AUDIT COMMITTEE REPORT

 

The following Report of the Audit Committee does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other filing we make under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically incorporate this Report by reference therein.

 

In accordance with its written charter, the audit committee assists the board in overseeing the company’s financial reporting process, including evaluating the effectiveness of internal accounting, auditing and financial controls and procedures.

 

Management is responsible for the financial reporting process, preparing consolidated financial statements in accordance with generally accepted accounting principles, designing and implementing a system of internal controls and procedures designed to ensure compliance with accounting standards and applicable laws and regulations.  The company’s independent registered public accountants are responsible for auditing the financial statements.  The audit committee is responsible for monitoring and reviewing these procedures and processes.  The audit committee is composed of four independent directors whose independence has been determined by the board of directors based on the standards set forth in the audit committee’s charter, the company’s governing documents and the rules promulgated by the American Stock Exchange.  The members of the audit committee are not professionally engaged in the practice of accounting or auditing. Mr. Mesolella qualifies as, and has been designated, the audit committee’s “financial expert” as defined by the Securities and Exchange Commission.  The audit committee relies in part, without independent verification, on the information provided to it and on the representations made by management and the independent registered public accountants that the financial statements have been prepared in conformity with generally accepted accounting principles.

 

During 2004 and early 2005, the members of the audit committee met separately and with members of the company’s management and with the company’s previous independent registered public accountants, Poulos & Bayer (“Poulos”), as well as the company’s current independent registered public accountants, Blackman Kallick Bartelstein, LLP (“BKB”).  The audit committee examined the independence of Poulos after the company hired Jody Brown, a former partner of Poulos, to be its chief financial officer.  Additionally, the audit committee evaluated potential replacements for Poulos and ultimately engaged BKB as the company’s independent registered public accountants.  The committee discussed with Poulos or BKB, as appropriate, numerous items at these meetings including the overall scope and plan for the year-end audit.  As part of these discussions, the audit committee discussed the results of Poulos’ and BKB’s examination and their observation and evaluation of the company’s internal controls.  Further, the audit committee reviewed and discussed, with management and BKB, the company’s audited consolidated financial statements as of and for the year ended December 31, 2004.  During fiscal 2004 and early 2005, management advised the committee that each set of financial statements reviewed had been prepared in accordance with generally accepted accounting principles, and reviewed significant accounting and disclosure issues with the committee.

 

On October 27, 2005, management of the company advised the audit committee that management had determined that (1) the company’s method of accounting for revenues generated by the company’s Search Engine Enhancement segment, and (2) the company’s presentation of revenues generated by its Affiliate Marketing segment, were inconsistent with generally accepted accounting principles.  Management and the audit committee also discussed this matter with BKB, the company’s

 

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current independent registered public accounting firm.  The audit committee concurred with management’s conclusion and the company undertook a comprehensive review of its previously filed consolidated financial statements. Based on this review, on December 30, 2005, the company restated its consolidated audited annual report for the year ended December 31, 2004, and its consolidated quarterly reports for the quarters ended March 31, 2004, June 30, 2004, September 30, 2004, March 31, 2005 and June 30, 2005.

 

As part of the above-referenced review, management evaluated the company’s internal controls.  As a result of the evaluation, the company concluded that its internal controls over revenue recognition for its Search Engine Enhancement segment and presentation of revenue for its Affiliate Marketing segment were deficient.  In order to remediate the internal controls deficiency, management has implemented or is in the process of implementing various measures.  The audit committee is overseeing this process and is receiving regular reports from management.

 

The audit committee also discussed with BKB all of the matters required by generally accepted auditing standards, including those described in Statement on Auditing Standards No. 61, as amended, “Communication with Audit Committees,” including the quality of our accounting principles, the reasonableness of significant judgments and the clarity of disclosures in the financial statements.  The audit committee also obtained a formal written statement from BKB, describing all relationships between BKB and the company that might bear on BKB’s independence.  The audit committee also discussed any relationships that may have an impact on BKB’s objectivity and independence including a review of audit and non-audit fees and the written disclosures and letter from BKB to the committee pursuant to Independence Standards Board Standard No. 1 (Independence Discussions with the Audit Committees).

 

Based on the reviews and discussions with management and BKB disclosed herein, the audit committee recommended to the board of directors that the restated audited consolidated financial statements be included in the company’s restated Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 2004, for filing with the Securities and Exchange Commission.

 

	The Audit Committee
	Vincent J. Mesolella (Chairman) James N. Held (1) Xavier Hermosillo (2) Patrick W. Walsh
(1) Committee member until January 2006.
(2) Committee member until December 2005.

 

EXECUTIVE COMPENSATION

 

Compensation Tables

 

The following table sets forth all compensation awarded to, earned by or paid, on a consolidated basis, to our chief executive officer and any other executive officer earning salary and bonus exceeding $100,000 referred to herein as the named executive officers.  Each of the four persons set forth below, Messrs. Jacobs, Mitchell, Brown and Martin, are actually paid by our subsidiary, WebSourced.   Our total compensation expense as reflected on our Consolidated Financial Statements includes the

 

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compensation expenses for each of our subsidiaries including WebSourced.  Only two executive officers, other than our chief executive officer, received a salary and bonus exceeding $100,000 for the year ended December 31, 2005.

 

Name and Principal Position				Annual Compensation												Long-Term Compensation							All Other Compensation ($)
																Awards					Payouts
		Year		Salary ($)					Bonus ($)					Other Annual Compensation ($)		Restricted Stock Award(s) ($)			Securities Underlying Options/SARs (#)		LTP Payouts ($)
Gerard M. Jacobs, President and Chief Executive Officer (1)		2005		$			294,981		$			100,000		0		0			1,000,000		0		0
		2004		$			225,527		0					0		$	0		0		0		0
		2003		$			30,000		0					0		$	320,000		0		0		0
Scott P. Mitchell, President (2)		2005		$		216,018			0					0		0			0		0		0
		2004		$		154,130			0					0		0			0		0		0
		2003		0					0					0		0			0		0		0
Jody Brown, Chief Financial Officer, (3)		2005		$			187,243		0					0		0			0		0		0
		2004		$			46,292		0					0		0			41,431		0		0
		2003		0					0					0		0			0		0		0
S. Patrick Martin, WebSourced, Inc. (4)		2005		$	243,957				$		75,000			0		0			300,000		0		0
		2004		$	254,433				0					0		0			0		0		0
		2003		$	182,897				$	20,625				0		0			0		0		0

 

(1)                                   In 2003, we granted 3,200,000 shares valued at $320,000 to the Roberti Jacobs Family Trust, which acquired the rights to these shares from Mr. Jacobs.

(2)                                   Mr. Mitchell began serving as our President in August, 2005.

(3)                                   Mr. Brown began serving as our Chief Financial Officer in August, 2004.

(4)                                   Mr. Martin ceased serving as President and Chief Executive Officer of WebSourced effective November 30, 2005.

 

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Option/SAR Grants in Last Fiscal Year

 

The following table sets forth information regarding the number of options granted to each of the named executive officers during the year ended December 31, 2005.

 

Name		Number of Securities Underlying Options		% of Total Options Granted to Employees in Fiscal Year		Exercise Price ($/Sh)			Expiration Date
Gerard M. Jacobs		1,000,000		47	%	$	5.25		1/20/2015
Scott P. Mitchell		—		—		—			—
Jody Brown		—		—		—			—
S. Patrick Martin (1)		300,000		14	%	$	5.25		1/20/2015

 

(1)                                   Mr. Martin ceased serving as President and Chief Executive Officer of WebSourced effective November 30, 2005.

 

Value of Securities Underlying Unexercised Options

 

The following table sets forth information regarding the number and value of securities underlying unexercised options or warrants held by each of the named executive officers at December 31, 2005.

