the Audit and Compensation Committees.
(2) Member of the Nominating & Governance Committee.
5
Director Biographies
Mr. James L. Conway has been our chief executive officer since April
1998, a director since January 1996 and president from January 1996 until
January 2001. From 1993 until April 1998, he was president of a Long Island
based manufacturer of specialty vending equipment for postal, telecommunication
and other industries. He was previously vice president, treasurer and director
of ITT Credit Corporation. Mr. Conway was recently elected to the board of
LISTnet which is an organization with the objective of promoting Long Island as
one of the national centers of excellence for software and technology solutions.
He also serves and is a member of the CEO Roundtable for Long Island.
Mr. Gerald O. Koop has been one of our directors since June 1998 and
president since January 2001. He has held management positions with Creative
Socio-Medics for more than the past five years, most recently as its chief
executive officer, a position he has held since 1996.
Mr. John F. Phillips has been one of our directors and president of
Creative Socio-Medics since June 1994, when Creative Socio-Medics was acquired,
and our vice president since June 1994.
Mr. Joseph G. Sicinski has been one of our directors since June 1998. He
was president and director of Trans Global Services, Inc., a technical staffing
company, from September 1992 until April 1998. From April 1998 until September
2002 he was also chief executive officer of Trans Global. In September 2003 he
retired from Trans Global and co-founded Novus Management Services, Inc, a
company providing services related to the insurance industry where he is also a
board member. In February 2004 he co-founded BDS Strategic Solutions, Inc., a
company providing permanent and temporary staffing with solution services and
programs related to human resource issues. He is chairman of the board of
directors of BDS.
Mr. Francis J. Calcagno has been one of our directors since September
2001. He is a senior managing director of Dominick & Dominick LLC, a position he
has held since 1997. From 1993 until 1997, he was a managing director of
Deloitte and Touche, LLP.
Mr. John S.T. Gallagher has been one of our directors since March 2002.
He is deputy county executive for health and human services in Nassau County,
New York. He has been a senior executive officer of North Shore University
Hospital and North Shore - Long Island Jewish Health System since 1982, having
served as executive vice president of North Shore from 1982 until 1992,
president from 1992 until 1997 and chief executive officer of the combined
hospital system from 1997 until January 2002. In January 2002, he became
co-chairman of the North Shore - Long Island Jewish Heath System Foundation. Mr.
Gallagher is also a director of Perot Systems Corporation, a worldwide provider
of information technology services.
Dr. Yacov Shamash has been one of our directors since January 2004. Dr.
Shamash is Vice President for Economic Development and the Dean of the College
of Engineering and Applied Sciences at Stony Brook University. Prior to joining
SUNY Stony Brook in 1992, Dr. Shamash served as the Director of the School of
Electrical Engineering and Computer Science at Washington State University. He
has also held faculty positions at Florida Atlantic University, the University
of Pennsylvania and Tel Aviv University. He received his undergraduate and
graduate degrees from Imperial College of Science and Technology in London,
England. Dr. Shamash has been a member of the Board of Directors of KeyTronic
Corporation, a contract manufacturer, since 1989, of American Medical Alert
Corporation, a healthcare service provider, since 2001 and of Manchester
Technologies, Inc., a hardware and software technology provider, since 2003.
Our directors are elected for a term of one year.
None of our officers and directors are related.
6
Our certificate of incorporation includes certain provisions, permitted
under Delaware law, which provide that our directors shall not be personally
liable to us or our stockholders for monetary damages for breach of fiduciary
duty as a director except for liability (i) for any breach of the director's
duty of loyalty to us or our stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for any transaction from which the director derived an improper
personal benefit, or (iv) for certain conduct prohibited by law. The Certificate
of Incorporation also contains broad indemnification provisions. These
provisions do not affect the liability of any director under Federal or
applicable state securities laws.
Vote Required
Provided that a quorum is present at the annual meeting, the seven
directors receiving the most votes are elected as directors for a term of one
year and until their successors are elected and qualified.
The board of directors recommends a vote FOR the nominees listed above.
Directors' Compensation
We pay each of our non-employee directors an annual fee of $20,000 and
we pay the chairman of our Audit Committee and Compensation Committee an
additional $12,500 per annum in respect of his service on each such committee.
Board of Directors and Committee Meetings
Our company's business, property and affairs are managed by or under the
direction of the board of directors. Members of the board are kept informed of
our company's business through discussion with the chief executive officer and
other officers, by reviewing materials provided to them and by participating at
meetings of the board and its committees.
We currently have three committees of the board of directors - the Audit
Committee, the Compensation Committee and the Nominating & Governance Committee.
Excluding actions by unanimous written consent, for the fiscal year
ended December 31, 2003, there were 8 meetings of the board of directors, 3
meetings of the Compensation Committee and 4 meetings of the Audit Committee.
Each director attended at least 75% of the meetings of the board and any
committee of which they are members. Since our Nominating & Governance Committee
was formed in February 2004, there were no meetings of that committee during our
fiscal year ended December 31, 2003.
The Audit Committee consists of three independent directors, Mr.
Gallagher, who is chairman of the committee, and Messrs. Calcagno and Sicinski.
Our Audit Committee is involved in discussions with our independent auditors
with respect to the scope and results of our year-end audit, our quarterly
results of operations, our internal accounting controls and the professional
services furnished by the independent auditors. See "Audit Committee Report."
Our board of directors has adopted a written charter for the Audit Committee
which the Audit Committee reviews and reassesses for adequacy on an annual
basis. A copy of the Audit Committee's current charter is attached to this proxy
statement as Appendix A. The charter can also be found on our website at
www.csmcorp.com.
The Compensation Committee, which is composed of Mr. Gallagher, who is a
chairman of the committee, and Messrs. Calcagno and Sicinski, services as the
stock option committee for our stock option plans and the employee stock
purchase plan, and it reviews and approves any employment agreements with
management and changes in compensation for our executive officers. Each of
Messrs. Gallagher, Calcagno and Sicinski is independent, as that term is defined
7
in the listing standards of the Nasdaq Stock Market. See "Compensation/Stock
Option Committee Report on Executive Compensation." The Compensation Committee
charter can be found on our website at www.csmcorp.com.
In February 2004, we formed our Nominating & Governance Committee. The
committee's can be found on our website at www.csmcorp.com. The Nominating &
Governance Committee is primarily responsible for reviewing our corporate
governance principles and independence standards; overseeing the annual
evaluation of our board and its committees; discharging the board's
responsibilities related to compensation of directors; identifying and
evaluating individuals for board and committee membership and chairs; making
recommendations to the board concerning the selection of director nominees and
making recommendations as to the size and composition of the board and its
committees. It will consider director nominee recommendations by stockholders
provided that the names of such nominees, accompanied by relevant biographical
information, are properly submitted in writing to our Secretary in accordance
with the procedures described below. The members of the Nominating & Governance
Committee are Dr. Shamash, who is chairman of the committee, and Messrs.
Gallagher and Calcagno, each of whom is independent, as that term is defined by
the listing standards of the Nasdaq Stock Market.
Our board has adopted a Code of Conduct that applies to all of our
employees, officers and directors and a code of ethics that applies to our
senior financial officers. You can find links to these materials on our website
at: www.csmcorp.com.
Nominees for Director
Any stockholder who wants to nominate a candidate for election to the
Board must deliver timely notice to our Secretary at our principal executive
offices. In order to be timely, the notice must be delivered
* in the case of an annual meeting, not less than 120 days prior to
the anniversary date of the immediately preceding annual meeting of
stockholders, although if we did not hold an annual meeting or the
annual meeting is called for a date that is not within 30 days of
the anniversary date of the prior year's annual meeting, the notice
must be received a reasonable time before we begin to print and mail
our proxy materials; and
* in the case of a special meeting of stockholders called for the
purpose of electing directors, the notice must be received a
reasonable time before we begin to print and mail our proxy
materials.
The stockholder's notice to the Secretary must set forth (1) as to each
person whom the stockholder proposes to nominate for election as a director (a)
his name, age, business address and residence address, (b) his principal
occupation and employment, (c) the number of shares of common stock of Netsmart
which are owned beneficially or of record by him and (d) any other information
relating to the nominee that would be required to be disclosed in a proxy
statement or other filings required to be made in connection with solicitations
of proxies for election of directors pursuant to Section 14 of the Exchange Act,
and the rules and regulations promulgated thereunder; and (2) as to the
stockholder giving the notice (a) his name and record address, (b) the number of
shares of common stock of the corporation which are owned beneficially or of
record by him, (c) a description of all arrangements or understandings between
the stockholder and each proposed nominee and any other person or persons
(including their names) pursuant to which the nomination(s) are to be made by
the stockholder, (d) a representation by him that he is a holder of record of
stock of Netsmart entitled to vote at such meeting and that he intends to appear
in person or by proxy at the meeting to nominate the person or persons named in
his notice and (e) any other information relating to the stockholder that would
be required to be disclosed in a proxy statement or other filings required to be
made in connection with solicitations of proxies for election of directors
pursuant to Section 14 of the Exchange Act and the rules and regulations
promulgated thereunder. The notice delivered by a stockholder must be
accompanied by a written consent of each proposed nominee to being named as a
nominee and to serve as a director if elected. The stockholder must be a
8
stockholder of record on the date on which he gives the notice described above
and on the record date for the determination of stockholders entitled to vote at
the meeting.
PROPOSAL 2 -
APPROVAL OF AN INCREASE IN THE NUMBER OF SHARES
AVAILABLE UNDER THE 2001 LONG-TERM INCENTIVE PLAN
The board of directors believes that in order to attract and retain the
services of executive and other key employees, it is necessary for us to have
the ability and flexibility to provide a compensation package which compares
favorably with those offered by other companies. Accordingly, in December 4,
2001, the board of directors adopted, and on March 2, 2002, the stockholders
approved, the 2001 Long-Term Incentive Plan, covering 180,000 shares of common
stock. On October 11, 2002, the board of directors adopted, subject to
stockholder approval, an amendment to the 2001 Long-Term Incentive Plan to
increase the number of shares subject to the plan from 180,000 shares to 550,000
shares, which was approved by our stockholders in January 2003. There are
currently 1,500 shares available for grant. Following the automatic grant of
shares to our non-employee directors on April 1, 2004 pursuant to the terms of
the 2001 Long-Term Incentive Plan, no shares will be available for grant. In
January 2004, our board of directors again approved an increase of 400,000
shares in the number of shares subject to the plan - to a total of 950,000
shares, subject to stockholder approval.
Although we presently have two other stock option plans, the 1998 and
1999 Long-Term Incentive Plans, as of March 12, 2004, there are presently only
4,250 shares available for grant under those plans. As of that date, we had
granted options or other equity-based incentives for a total of 1,090,000 shares
of common stock under these prior plans and had issued a total of 1,018,750
shares of common stock under these plans, 62,000 shares of common stock were
subject to outstanding options and 5,000 options had expired. However, any
shares which are subject to outstanding options which expire unexercised may be
subject to awards under the plans.
Our stock option plans are administered by a committee of at least two
non-employee directors appointed by the board. The compensation committee serves
as the committee under all of our stock option plans. Any member or alternate
member of the committee is not eligible to receive options or stock under these
plans except for the annual option grant and certain options grants which were
approved by the stockholders in connection with the approval of the 1998 plan.
The committee has broad discretion in determining the persons to whom stock
options or other awards are to be granted and the terms and conditions of the
award, including the type of award, the exercise price and term and restrictions
and forfeiture conditions. If no committee is appointed, the functions of the
committee are performed by the board of directors. The compensation committee
currently consists of Messrs. Francis J. Calcagno, John S.T. Gallagher and
Joseph G. Sicinski.
Set forth below is a summary of the 2001 plan, as amended, but this
summary is qualified in its entirety by reference to the full text of the 2001
plan, a copy of which is included as Appendix A to this proxy statement. The
summary does not take into account the proposed amendments to the plan described
under proposal 3, below.
Summary
The plan, which expires in December 3, 2011 unless terminated earlier by
the board of directors, gives the board of directors broad authority to modify
the plan, and, in particular, to eliminate any provisions which are not required
9
in order to meet the requirements of Rule 16b-3 under the Securities Exchange
Act of 1934, as amended.
After giving effect to the proposed increase in the number of shares
available under the 2001 plan, we may issue a maximum of 950,000 shares of
common stock under the amended 2001 plan, of which options to purchase 550,000
shares of common stock have been granted. If an option under the 2001 plan
expires or terminates without being exercised in full or if shares awarded under
the plan are forfeited or otherwise terminate without a payment being made to
the participant in the form of stock, such shares will again be available for
future issuance under the plan. The plan imposes no limit on the number of
officers and other key employees to whom awards may be made.
We may make awards under the 2001 plan to key employees, including
officers and directors of Netsmart and our subsidiaries, and consultants and
others who perform services for Netsmart and our subsidiaries, except that
directors who are not employed by us or our subsidiaries or are not otherwise
engaged by us are not eligible for options under the 2001 plan, except that the
2001 plan provides for the automatic grant to each non-employee directors of a
non-qualified option to purchase 5,000 shares of common stock on April 1st of
each year, commencing April 1, 2002. In the event that the stockholders also
approve the proposed amendment to the plan to increase the number of shares
granted to non-employee directors described in Proposal 3, below, the number of
shares underlying the options granted to the outside directors will be increased
to 6,000 and the number of shares underlying the options granted to the chairman
of the audit committee and the compensation committee will be increased to
7,500. If any non-employee director is first elected to the board after April
1st in any calendar year, the director will receive the automatic grant on an
option to purchase 5,000 shares of common stock on the date of his or her
election, which will be increased to 6,000 shares in the event that proposal 3
is approved. The options to non-employee directors pursuant to the annual grant
or the grant to newly-elected non-employee directors have a term of five years
from the date of grant and become exercisable as to all of the shares of common
stock subject to the option six months from the date of grant, except that they
become immediately exercisable if a change of control, as defined in the 2001
plan, should occur and such options terminate seven months after termination of
service if such termination is other than as a result of his or her death or
disability.