 

		Share Acquired on		Value		Number of Securities Underlying Unexercised Options/SARs at December 31, 2005(1)				Value of Unexercised In-the- Money Options/SARs at December 31, 2005 (2)
Name		Exercise (#)		Realized ($)		Exercisable		Unexercisable		Exercisable			Unexercisable
Gerard M. Jacobs		—		—		0		1,000,000		0			0
Scott P. Mitchell		—		—		89,285		100,000	(3)	$	12,500		$	0
Jody Brown						41,431		0		$	12,429		$	0
S. Patrick Martin (4)		—		—		743,147	(5)	300,000		$	1,611,179		$	0

 

(1)                                   These amounts represent the total number of shares issuable on exercise of warrants held by the named executive officers at December 31, 2005.

(2)                                   These amounts represent the difference between the exercise price of options or warrants and the closing bid price of our common stock on December 31, 2005.

(3)                                   Includes warrants to purchase 39,285 shares issued to Scott and Kristi Family Limited Partnership.

(4)                                   Mr. Martin ceased serving as President and Chief Executive Officer of WebSourced effective November 30, 2005.

(5)                                   Among these warrants, 33,147 were granted in 2000 at an exercise price of $2.00 per share which was reduced to $0.45 per share in 2003, 200,000 in 2002 at an exercise price of $0.27 per share, and 510,000 in 2003 at an exercise price of $0.13 per share.

 

Executive Officers

 

The board of directors annually elects our executive officers.  These officers may, subject to any contract rights, be terminated at any time.  Listed below is information about our executive officers except for Mr. Jacobs, whose biography is included above.

 

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Scott P. Mitchell: President .  Since August 2005, Mr. Mitchell has served as our president and as the chief executive officer of Cherish, Inc. since 2004.  Mr. Mitchell launched several successful Internet businesses including HSN.com, RollingStone.com and Tunes.com.  In 2004 he merged his online dating company with the Company and formed Cherish, Inc., the Company’s wholly owned online dating subsidiary.  Mr. Mitchell holds Bachelor of Science degrees from Illinois State University in Psychology and Economics and a Masters of Business Administration, Masters of Management and Organizational Development and Masters of Management Information Systems from Benedictine University.

 

Jody Brown: Chief Financial Officer .  Since August 2004, Mr. Brown has served as our chief financial officer.  From January 2001 until August 2004, Mr. Brown was a partner at the accounting firm of Poulos & Bayer, our pervious independent registered public accountant.  He had worked at Poulos & Bayer since 1995. Mr. Brown graduated from the University of Illinois at Chicago in 1995.

 

George Douaire: Chief Operating Officer .  Since August 2005, Mr. Douaire has served as our chief operating officer.  Previously, Mr. Douaire served as general manager of e-business and kodak.com and vice president of marketing for the Eastman Kodak Company.  Prior to that, Mr. Douaire was senior vice president at Peapod Interactive.  Mr. Douaire began his career at the Chicago Tribune Company in 1984 and served in a number of positions within the company.  Mr. Douaire also served on the Tribune Company’s corporate staff, as manager of marketing development.  Mr. Douaire holds a Bachelor of Arts degree from Fairfield University in Fairfield, Connecticut and a Masters of Business Administration from the Loyola University Graduate School of Business in Chicago.

 

Employment Agreements

 

Scott P. Mitchell entered into an employment agreement with our indirect wholly owned subsidiary Cherish, Inc. effective August 19, 2004,  pursuant to which he serves as the President and Chief Executive Officer of Cherish.  On August 19, 2005, this agreement was amended to provide that Mr. Mitchell will serve as our President as well.  The employment agreement, as amended, provides for the following: (i) an employment term ending on December 31, 2008; (ii) base salary equal to $250,000 per annum; (iii) other benefits that are generally available to the vice presidents of the Company’s WebSourced Inc subsidiary; (iv) a non-competition and non-solicitation covenant during the term of the employment agreement and for a period of two years thereafter; (v) termination of the employment agreement (A) by us for cause or the disability of Mr. Mitchell, (B) automatically upon the death of Mr. Mitchell, or (C) by Mr. Mitchell if he is asked to relocate to a different geographic area, does not accept such relocation, and a suitable position cannot be arranged at his current location; and (vi) severance equal to all amounts that would have become due and owing through December 31, 2007 if we terminate the employment agreement other than for cause or the death or disability of Mr. Mitchell.

 

S. Patrick Martin entered into an employment agreement with our WebSourced, Inc. subsidiary, pursuant to which he served as the chief executive officer of WebSourced, effective as of January 1, 2004.  The term of the agreement continued until December 31, 2008, unless sooner terminated in accordance with the agreement.  Under the agreement, Mr. Martin received a base salary of $240,000 per year, subject to increases and bonuses granted in the discretion of the board of directors of WebSourced.  If WebSourced terminated the agreement prior to the expiration of the term other than “for cause,” then Mr. Martin is entitled to all amounts of his annual base salary that would have become due and owing through December 31, 2008, as if Mr. Martin’s employment had not been terminated

 

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prior thereto.  The employment agreement contains non-compete and non-solicitation provisions during the term of the agreement and for a period of one year thereafter.

 

On December 2, 2005, we entered into a Separation Agreement and General Release with S. Patrick Martin, pursuant to which Mr. Martin ceased serving as the president and chief executive officer of our WebSourced, Inc. subsidiary effective November 30, 2005.  Additionally, Mr. Martin ceased serving on the board of directors and the board’s executive committee.  Further, Mr. Martin ceased serving as an employee, officer, director or committee member of any subsidiary of the Company on which he had served.

 

We agreed to pay to Mr. Martin an aggregate of $105,000 over a period of twelve months beginning December 15, 2005.  Additionally, we agreed to pay, in one lump sum, an amount representing all of the Company’s obligations for salary, sick and vacation pay due to Mr. Martin.  Also pursuant to this agreement, we agreed to amend the terms of certain vested options or warrants previously granted to Mr. Martin, which otherwise would have terminated within thirty days following the separation date, to provide that Mr. Martin may exercise such options or warrants during the period beginning January 1, 2006 and ending November 30, 2006.

 

Equity Compensation Plan Information

 

The following table presents certain information, as of December 31, 2005, with respect to compensation plans, including individual compensation arrangements, under which equity securities are authorized for issuance:

 

Plan category		Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights			Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
		(a)		(b)			(c)
Equity compensation plans approved by security holders		0		0			0
Equity compensation plans not approved by security holders		5,686,916		$	2.31		0
Total		5,686,916		$	2.31		0

 

Certain Relationships and Related Transactions

 

On August 31, 2002, we sold the stock of Safe Environment Corporation of Indiana, hereinafter referred to as “SECO” and our interest in Acadian Builders, LLC to GMP, LLC.  John Giura, our former vice chairman and the holder of approximately 7.1% of our outstanding common stock owned 60% of

 

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GMP at the time of the transaction.  As part of the sale, GMP agreed to pay us, among other things, certain contract payments referred to as the “GMP contract payments,” $175,000 in cash by November 30, 2002, plus $470,000 payable in the amount of $35,000 per quarter beginning on December 31, 2002.  The obligation to pay $470,000 was evidenced by a non-interest bearing promissory note maturing on December 31, 2005 and secured by a pledge by GMP of all of its common stock of SECO.  GMP subsequently defaulted on a portion of the GMP contract payments and on its obligation under the note.  GMP had made $125,000 of the GMP contract payments as of March 31, 2003.  As a result of Mr. Giura’s and SECO’s default of their obligations under the August 31, 2002 agreement, on March 31, 2003 we entered into a revised agreement with GMP, SECO and Mr. Giura.  Under this agreement: (1) GMP and SECO agreed to use their best efforts to cause an escrow agent not related to us, GMP or SECO to sign agreements to pay us $300,000 in funds that would otherwise become due and payable to SECO out of a certain escrow account established for a SECO construction project located in St. Ann, Missouri as soon as SECO becomes entitled to the proceeds; (2) GMP and SECO agreed to use their best efforts to cause certain parties not related to us, GMP or SECO to sign agreements pursuant to which an aggregate of up to $200,000 that would otherwise become due and payable to Acadian Builders, LLC would be paid to us from proceeds of sales from a housing development located in St. Charles, Missouri; (3) GMP agreed to pay the GMP contract payments by July 31, 2003; and (4) we agreed that if GMP and SECO fully performed GMP contract payments, and were not in default of any of certain other obligations to us, then we would reduce the principal of the note from $470,000 to $337,495.09.  The escrow account was funded and the escrow agent was given irrevocable instructions, which were acknowledged by the escrow agent, to pay us the $300,000 upon SECO becoming entitled to the proceeds.  GMP, SECO and Mr. Giura failed, however, to fully perform.  As of December 31, 2003, the remaining unpaid GMP contract payments totaled approximately $69,000 and GMP had failed to make any payments on its note.

 

As a result of the default on the revised agreement signed March 31, 2003, on August 31, 2004, we entered into an agreement with GMP, SECO and Mr. Giura. Mr. Jacobs, our chief executive officer also became a party to the agreement due to the proxy arrangement described below.  Under this agreement, Mr. Giura agreed: (a) to provide proof of payment of all amounts due in connection with the settlement of a lawsuit with The Greater St. Louis Construction Laborer’s Welfare Fund in which Mr. Giura and SECO were named as defendants and for which Mr. Giura agreed to indemnify us pursuant to an indemnification agreement dated as of October 22, 2003, between Mr. Giura and us; (b) to resign as our employee and director; (c) to indemnify and hold us harmless against all claims relating to SECO’s construction project in St. Ann, Missouri, which claims relate to disputes between SECO and the City of St. Ann with respect to the cost and performance of certain changes requested by the City of St. Ann to be made to the project by SECO; (d) to guarantee completion of the St. Ann project and payment to us of $300,000 from the St. Ann escrow account no later than April 19, 2005; (e) to cause Janet and Gerald Winter, the principal owners of Acadian Builders to deliver an instruction letter, acceptable to us and executed by all appropriate persons, directing the title company to disburse to us the profits resulting from the sale of so-called “Lot 1” located in the St. Charles, Missouri housing development; (f) to appoint Mr. Jacobs as Mr. Giura’s proxy, to exercise voting rights over the shares of our common stock held by Mr. Giura on any matter for which the shares may be voted, in Mr. Jacobs’ sole discretion; and (g) to waive and release all claims against us, except those provided for in the settlement agreement.

 

We agreed, subject to Mr. Giura fulfilling his obligations under the agreement: (i) to release the debt in the aggregate principal amount of $545,074.73 owed by GMP to us and to return the note in the amount of $470,000 marked “cancelled” which evidences a portion of the $545,074.73 aggregate debt;

 

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(ii) to reimburse Mr. Giura in the amount of $690.00 per month for twelve months commencing September 1, 2004 and ending August 31, 2005 for medical insurance premiums; (iii) to pay Mr. Giura to serve as a consultant for a sixty month period commencing September 1, 2004 and ending August 31, 2009 for $8,333 per month, reduced to $4,166 per month in the event our common stock should close at $6.00 or higher for ten consecutive days during the sixty month period, the payment to be made regardless of the death or disability of Mr. Giura; (iv) to grant Mr. Giura a warrant, exercisable for three years, to purchase up to 150,000 shares of our common stock at an exercise price of $3.50 per share; and (v) upon Mr. Jacobs certifying that Mr. Giura has fully complied with his obligations under the settlement agreement, to deliver to Mr. Giura a warrant, exercisable for three years, to purchase up to 150,000 shares of our common stock at an exercise price of $4.50 per share.

 

Mr. Giura, GMP and SECO failed to deliver a fully-executed copy of the instruction letter required by (e) above, and also failed to make the payment by April 19, 2005 required by (d) above.  We believe we will still ultimately be paid $300,000 either from the St. Ann’s escrow account as soon as SECO becomes entitled to proceeds of the St. Ann’s escrow account or pursuant to Mr. Giura’s payment guaranty referred to in (d) above.  We also expect to recover $200,000 from the sale of lots at the St. Charles development.  Because of the defaults described above, we have ceased paying Mr. Giura the consulting payments described above, are no longer reimbursing him for the insurance premiums and are no longer obligated to grant him the warrants described above.

 

We, along with our subsidiary WebSourced, borrowed monies from the Roberti Jacobs Family Trust, which owns approximately 14.4% of our outstanding common stock.  The trust is irrevocable.  The trustee of the trust is the mother-in-law of Gerard M. Jacobs, our chief executive officer.  Mr. Jacobs is neither a trustee nor a beneficiary of the Roberti Jacobs Family Trust, however, his children are beneficiaries of the trust.  Mr.  Jacobs has disclaimed any beneficial ownership of any of the securities owned by the Roberti Jacobs Family Trust.  All of the loans were repaid during the year ended December 31, 2004.  A schedule setting forth the original principal amount and interest rate of each loan is set forth below.

 

Lender		Borrower		Date of Loan		Original Principal Amount			Repayment Terms
Roberti Jacobs Family Trust		CGI Holding Corporation		12/15/02		$	250,000		13% interest, payable upon demand (1)
Roberti Jacobs Family Trust		CGI Holding Corporation		11/15/03		$	170,000		13% interest, payable upon demand (2)
Roberti Jacobs Family Trust		CGI Holding Corporation		11/05/03		$	200,000		18% interest, payable upon demand
Roberti Jacobs Family Trust		CGI Holding Corporation		11/20/03		$	90,000		15% interest, due 6/30/2004 (3)

 

(1)                                   In connection with this loan, we granted the trust warrants, exercisable for 10 years, to purchase 1,000,000 shares of our common stock at $0.10 per share, the trading price of our shares on the date the terms of the loan were agreed to by the parties.

 

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(2)                                   In connection with this loan, we granted the trust warrants, exercisable for 10 years, to purchase 680,000 shares of our common stock at $0.10 per share, the trading price of our shares on the date the terms of the loan were agreed to by the parties.

 

(3)                                   In connection with this loan, we granted the trust warrants, exercisable for 10 years, to purchase 40,000 shares of our common stock at $0.50 per share, the trading price of our shares on the date of the terms of the loan were agreed to by the parties.

 

As part of our acquisition of WebCapades, Inc. on August 19, 2004, we issued notes payable totaling $1.2 million to the former shareholders of WebCapades.  These notes are being repaid in level monthly installments over twenty-four months without interest.  The former shareholders of WebCapades were also issued shares of our common stock as part of the acquisition, and Scott Mitchell, a former WebCapades shareholder, is currently our president and the president of our Cherish, Inc. subsidiary.

 

On December 6, 2004, we completed a private placement of 4.3 million units at $3.50 per unit to a group of accredited investors.  Each unit consists of one share of common stock and one warrant to purchase 0.55 shares of common stock, exercisable until the earlier of (1) November 30, 2007; and (2) thirty calendar days after the date upon which the closing price of our common stock has been trading at $8.00 or more per share for twenty consecutive days, exercisable at $4.12 per share.  We realized gross proceeds of $15,050,000 from this offering.  We anticipate using the proceeds for general corporate purposes, including to pay any cash portion of the purchase price of acquired entities.  We paid T. Benjamin Jennings, our chairman, $275,000 and granted him warrants, to purchase 75,000 shares of common stock on the same terms and conditions as the warrants described above, for his efforts in this financing and in connection with negotiating certain potential acquisitions.  We may also pay Mr. Jennings consulting payments in the future.  In particular, our board has authorized us to pay, in the discretion of Mr. Jacobs, our chief executive officer, up to $10,000 per month for services to be rendered by Mr. Jennings.

 

Jeffrey S. Martin, the brother of S. Patrick Martin, was employed by WebSourced until November 30, 2005.  During 2004 and through his termination in 2005, we paid Mr. Jeffrey Martin a salary of $147,652 and $144,008, respectively.