The committee has the authority to grant the following types of awards
under the 2001 plan: incentive or non-qualified stock options; stock
appreciation rights; restricted stock; deferred stock; stock purchase rights
and/or other stock-based awards. All options granted under the 2001 plan are
exercisable at the fair market value of our common stock on the date of grant.
Outstanding options cannot be repriced without stockholder approval. The 2001
plan is designed to provide us with broad discretion to grant incentive
stock-based rights.
Federal Income Tax Consequences
The following is a brief summary of the Federal income tax consequences
as of the date hereof with respect to awards under the 2001 plan for
participants who are both citizens and residents of the United States. This
description of the Federal income tax consequences is based upon law and
Treasury interpretations in effect on the date of this prospectus (including
proposed and temporary regulations which may be changed when finalized), and it
should be understood that this summary is not exhaustive, that the law may
change and further that special rules may apply with respect to situations not
specifically discussed herein, including federal employment taxes, foreign,
state and local taxes and estate or inheritance taxes. As such, participants are
urged to consult with their own qualified tax advisors. The 2001 plan is not
qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended.
10
Options or Stock Purchase Rights
Non-Qualified Options
---------------------
No taxable income will be realized by the participant upon the grant of
a non-qualified option.
Exercise with Cash
------------------
On exercise, the excess of the fair market value of the stock at the
time of exercise over the option price of such stock will be compensation and
(i) will be taxable at ordinary income tax rates in the year of exercise, (ii)
will be subject to withholding for Federal income tax purposes and (iii)
generally will be an allowable income tax deduction to us. The participant's tax
basis for stock acquired upon exercise of a non-qualified option will be equal
to the option price paid for the stock, plus any amounts included in income as
compensation.
Exercise with Common Stock
--------------------------
If the participant pays the exercise price of an option in whole or in
part with previously-owned shares of common stock, the participant's tax basis
and holding period for the newly-acquired shares is determined as follows: As to
a number of newly-acquired shares equal to the number of previously-owned shares
used by the participant to pay the exercise price, no gain or loss will be
recognized by the participant on the date of exercise and the participant's tax
basis and holding period for the previously-owned shares will carry over to the
newly-acquired shares on a share-for-share basis, thereby deferring any gain
inherent in the previously-owned shares. As to each remaining newly acquired
share, the participant's tax basis will equal the fair market value of the share
on the date of exercise and the participant's holding period will begin on the
day after the exercise date. The participant's compensation income and our
deduction will not be affected by whether the exercise price is paid in cash or
in shares of common stock. Special rules, discussed below under "Incentive Stock
Options - Disposition of Incentive Option Shares," will apply if a participant
surrenders previously-owned shares acquired upon the exercise of an incentive
option that have not satisfied certain holding period requirements in payment of
any or all of the exercise price of a non-qualified option.
Disposition of Option Shares
----------------------------
When a sale of the acquired shares occurs, a participant will recognize
capital gain or loss equal to the difference between the sales proceeds and the
tax basis of the shares. Such gain or loss will be treated as capital gain or
loss if the shares are capital assets. The capital gain or loss will be
long-term capital gain or loss treatment if the shares have been held for more
than 12 months. There will be no tax consequences to us in connection with a
sale of shares acquired under an option.
Incentive Stock Options
-----------------------
The grant of an ISO will not result in any federal income tax to a
participant.
Exercise with Cash
------------------
Upon the exercise of an incentive option, a participant normally will
not recognize any income for federal income tax purposes. However, the excess of
the fair market value of the shares transferred upon the exercise over the
exercise price of such shares (the "spread") generally will constitute an
11
adjustment to income for purposes of calculating the alternative minimum tax of
the participant for the year in which the option is exercised and as a result of
the exercise a participant's federal income tax liability may be increased.
Exercise with Common Stock
--------------------------
If the holder of an incentive stock option pays the exercise price, in
full or in part, with shares of previously acquired common stock, the exchange
should not affect the incentive stock option tax treatment of the exercise. No
gain or loss should be recognized on the exchange and the shares received by the
participant, equal in number to the previously acquired shares exchanged
therefor, will have the same basis and holding period as the previously acquired
shares. The participant will not, however, be able to utilize the old holding
period for the purpose of satisfying the incentive stock option holding period
requirements described below. Shares received in excess of the number of
previously acquired shares will have a basis of zero and a holding period, which
commences as of the date the common stock is issued to the participant upon
exercise of the incentive option. If an exercise is effected using shares
previously acquired through the exercise of an incentive stock option, the
exchange of the previously acquired shares will be considered a disposition of
such shares for the purpose of determining whether a Disqualifying Disposition
has occurred.
Disposition of Incentive Option Shares
--------------------------------------
If the incentive option holder disposes of the stock acquired upon the
exercise of an ISO (including the transfer of acquired stock in payment of the
exercise price of another incentive stock option) either within two years from
the date of grant or within one year from the date of exercise, the option
holder will recognize ordinary income at the time of such disqualifying
disposition to the extent of the difference between the exercise price and the
lesser of the fair market value of the stock on the date the incentive option is
exercised or the amount realized on such disqualifying disposition. Any
remaining gain or loss is treated as a short-term or long-term capital gain or
loss, depending on how long the shares were held prior to the disqualifying
disposition. In the event of such disqualifying disposition, the incentive stock
option alternative minimum tax treatment described above under " -- Exercise
with Cash," may not apply (although, where the disqualifying disposition occurs
subsequent to the year the incentive stock option is exercised, it may be
necessary for the participant to amend his return to eliminate the tax
preference item previously reported).
Our Deduction
-------------
We are not entitled to a tax deduction upon either exercise of an
incentive option or disposition of stock acquired pursuant to such an exercise,
except to the extent that the option holder recognized ordinary income in a
disqualifying disposition.
Stock Appreciation Rights and Phantom Stock
-------------------------------------------
The grant of stock appreciation rights or phantom stock ordinarily will
not result in any federal income tax to a participant. Upon the exercise of a
stock appreciation or phantom stock right, a participant will recognize ordinary
income in an amount equal to the cash or the fair market value of the stock, if
any, received by the participant. At such time, we will be entitled to a tax
deduction for the amount of income recognized by the participant.
Stock Grants
------------
A participant who receives a stock grant under the 2001 plan generally
will be taxed at ordinary income rates on the fair market value of shares when
they vest, if subject to vesting or other restrictions, or, otherwise, when
received.
12
However, a participant who, within 30 days after receiving such shares,
makes an election under Section 83(b) of the Internal Revenue Code of 1986, will
recognize ordinary income on the date of issuance of the stock equal to the fair
market value of the shares on that date. If a Section 83(b) election is made,
the holding period for the shares will commence on the day after the shares are
received and no additional taxable income will be recognized by the participant
at the time the shares vest. However, if shares subject to a Section 83(b)
election are forfeited, no tax deduction is allowable to the participant for the
forfeited shares. Taxes are required to be withheld from the participant at the
time and on the amount of ordinary income recognized by the participant. We will
be entitled to a deduction at the same time and in the same amount as the
participant recognizes income.
Dividends paid on shares still subject to restrictions are compensation
income to the participant and compensation expense to us. If a Section 83(b)
election is timely made by a participant, dividends paid on restricted shares
will be dividend income to the participant.
Option Grants During 2003
During 2003, we granted options to purchase 370,000 shares of common
stock under the 2001 plan, 161,500 of which were granted to our executive
officers. See " MANAGEMENT -- Stock Option Grants in Last Fiscal Year." In
addition, options to purchase 25,000 shares of common stock at a price of $4.37
per share were granted to our management directors under the 2001 plan.
Vote Required
The proposal to approve an increase in the number of shares available
under 2001 plan requires the approval of a majority of the shares of common
stock present and voting, provided that a quorum is present.
The board of directors recommends a vote FOR the proposal.
13
PROPOSAL 3 -
APPROVAL OF AMENDMENTS TO THE 2001 LONG-TERM INCENTIVE PLAN
Our 2001 Long-Term Incentive Plan provides for the automatic grant to
each non-employee director of a non-qualified option to purchase 5,000 shares of
common stock on April 1st of each year, commencing April 1, 2002. Subject to
approval of the increase in the number of shares available under the 2001 Plan
in accordance with proposal 2, stockholders are requested in this proposal 3 to
approve an amendment to the 2001 plan to increase the number of shares
underlying options granted automatically to each non-employee director from
5,000 shares to 6,000 shares and to increase the number of shares underlying
options granted to the non-employee director serving as Chairman of each of the
Audit Committee and Compensation Committee from 5,000 shares to 7,500 shares;
provided, that if one person serves as Chairman of both committees he would
receive options to purchase a total of 7,500 shares.
Since the number of shares under the 2001 plan is insufficient to permit
the automatic grant of options to purchase 5,000 shares to each of the
non-employee directors on April 1, 2004, in the event that stockholders approve
proposal 2 and this proposal 3, on the date stockholders approve the proposals
each non-employee director will be granted options to purchase 5,625 shares and
the non-employee director serving as Chairman of the Audit and Compensation
Committee will be granted options to purchase 7,125 shares. The number of
options to be granted to the non-employee directors on receipt of stockholder
approval was determined by subtracting the options to purchase 375 shares to be
granted automatically on April 1, 2004 pursuant to the current terms of the 2001
Long-Term Incentive Plan from the number of shares to be granted following
approval of this proposal 3
A summary of the 2001 plan is set forth under proposal 2, above.
The board of directors believes that it is increasingly difficult to
attract and retain qualified individuals to serve as directors of public
companies. In addition, Nasdaq's newly-adopted governance requirements require
that a majority of the board of directors be "independent" as defined by Nasdaq.
The board of directors believes that we must provide our independent directors
with compensation which compares favorably to the compensation provided by other
companies. The board believes that the increase in the number of options
automatically granted to our non-employee directors will enable us to provide
our non-employee directors with a favorable compensation package.
Vote Required
The proposal to approve the amendment to the 2001 plan requires the
approval of a majority of the shares of common stock present and voting,
provided that a quorum is present.
The board of directors recommends a vote FOR the proposal.
14
PROPOSAL 4 -
SELECTION OF INDEPENDENT AUDITORS
It is proposed that the stockholders approve the selection of Marcum &
Kliegman LLP as our independent public accountant for the year ending December
31, 2004. The Audit Committee has approved the selection of Marcum & Kliegman
LLP as our independent public accountants. However, in the event approval of the
proposal is not obtained, the selection of the independent auditors will be
reconsidered by the Audit Committee.
At no time since its engagement has Marcum & Kliegman LLP had any direct
or indirect financial interest in or any connection with us or any of our
subsidiaries other than as independent accountant.
Our financial statements for the years ended December 31, 2001 and 2000
were audited by Richard A. Eisner & Company, LLP, whose report on such financial
statements did not include any qualification, disclaimer, modification or
explanatory paragraph. There were no disagreements with Richard A. Eisner &
Company, LLP during the years ended December 31, 2001 or 2000 or during the
period subsequent to December 31, 2001 on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure.
On May 7, 2002, the Audit Committee of the board of directors
recommended, and the board of directors approved, the dismissal of the Richard
A. Eisner & Company, LLP, as our independent public accountants and the
selection of Marcum & Kliegman LLP to serve as our independent public
accountant.
Vote Required
The proposal to approve the selection of Marcum & Kliegman LLP as our
independent accountant requires the approval of a majority of the shares of
common stock present and voting, provided that a quorum is present.
The board of directors recommends a vote FOR the proposal.
15
BENEFICIAL OWNERSHIP OF SECURITIES AND
SECURITY HOLDINGS OF MANAGEMENT
Directors' Compensation
The following table and discussion provides information as to the shares
of common stock beneficially owned on March 16, 2004 by:
* each director;
* each officer named in the summary compensation table;
* each person owning of record or known by us, based solely on
information filed with the Securities and Exchange Commission, to
own beneficially at least 5% of our common stock; and
* all officers and directors as a group.
Percent of
Number of Shares Outstanding
Name Beneficially Owned (1) Common Stock
---- ---------------------- ------------
Officers and Directors
----------------------
John F. Phillips 138,950 2.6%
Edward D. Bright 129,877 2.4%
Gerald O. Koop 143,576 2.7%
James L. Conway 109,998 2.1%
Anthony F. Grisanti 132,315 2.5%
Joseph G. Sicinski 25,000 *
Francis J. Calcagno 10,000 *
John S.T. Gallagher 15,000 *
Dr. Yacov Shamash 0 *
All directors and officers as a group 704,716 12.8%
(nine individuals)
5% Stockholders
---------------
Eagle Asset Management, Inc. 457,245 8.6%
880 Carillon Parkway
St. Petersburgh, Florida 33716
----------
* Less than 1%.
(1) Unless otherwise indicated, each person has the sole voting and sole
investment power and direct beneficial ownership of the shares. Each
person is deemed to beneficially own shares of common stock issuable
upon exercise of options which are exercisable on or within 60 days
after the date as of which the information is provided.
16
The number of shares owned by our directors and officers shown in the
table includes shares of common stock which are issuable upon
exercise of options that are exercisable at March 16, 2004 or will
become exercisable within 60 days after that date. Set forth below is
the number of shares issuable upon exercise of those options for each
of our directors and the officers named in the Summary Compensation
Table.