 

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STOCKHOLDER PROPOSALS

 

We have not received any stockholder proposals for inclusion in this year’s proxy statement.  Because we were unable to hold an annual stockholder meeting during 2005, the annual meeting described herein constitutes our 2005 annual stockholder meeting.  We expect to hold our 2006 annual stockholder meeting later on during calendar year 2006.  As such, if a stockholder wishes to present a proposal to be included in the proxy statement for the 2006 annual stockholder meeting, the proposal must be submitted in writing and received by our secretary at our offices within a reasonable time prior to the filing of the proxy statement for the 2006 annual stockholder meeting, addressed as follows:  CGI Holding Corporation, 5 Revere Drive, Suite 510, Northbrook, Illinois 60062.

 

ANNUAL REPORT ON FORM 10-KSB

 

Our 2004 Annual Report on Form 10-KSB, as amended, including financial statements for the years ended December 31, 2004 and 2003, accompanies this proxy statement.  If requested, we will provide you copies of any exhibits to the Form 10-KSB upon the payment of a fee covering our reasonable expenses in furnishing the exhibits.  You can request exhibits to our Form 10-KSB by writing us at 5 Revere Drive, Suite 510, Northbrook, Illinois 60062, attention: Corporate Secretary.

 

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YOUR VOTE IS IMPORTANT.  THE PROMPT RETURN OF
PROXIES WILL SAVE US THE EXPENSE OF
FURTHER REQUESTS FOR PROXIES.  PLEASE
PROMPTLY MARK, SIGN, DATE AND RETURN THE
ENCLOSED PROXY IN THE ENCLOSED ENVELOPE.

 

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CGI HOLDING CORPORATION
5 Revere Drive, Suite 510
Northbrook, Illinois 60062
This Proxy is solicited on behalf of the Board of Directors

 

The undersigned hereby appoints Gerard M. Jacobs and Jody Brown, and each of them as Proxies, with the power to appoint their substitutes, and hereby authorizes them to represent and to vote all the Common Stock of CGI Holding Corporation held of record by the undersigned at the close of business on May 6, 2005, at the Annual Meeting of Stockholders when convened on June 17, 2005 and at any postponements or adjournments thereof.

 

THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED “FOR” EACH OF THE PROPOSALS SET FORTH HEREIN. In the event that any other matter may properly come before the Annual Meeting, or any postponements or adjournments thereof, the Proxies are authorized, in their discretion, to vote on the matter.

 

PLEASE MARK VOTES AS IN THIS EXAMPLE ý

 

1.

Elect the following seven individuals to serve as directors, including four independent directors, until the next annual meeting of Stockholders or otherwise as provided in our governing documents.

For

Withhold All

For All Except

o

o

o

(01)

Gerard M. Jacobs

(02)

T. Benjamin Jennings

(03)

James N. Held

(07)  Patrick Walsh

(04)

Xavier Hermosillo

(05)

S. Patrick Martin

(06)

Vincent J. Mesolella

INSTRUCTION:  To withhold authority to vote for any nominee(s) mark “For All Except” and write that nominee(s’) name(s) or number(s) in the space provided below.

FOR

AGAINST

ABSTAIN

2.

Approve the 2005 Long Term Incentive Plan.

o

o

o

3.

Approve amendments to Article IV of our Articles of Incorporation to increase the

FOR

AGAINST

ABSTAIN

number of shares of common stock authorized for issuance from 100 million shares

to 200 million shares.

o

o

o

FOR

AGAINST

ABSTAIN

4.

Approve amendments to Article I of our Articles of Incorporation to change our name to Think Partnership Inc.

o

o

o

Signature of Stockholder

Dated:

Signature, if held jointly

Dated:

Signature, if held jointly

Dated:

Signature, if held jointly

Dated:

Signature, if held jointly

Dated:

Please sign exactly as your name or names appear above. For joint accounts, each owner should sign.  When signing as executor, administrator, attorney, trustee, guardian or in another representative capacity, please give your full title. If a corporation or partnership, please sign in the name of the corporation or partnership by an authorized officer or person.  Please sign, date and return this proxy card promptly using the enclosed envelope.

 

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ANNEX A

 

 

CHARTER OF THE NOMINATING COMMITTEE
OF CGI HOLDING CORPORATION

 

Purpose

 

The purpose of the Nominating Committee (the “Committee”) of the board of directors of CGI Holding Corporation (the “Company”) is to recommend individuals to the board for nomination as members of the board and its committees and to develop and recommend to the board a set of corporate governance guidelines.  The Committee shall report to the board on a regular basis but not less than once a year.

 

Membership

 

The Committee shall be composed of at least three directors, all of whom must be “independent” under the listing standards of the American Stock Exchange as well as any other applicable laws, rules and regulations governing independence, as determined from time to time by the Company’s board of directors.  The Committee members and the Committee Chairperson shall be appointed by the board.  Members shall serve at the pleasure of the board and for such terms or terms as the board may determine.

 

Meetings

 

The Committee must meet in person or telephonically as often as it determines is necessary or appropriate, but not less frequently than annually.  The Committee may request that any directors or members of management of the Company attend any meeting of the Committee to provide any information requested by the Committee.  The Committee shall keep written minutes of its meetings and maintain the minutes in the books and records of the Company.

 

Purpose and Responsibilities

 

The Committee will have the following purpose and responsibilities:

 

1.                                        identify individuals qualified to become board members, consistent with criteria approved by the board;

 

2.                                        recommend that the board select, the director nominees for the next annual meeting of stockholders;

 

3.                                        develop and recommend for the board, a set of corporate governance principles applicable to the Company;

 

4.                                        oversee the evaluation of the board and management; and

 

5.                                        conduct an annual performance evaluation of the committee.

 

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Performance Evaluation

 

The Committee may produce and provide the board with an annual performance evaluation of the Committee.  In conducting its evaluation, the Committee shall compare the performance of the Committee with the requirements of this Charter and set forth the goals and objectives of the Committee for the upcoming year.  The performance evaluation shall also recommend any improvements to this Charter deemed necessary or desirable.  The performance evaluation by the Committee may be conducted in any manner deemed appropriate by the Committee.  The report to the board may take the form of an oral report by the Chairperson of the Committee or any other member of the Committee designated by the Committee to make this report.

 

Delegation to Subcommittee

 

The Committee may form and delegate authority to subcommittees consisting of one or more members when appropriate, provided that the decision of the subcommittees shall be presented to the full Committee at its next meeting.

 

Resources and Authority of the Committee

 

The Committee shall have the resources and authority appropriate to discharge its duties and responsibilities, and may retain, at the Company’s expense, such independent counsel or other consultants as it deems necessary.  The Committee shall have the sole authority to select and retain any consultants or search firms, to terminate any consultants or search firms retained by it, and to approve the consultants or search firms’ fees and any other terms of the engagement.

 

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ANNEX B

 

 

CGI HOLDING CORPORATION
Audit Committee Charter

 

Purpose

 

The Audit Committee (the “Committee”) is a committee of the Board (the “Board”) of Directors (the “Directors” or individually a “Director”) of CGI Holding Corporation (“CGI”).  The primary function of the Committee is to assist the Board in fulfilling its oversight responsibilities by reviewing the financial information which will be provided to the shareholders and others, the systems of internal controls which management and the Board have established, and the audit process.

 

Organization, Membership and Meetings

 

The Committee shall be comprised of at least two Directors who qualify as independent directors under rules of the American Stock Exchange.  Members of the Committee, including the Chairman of the Committee, shall be appointed annually by the Board and should have a basic understanding of finance and accounting and be able to read and understand financial statements.  If required by applicable law, at least one member of the Committee shall have accounting or related financial management expertise. Members of the Committee may be replaced by the Board at any time, but shall otherwise serve until a successor has been named.  The Committee shall meet at least once a year, with the authority to convene additional meetings, as circumstances require. The Committee may invite members of management, independent auditors, legal counsel or others to attend meetings and to provide relevant information.  The Committee may include non- Committee Board members at its meetings, and shall hold, when deemed necessary or appropriate by the Committee, an executive session of the meeting at which only independent Directors are present.  The Committee shall consider meeting in separate session(s) with CGI’s independent auditor and/or management to discuss any matters that the Committee or these groups believe should be discussed privately with the Committee.  The Committee may form and delegate authority to subcommittees when appropriate, or to one or more members of the Committee.  The Committee shall maintain written minutes of its meetings, which minutes shall be filed with the corporate records of CGI.

 

Committee Authority and Responsibilities

 

To fulfill its responsibilities and duties hereunder, the Committee shall:

 

Review and update its charter annually for approval by the Board and publish the same as required by applicable law;

 

Be directly and solely responsible for the oversight, engagement and termination of any independent auditor of CGI for the purpose of preparing or issuing and audit report or related work.  Each independent auditor shall report directly to the Committee;

 

Approve in advance the engagement of the independent auditor for all audit services and non-audit services, and approve the fees and other terms of any such engagement;

 

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Confirm and monitor the independence of the independent auditor.  On an annual basis, or more often if deemed necessary, receive from the independent auditor the letter required by the Independence Standards Board Statement No. 1, as amended, and discuss with the independent auditor all significant relationships they have with CGI that could impair the auditor’s independence;

 

Establish polices for the hiring of employees or former employees of the independent auditor, taking into consideration the impact of such polices on auditor independence;

 

Review and approve the annual audit plan, including staffing, prior to the audit;

 

Review with management and the independent auditor at the completion of the annual audit:

 

The results of the independent auditor’s audit of the financial statements and related footnotes;

 

Other matters related to the conduct of the audit which are to be communicated to the Committee under either generally accepted auditing standards including Statement of Auditing Standards No. 61, as amended, or relevant regulatory requirements;

 

Consider and review with the independent auditor the adequacy and effectiveness of internal controls over the financial reporting process;

 

Prepare an annual report to shareholders as required by the Securities and Exchange Commission;

 

Consider and review with management significant findings, along with management’s response and follow-up on previous audit recommendations regarding compliance with Board approved risk management polices and procedures;

 

Inquire of management and the independent auditor about significant risks or exposures, and assess the steps taken to appropriately manage such risks;

 

Review material legal and regulatory matters that could have a significant impact on CGI’s financial statements;

 

Periodically review and update CGI’s Code of Ethics, review the results of monitoring for compliance by management, and provide for and review prompt disclosure to the public of any change in, or waiver of such Code of Ethics;

 

Report Committee actions to the Board with such recommendations as the Committee may deem appropriate;

 

Have the power and authority to investigate any matters within the Committee’s scope of responsibilities;

 

Have the power and authority to retain independent counsel, accountants, advisors or others to assist it in the performance of its duties or responsibilities, or in the conduct of

 

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any investigation, and to pay any and all fees and expenses of such advisors and experts deemed necessary by the Committee.  The fees and expenses of the advisors and experts shall be paid by CGI;

 

Review its own performance, at least annually, for purposes of self-evaluation and encourage the continuing improvement of the Committee in the performance of its duties and responsibilities; and

 

Perform such other activities consistent with this Charter, CGI’s Bylaws and governing law, and as the Board or Committee deems necessary or appropriate.

 

While the Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Committee to plan or conduct audits or to determine that CGI’ s financial statements are complete and accurate and are in accordance with accounting principles accepted in the United States of America. This is the responsibility of management.

 

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ANNEX C

 

 

CGI HOLDING CORPORATION
2005 LONG-TERM INCENTIVE Plan

 

CGI HOLDING CORPORATION, a Nevada corporation (the “Company”), sets forth herein the terms of the CGI Holding Corporation 2005 Long-Term Incentive Plan (the “Plan”) as follows:

 

1.                                        Purpose .

 

The purpose of the Plan is to aid the Company and its subsidiaries in recruiting and retaining persons as directors, officers, employees, agents, consultants or advisors and to motivate these persons and other persons permitted to participate in the plan to exert their best efforts on behalf of the Company and its subsidiaries by providing incentives through the grant of stock-based incentive awards.  The Company expects that it will benefit from the stock ownership opportunities provided to the participants by aligning participants’ interest in the Company’s success with that of other shareholders.  The Plan will allow eligible participants to acquire shares of the Company’s common stock, $0.001 par value (“Shares”) either directly through the grant of shares which are restricted and subject to risk of forfeiture (“Restricted Shares”) or through the grant of options to purchase Shares (“Options”).  Options granted under the Plan may be nonqualified stock options or may be “incentive stock options” (“ISOs”) within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended from time to time (the “Code”), or the corresponding provision of any subsequently enacted tax statute.  The Plan shall also permit the grant of other stock-based awards (“Other Stock-Based Awards” – together with awards of Restricted Shares or Options, hereinafter at times collectively referred to as “Awards” and individually referred to as an “Award;” the grantee of an Award is hereinafter referred to individually as a “Participant” and collectively as the “Participants”).  Eligibility for Awards may be based on the criteria the Board (as defined below), or any committee thereof, deems appropriate, which may be tied to performance standards and vesting standards requiring continued performance of services to the Company.  References to a committee of the Board herein shall mean a committee vested by the Board with authority to administer the Plan.

 

2.                                        Administration .

 

2.1                                  Board or Committee .

 

The Plan shall be administered by the board of directors of the Company (the “Board”) or any committee of the Board; provided that if the Company’s securities are listed on a national securities exchange or included for quotation on the Nasdaq National Market System, the Plan shall be administered by a committee of directors who are “independent” under the applicable rules of the exchange or Nasdaq.

 

2.2                                  Action by Board or Committee .

 

The Board, or any committee thereof, shall have power and authority to administer the Plan and to take all actions and to make all determinations required or permitted under the Plan with respect to any Award granted hereunder consistent with the articles of incorporation and by-laws of the Company and applicable law.  These powers shall include, but not be limited to, the power to interpret the Plan

 

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and to amend, waive or extend any provision or limit of any Award, and to approve the forms of agreement for use under the Plan.  The interpretation and construction by the Board, or any committee thereof, of any provision of the Plan and any Award granted hereunder shall be final and conclusive.

 

2.3                                  No Liability .

 

No member of the Board, or any committee thereof, shall be liable for any action or determination made, or any failure to take or make an action or determination, in good faith with respect to the Plan.

 

2.4                                  Tax Withholding .

 

The Company may withhold or require payment from the Participant of any amount the Company may determine to be necessary to withhold for federal, state, local, non-U.S. income, payroll or other taxes as a result of the exercise, grant or vesting of an Award.  Unless otherwise specified, the Participant may elect to pay a portion or all of the withholding taxes by:  (i) delivery in Shares; (ii) having the Company withhold Shares with a Fair Market Value or cash equal to the amount of the taxes that would have otherwise been payable by the Participant; or (iii) paying cash.

 

2.5                                  Nontransferability of Awards/Beneficiaries .

 

No Award or interest in an Award may be sold, assigned, pledged (as collateral for a loan or as security for the performance of an obligation or for any other purpose) or transferred by the Participant or made subject to attachment or similar proceedings otherwise than by will or by the applicable laws of descent and distribution, except to the extent a Participant designates one or more beneficiaries on a Company-approved form who may exercise the Award or receive payment under the Award after the Participant’s death.  During a Participant’s lifetime, an Award may be exercised only by the Participant or permitted transferee of the Award.  Notwithstanding the foregoing and to the extent permitted by Section 422 of the Code or any successor thereto, the Board, or any committee thereof, in its or their sole discretion, may permit a Participant to assign or transfer an Award; provided , however , that any Award assigned or transferred shall be subject to all the terms and conditions of the Plan and the agreement evidencing the Award.

 

A Participant may designate a beneficiary to succeed to the Participant’s Awards under the Plan in the event of the Participant’s death.  Upon the death of the Participant, the beneficiary shall succeed to the rights of the Participant to the extent permitted by law and the terms of this Plan and any agreement applicable to the Award.  In the absence of a validly designated beneficiary who is living at the time of the Participant’s death, the Participant’s executor or administrator of the Participant’s estate shall succeed to any Award granted the Participant and the Award shall be transferable by will or pursuant to laws of descent and distribution.