Name Number
---- ------
John F. Phillips 26,250
Edward D. Bright 5,000
Gerald O. Koop 24,750
James L. Conway 24,750
Anthony F. Grisanti 62,250
Joseph G. Sicinski 5,000
Francis J. Calcagno 10,000
John S.T. Gallagher 10,000
Dr. Shamash 0
All officers and directors as a group 168,000
EXECUTIVE OFFICERS
Set forth below is a list of, and information concerning, our executive
officers:
Name Position
---- --------
James L. Conway Chief executive officer
Gerald O. Koop President
Anthony F. Grisanti Chief financial officer, treasurer and
secretary
John F. Phillips President of Creative Socio-Medics and vice
president of Netsmart
Mr. Anthony F. Grisanti has been our treasurer since June 1994,
secretary since February 1995 and chief financial officer since January 1996.
For information regarding Messrs. Conway, Koop and Phillips, please see
"Proposal 1 - Election of Directors -Director Biographies".
17
EXECUTIVE COMPENSATION
Set forth below is information with respect to compensation paid or
accrued by us for the three years ended December 31, 2003, 2002, and 2001 to our
chief executive officer and to each of our other executive officers whose salary
and bonus for 2003 exceeded $100,000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Awards
------
Number of Shares
Annual Compensation Underlying Options
------------------- ------------------
Other Annual
Name and Principal Position Year Salary Bonus Compensation(1)
--------------------------- ---- ------ ----- ---------------
James L. Conway, 2003 $ 207,814 $ 188,000 - 49,500
Chief Executive Officer 2002 193,151 120,000 - 20,000
2001 182,239 61,261 - -
Gerald O. Koop, 2003 $ 189,880 $ 206,539(2) - 49,500
President 2002 170,807 170,408(2) - 20,000
2001 160,959 97,874(2) - -
John F. Phillips, 2003 $ 187,772 $ 84,000 - 35,000
Vice President 2002 170,807 60,000 - 15,000
2001 160,959 41,041 - -
Anthony F. Grisanti, 2003 $ 162,343 $ 144,000 - 27,500
Chief Financial Officer 2002 148,463 106,000 - 16,000
2001 139,679 65,821 - -
(1) Other Annual Compensation excludes certain perquisites and other
non-cash benefits provided by us since such amounts do not exceed the
lesser $50,000 of 10% of the total annual compensation disclosed in this
table for the respective officer.
(2) The bonuses for Mr. Koop include accrued commissions of $135,539 for
2003 and $165,408 for 2002. The 2003 commissions will be paid in
installments through 2004 and the 2002 commissions were paid in
installments through 2003.
Employment Agreements
In January 2001, we entered into employment agreements with Messrs.
James L. Conway, John F. Phillips, Gerald O. Koop and Anthony F. Grisanti for
a term of three years for Messrs. Conway and Grisanti and two years for
Messrs. Koop and Phillips. During 2003 we extended the term of the
employment agreements by one year for Messrs. Conway, Koop & Grisanti. We
believe that these officers are vital to our business. Each of the officers
18
has the right to extend the term for an additional year beyond the 2003
amendment. Following termination of the employment term, or earlier at the
discretion of the officer, each of the officers has the right to continue as a
part-time consultant for a term of five years for annual compensation of
$75,000.
Pursuant to these employment agreements, these officers received the
following salaries in 2003: Mr. Conway - $187,689, Mr. Koop - $164,227, Mr.
Phillips - $164,277, and Mr. Grisanti - $140,766. The agreements provide for
annual increases associated with cost of living indexes or 5%, whichever is
greater. The agreements provide that the executives are eligible to participate
in a bonus pool to be determined annually by the board, based on the executive's
performance. The agreements also provide each of these officers with an
automobile allowance, which is included under "Salary", and insurance benefits.
In the event of the officer's dismissal or resignation or a material change in
his duties or in the event of a termination of employment by the executive or by
us as a result of a change of control, the officer may receive severance
payments of between 30 and 36 months' compensation. In January 2001, we entered
into a consulting agreement with Mr. Bright - see "Certain Relationships and
Related Transactions."
Stock Option Plans
We currently have three stock option plans -- the 1998 Long-Term
Incentive Plan, 1999 Long-Term Incentive Plan and 2001 Long-Term Incentive Plan.
The plans were designed to strengthen our ability to attract and retain in our
employ persons of training, experience and ability and to furnish additional
incentives to officers, employees, consultants and directors.
The 1998 plan covers 790,000 shares of common stock, with no shares
remaining for the grant of additional awards under the plan. The 1999 plan
covers 300,000 shares of common stock, with a total of 4,250 shares remaining
for the grant of additional award under the plan. The 2001 plan covers 550,000
shares of common stock, with a total of 1,500 shares remaining for the grant of
additional award under the plan.
The stock option plans are administered by a committee of at least two
non-employee directors appointed by the board. The Compensation Committee serves
as the committee under all of our stock option plans. Any member or alternate
member of the committee is not eligible to receive options or stock under these
plans except for the annual option grant and certain option grants which were
approved by the stockholders in connection with the approval of the 1998 plan.
If no committee is appointed, the functions of the committee are performed by
the board of directors.
19
Stock Option Grants in Last Fiscal Year
The following table provides information concerning each grant of
options to purchase the Company's common stock made during the fiscal year ended
December 31, 2003 to the Named Executive Officers.
Individual Grants
----------------- Potential Realizable Value
at Assumed Annual Rate
Number of Percent of of Stock Price
Securities Total Options Appreciation for
Underlying Granted to Exercise Option Term (1)
Options Employees in Price Per Expiration ---------------
Name Granted Fiscal Year Share Date 5% 10%
---- ------- ----------- --------- ---- -- ---
James L. Conway 25,000 6.8% $4.93 1/27/02 $41,917 $95,095
24,500 6.6% $4.37 5/22/08 $36,412 $82,607
Gerald O. Koop 25,000 6.8% $4.93 1/27/02 $41,917 $95,095
24,500 6.6% $4.37 5/22/08 $36,412 $82,607
John F. Phillips 17,500 4.7% $4.93 1/27/08 $29,342 $66,566
17,500 4.7% $4.37 5/22/08 $26,009 $59,005
Anthony F. Grisanti 17,500 4.7% $4.93 1/27/08 $29,342 $66,566
10,000 2.7% $4.37 5/22/08 $14,862 $33,717
(1) Potential realizable value is based on the assumption that the common stock
of the company appreciates at the annual rate shown (compounded annually) from
the date of grant until the expiration of the 10 year option term. These
numbers are calculated based on the requirements promulgated by the Securities
and Exchange Commission and do not reflect the Company's estimate of future
stock price growth. There is no assurance provided to any executive officer or
any other holder of the Company's securities that the actual stock price
appreciation over the term of the option will be at the assumed 5% or 10%
annual rates of compounded stock price appreciation or at any other defined
level. No value will be realized from the option grants made to the officers
of the Company unless the market price of the Company's common stock
appreciates over the option term.
Option Exercises and Outstanding Options
The following table sets forth information concerning the exercise of
options during the year ended December 31, 2003 and the year-end value of
options held by our officers named in the Summary Compensation Table.
20
Aggregate Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values
Number of Securities
Shares Underlying Value of Unexercised
Acquired Value Unexercised Options In-the-Money Options
Name On Exercise Realized (1) At Fiscal Year-End At Fiscal Year-End (2)
---- ----------- ------------ ------------------- ----------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
James L. Conway 44,750 $227,668 12,500 12,250 $130,250 $134,505
Gerald O. Koop 112,500 $421,550 24,750 12,250 $264,755 $134,505
John F. Phillips 92,500 $530,898 17,500 12,250 $187,250 $ 96,075
Anthony F. Grisanti 0 0 57,250 5,000 $696,725 $ 54,900
-------------------
(1) Value realized is calculated by subtracting the exercise price from
the fair market value of our common stock on the exercise date.
(2) Value is calculated by subtracting the exercise price from the
closing price of our common stock on the Nasdaq SmallCap Market of
$15.35 per share on December 31, 2003.
Equity Compensation Plan Information
The following chart summarizes the options outstanding and available to
be issued at March 16, 2003:
Plan Category Number of securities to Weighted-average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options outstanding options future issuance under
equity compensation
plans excluding
securities reflected in
column (a)]
(a) (b) (c)
Equity compensation
plans approved by
security holders 330,878 $4.073 5,750
Equity compensation
plans not approved by
security holders 0 0 0
Total 330,878 $4.073 5,750
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Exchange Act requires our executive officers,
directors and persons who own more than ten percent of a registered class of our
equity securities ("Reporting Persons") to file reports of ownership and changes
in ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission and
the Nasdaq Stock Exchange. These Reporting Persons are required by SEC
regulation to furnish us with copies of all Forms 3, 4 and 5 they file with the
21
SEC and Nasdaq. Based solely upon our review of the copies of the forms we have
received, we believe that all Reporting Persons complied on a timely basis with
all filing requirements applicable to them with respect to transactions during
fiscal 2003.
Board of Directors Interlocks and Insider Participation
During fiscal 2003, our Compensation/Stock Option Committee consisted of
Messrs. Gallagher, Calcagno, and Sicinski. None of them were our officers or
employees during fiscal 2003 nor did they have any relationship with us that is
required to be disclosed in this proxy statement pursuant to the rules of the
Securities and Exchange Commission.
Filings made by companies with the Securities and Exchange Commission
sometimes "incorporate information by reference." This means the
company is referring you to information that has been previously filed
with the SEC and that this information should be considered as part of
the filing you are reading. The Compensation Committee Report, Stock
Performance Graph and Audit Committee Report in this proxy statement are
not incorporated by reference into any other filings with the SEC.
COMPENSATION COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
The compensation of our executive officers is determined by the
Compensation Committee of our board of directors, subject to applicable
employment agreements. Our Compensation Committee has adopted a charter that is
available on our website at www.csmcorp.com. Each member of the Compensation
Committee is a director who is not employed by us or any of our affiliates. The
following report with respect to certain compensation paid or awarded to our
executive officers during fiscal 2003 is furnished by the directors who
comprised the Compensation Committee during fiscal 2003.
General Policies
Our compensation programs are intended to enable us to attract,
motivate, reward and retain the management talent required to achieve our
corporate objectives, and thereby increase shareholder value. It is our policy
to provide incentives to our senior management to achieve both short-term and
long-term objectives and to reward exceptional performance and contributions to
the development of our businesses. To attain these objectives, our executive
compensation program includes a competitive base salary, cash incentive bonuses
and stock-based compensation. See "Executive Compensation -- Employment
Agreements".
Stock options are granted to employees, including our executive
officers, under our option plans. The Committee believes that stock options
provide an incentive that focuses the executive's attention on managing Netsmart
from the perspective of an owner with an equity stake in the business. Options
are awarded with an exercise price equal to the market value of common stock on
the date of grant. Among our executive officers, the number of shares subject to
options granted to each individual generally depends upon the level of that
officer's responsibility. The largest grants are awarded to the most senior
officers who, in the view of the Compensation Committee, have the greatest
potential impact on our profitability and growth. Previous grants of stock
options are reviewed but are not considered the most important factor in
determining the size of any executive's stock option award in a particular year.
22
Relationship of Compensation to Performance and Compensation of Chief Executive
Officer
The Compensation Committee annually establishes, subject to the approval
of our board of directors and any applicable employment agreements, the salaries
to be paid to our executive officers during the coming year. The base salary of
each of Messrs. Conway, Phillips, Koop and Grisanti is established by contract.
In setting salaries, the Compensation Committee takes into account several
factors, including the extent to which an individual may participate in the
stock plans maintained by us, and qualitative factors bearing on an individual's
experience, responsibilities, management and leadership abilities, and job
performance.
For fiscal 2003, pursuant to the terms of his employment agreement with
us, our Chairman received a base salary and additional compensation (See
"Executive Compensation - Employment Agreements").
The Compensation Committee:
John S.T. Gallagher (Chairman)
Francis J. Calcagno
Joseph G. Sicinski
AUDIT COMMITTEE REPORT
As required by its written charter, which is attached as Appendix "B" to
this Proxy Statement, which sets forth its responsibilities and duties, the
Audit Committee reviewed and discussed the audited financial statements with
Netsmart's management and discussed with Marcum & Kliegman LLP, Netsmart's
independent accountants, the matters required to be discussed by Statement on
Auditing Standards No. 61, Communication with Audit Committees, as amended.
The Audit Committee has received from Marcum & Kliegman LLP the written
disclosures and the letter required by Independence Standards Board Standard No.
1, Independence Discussions with Audit Committees, and the Audit Committee has
discussed with Marcum & Kliegman that firm's independence. Based upon these
discussions with management and the independent accountants, the Audit Committee
recommended to Netsmart that the audited consolidated financial statements for
Netsmart be included in Netsmart's Annual Report on Form 10-K for the fiscal
year ended December 31, 2003 for filing with the Securities and Exchange
Commission.
The Audit Committee has also reviewed and discussed the fees paid to
Marcum & Kliegman LLP during the last fiscal year for audit and non-audit
services, which are set forth below under "Audit Fees," and has determined that
the provision of the non-audit services are compatible with the firm's
independence.
The Audit Committee
John S.T. Gallagher (Chairman)
Francis J. Calcagno
Joseph G. Sicinski
23
Independence of Audit Committee
In fiscal 2003, our Audit Committee consisted of Messrs. Gallagher
(Chairman), Calcagno and Sicinski. Each of the persons who served on the
Committee during fiscal 2003 is independent, as defined by Rule 4200(a)(15) of
the NASD listing standards and as required by Section 10A(m) of the Securities
Exchange Act.
Audit Committee Financial Expert
The Board has determined that each of Messrs. Gallagher, Sicinski, and
Calcagno, qualifies as an "Audit Committee financial expert," as defined by
Securities and Exchange Commission rules, based on his education, experience and
background.