 

3.                                        Common Stock Covered by the Plan .

 

The number of Shares with respect to Awards which may be granted under the Plan shall not exceed Ten Million (10,000,000), subject to adjustment as provided in Section 12 .  The number of Shares with respect to which Awards may be granted to a participant during any calendar year shall not exceed Four Hundred Thousand (400,000), subject to adjustment as provided in Section 12 .  The Shares to be issued as Restricted Shares or upon exercise of Options may be authorized, but unissued, Shares.

 

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If any Option expires, terminates or is terminated for any reason prior to exercise in full, or any Restricted Shares are forfeited, or any Other Stock-Based Award is terminated or forfeited, the Shares that were subject to the unexercised portion of the Option or the Restricted Shares or Other Stock-Based Awards that are forfeited or terminated (collectively, “Lapsed Shares”), as the case may be, shall be available immediately for future grants of Awards under the Plan, but will be counted against that calendar year’s limit for a given Participant.  To the extent any Award is exercised in whole or part through a cashless exercise pursuant to Section 6.8(c)  hereof, that portion of the Award used to fund the cashless exercise shall not be available for future issuance pursuant to this Plan.

 

4.                                        Eligibility .

 

Awards may be granted under the Plan to any employee of the Company or any direct or indirect subsidiary thereof, and to any director, consultant, agent, individual, company, advisor or independent contractor who renders bona fide services to the Company or any direct or indirect subsidiary that (i) is not in connection with the offer and sale of the Company’s securities in a capital-raising transaction and (ii) does not directly or indirectly promote or maintain a market for the Company’s securities.  Except where the context otherwise requires, references in this Plan to “employment” and related terms shall apply to services in any capacity.  Persons who have been granted Options are referred to as “Optionees.” A person may hold more than one Option, subject to the restrictions as are provided herein, and may also hold more than one grant of Restricted Shares of Other Stock-Based Awards.  All references to an “employee” of the Company shall include employees of any direct or indirect subsidiary of the Company, 50% or more of which is beneficially owned by the Company.

 

The Board, or any committee thereof, may also grant Awards in substitution for options or other equity interests held by persons who become employees of the Company or of any direct or indirect subsidiary as a result of the Company or any subsidiary acquiring or merging with the person’s employer or acquiring its assets or to persons who were employees or directors of the previous employer and received an option in that capacity even if they do not become employees or directors of the Company.  In addition, the Board, or any committee thereof, may permit the Company to assume options granted outside the Plan to persons who would have been eligible under the terms of the Plan to receive a grant.  If necessary to conform the Awards to the interests for which they are substituted, the Board, or any committee thereof, may grant substitute Awards under terms and conditions that vary from those the Plan otherwise requires.

 

5.                                        Effective Date and Term .

 

5.1                                  Effective Date .

 

The Plan will become effective as of the date adopted by the Board (the “Effective Date”).

 

5.2                                  Term .

 

The Plan shall terminate on the tenth anniversary of the Effective Date, unless previously terminated under Section 11 .  All Awards granted prior to termination of the Plan shall continue in full force and effect following the termination of the Plan, subject to the terms and conditions upon which they were granted.

 

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6.                                        Terms and Conditions of Stock Options .

 

6.1                                  Grant of Options .

 

Subject to the terms and conditions of the Plan, the Board may, at any time and from time to time prior to the termination of the Plan, grant to eligible Participants Options to purchase Shares on terms and conditions as the Board, or any committee thereof, may determine, including any terms or conditions that may be necessary to qualify the Options as ISOs; provided that ISOs may only be granted to employees of the Company or any direct or indirect subsidiary.

 

6.2                                  Stock Options under Code Section 422 .

 

The date as of which the Board, or any committee thereof, approves the grant of an Option shall be considered the date on which the Option is granted.  Neither the Optionee nor any person entitled to exercise any rights hereunder shall have any of the rights of a shareholder with respect to the Shares subject to an Option except to the extent that the certificates for the Shares have been issued upon the exercise of the Option.

 

6.3                                  Limitation on Incentive Stock Options .

 

An Option granted to an employee hereunder shall constitute an ISO only to the extent that the aggregate fair market value (determined at the time the Option is granted) of the Stock with respect to which ISOs are exercisable for the first time by the Optionee during any calendar year (under the Plan and all other plans of the Company and any subsidiaries, within the meaning of Code Section 422(d)) does not exceed one hundred thousand dollars ($100,000).  This limitation shall be applied by taking Options into account in the order in which the Options were granted.

 

6.4                                  Option Agreements .

 

All Options granted hereunder shall be evidenced by written agreements in the form or forms the Board, or any committee thereof, shall from time to time determine. Option agreements may be amended by the Board, or any committee thereof, from time to time and need not contain uniform provisions.

 

6.5                                  Option Price .

 

The purchase price of each Share subject to an Option granted under this Section 6 shall be fixed by the Board, or any committee thereof.  No Option, once granted hereunder, may be repriced.  In the case of an Option not intended to constitute an ISO, the option price shall be not less than 100% of the Fair Market Value of the Shares covered by the Option.  In the case of an Option that is intended to be an ISO, the option price shall be not less than 100% of the Fair Market Value (as defined below) of the Shares covered by the Option on the date the Option is granted; provided , however , that in the event the employee would otherwise be ineligible to receive an ISO by reason of Code Sections 422(b)(6) or 424(d), the option price of each Share that is intended to be an ISO shall be not less than 110% of the Fair Market Value of a Share covered by the Option at the time the Option is granted.

 

“Fair Market Value” shall mean, in the event that the Company’s common stock is listed on an established national or regional stock exchange, or is publicly traded on an established securities market,

 

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the closing price of the stock on the exchange or in the market on the date the Option is granted (the highest such closing price if there is more than one exchange or market), or, if the stock has not traded on that day, on the last preceding day on which the stock traded; provided that if the Shares are not listed, quoted or publicly traded or, if their price cannot be determined despite their being listed, quoted or publicly traded, “Fair Market Value” shall be determined by the Board, in its sole discretion.

 

6.6                                  Term .

 

Each Option granted under the Plan shall terminate and all rights to purchase Shares thereunder shall cease no later than ten (10) years from the date the Option is granted or such shorter period as determined by the Board, or any committee thereof, and stated in the agreement relating to the Option; provided , however , with respect to an ISO granted to a Participant who on the date of grant owns more than 10% of the Company’s voting stock, the Option shall terminate no later than five (5) years from the date of grant.

 

6.7                                  Option Period and Limitations on Exercise .

 

Each Option granted under the Plan shall be exercisable in whole or in part at any time and from time to time over a period commencing on or after the date of grant of the Option and ending upon expiration or termination of the Option.  Without limiting the foregoing, the Board, or any committee thereof, may in its or their sole discretion provide that an Option may not be exercised in whole or in part for some period or periods of time during which the Option is outstanding.  Any limit on the exercise of an Option may be rescinded, modified or waived by the Board, or any committee thereof, in its or their sole discretion, at any time and from time to time after the date the Option is granted.

 

6.8                                  Exercise .

 

(a)                                   Only the Optionee receiving an Option (or, in the event of the Optionee’s legal incapacity or incompetency, the Optionee’s guardian or legal representative, and in the case of the Optionee’s death, the Optionee’s estate) may exercise the Option.

 

(b)                                  An Option that is exercisable hereunder may be exercised by delivery to the Company on any business day, at its principal office addressed to the attention of the Corporate Secretary, of written notice of exercise.  The notice shall specify the number of Shares for which the Option is being exercised and shall be accompanied by payment in full of the option price of the Shares for which the Option is being exercised.

 

(c)                                   Payment of the option price for the Shares purchased pursuant to the exercise of an Option shall be made, as determined by the Board, or any committee thereof, and set forth in the option agreement, as follows:

 

(i)                                      in cash or by certified check payable to the order of the Company;

 

(ii)                                   in Shares having a Fair Market Value equal to the aggregate option price for the Shares being purchased pursuant to the Option and satisfying any other requirements as may be imposed by the Board, or any committee thereof; provided , that the Shares have been held by the participant for no less than six months (or such other period as established from time to time by the Board or applicable law or regulation);

 

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(iii)                                partly in cash and, subject to (ii) above, partly in Shares;

 

(iv)                               subject to (ii) above, if there is a public market for the Shares at the time, through the delivery of irrevocable instructions to a broker to sell Shares obtained upon the exercise of the Option and to deliver promptly to the Company an amount out of the proceeds of the sale equal to the aggregate exercise price for the Shares being purchased pursuant to the Option; or

 

(v)                                  any other method as determined by the Board, or any committee thereof, in its or their sole discretion.

 

(d)                                  Notwithstanding the foregoing, the Board, or any committee thereof, may, in its or their discretion, impose and set forth in the agreement governing the Option, limitations or prohibitions on the method of exercise.  Promptly after the exercise of an Option and the payment in full of the option price of the Shares covered thereby, the person exercising the Option shall be entitled to a stock certificate(s) evidencing the Shares.  A person holding or exercising an Option shall have none of the rights of a shareholder until the option price for Shares is fully paid and except as provided in Section 12 , no adjustment shall be made for dividends or other rights for which the record date is prior to the date of the full option price has been paid.

 

(e)                                   If the Optionee is not vested as to his or her entire Option at the time the Optionee terminates or is terminated as an employee, then the Shares covered by the unvested portion of the Option shall revert to the Plan.  If, after termination, the Optionee does not exercise his or her Option within the time specified in the relevant agreement governing the Option, the Option shall terminate, and the Shares covered by the Option shall revert to the Plan.

 

7.                                        Restricted Shares .

 

7.1                                  Grant of Restricted Shares .

 

Subject to the terms and conditions of the Plan, the Board, or any committee thereof, may, at any time and from time to time prior to the termination of the Plan, grant Restricted Shares to eligible Participants as the Board, or any committee thereof, may determine from time to time.

 

7.2                                  Transfer Restrictions .

 

Restricted Shares granted hereunder may not be sold, assigned, transferred, pledged or otherwise encumbered, except as provided in the Plan or the applicable agreement governing the Award.  Each participant receiving an award of Restricted Shares shall be issued a stock certificate registered in the name of the Participant and bearing an appropriate legend referring to the terms, conditions and restrictions applicable to the Award.  The stock certificates evidencing the Restricted Shares shall be held in custody by the Company until the restrictions lapse, and as a condition of any award of Restricted Shares, the Participant shall deliver to the Company a stock power, endorsed in blank, relating to the Shares covered by that Award.

 

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7.3                                  Rights of Unvested Restricted Shares .

 

Except as provided in Section 7.2 , the Participant shall have, with respect to Restricted Shares awarded, all of the rights of a stockholder of the Company, including the right to vote the Restricted Shares and the right to receive any dividends paid by the Company with respect to the shares.

 

7.4                                  Legends .

 

Any Restricted Shares issued under the Plan shall be subject to restrictions on transfer and any certificates representing shares of Restricted Stock shall contain a legend describing the restrictions as shall be necessary to satisfy applicable legal requirements.

 

7.5                                  Representations of Grantee .

 

Each recipient of an Award of Restricted Stock under the Plan shall, at the time of the Award, as a condition to the Award, enter into a Restricted Stock grant agreement in a form approved by the Board, or any committee thereof.

 

8.                                        Other Stock-Based Awards .

 

The Board, or any committee thereof, in its or their sole discretion, may grant Other Stock-Based Awards, including grants of Shares and awards that are valued in whole or in part by reference to, or are otherwise based on, Shares or on the Fair Market Value thereof.  Other Stock-Based Awards shall be in the form and subject to the terms and conditions as determined by the Board, or any committee thereof.  Other Stock-Based Awards may be granted alone or in tandem with any other Awards granted under the Plan.

 

9.                                        Use of Proceeds .

 

The proceeds received by the Company from the sale of Shares pursuant to Awards granted hereunder shall constitute general funds of the Company.

 

10.                                  Requirements of Law .

 

The Company shall not be required to sell or issue any Award (or any Shares or Option underlying the Award) if the sale or issuance would constitute a violation by the person exercising the Award or the Company of any provision of any law or regulation of any governmental authority, including, without limit, any federal or state securities laws or regulations or the Company’s articles of incorporation or by-laws.  If at any time the Board, or any committee thereof, shall determine, in its or their discretion, that the listing, inclusion, registration or qualification of any Award (or any Shares or Option underlying the Award) upon any securities exchange or under any state or federal law, or the consent of any government regulatory body, is necessary or desirable as a condition of, or in connection with, the sale or issuance, the Award (or any Shares or Option underlying the Award) may not be issued or exercised in whole or in part, unless the listing, registration, inclusion, qualification, consent or approval shall have been effected or obtained on terms and conditions acceptable to the Board, or any committee thereof, and any delay caused thereby shall in no way affect the date of termination of, or the restriction period of, any Award (or any Shares or Option underlying the Award).  The Company shall not be required to sell or issue any Shares unless the Company has received evidence satisfactory to the

 

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Board, or any committee thereof, in its or their sole discretion that the Participant may acquire the Shares pursuant to an exemption from registration under federal and state securities law.  Any determination in this connection by the Board, or any committee thereof, shall be final and conclusive.  The Company shall not be obligated to take any affirmative action or order to cause the exercise of an Award (or any Shares or Option underlying the Award) or the issuance of Shares pursuant thereto to comply with any law or regulation of any governmental authority.  As to any jurisdiction that expressly imposes the requirement that an Award shall not be exercisable unless and until the Shares covered by the Award are registered or are subject to an available exemption from registration, the exercise of the Award (or any Shares or Option underlying the Award), under circumstances in which the laws of the jurisdiction apply, shall be deemed conditioned upon the effectiveness of the registration or the availability of any exemption.

 

11.                                  Amendment and Termination .

 

The Board, or any committee thereof, may, from time to time, amend the Plan or any provision thereof as it or they deem advisable.  The Board, or any committee thereof, may, at any time, terminate the Plan.  Any amendment or termination of the Plan shall not adversely affect any Award previously granted.

 

12.                                  Anti-dilution Adjustments .

 

12.1                            Adjustments to Plan or Number or Class of Shares or Restricted Shares Issuable under the Plan .

 

Notwithstanding any other provision of the Plan, the Board, or any committee thereof, may, at any time, make or provide for any adjustments to the number and class of Shares issuable under the Plan or any Award granted hereunder as it or they shall deem appropriate to prevent dilution or enlargement of rights, including adjustments in the event of changes in the outstanding Shares by reason of stock dividends, stock splits, recapitalizations, mergers, consolidations, combinations or exchanges of Shares, separations, reorganizations, liquidations and similar transactions.  Any determination by the Board, or any committee thereof, shall be final and conclusive.  Any fractional Shares resulting from any adjustments shall be eliminated.

 

12.2                            Adjustments to Terms of Awards Previously Granted .

 

If the number of outstanding Shares is increased or decreased or changed into or exchanged for a different number or kind of Shares or other securities of the Company by reason of any recapitalization, reclassification, stock split, combination, exchange, dividend or other distribution payable in capital stock, or other increase or decrease in the Shares effected without receipt of consideration by the Company, occurring after the Effective Date, a proportionate and appropriate adjustment shall be made by the Company in the number and kind of Shares for which Awards are outstanding, so that the proportionate interest of the Participant immediately following the event shall, to the extent practicable, be the same as immediately prior to any event. Any adjustment in outstanding Awards shall not change the aggregate option price payable with respect to Shares subject to the unexercised portion of the Award outstanding but shall include a corresponding proportionate adjustment in the option price per Share.  Similar proportionate adjustments for events referenced in this Section 12.2 shall be made as

 

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necessary, in the sole discretion of the Board, or any committee thereof, with respect to Other Stock-Based Awards.