Code of Ethics for Senior Financial Officers
The Board of Directors has adopted a Code of Ethics applicable to our
senior financial officers, which is attached as Exhibit "C" to this Proxy
Statement. Pursuant to the Code of Ethics, our senior financial officers agree
to abide by principles governing their professional and ethical conduct.
AUDIT FEES
General
We were billed by Marcum & Kliegman LLP the aggregate amount of
approximately $67,500 in respect of fiscal 2003 and $ 98,000 in respect to
fiscal 2002 for fees for professional services rendered for the audit of our
annual financial statements and review of our financial statements included in
our Forms 10-Q.
Audit-Related Fees
Marcum & Kliegman LLP did not provide any assurance and related services
in fiscal 2003 and fiscal 2002 that are related to the audit or review of our
annual financial statements and review of our financial statements included in
our Forms 10-Q that are not reported under the preceding paragraph.
Tax Fees
We were billed by Marcum & Kliegman LLP the aggregate amount of
approximately $27,475 in respect of 2003 and $20,989 in respect of 2002 for fees
for services consisting primarily of tax compliance, tax advice or tax planning
services in respect of the preparation of our federal and state tax returns.
Financial Information Systems Design and Implementation Fees
Marcum & Kliegman LLP did not render any services related to financial
information systems design and implementation during fiscal 2003.
All Other Fees
Marcum & Kliegman LLP rendered other services consisting primarily of
services rendered in connection with acquisitions, reviews of registration
statements and issuances of related consents, audits of employee benefit plans
and advise regarding common stock purchase warrants. Aggregate fees billed for
24
all other services rendered by Marcum & Kliegman LLP were approximately $85,629
for fiscal 2003 and $85,629 in respect of fiscal 2002.
Our Audit Committee has determined that the provision of services by
Marcum & Kliegman LLP other than for audit related services is compatible with
maintaining the independence of Marcum & Kliegman as our independent
accountants.
Our Audit Committee approved all of the services provided by Marcum &
Kliegman LLP and described in the preceding paragraphs.
Pre-Approval Policies
Our Audit Committee has pre-approved the provision by Marcum & Kliegman
LLP of audit-services and of non-prohibited audit related services such as those
described above under "All Other Fees" for fees in an amount not to exceed an
aggregate $10,000. Our Audit Committee has not otherwise adopted any blanket
pre-approval policies.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We entered into a consulting agreement with Mr. Bright dated January 1,
2001, pursuant to which Mr. Bright is to devote 50% of his time to our business
for a period of two years. Following the completion of the term, or earlier at
the discretion of Mr. Bright, Mr. Bright continues as a consultant for an
additional five years. Mr. Bright receives compensation at the annual rate of
$75,000 during the consulting term, and we provide him with an automobile
allowance and insurance benefits. Mr. Bright is eligible, at the discretion of
the board, to participate in a bonus pool which may be established by the board.
In the event that Mr. Bright's consultant relationship is terminated as a result
of a change of control, we are to pay him as severance pay between 30 and 36
months compensation. We paid Mr. Bright total compensation of $87,000 for
2003, in addition to a bonus of $7,500.
PERFORMANCE GRAPH
The following graph, based on data provided by the Center for Research
in Security Prices, shows changes in the value of $100 invested on December 31,
1998, of: (a) shares of our common stock; (b) the Nasdaq stock index (US
companies); and (c) an SIC peer group consisting of Nasdaq listed companies in
SIC code 7370 through 7379, which are computer and data processing companies.
The values of each investment at the end of each period are derived from
compounded daily returns that include all dividends. Total stockholder returns
from each investment can be calculated from the year-end investment values shown
beneath the graph provided below.
25
[GRAPH]
12/31/98 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03
-------- -------- -------- -------- -------- --------
Netsmart Technologies, Inc. 100.0 248.8 73.2 114.3 182.2 606.7
Nasdaq Stock Market (US companies) 100.0 185.4 111.8 88.8 61.4 91.8
Nasdaq computer and data processing 100.0 220.0 101.3 81.5 56.2 74.1
stocks
The index level for all indices was set at 100.0 on December 31, 1998,
when trading in our common stock commenced.
INDEPENDENT AUDITORS
Marcum & Kliegman LLP acted as our independent auditors for the year
ended December 31, 2003 and has been selected by our board of directors, upon
the recommendation of the Audit Committee, to continue to act as our independent
auditors for our 2004 fiscal year.
A representative of Marcum & Kliegman LLP plans to be present at the
annual meeting with the opportunity to make a statement if he desires to do so,
and will be available to respond to appropriate questions.
FINANCIAL STATEMENTS
A copy of our Form 10-K for the year ended December 31, 2003, without
exhibits, accompanies this proxy statement. Stockholders are referred to the
report for financial and other information about us.
Additional copies of our Form 10-K for the year ended December 31, 2003
may be obtained without charge by writing to Mr. Anthony F. Grisanti, Chief
Financial Officer, Netsmart Technologies, Inc., 3500 Sunrise Highway, Great
River, NY 11739. Exhibits will be furnished upon request and upon payment of a
handling charge of $.25 per page, which represents our reasonable cost on
furnishing such exhibits.
26
OTHER MATTERS
Matters to be Considered at the Meeting
Our board of directors does not intend to present to the meeting any
matters not referred to in the form of proxy. If any proposal not set forth in
this proxy statement should be presented for action at the meeting, and is a
matter which should come before the meeting, it is intended that the shares
represented by proxies will be voted with respect to such matters in accordance
with the judgment of the persons voting them.
Cost of Solicitation
We will bear the costs of soliciting proxies, which we estimate to be
$25,000. In addition to the solicitation of proxies by mail, our directors,
officers and employees, who will receive no compensation in addition to their
regular salary, may solicit proxies by mail, telecopier, telephone or personal
interview. We will request that brokers and other custodians, nominees and
fiduciaries forward proxy material to the beneficial holders of the common stock
held of record by such persons, where appropriate, and will, upon request,
reimburse such persons for their reasonable out-of-pocket expenses incurred in
connection therewith.
27
Deadline for Submission of Stockholder Proposals for the 2005 Annual Meeting
Proposals of stockholders intended to be presented at the 2005 Annual
Meeting of Stockholders pursuant to SEC Rule 14a-8 must be received at our
principal office not later than November 10, 2004 to be included in the proxy
statement for that meeting.
In addition, in order for a stockholder proposal to be presented at our
meeting without it being included in our proxy materials, notice of such
proposal must be delivered to the Secretary of our company at our principal
offices no later than January 24, 2005. If notice of any stockholder proposal is
received after January 24, 2005, then the notice will be considered untimely and
we are not required to present such proposal at the 2004 Annual Meeting. If the
Board of Directors chooses to present a proposal submitted after January 24,
2005 at the 2005 Annual Meeting, then the persons named in proxies solicited by
the Board of Directors for the 2005 Annual Meeting may exercise discretionary
voting power with respect to such proposal.
A copy of the Annual Report has been mailed to every stockholder of
record. The Annual Report is not considered proxy soliciting material.
By Order of the Board of Directors
/s/ James L. Conway
-----------------------------------
James L. Conway
Chief Executive Officer
March 30, 2004
28
APPENDIX A
NETSMART TECHNOLOGIES, INC.
---------------------------
2001 Long-Term Incentive Plan (as amended)
1. Purpose; Definitions.
The purpose of the Netsmart Technologies, Inc. 2001 Long-Term Incentive
Plan (the "Plan") is to enable Netsmart Technologies, Inc. (the "Company") to
attract, retain and reward key employees of the Company and its Subsidiaries and
Affiliates, and others who provide services to the Company and its Subsidiaries
and Affiliates, and strengthen the mutuality of interests between such key
employees and such other persons and the Company's stockholders, by offering
such key employees and such other persons incentives and/or other equity
interests or equity-based incentives in the Company, as well as
performance-based incentives payable in cash.
For purposes of the Plan, the following terms shall be defined as set
forth below:
(a) "Affiliate" means any corporation, partnership, limited liability company,
joint venture or other entity, other than the Company and its Subsidiaries, that
is designated by the Board as a participating employer under the Plan, provided
that the Company directly or indirectly owns at least 20% of the combined voting
power of all classes of stock of such entity or at least 20% of the ownership
interests in such entity.
(b) "Board" means the Board of Directors of the Company.
(c) "Book Value" means, as of any given date, on a per share basis (i) the
stockholders' equity in the Company as of the last day of the immediately
preceding fiscal year as reflected in the Company's consolidated balance sheet,
subject to such adjustments as the Committee shall specify at or after grant,
divided by (ii) the number of then outstanding shares of Stock as of such
year-end date, as adjusted by the Committee for subsequent events.
(d) "Cause" means a felony conviction of a participant, or the failure of a
participant to contest prosecution for a felony, or a participant's willful
misconduct or dishonesty, or breach of trust or other action by which the
participant obtains personal gain at the expense of or to the detriment of the
Company or, if the participant has an employment agreement with the Company, a
Subsidiary or Affiliate, an event which constitutes "cause" as defined in such
employment agreement.
(e) "Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor thereto.
(f) "Commission" means the Securities and Exchange Commission or any successor
thereto.
(g) "Committee" means the Committee referred to in Section 2 of the Plan. If at
any time no Committee shall be in office, then the functions of the Committee
specified in the Plan shall be exercised by the Board.
(h) "Company" means Netsmart Technologies, Inc., a Delaware corporation, or any
successor corporation.
A-1
(i) "Deferred Stock" means an award made pursuant to Section 8 of the Plan of
the right to receive Stock at the end of a specified deferral period.
(j) "Disability" means disability as determined under procedures established by
the Committee for purposes of the Plan.
(k) "Early Retirement" means retirement, with the express consent for purposes
of the Plan of the Company at or before the time of such retirement, from active
employment with the Company and any Subsidiary or Affiliate pursuant to the
early retirement provisions of the applicable pension plan of such entity.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as amended, from
time to time, and any successor thereto.
(m) "Fair Market Value" means, as of any given date, the market price of the
Stock as determined by or in accordance with the policies established by the
Committee in good faith; provided, that, in the case of an Incentive Stock
Option, the Fair Market Value shall be determined in accordance with the Code
and the Treasury regulations under the Code.
(n) "Incentive Stock Option" means any Stock Option intended to be and
designated as an "Incentive Stock Option" within the meaning of Section 422 of
the Code.
(o) "Non-Employee Director" shall have the meaning set forth in Rule 16b-3 of
the Commission pursuant to the Exchange Act or any successor definition adopted
by the Commission; provided that in the event that said rule (or successor rule)
shall not have such a definition, the term Non-Employee Director shall mean a
director of the Company who is not otherwise employed by the Company or any
Subsidiary or Affiliate.
(p) "Non-Qualified Stock Option" means any Stock Option that is not an Incentive
Stock Option.
(q) "Normal Retirement" means retirement from active employment with the Company
and any Subsidiary or Affiliate on or after age 65.
(r) "Other Stock-Based Award" means an award under Section 10 of the Plan that
is valued in whole or in part by reference to, or is otherwise based on, Stock.
(s) "Plan" means this Netsmart Technologies, Inc. 2001 Long-Term Incentive Plan,
as hereinafter amended from time to time.
(t) "Restricted Stock" means an award of shares of Stock that is subject to
restrictions under Section 7 of the Plan.
(u) "Retirement" means Normal Retirement or Early Retirement.
(v) "Stock" means the Common Stock, par value $.01 per share, of the Company or
any class of common stock into which such common stock may hereafter be
converted or for which such common stock may be exchanged pursuant to the
Company's certificate of incorporation or as part of a recapitalization,
reorganization or similar transaction.
A-2
(w) "Stock Appreciation Right" means the right pursuant to an award granted
under Section 6 of the Plan to surrender to the Company all (or a portion) of a
Stock Option in exchange for an amount equal to the difference between (i) the
Fair Market Value, as of the date such award or Stock Option (or such portion
thereof) is surrendered, of the shares of Stock covered by such Stock Option (or
such portion thereof), subject, where applicable, to the pricing provisions in
Paragraph 6(b)(ii) of the Plan and (ii) the aggregate exercise price of such
Stock Option or base price with respect to such award (or the portion thereof
which is surrendered).
(x) "Stock Option" or "Option" means any option to purchase shares of Stock
(including Restricted Stock and Deferred Stock, if the Committee so determines)
granted pursuant to Section 5 of the Plan.
(y) "Stock Purchase Right" means the right to purchase Stock pursuant to Section
9 of the Plan.
(z) "Subsidiary" means any corporation or other business association, including
a partnership (other than the Company) in an unbroken chain of corporations or
other business associations beginning with the Company if each of the
corporations or other business associations (other than the last corporation in
the unbroken chain) owns equity interests (including stock or partnership
interests) possessing 50% or more of the total combined voting power of all
classes of equity in one of the other corporations or other business
associations in the chain.
In addition, the terms "Change in Control," "Potential Change in
Control" and "Change in Control Price" shall have meanings set forth,
respectively, in Paragraphs 11(b), (c) and (d) of the Plan.
2. Administration.
(a) The Plan shall be administered by a Committee of not less than two
Non-Employee Directors, who shall be appointed by the Board and who shall serve
at the pleasure of the Board. If and to the extent that no Committee exists
which has the authority to so administer the Plan, the functions of the
Committee specified in the Plan shall be exercised by the Board. Notwithstanding
the foregoing, in the event that the Company is not subject to the Exchange Act
or in the event that the administration of the Plan by a Committee of
Non-Employee Directors is not required in order for the Plan to meet the test of
Rule 16b-3 of the Commission under the Exchange Act, or any subsequent rule,
then the Committee need not be composed of Non-Employee Directors.
(b) The Committee shall have full authority to grant, pursuant to the terms of
the Plan, to officers and other persons eligible under Section 4 of the Plan:
Stock Options, Stock Appreciation Rights, Restricted Stock, Deferred Stock,
Stock Purchase Rights and/or Other Stock-Based Awards. In particular, the
Committee shall have the authority:
(i) to select the officers and other eligible persons to whom Stock Options,
Stock Appreciation Rights, Restricted Stock, Deferred Stock, Stock Purchase
Rights and/or Other Stock-Based Awards may from time to time be granted pursuant
to the Plan;
(ii) to determine whether and to what extent Incentive Stock Options,
Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock,
Deferred Stock, Stock Purchase Rights and/or Other Stock-Based Awards, or any
combination thereof, are to be granted pursuant to the Plan, to one or more
eligible persons;
(iii) to determine the number of shares to be covered by each such award
granted pursuant to the Plan;
A-3
(iv) to determine the terms and conditions, not inconsistent with the terms
of the Plan, of any award granted under the Plan, including, but not limited to,
the share price or exercise price and any restriction or limitation, or any
vesting, acceleration or waiver of forfeiture restrictions regarding any Stock
Option or other award and/or the shares of Stock relating thereto, based in each
case on such factors as the Committee shall, in its sole discretion, determine;
(v) to determine whether, to what extent and under what circumstances a
Stock Option may be settled in cash, Restricted Stock and/or Deferred Stock
under Paragraph 5(b)(x) or (xi) of the Plan, as applicable, instead of Stock;
(vi) to determine whether, to what extent and under what circumstances
Option grants and/or other awards under the Plan and/or other cash awards made
by the Company are to be made, and operate, on a tandem basis with other awards
under the Plan and/or cash awards made outside of the Plan in a manner whereby
the exercise of one award precludes, in whole or in part, the exercise of
another award, or on an additive basis;
(vii) to determine whether, to what extent and under what circumstances
Stock and other amounts payable with respect to an award under this Plan shall
be deferred either automatically or at the election of the participant,
including any provision for any determination or method of determination of the
amount (if any) deemed be earned on any deferred amount during any deferral
period;
(viii) to determine the terms and restrictions applicable to Stock Purchase
Rights and the Stock purchased by exercising such Rights; and
(ix) to determine an aggregate number of awards and the type of awards to be
granted to eligible persons employed or engaged by the Company and/or any
specific Subsidiary, Affiliate or division and grant to management the authority
to grant such awards, provided that no awards to any person subject to the
reporting and short-swing profit provisions of Section 16 of the Exchange Act
may be granted awards except by the Committee.
(c) The Committee shall have the authority to adopt, alter and repeal such
rules, guidelines and practices governing the Plan as it shall, from time to
time, deem advisable; to interpret the terms and provisions of the Plan and any
award issued under the Plan and any agreements relating thereto, and otherwise
to supervise the administration of the Plan.
(d) All decisions made by the Committee pursuant to the provisions of the Plan
shall be made in the Committee's sole discretion and shall be final and binding
on all persons, including the Company and Plan participants.
3. Stock Subject to Plan.
(a) The total number of shares of Stock reserved and available for distribution
under the Plan shall be [nine hundred fifty thousand (950,000)] shares of Common
Stock. In the event that awards are granted in tandem such that the exercise of
one award precludes the exercise of another award then, for the purpose of
determining the number of shares of Stock as to which awards shall have been
granted, the maximum number of shares of Stock issuable pursuant to such tandem
awards shall be used.
(b) Subject to Paragraph 6(b)(v) of the Plan, if any shares of Stock that have
been optioned cease to be subject to a Stock Option, or if any such shares of
Stock that are subject to any Restricted Stock or Deferred Stock award, Stock
Purchase Right or Other Stock-Based Award granted under the Plan are forfeited
A-4
or any such award otherwise terminates without a payment being made to the
participant in the form of Stock, such shares shall again be available for
distribution in connection with future awards under the Plan.
(c) In the event of any merger, reorganization, consolidation, recapitalization,
stock dividend, stock split, stock distribution, reverse split, combination of
shares or other change in corporate structure affecting the Stock, such
substitution or adjustment shall be made in the aggregate number of shares
reserved for issuance under the Plan, in the base number of shares, in the
number and option price of shares subject to outstanding Options granted under
the Plan, in the number and purchase price of shares subject to outstanding
Stock Purchase Rights under the Plan, and in the number of shares subject to
other outstanding awards granted under the Plan as may be determined to be
appropriate by the Committee, in its sole discretion, provided that the number
of shares subject to any award shall always be a whole number. Such adjusted
option price shall also be used to determine the amount payable by the Company
upon the exercise of any Stock Appreciation Right associated with any Stock
Option.
4. Eligibility.
(a) Officers and other key employees and directors of, and consultants and
independent contractors to, the Company and its Subsidiaries and Affiliates (but
excluding, except as to Paragraph 4(b) of the Plan, Non-Employee Directors) who
are responsible for or contribute to the management, growth and/or profitability
of the business of the Company and/or its Subsidiaries and Affiliates are
eligible to be granted awards under the Plan.
(b) On each April 1 of each year, commencing April 1, 2002, each person who is a
Non-Employee Director on such date shall automatically be granted a
Non-Qualified Stock Option to purchase five thousand (5,000) shares of Common
Stock (or such lesser number of shares of Common Stock as remain available for
grant at such date under the Plan, divided by the number of Non-Employee
Directors at such date); provided, however, that with respect to the automatic
grant on April 1, 2002, in the event that the Plan shall not have been approved
by stockholders on or prior to April 1, 2002, the automatic option grant in 2002
shall be granted on the date that the Plan is approved by stockholders. On April
1 of each year commencing April 1, 2004, each Non-Employee Director serving on
such date shall automatically be granted a Non-Qualified Stock Option to
purchase six thousand (6,000) shares of common stock; provided, that each person
who is a Non-Employee Director who is serving as Chairman of the Corporation's
Audit Committee or Compensation Committee shall automatically be granted a
Non-Qualified Stock Option to purchase seven thousand five hundred (7,500)
shares of Common Stock; provided, further, that if one person shall be serving
as Chairman of both the Audit Committee and Compensation Committee he shall
receive an option to purchase an aggregate seven thousand five hundred (7,500)
shares of Common Stock. In the event that there shall not be sufficient shares
of Common Stock available for grant on any such date, each Non-Employee Director
shall receive an option for such lesser number of shares of Common Stock as
remain available for grant at such date under the Plan, divided by the number of
Non-Employee Directors at such date and upon the date of the approval by
stockholders of any amendment to this Plan increasing the number of shares
reserved hereunder to an amount sufficient to enable such grant, each
Non-Employee Director shall receive a grant for an option to purchase the number
of shares which he would have received but for such insufficiency, after
deducting any shares previously granted to him on April 1 of such year. Such
Stock Options shall be exercisable at a price per share equal to the greater of
the Fair Market Value on the date of grant or the par value of one share of
Common Stock. The Non-Qualified Stock Options granted pursuant to this Paragraph
4(b) and pursuant to Paragraph 4(c) of the Plan shall become exercisable as to
all of the shares subject thereto six (6) months from the date of grant, and
shall expire on the earlier of (i) five years from the date of grant, or (ii)
seven (7) months from the date such Non-Employee Director ceases to be a
A-5
director if such Non-Employee Director ceases to be a director other than as a
result of his death or Disability. The provisions of this Paragraph 4(b) and
said Paragraph 4(c) may not be amended more than one (1) time in any six (6)
month period other than to comply with changes in the Code or the Employee
Retirement Income Security Act ("ERISA") or the rules thereunder.
(c) If any Non-Employee Director is first elected to the board subsequent to
April 1 or any year, commencing April 1, 2004, such person shall automatically
be granted a Non-Qualified Stock Option to purchase six thousand (6,000) shares
of Common Stock (or such lesser number of shares of Common Stock as remain
available for grant at such date under the Plan, divided by the number of
Non-Employee Directors who are elected as directors at such date).
5. Stock Options.
(a) Administration. Stock Options may be granted alone, in addition to or in
tandem with other awards granted under the Plan and/or cash awards made outside
of the Plan. Any Stock Option granted under the Plan shall be in such form as
the Committee may from time to time approve. Stock Options granted under the
Plan may be of two types: (i) Incentive Stock Options and (ii) Non-Qualified
Stock Options. The Committee shall have the authority to grant to any optionee
Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock
Options (in each case with or without Stock Appreciation Rights).
(b) Option Grants. Options granted under the Plan shall be subject to the
following terms and conditions and shall contain such additional terms and
conditions, not inconsistent with the terms of the Plan, as the Committee, in
its sole discretion, shall deem desirable:
(i) Option Price. The option price per share of Stock purchasable under a
Stock Option shall be determined by the Committee at the time of grant.
Outstanding stock options shall not be repriced without stockholder approval.
(ii) Option Term. The term of each Stock Option shall be fixed by the
Committee, but no Stock Option shall be exercisable more than ten (10) years
after the date the Option is granted.
(iii) Exercisability. Stock Options shall be exercisable at such time or
times and subject to such terms and conditions as shall be determined by the
Committee at or after grant. If the Committee provides, in its sole discretion,
that any Stock Option is exercisable only in installments, the Committee may
waive such installment exercise provisions at any time at or after grant in
whole or in part, based on such factors as the Committee shall, in its sole
discretion, determine.
(iv) Method of Exercise.
(A) Subject to whatever installment exercise provisions apply under
Paragraph 5(b)(iii) of the Plan, Stock Options may be exercised in whole or in
part at any time during the option period, by giving written notice of exercise
to the Company specifying the number of shares to be purchased. Such notice
shall be accompanied by payment in full of the purchase price, either by check,
note or such other instrument, securities or property as the Committee may
accept. As and to the extent determined by the Committee, in its sole
discretion, at or after grant, payments in full or in part may also be made in
the form of Stock already owned by the optionee or, in the case of the exercise
of a Non-Qualified Stock Option, Restricted Stock or Deferred Stock subject to
an award hereunder (based, in each case, on the Fair Market Value of the Stock
on the date the option is exercised, as determined by the Committee).
A-6
(B) If payment of the option exercise price of a Non-Qualified Stock
Option is made in whole or in part in the form of Restricted Stock or Deferred
Stock, the Stock issuable upon such exercise (and any replacement shares
relating thereto) shall remain (or be) restricted or deferred, as the case may
be, in accordance with the original terms of the Restricted Stock award or
Deferred Stock award in question, and any additional Stock received upon the
exercise shall be subject to the same forfeiture restrictions or deferral
limitations, unless otherwise determined by the Committee, in its sole
discretion, at or after grant.
(C) No shares of Stock shall be issued until full payment therefor has
been received by the Company. In the event of any exercise by note or other
instrument, the shares of Stock shall not be issued until such note or other
instrument shall have been paid in full, and the exercising optionee shall have
no rights as a stockholder until such payment is made.
(D) Subject to Paragraph 5(b)(iv)(C) of the Plan, an optionee shall
generally have the rights to dividends or other rights of a stockholder with
respect to shares subject to the Option when the optionee has given written
notice of exercise, has paid in full for such shares, and, if requested, has
given the representation described in Paragraph 14(a) of the Plan.
(v) Non-Transferability of Options. No Stock Option shall be transferable by
the optionee otherwise than by will or by the laws of descent and distribution,
and all Stock Options shall be exercisable, during the optionee's lifetime, only
by the optionee.
(vi) Termination by Death. Subject to Paragraph 5(b)(ix) of the Plan with
respect to Incentive Stock Options, if an optionee's employment by the Company
and any Subsidiary or Affiliate terminates by reason of death, any Stock Option
held by such optionee may thereafter be exercised, to the extent such option was
exercisable at the time of death or on such accelerated basis as the Committee
may determine at or after grant (or as may be determined in accordance with
procedures established by the Committee), by the legal representative of the
estate or by the legatee of the optionee under the will of the optionee, for a
period of one year (or such other period as the Committee may specify at grant)
from the date of such death or until the expiration of the stated term of such
Stock Option, whichever period is the shorter.
(vii) Termination by Reason of Disability or Retirement. Subject to
Paragraph 5(b)(ix) of the Plan with respect to Incentive Stock Options, if an
optionee's employment by the Company and any Subsidiary or Affiliate terminates
by reason of a Disability or Normal or Early Retirement, any Stock Option held
by such optionee may thereafter be exercised by the optionee, to the extent it
was exercisable at the time of termination or on such accelerated basis as the
Committee may determine at or after grant (or as may be determined in accordance
with procedures established by the Committee), for a period of one year (or such
other period as the Committee may specify at grant) from the date of such
termination of employment or until the expiration of the stated term of such
Stock Option, whichever period is the shorter; provided, however, that, if the
optionee dies within such one-year period (or such other period as the Committee
shall specify at grant), any unexercised Stock Option held by such optionee
shall thereafter be exercisable to the extent to which it was exercisable at the
time of death for a period of one year from the date of such death or until the
expiration of the stated term of such Stock Option, whichever period is the
shorter. In the event of termination of employment by reason of Disability or
Normal or Early Retirement, if an Incentive Stock Option is exercised after the
expiration of the exercise periods that apply for purposes of Section 422 of the
Code, such Stock Option will thereafter be treated as a Non-Qualified Stock
Option.
(viii) Other Termination. Unless otherwise determined by the Committee (or
pursuant to procedures established by the Committee) at or after grant, if an
optionee's employment by the Company and any Subsidiary or Affiliate terminates
A-7
for any reason other than death, Disability or Normal or Early Retirement, the
Stock Option shall thereupon terminate; provided, however, that if the optionee
is involuntarily terminated by the Company or any Subsidiary or Affiliate
without Cause, including a termination resulting from the Subsidiary, Affiliate
or division in which the optionee is employed or engaged, ceasing, for any
reason, to be a Subsidiary, Affiliate or division of the Company, such Stock
Option may be exercised, to the extent otherwise exercisable on the date of
termination, for a period of three months (or seven months in the case of a
person subject to the reporting and short-swing profit provisions of Section 16
of the Exchange Act) from the date of such termination or until the expiration
of the stated term of such Stock Option, whichever is shorter.