 

13.                                  Change in Control .

 

Notwithstanding anything contained in this Plan to the contrary and unless otherwise provided in the agreement governing the Award, in the event a Participant is terminated “without cause” (as that term is defined in the agreement governing the Award to the Participant) during the one year period following a Change in Control, then: (i) any and all Options granted hereunder which would vest with the passage of time were the Participant to continue as an employee for the applicable period and the “Current Year’s Percentage” (as hereinafter defined) of any Options which are tied to performance standards that could possibly be achieved during the calendar year in which the Participant’s employment has been terminated, shall be deemed to vest in full and become immediately exercisable, and shall remain exercisable throughout their entire term; (ii) any restrictions imposed on Restricted Shares shall lapse with respect to Restricted Shares which would vest with the passage of time were the Participant to continue as an employee for the applicable period and the “Current Year’s Percentage” of any Restricted Shares which are tied to performance standards that could possibly be achieved during the calendar year in which the Participant’s employment has been terminated; and (iii) the maximum payout opportunities attainable under all Other Stock-Based Awards which would vest with the passage of time were the Participant to continue as an employee for the applicable period shall be deemed to have vested in full and the “Current Year’s Percentage” shall be deemed to have been fully earned for the calendar year in which the Participant’s employment has been terminated.  Any of the Awards vesting or exercised by virtue of this Section 13 shall be paid in cash or in the sole discretion of the Board, or any committee thereof, in Shares to the Participant within thirty (30) days following the effective date of the termination of employment.  Any Shares issued in respect of these Awards shall be valued at the Fair Market Value as of the effective date of the termination of employment without cause.  For purposes of this Section 13 , the “Current Year’s Percentage” shall mean that percentage of the performance-based Award that would have been satisfied for the calendar year in question based upon the product of (i) the percentage of calendar quarters completed for the year in which the employee is terminated without cause, multiplied by (ii) the performance-based Award that the employee would have earned had the entire four calendar quarters of the Company’s performance and the employee’s performance for the year equaled the average quarterly performance for all calendar quarters completed prior to termination of the employee’s employment for the year in question.

 

For purposes of this Section 13 , “Change in Control” means:

 

(a)                                   any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended, or any successor thereto) (a “Person”) becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Act) of 50% or more of either (A) the then outstanding Shares (the “Outstanding Company Common Stock”) or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided , however , that, for purposes of this clause (a), the following acquisitions shall not constitute a Change in Control:  (1) any acquisition directly from the Company with approval by the Board, (2) any acquisition by the Company or any of its subsidiaries, (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its subsidiaries, (4) any acquisition by an underwriter

 

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temporarily holding securities pursuant to an offering of the securities or (5) any acquisition pursuant to a transaction that complies with clauses (b)(1) and (2) below; or

 

(b)                                  consummation of a reorganization, merger, statutory share exchange or consolidation (or similar corporate transaction) involving the Company or any of its subsidiaries, a sale or other disposition of all or substantially all of the assets of the Company, or the acquisition of assets or stock of another entity (a “Business Combination”), in each case, unless, immediately following the Business Combination, (1) substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to the Business Combination beneficially own, directly or indirectly, 50% or more of, respectively, the then outstanding Shares and the total voting power of (x) the corporation resulting from the Business Combination (the “Surviving Company”) or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 80% or more of the voting securities eligible to elect directors of the Surviving Company (the “Parent Company”), in substantially the same proportion as their ownership, immediately prior to the Business Combination, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be and (2) no Person (other than any employee benefit plan (or related trust) sponsored or maintained by the Surviving Company or the Parent Company) becomes the beneficial owner, directly or indirectly, of 50% or more of the outstanding Shares of common stock and the total voting power of the outstanding voting securities eligible to elect directors of the Parent Company (or, if there is no Parent Company, the Surviving Company); or

 

(c)                                   Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

 

14.                                  Further Adjustment of Awards .

 

Subject to the above provisions, the Board, or any committee thereof, shall have the discretion, exercisable at any time before a sale, merger, consolidation, reorganization, liquidation, dissolution or Change in Control transaction, to take any further action as it or they determine to be necessary or advisable with respect to Awards.  Any action may include (but shall not be limited to) establishing, amending or waiving the type, terms, conditions or duration of, or restrictions on, Awards so as to provide for earlier, later, extended or additional time for exercise, lifting of restrictions and other modifications, and the Board, or any committee thereof, may take any actions with respect to all Participants, to certain categories of Participants or only to individual Participants.  The Board, or any committee thereof, may take any action before or after granting Awards.

 

15.                                  Disclaimer of Rights .

 

No provision in the Plan or any agreement regarding an Award granted under the Plan shall be construed to confer upon any individual the right to remain in the service of the Company or any subsidiary thereof, or to interfere in any way with the right and authority of the Company or any subsidiary thereof, either to increase or decrease the compensation of any individual at any time, or to terminate any employment or other relationship between any individual and the Company or any subsidiary thereof. The obligation of the Company to pay any benefits pursuant to the Plan shall be interpreted as a contractual obligation to pay only those amounts described herein, in the manner and

 

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under the conditions prescribed herein. The Plan shall in no way be interpreted to require the Company to transfer any amounts to a third party trustee or otherwise hold any amounts in trust or escrow for payment to any Participant or beneficiary under the terms of the Plan.

 

16.                                  No Trust or Fund .

 

The Plan is intended to constitute an “unfunded” plan.  Nothing contained herein shall require the Company to segregate any monies, other property or Shares, or to create any trusts, or to make any special deposits for any immediate or deferred amounts payable to any Participant, and no Participant shall have any rights that are greater than those of a general unsecured creditor of the Company.

 

17.                                  Nonexclusivity .

 

The adoption of the Plan shall not be construed as creating any limit on the right and authority of the Board, or any committee thereof, to adopt any other incentive compensation arrangements (either generally or specifically) as the Board, or any committee thereof, in its or their discretion determines desirable.

 

18.                                  Indemnification .

 

To the extent permitted by applicable law, each director of the Company including any member of a committee of the Board (each an “Indemnitee”) shall be indemnified and held harmless by the Company against and from any and all loss, cost, liability or expense that may be imposed upon or reasonably incurred by an Indemnitee in connection with, or resulting from, any claim, action, suit or proceeding to which the Indemnitee may be a party or in which an Indemnitee may be involved by reason of any action taken or failure to act under the Plan, and against and from any and all amounts paid by an Indemnitee (with the Company’s written approval) in the settlement thereof, or paid by an Indemnitee in satisfaction of a judgment in any action, suit or proceeding except a judgment in favor of the Company; subject, however, to the condition that upon the institution of any claim, action, suit or proceeding against an Indemnitee, the Indemnitee shall give the Company an opportunity in writing, at its own expense, to defend against the claim, action, suit or proceeding.  The foregoing right of indemnification shall not be exclusive of any other right to which the persons may be entitled as a matter of law, under the Company’s articles of incorporation, by-laws or any indemnification agreement with the Company or otherwise, or any power the Company may have to indemnify an Indemnitee or hold the Indemnitee harmless.

 

The Board and each officer and Participant shall be fully justified in reasonably relying or acting upon any information furnished in connection with the administration of the Plan by the Company or any employee.  In no event shall any persons who are, or were, members of the Board, or an officer or employee of the Company, be liable for any determination made or other action taken or any omission to act in reliance upon any information, or for any action (including furnishing of information) taken or any failure to act, if done in good faith.

 

19.                                  Severability .

 

In the event that any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.

 

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20.                                  Governing Law .

 

To the extent not preempted by federal law, the Plan and all option and restricted stock agreements hereunder shall be construed in accordance with and governed by the laws of the State of Illinois applicable to contracts made and to be performed entirely within the State of Illinois.

 

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