(ix) Incentive Stock Options.
(A) Anything in the Plan to the contrary notwithstanding, no term of
the Plan relating to Incentive Stock Options shall be interpreted, amended or
altered, nor shall any discretion or authority granted under the Plan be so
exercised, so as to disqualify the Plan under Section 422 of the Code, or,
without the consent of the optionee(s) affected, to disqualify any Incentive
Stock Option under such Section 422.
(B) To the extent required for "incentive stock option" status under
Section 422(d) of the Code (taking into account applicable Treasury regulations
and pronouncements), the Plan shall be deemed to provide that the aggregate Fair
Market Value (determined as of the time of grant) of the Stock with respect to
which Incentive Stock Options are exercisable for the first time by the optionee
during any calendar year under the Plan and/or any other stock option plan of
the Company or any Subsidiary or parent corporation (within the meaning of
Section 425 of the Code) shall not exceed $100,000. If Section 422 is hereafter
amended to delete the requirement now in Section 422(d) that the plan text
expressly provide for the $100,000 limitation set forth in Section 422(d), then
this Paragraph 5(b)(ix)(B) shall no longer be operative and the Committee may
accelerate the dates on which the incentive stock option may be exercised.
(C) To the extent permitted under Section 422 of the Code or the
applicable regulations thereunder or any applicable Internal Revenue Service
pronouncement:
(I) If (x) a participant's employment is terminated by reason of
death, Disability or Retirement and (y) the portion of any Incentive Stock
Option that is otherwise exercisable during the post-termination period
specified under Paragraphs 5(b)(vi) and (vii) of the Plan, applied without
regard to the $100,000 limitation contained in Section 422(d) of the Code, is
greater than the portion of such option that is immediately exercisable as an
"incentive stock option" during such post-termination period under Section 422,
such excess shall be treated as a Non-Qualified Stock Option; and
(II) if the exercise of an Incentive Stock Option is accelerated
by reason of a Change in Control, any portion of such option that is not
exercisable as an Incentive Stock Option by reason of the $100,000 limitation
contained in Section 422(d) of the Code shall be treated as a Non-Qualified
Stock Option.
(x) Buyout Provisions. The Committee may at any time offer to buy out for a
payment in cash, Stock, Deferred Stock or Restricted Stock an option previously
granted, based on such terms and conditions as the Committee shall establish and
communicate to the optionee at the time that such offer is made.
(xi) Settlement Provisions. If the option agreement so provides at grant or
is amended after grant and prior to exercise to so provide (with the optionee's
consent), the Committee may require that all or part of the shares to be issued
A-8
with respect to the spread value of an exercised Option take the form of
Deferred or Restricted Stock which shall be valued on the date of exercise on
the basis of the Fair Market Value (as determined by the Committee) of such
Deferred or Restricted Stock determined without regard to the deferral
limitations and/or forfeiture restrictions involved.
6. Stock Appreciation Rights.
(a) Grant and Exercise.
(i) Stock Appreciation Rights may be granted in conjunction with all or part
of any Stock Option granted under the Plan. In the case of a Non-Qualified Stock
Option, such rights may be granted either at or after the time of the grant of
such Stock Option. In the case of an Incentive Stock Option, such rights may be
granted only at the time of the grant of such Stock Option.
(ii) A Stock Appreciation Right or applicable portion thereof granted with
respect to a given Stock Option shall terminate and no longer be exercisable
upon the termination or exercise of the related Stock Option, subject to such
provisions as the Committee may specify at grant where a Stock Appreciation
Right is granted with respect to less than the full number of shares covered by
a related Stock Option.
(iii) A Stock Appreciation Right may be exercised by an optionee, subject to
Paragraph 6(b) of the Plan, in accordance with the procedures established by the
Committee for such purpose. Upon such exercise, the optionee shall be entitled
to receive an amount determined in the manner prescribed in said Paragraph 6(b).
Stock Options relating to exercised Stock Appreciation Rights shall no longer be
exercisable to the extent that the related Stock Appreciation Rights have been
exercised.
(b) Terms and Conditions. Stock Appreciation Rights shall be subject to such
terms and conditions, not inconsistent with the provisions of the Plan, as shall
be determined from time to time by the Committee, including the following:
(i) Stock Appreciation Rights shall be exercisable only at such time or
times and to the extent that the Stock Options to which they relate shall be
exercisable in accordance with the provisions of this Section 6 and Section 5 of
the Plan; provided, however, that any Stock Appreciation Right granted to an
optionee subject to Section 16(b) of the Exchange Act subsequent to the grant of
the related Stock Option shall not be exercisable during the first six months of
its term, except that this special limitation shall not apply in the event of
death or Disability of the optionee prior to the expiration of the six-month
period. The exercise of Stock Appreciation Rights held by optionees who are
subject to Section 16(b) of the Exchange Act shall comply with Rule 16b-3
thereunder to the extent applicable.
(ii) Upon the exercise of a Stock Appreciation Right, an optionee shall be
entitled to receive an amount in cash and/or shares of Stock equal in value to
the excess of the Fair Market Value of one share of Stock over the option price
per share specified in the related Stock Option multiplied by the number of
shares in respect of which the Stock Appreciation Right shall have been
exercised, with the Committee having the right to determine the form of payment.
When payment is to be made in shares of Stock, the number of shares to be paid
shall be calculated on the basis of the Fair Market Value of the shares on the
date of exercise. When payment is to be made in cash, such amount shall be based
upon the Fair Market Value of the Stock on the date of exercise, determined in a
manner not inconsistent with Section 16(b) of the Exchange Act and the rules of
the Commission thereunder.
A-9
(iii) Stock Appreciation Rights shall be transferable only when and to the
extent that the underlying Stock Option would be transferable under Paragraph
5(b)(v) of the Plan.
(iv) Upon the exercise of a Stock Appreciation Right, the Stock Option or
part thereof to which such Stock Appreciation Right is related shall be deemed
to have been exercised only to the extent of the number of shares issued under
the Stock Appreciation Right at the time of exercise based on the value of the
Stock Appreciation Right at such time.
(v) In its sole discretion, the Committee may grant Stock Appreciation
Rights that become exercisable only in the event of a Change in Control and/or a
Potential Change in Control, subject to such terms and conditions as the
Committee may specify at grant; provided that any such Stock Appreciation Rights
shall be settled solely in cash.
(vi) The Committee, in its sole discretion, may also provide that, in the
event of a Change in Control and/or a Potential Change in Control, the amount to
be paid upon the exercise of a Stock Appreciation Right shall be based on the
Change in Control Price, subject to such terms and conditions as the Committee
may specify at grant.
7. Restricted Stock.
(a) Administration. Shares of Restricted Stock may be issued either alone, in
addition to or in tandem with other awards granted under the Plan and/or cash
awards made outside of the Plan. The Committee shall determine the eligible
persons to whom, and the time or times at which, grants of Restricted Stock will
be made, the number of shares to be awarded, the price (if any) to be paid by
the recipient of Restricted Stock, subject to Paragraph 7(b) of the Plan, the
time or times within which such awards may be subject to forfeiture, and all
other terms and conditions of the awards. The Committee may condition the grant
of Restricted Stock upon the attainment of specified performance goals or such
other factors as the Committee may, in its sole discretion, determine. The
provisions of Restricted Stock awards need not be the same with respect to each
recipient.
(b) Awards and Certificates.
(i) The prospective recipient of a Restricted Stock award shall not have any
rights with respect to such award unless and until such recipient has executed
an agreement evidencing the award and has delivered a fully executed copy
thereof to the Company, and has otherwise complied with the applicable terms and
conditions of such award.
(ii) The purchase price for shares of Restricted Stock may be equal to or
less than their par value and may be zero.
(iii) Awards of Restricted Stock must be accepted within a period of 60 days
(or such shorter period as the Committee may specify at grant) after the award
date, by executing a Restricted Stock Award Agreement and paying the price, if
any, required under Paragraph 7(b)(ii).
(iv) Each participant receiving a Restricted Stock award shall be issued a
stock certificate in respect of such shares of Restricted Stock. Such
certificate shall be registered in the name of such participant, and shall bear
an appropriate legend referring to the terms, conditions, and restrictions
applicable to such award.
(v) The Committee shall require that (A) the stock certificates evidencing
shares of Restricted Stock be held in the custody of the Company until the
restrictions thereon shall have lapsed, and (B) as a condition of any Restricted
A-10
Stock award, the participant shall have delivered a stock power, endorsed in
blank, relating to the Restricted Stock covered by such award.
(c) Restrictions and Conditions. The shares of Restricted Stock awarded pursuant
to this Section 7 shall be subject to the following restrictions and conditions:
(i) Subject to the provisions of the Plan and the award agreement, during a
period set by the Committee commencing with the date of such award (the
"Restriction Period"), the participant shall not be permitted to sell, transfer,
pledge or assign shares of Restricted Stock awarded under the Plan. Within these
limits, the Committee, in its sole discretion, may provide for the lapse of such
restrictions in installments and may accelerate or waive such restrictions in
whole or in part, based on service, performance and/or such other factors or
criteria as the Committee may determine, in its sole discretion.
(ii) Except as provided in this paragraph 7(c)(ii) and Paragraph 7(c)(i) of
the Plan, the participant shall have, with respect to the shares of Restricted
Stock, all of the rights of a stockholder of the Company, including the right to
vote the shares and the right to receive any regular cash dividends paid out of
current earnings. The Committee, in its sole discretion, as determined at the
time of award, may permit or require the payment of cash dividends to be
deferred and, if the Committee so determines, reinvested, subject to Paragraph
14(e) of the Plan, in additional Restricted Stock to the extent shares are
available under Section 3 of the Plan, or otherwise reinvested. Stock dividends,
splits and distributions issued with respect to Restricted Stock shall be
treated as additional shares of Restricted Stock that are subject to the same
restrictions and other terms and conditions that apply to the shares with
respect to which such dividends are issued, and the Committee may require the
participant to deliver an additional stock power covering the shares issuable
pursuant to such stock dividend, split or distribution. Any other dividends or
property distributed with regard to Restricted Stock, other than regular
dividends payable and paid out of current earnings, shall be held by the Company
subject to the same restrictions as the Restricted Stock.
(iii) Subject to the applicable provisions of the award agreement and this
Section 7, upon termination of a participant's employment with the Company and
any Subsidiary or Affiliate for any reason during the Restriction Period, all
shares still subject to restriction will vest, or be forfeited, in accordance
with the terms and conditions established by the Committee at or after grant.
(iv) If and when the Restriction Period expires without a prior forfeiture
of the Restricted Stock subject to such Restriction Period, certificates for an
appropriate number of unrestricted shares, and other property held by the
Company with respect to such Restricted Shares, shall be delivered to the
participant promptly.
(d) Minimum Value Provisions. In order to better ensure that award payments
actually reflect the performance of the Company and service of the participant,
the Committee may provide, in its sole discretion, for a tandem Stock Option or
performance-based or other award designed to guarantee a minimum value, payable
in cash or Stock to the recipient of a Restricted Stock award, subject to such
performance, future service, deferral and other terms and conditions as may be
specified by the Committee.
8. Deferred Stock.
(a) Administration. Deferred Stock may be awarded either alone, in addition to
or in tandem with other awards granted under the Plan and/or cash awards made
outside of the Plan. The Committee shall determine the eligible persons to whom
and the time or times at which Deferred Stock shall be awarded, the number of
shares of Deferred Stock to be awarded to any person, the duration of the period
A-11
(the "Deferral Period") during which, and the conditions under which, receipt of
the Stock will be deferred, and the other terms and conditions of the award in
addition to those set forth in Paragraph 8(b). The Committee may condition the
grant of Deferred Stock upon the attainment of specified performance goals or
such other factors or criteria as the Committee shall, in its sole discretion,
determine. The provisions of Deferred Stock awards need not be the same with
respect to each recipient.
(b) Terms and Conditions. The shares of Deferred Stock awarded pursuant to this
Section 8 shall be subject to the following terms and conditions:
(i) Subject to the provisions of the Plan and the award agreement referred
to in Paragraph 8(b)(vi) of the Plan, Deferred Stock awards may not be sold,
assigned, transferred, pledged or otherwise encumbered during the Deferral
Period. At the expiration of the Deferral Period (or the Elective Deferral
Period referred to in Paragraph 8(b)(v) of the Plan, where applicable), share
certificates representing the shares covered by the Deferred Stock award shall
be delivered to the participant or his legal representative.
(ii) Unless otherwise determined by the Committee at grant, amounts equal to
any dividends declared during the Deferral Period with respect to the number of
shares covered by a Deferred Stock award will be paid to the participant
currently, or deferred and deemed to be reinvested in additional Deferred Stock,
or otherwise reinvested, all as determined at or after the time of the award by
the Committee, in its sole discretion.
(iii) Subject to the provisions of the award agreement and this Section 8,
upon termination of a participant's employment with the Company and any
Subsidiary or Affiliate for any reason during the Deferral Period for a given
award, the Deferred Stock in question will vest, or be forfeited, in accordance
with the terms and conditions established by the Committee at or after grant.
(iv) Based on service, performance and/or such other factors or criteria as
the Committee may determine, the Committee may, at or after grant, accelerate
the vesting of all or any part of any Deferred Stock award and/or waive the
deferral limitations for all or any part of such award.
(v) A participant may elect to further defer receipt of an award (or an
installment of an award) for a specified period or until a specified event (the
"Elective Deferral Period"), subject in each case to the Committee's approval
and to such terms as are determined by the Committee, all in its sole
discretion. Subject to any exceptions adopted by the Committee, such election
must generally be made at least twelve months prior to completion of the
Deferral Period for such Deferred Stock award (or such installment).
(vi) Each award shall be confirmed by, and subject to the terms of, a
Deferred Stock agreement executed by the Company and the participant.
(c) Minimum Value Provisions. In order to better ensure that award payments
actually reflect the performance of the Company and service of the participant,
the Committee may provide, in its sole discretion, for a tandem Stock Option or
performance-based or other award designed to guarantee a minimum value, payable
in cash or Stock to the recipient of a deferred stock award, subject to such
performance, future service, deferral and other terms and conditions as may be
specified by the Committee.
9. Stock Purchase Rights.
A-12
(a) Awards and Administration. The Committee may grant eligible participants
Stock Purchase Rights which shall enable such participants to purchase Stock
(including Deferred Stock and Restricted Stock):
(i) at its Fair Market Value on the date of grant;
(ii) at a percentage of such Fair Market Value on such date, such percentage
to be determined by the Committee in its sole discretion;
(iii) at an amount equal to Book Value on such date; or
(iv) at an amount equal to the par value of such Stock on such date.
The Committee shall also impose such deferral, forfeiture and/or other
terms and conditions as it shall determine, in its sole discretion, on such
Stock Purchase Rights or the exercise thereof. The terms of Stock Purchase
Rights awards need not be the same with respect to each participant. Each Stock
Purchase Right award shall be confirmed by, and be subject to the terms of, a
Stock Purchase Rights Agreement.
(b) Exercisability. Stock Purchase Rights shall generally be exercisable for
such period after grant as is determined by the Committee not to exceed sixty
(60) days. However, the Committee may provide, in its sole discretion, that the
Stock Purchase Rights of persons potentially subject to Section 16(b) of the
Exchange Act shall not become exercisable until six months and one day after the
grant date, and shall then be exercisable for ten trading days at the purchase
price specified by the Committee in accordance with Paragraph 9(a) of the Plan.
10. Other Stock-Based Awards.
(a) Administration.
(i) Other awards of Stock and other awards that are valued in whole or in
part by reference to, or are otherwise based on, Stock ("Other Stock-Based
Awards"), including, without limitation, performance shares, convertible
preferred stock (to the extent a series of preferred stock has been or may be
created by, or in accordance with a procedure set forth in, the Company's
certificate of incorporation), convertible debentures, warrants, exchangeable
securities and Stock awards or options valued by reference to Fair Market Value,
Book Value or performance of the Company or any Subsidiary, Affiliate or
division, may be granted either alone or in addition to or in tandem with Stock
Options, Stock Appreciation Rights, Restricted Stock, Deferred Stock or Stock
Purchase Rights granted under the Plan and/or cash awards made outside of the
Plan.
(ii) Subject to the provisions of the Plan, the Committee shall have
authority to determine the persons to whom and the time or times at which such
award shall be made, the number of shares of Stock to be awarded pursuant to
such awards, and all other conditions of the awards. The Committee may also
provide for the grant of Stock upon the completion of a specified performance
period. The provisions of Other Stock-Based Awards need not be the same with
respect to each recipient.
(b) Terms and Conditions. Other Stock-Based Awards made pursuant to this Section
10 shall be subject to the following terms and conditions:
(i) Subject to the provisions of the Plan and the award agreement referred
to in Paragraph 10(b)(v) of the Plan, shares of Stock subject to awards made
under this Section 10 may not be sold, assigned, transferred, pledged or
A-13
otherwise encumbered prior to the date on which the shares are issued, or, if
later, the date on which any applicable restriction, performance or deferral
period lapses.
(ii) Subject to the provisions of the Plan and the award agreement and
unless otherwise determined by the Committee at grant, the recipient of an award
under this Section 10 shall be entitled to receive, currently or on a deferred
basis, interest or dividends or interest or dividend equivalents with respect to
the number of shares covered by the award, as determined at the time of the
award by the Committee, in its sole discretion, and the Committee may provide
that such amounts (if any) shall be deemed to have been reinvested in additional
Stock or otherwise reinvested.
(iii) Any award under Section 10 and any Stock covered by any such award
shall vest or be forfeited to the extent so provided in the award agreement, as
determined by the Committee, in its sole discretion.
(iv) In the event of the participant's Retirement, Disability or death, or
in cases of special circumstances, the Committee may, in its sole discretion,
waive in whole or in part any or all of the remaining limitations (if any)
imposed with respect to any or all of an award pursuant to this Section 10.
(v) Each award under this Section 10 shall be confirmed by, and subject to
the terms of, an agreement or other instrument by the Company and by the
participant.
(vi) Stock (including securities convertible into Stock) issued on a bonus
basis under this Section 10 may be issued for no cash consideration.
11. Change in Control Provisions.
(a) Impact of Event. In the event of a "Change in Control," as defined in
Paragraph 11(b) of the Plan, or a "Potential Change in Control," as defined in
Paragraph 11(c) of the Plan, except to the extent otherwise determined by the
Committee or the Board at or after grant (subject to any right of approval
expressly reserved by the Committee or the Board at the time of such
determination), the following acceleration and valuation provisions shall apply:
(i) Any Stock Appreciation Rights outstanding for at least six months and
any Stock Options awarded under the Plan not previously exercisable and vested
shall become fully exercisable and vested, regardless of whether the amendment
to the Plan pursuant to which such Stock Options shall have been granted shall
have been approved by stockholders; provided, however, that if such stockholder
approval shall not have been obtained prior to a Change of Control or a
Potential Change of Control, any Incentive Stock Options may, with the consent
of the holders thereof, be treated as Non-Qualified Stock Options.
(ii) The restrictions and deferral limitations applicable to any Restricted
Stock, Deferred Stock, Stock Purchase rights and Other Stock-Based Awards, in
each case to the extent not already vested under the Plan, shall lapse and such
shares and awards shall be deemed fully vested, regardless of whether the
amendment to the Plan pursuant to which such Stock Options shall have been
granted shall have been approved by stockholders.
(iii) The value of all outstanding Stock Options, Stock Appreciation Rights,
Restricted Stock, Deferred Stock, Stock Purchase Rights and Other Stock-Based
Awards, in each case to the extent vested (including such rights which shall
have become vested pursuant to Paragraphs 11(a)(i) and (ii) of the Plan), shall
be purchased by the Company ("cashout") in a manner determined by the Committee,
A-14
in its sole discretion, on the basis of the "Change in Control Price" as defined
in Paragraph 11(d) of the Plan as of the date such Change in Control or such
Potential Change in Control is determined to have occurred or such other date as
the Committee may determine prior to the Change in Control, unless the Committee
shall, contemporaneously with or prior to any particular Change of Control or
Potential Change of Control, determine that this Paragraph 11(a)(iii) shall not
be applicable to such Change in Control or Potential Change in Control.
(b) Definition of "Change in Control." For purposes of Paragraph 11(a) of the
Plan, a "Change in Control" means the happening of any of the following:
(i) When any "person" (as defined in Section 3(a)(9) of the Exchange Act and
as used in Sections 13(d) and 14(d) of the Exchange Act, including a "group" as
defined in Section 13(d) of the Exchange Act, but excluding the Company and any
Subsidiary and any employee benefit plan sponsored or maintained by the Company
or any Subsidiary and any trustee of such plan acting as trustee) directly or
indirectly becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act, as amended from time to time), of securities of the Company
representing twenty-five percent or more of the combined voting power of the
Company's then outstanding securities; provided, however, that a Change of
Control shall not arise if such acquisition is approved by the board of
directors or if the board of directors or the Committee determines that such
acquisition is not a Change of Control or if the board of directors authorizes
the issuance of the shares of Common Stock (or securities convertible into
Common Stock or upon the exercise of which shares of Common Stock may be issued)
to such persons; or
(ii) When, during any period of twenty-four consecutive months during the
existence of the Plan, the individuals who, at the beginning of such period,
constitute the Board (the "Incumbent Directors") cease for any reason other than
death, Disability or Retirement to constitute at least a majority thereof,
provided, however, that a director who was not a director at the beginning of
such 24-month period shall be deemed to have satisfied such 24-month requirement
(and be an Incumbent Director) if such director was elected by, or on the
recommendation of, or with the approval of, at least two-thirds of the directors
who then qualified as Incumbent Directors either actually (because they were
directors at the beginning of such 24-month period) or by prior operation of
this Paragraph 11(b)(ii); or
(iii) The occurrence of a transaction requiring stockholder approval for the
acquisition of the Company by an entity other than the Company or a Subsidiary
through purchase of assets, or by merger, or otherwise.
(c) Definition of Potential Change in Control. For purposes of Paragraph 11(a)
of the Plan, a "Potential Change in Control" means the happening of any one of
the following:
(i) The approval by stockholders of an agreement by the Company, the
consummation of which would result in a Change in Control of the Company as
defined in Section 11(b) of the Plan; or
(ii) The acquisition of beneficial ownership, directly or indirectly, by any
entity, person or group (other than the Company or a Subsidiary or any Company
employee benefit plan or any trustee of such plan acting as such trustee) of
securities of the Company representing five percent or more of the combined
voting power of the Company's outstanding securities and the adoption by the
Board of Directors of a resolution to the effect that a Potential Change in
Control of the Company has occurred for purposes of the Plan.
A-15
(d) Change in Control Price. For purposes of this Section 11, "Change in Control
Price" means the highest price per share paid in any transaction reported on the
principal stock exchange on which the Stock is traded or the average of the
highest bid and asked prices as reported by NASDAQ, or paid or offered in any
bona fide transaction related to a potential or actual Change in Control of the
Company at any time during the sixty-day period immediately preceding the
occurrence of the Change in Control (or, where applicable, the occurrence of the
Potential Change in Control event), in each case as determined by the Committee
except that, in the case of Incentive Stock Options and Stock Appreciation
Rights relating to Incentive Stock Options, such price shall be based only on
transactions reported for the date on which the optionee exercises such Stock
Appreciation Rights or, where applicable, the date on which a cashout occurs
under Paragraph 11(a)(iii).
12. Amendments and Termination.
(a) The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration, or discontinuation shall be made which would impair the rights of an
optionee or participant under a Stock Option, Stock Appreciation Right (or
Limited Stock Appreciation Right), Restricted or Deferred Stock award, Stock
Purchase Right or Other Stock-Based Award theretofore granted, without the
optionee's or participant's consent, and no amendment will be made without
approval of the stockholders if such amendment requires stockholder approval
under state law or if stockholder approval is necessary in order that the Plan
comply with Rule 16b-3 of the Commission under the Exchange Act or any
substitute or successor rule or if stockholder approval is necessary in order to
enable the grant pursuant to the Plan of options or other awards intended to
confer tax benefits upon the recipients thereof.
(b) The Committee may amend the terms of any Stock Option or other award
theretofore granted, prospectively or retroactively, but no such amendment shall
impair the rights or any holder without the holder's consent. The Committee may
also substitute new Stock Options for previously granted Stock Options (on a one
for one or other basis), including previously granted Stock Options having
higher option exercise prices.
(c) Subject to the provisions of Paragraphs 12(a) and (b) of the Plan, the Board
shall have broad authority to amend the Plan to take into account changes in
applicable securities and tax laws and accounting rules, as well as other
developments, and, in particular, without limiting in any way the generality of
the foregoing, to eliminate any provisions which are not required to included as
a result of any amendment to Rule 16b-3 of the Commission pursuant to the
Exchange Act.
13. Unfunded Status of Plan.
The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
participant or optionee by the Company, nothing contained in this Plan shall
give any such participant or optionee any rights that are greater than those of
a general creditor of the Company. In its sole discretion, the Committee may
authorize the creation of trusts or other arrangements to meet the obligations
created under the Plan to deliver Stock or payments in lieu of or with respect
to awards under this Plan; provided, however, that, unless the Committee
otherwise determines with the consent of the affected participant, the existence
of such trusts or other arrangements shall be consistent with the "unfunded"
status of the Plan.
14. General Provisions.
(a) The Committee may require each person purchasing shares pursuant to a Stock
Option or other award under the Plan to represent to and agree with the Company
in writing that the optionee or participant is acquiring the shares without a
view to distribution thereof. The certificates for such shares may include any
A-16
legend which the Committee deems appropriate to reflect any restrictions on
transfer. All certificates or shares of Stock or other securities delivered
under the Plan shall be subject to such stock-transfer orders and other
restrictions as the Committee may deem advisable under the rules, regulations,
and other requirements of the Commission, any stock exchange upon which the
Stock is then listed, and any applicable Federal or state securities law, and
the Committee may cause a legend or legends to be put on any such certificates
to make appropriate reference to such restrictions.
(b) Nothing contained in this Plan shall prevent the Board from adopting other
or additional compensation arrangements, subject to stockholder approval if such
approval is required; and such arrangements may be either generally applicable
or applicable only in specific cases.
(c) Neither the adoption of the Plan nor the grant of any award pursuant to the
Plan shall confer upon any employee of the Company or any Subsidiary or
Affiliate any right to continued employment with the Company or a Subsidiary or
Affiliate, as the case may be, nor shall it interfere in any way with the right
of the Company or a Subsidiary or Affiliate to terminate the employment of any
of its employees at any time.
(d) No later than the date as of which an amount first becomes includible in the
gross income of the participant for Federal income tax purposes with respect to
any award under the Plan, the participant shall pay to the Company, or make
arrangements satisfactory to the Committee regarding the payment of, any
Federal, state, or local taxes of any kind required by law to be withheld with
respect to such amount. Unless otherwise determined by the Committee,
withholding obligations may be settled with Stock, including Stock that is part
of the award that gives rise to the withholding requirement. The obligations of
the Company under the Plan shall be conditional on such payment or arrangements
and the Company and its Subsidiaries or Affiliates shall, to the extent
permitted by law, have the right to deduct any such taxes from any payment of
any kind otherwise due to the participant.
(e) The actual or deemed reinvestment of dividends or dividend equivalents in
additional Restricted Stock (or in Deferred Stock or other types of Plan awards)
at the time of any dividend payment shall only be permissible if sufficient
shares of Stock are available under Section 3 of the Plan for such reinvestment
(taking into account then outstanding Stock Options, Stock Purchase Rights and
other Plan awards).
15. Effective Date of Plan.
The Plan shall be effective as of the date the Plan is approved by the
Board, subject to the approval of the Plan by a majority of the votes cast by
the holders of the Company's Common Stock at the next annual or special meeting
of stockholders. Any grants made under the Plan prior to such approval shall be
effective when made (unless otherwise specified by the Committee at the time of
grant), but shall be conditioned on, and subject to, such approval of the Plan
by such stockholders.
16. Term of Plan.
Stock Option, Stock Appreciation Right, Restricted Stock award, Deferred
Stock award, Stock Purchase Right or Other Stock-Based Award may be granted
pursuant to the Plan, until ten (10) years from the date the Plan was approved
by the Board, unless the Plan shall be terminated by the Board, in its
discretion, prior to such date, but awards granted prior to such termination may
extend beyond that date.
A-17
APPENDIX B
AUDIT COMMITTEE CHARTER
Purpose
The Audit Committee is appointed by the Board to assist the Board in
monitoring (1) the accounting and financial reporting processes of the Company,
(2) the integrity of the financial statements of the Company, (3) the
independent auditor's qualifications and independence, (4) the performance of
the Company's internal audit function and independent auditors, and (5) the
compliance by the Company with legal and regulatory requirements.
The Audit Committee shall prepare the report required by the rules of
the Securities and Exchange Commission ("the Commission") to be included in the
Company's annual proxy statement and any other Committee reports required by
applicable securities laws or stock exchange listing requirements or rules.
Committee Membership
The Audit Committee shall consist of no fewer than three members. The
members of the Audit Committee shall meet the independence and experience
requirements of Nasdaq, Section 10A(m)(3) of the Securities Exchange Act of 1934
(the "Exchange Act") and the rules and regulations of the Commission.
The members of the Audit Committee shall be appointed by the Board.
Audit Committee members may be replaced by the Board.
Committee Authority and Responsibilities
The Audit Committee shall have the sole authority to appoint or replace
the independent auditor (subject, if applicable, to shareholder ratification).
The Audit Committee shall be directly responsible for the compensation and
oversight of the work of the independent auditor (including resolution of
disagreements between management and the independent auditor regarding financial
reporting) for the purpose of preparing or issuing an audit report or related
work. The independent auditor shall report directly to the Audit Committee.
The Audit Committee shall pre-approve all audit and non-audit services
and shall approve all engagement fees and terms. The Audit Committee
shall consult with management but shall not delegate these
responsibilities.
B-1
The Audit Committee may form and delegate authority to subcommittees
consisting of one or more members when appropriate, including the authority to
grant preapprovals of audit and permitted non-audit services, provided that
decisions of such subcommittee to grant preapprovals shall be presented to the
full Audit Committee at its next scheduled meeting.
The Audit Committee shall have the authority, to the extent it deems
necessary or appropriate, to retain independent legal, accounting or other
advisors. The Company shall provide for appropriate funding, as determined by
the Audit Committee, for payment of compensation to the independent auditor for
the purpose of rendering or issuing an audit report and to any advisors employed
by the Audit Committee.
The Audit Committee shall meet as often as it determines, but not less
frequently than quarterly. The Audit Committee may request any officer or
employee of the Company or the Company's outside counsel or independent auditor
to attend a meeting of the Committee or to meet with any members of, or
consultants to, the Committee. The Audit Committee shall meet with management,
any internal auditors and the independent auditor in separate executive
sessions.
The Audit Committee, to the extent it deems necessary or appropriate, shall:
Financial Statement and Disclosure Matters
1. Review and discuss with management and the independent auditor the
annual audited financial statements, including disclosures made in management's
discussion and analysis, and recommend to the Board whether the audited
financial statements should be included in the Company's Form 10-K.
2. Review and discuss with management and the independent auditor the
Company's quarterly financial statements prior to the filing of its Form 10-Q,
including disclosures made in management's discussion and analysis and the
results of the independent auditor's review of the quarterly financial
statements.
3. Discuss with management and the independent auditor significant
financial reporting issues and judgments made in connection with the preparation
of the Company's financial statements, including (a) any significant changes in
the Company's selection or application of accounting principles, (b) any major
issues as to the adequacy of the Company's internal controls, (c) the
development, selection and disclosure of critical accounting estimates, and (d)
analyses of the effect of alternative assumptions, estimates or GAAP methods on
the Company's financial statements.
4. Discuss with management and the Company's independent auditor:
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
Company's ability to record, process, summarize and report
financial data and any material weaknesses in internal
controls reported by management; and
B-2
(b) Any significant changes in the Company's internal controls;
and
(c) Any fraud, whether or not material, that involves
management or other employees who have a significant role
in the Company's internal controls.
Review disclosures made to the Audit Committee by the Company's CEO and
CFO in connection with their certification of the foregoing for the Form 10-K
and Form 10-Q.
5. Discuss with management the Company's earnings press releases.
6. Discuss with management and the independent auditor the effect of
regulatory and accounting initiatives as well as off-balance sheet structures,
if any, on the Company's financial statements.
7. Discuss with management the Company's major financial risk exposures
and the steps management has taken to monitor and control such exposures,
including the Company's risk assessment and risk management policies.
8. Discuss with the independent auditor the matters required to be
discussed by Statement on Auditing Standards No. 61 relating to the conduct of
the audit. In particular, discuss:
(a) The adoption of, or changes to, the Company's significant
auditing and accounting principles and practices as
suggested by the independent auditor, any internal
auditors or management.
(b) The management letter provided by the independent auditor
and the Company's response to that letter.
(c) Any difficulties encountered in the course of the audit
work, including any restrictions on the scope of
activities or access to requested information, and any
significant disagreements with management.
9. Discuss with the independent auditors the matters required to be
discussed by Section 10A(k) of the Securities Exchange Act of 1934, as amended,
as follows:
B-3
All critical accounting policies and practices to be used;
(b) All alternative treatments of financial information, if
any, within generally accepted accounting principles that
have been discussed with management of the Company,
ramifications of the use of such alternative disclosures
and treatments, and the treatment preferred by the
independent auditors;
(c) Other material written communications between the
independent auditors and the management of the Company,
such as any management letter or schedule of unadjusted
differences.
10. Review and discuss the adequacy and effectiveness of the Company's
disclosure controls and procedures and management reports thereon.
Oversight of the Company's Relationship with the Independent Auditor
--------------------------------------------------------------------
11. Review and evaluate the lead partner of the independent auditor
team.
12. Obtain and review a report from the independent auditor at least
annually regarding (a) the independent auditor's internal quality-control
procedures, (b) any material issues raised by the most recent internal
quality-control review, or peer review, of the firm, or by any inquiry or
investigation by governmental or professional authorities within the preceding
five years respecting one or more independent audits carried out by the firm,
(c) any steps taken to deal with any such issues, (d) all relationships between
the independent auditor and the Company and (e) confirmation that their audit
has been performed in accordance with the requirements of Section 10A of the
Securities Exchange Act of 1934. Evaluate the qualifications, performance and
independence of the independent auditor, including considering whether the
auditor's quality controls are adequate and the provision of permitted non-audit
services is compatible with maintaining the auditor's independence, and taking
into account the opinions of management and any internal auditor. The Audit
Committee shall present its conclusions with respect to any internal auditor to
the Board.
13. Ensure the rotation of the lead (or coordinating) audit partner
having primary responsibility for the audit and the audit partner responsible
for reviewing the audit as required by law.
14. Confirm that the lead audit partner, and the lead audit partner
responsible for reviewing the audit, for the Company's independent auditors has
not performed audit services for the Company for in excess of the five previous
fiscal years.
15. Meet with the independent auditor prior to the audit to discuss the
planning, scope and staffing of the audit.
B-4
Compliance Oversight Responsibilities
-------------------------------------
16. Obtain from the independent auditor assurance that Section 10A(b)
(Required Response to Audit Committees - Illegal Acts) of the Exchange Act has
not been implicated.
17. Obtain reports from management, any senior internal auditing
executive and the independent auditor that the Company and any
subsidiary/foreign affiliated entities are in conformity with applicable
legal requirements and the Company's code of ethics.
18. Discuss with management and the independent auditor any
correspondence with regulators or governmental agencies and any employee
complaints or published reports which raise material issues regarding the
Company's financial statements or accounting policies.
19. Discuss with management, the independent auditors, the internal
auditors and the Company's General Counsel as appropriate, any legal, regulatory
or compliance matters that may have a material impact on the financial
statements or compliance policies, including significant changes in accounting
standards or rules as promulgated by the Financial Accounting Standards Board,
the Securities and Exchange Commission or other regulatory authorities with
relevant jurisdiction.
Complaints
----------
20. Establish procedures for:
(a) The receipt, retention, and treatment of complaints
received by the Company regarding accounting, internal
accounting controls, or auditing matters.
(b) The confidential, anonymous submission by employees of the
Company of concerns regarding questionable accounting or
auditing matters.
General - The Audit Committee shall:
-------
21. Make regular reports to the Board of Directors.
22. Establish the policy for the Company's hiring of employees or former
employees of the independent auditors who were engaged on the Company's account.
23. Review any management decision to seek a second opinion from
independent auditors other than the Company's regular independent auditors with
respect to any significant accounting issue.
24. Review and reassess the adequacy of this Committee and its Charter
at least annually and recommend to the Board any changes the Committee deems
appropriate.
B-5
25. Perform any other activities consistent with this Charter, the
Company's By-Laws and governing law as the Committee or the Board deems
necessary or appropriate.
26. Make available this Charter on the Company's website at
www.csmcorp.com as required by the rules and regulations of the Securities and
Exchange Commission and The Nasdaq Stock Market.
Limitation of Audit Committee's Role
------------------------------------
While the Audit Committee has the responsibilities and powers set forth
in this Charter, it is not the duty of the Audit Committee to plan or conduct
audits or to determine that the Company's financial statements and disclosures
are complete and accurate and are in accordance with generally accepted
accounting principles and applicable rules and regulations. These are the
responsibilities of management and the independent auditor.
B-6
APPENDIX C
CODE OF ETHICS
FOR
SENIOR FINANCIAL OFFICERS
-----------------
It is the policy of Netsmart Technologies, Inc. that the Chairman, Chief
Executive Officer, Chief Financial Officer, and Controller of Netsmart
Technologies, Inc. and its subsidiaries (collectively, the "Company") adhere to
and advocate the following principles governing their professional and ethical
conduct in the fulfillment of their responsibilities:
1. Act with honesty and integrity, avoiding actual or apparent conflicts
between his or her personal, private interests and the interests of the Company,
including receiving improper personal benefits as a result of his or her
position.
2. Disclose to the Chair of the Audit Committee of the Company's Board of
Directors any material transaction or relationship that reasonably could be
expected to give rise to a conflict of interest.
3. Perform responsibilities with a view to causing periodic reports and
documents filed with or submitted to the SEC and all other public communications
made by the Company to contain information which is accurate, complete, fair,
objective, relevant, timely and understandable.
4. Comply with laws, rules and regulations of federal, state, and local
governments applicable to the Company, and with the rules and regulations of
private and public regulatory agencies having jurisdiction over the Company.
5. Act in good faith, responsibly, with due care, competence and diligence,
without misrepresenting or omitting material facts or allowing independent
judgment to be compromised or subordinated.
6. Respect the confidentiality of information acquired in the course of
performance of his or her responsibilities except when authorized or otherwise
legally obligated to disclose any such information; not use confidential
information acquired in the course of performing his or her responsibilities for
personal advantage.
7. Share knowledge and maintain skills important and relevant to the needs
of the Company, its shareholders and other constituencies, and the general
public.
8. Pro-actively promote ethical behavior among subordinates and peers in his
or her work environment and community.
9. Use and control all corporate assets and resources employed by or
entrusted to him or her in a responsible manner.
C-1
10. Not use corporate information, corporate assets, corporate opportunities
or his or her position with the Company for personal gain; not compete directly
or indirectly with the Company.
11. Comply in all respects with the Company's Ethical Standards and
Policies.
12. Advance the Company's legitimate interests when the opportunity arises.
Each officer covered by this Code shall report, in person or in writing, any
known or suspected violations of this Code to the Chair of the Audit Committee.
The Audit Committee will investigate any reported violations and will oversee an
appropriate response, including corrective action and preventative measures. Any
officer who violates this Code will face appropriate, case-specific disciplinary
action, which may include demotion or discharge.
Any request for a waiver of any provision of this Code must be in writing and
addressed to the Board of Directors. Any waiver of this Code will be disclosed
promptly on Form 8-K or any other means approved by the SEC.
It is also the Policy of the Company that each officer covered by this Code
shall acknowledge and certify to the foregoing annually and file a copy of such
certification with the Audit Committee of the Company's Board of Directors.
OFFICER'S CERTIFICATION
I have read and understand the foregoing Code of Ethics. I hereby certify
that I am in compliance with the foregoing Code of Ethics, and I will comply
with the Code in the future. I understand that any violation of the Code will
subject me to appropriate disciplinary action, which may include demotion or
discharge.
Date:_________ ________________________
Name: