1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 5, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission File Number: 1-12302
BARNES & NOBLE, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 06-1196501
---------------------------------------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
122 Fifth Avenue, New York, NY 10011
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(Address of Principal Executive Offices) (Zip Code)
(212) 633-3300
--------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Number of shares of $.001 par value common stock outstanding as of May 31, 2001:
65,649,017.
2
BARNES & NOBLE, INC. AND SUBSIDIARIES
May 5, 2001
Index to Form 10-Q
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations - For the 13 weeks ended
May 5, 2001 and April 29, 2000........................................ 3
Consolidated Balance Sheets - May 5, 2001, April 29, 2000 and
February 3, 2001...................................................... 4
Consolidated Statement of Changes in Shareholders' Equity - May 5, 2001... 6
Consolidated Statements of Cash Flows - For the 13 weeks ended
May 5, 2001 and April 29, 2000........................................ 7
Notes to Consolidated Financial Statements................................ 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk................ N/A
PART II - OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 18
Item 2. Changes in Securities and Use of Proceeds................................. 18
Item 6. Exhibits and Reports on Form 8-K.......................................... 19
</TABLE>
3
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(thousands of dollars, except per share data)
(unaudited)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
13 weeks ended
-----------------------------
May 5, 2001 April 29, 2000
----------- --------------
<S> <C> <C>
Sales $ 1,009,637 894,256
Cost of sales and occupancy 750,586 654,167
----------- ----------
Gross profit 259,051 240,089
----------- ----------
Selling and administrative expenses 210,170 182,779
Depreciation and amortization 36,723 33,005
Pre-opening expenses 825 1,483
----------- ----------
Operating profit 11,333 22,822
Interest (net of interest income of $468 and $131,
respectively) and amortization of deferred
financing fees (11,277) (9,773)
Equity in net loss of Barnes & Noble.com (14,315) (17,598)
Other expense, net (5,385) (2,534)
----------- ----------
Loss before benefit for income taxes (19,644) (7,083)
Benefit for income taxes (8,152) (2,939)
----------- ----------
Net loss $ (11,492) (4,144)
=========== ==========
Loss per common share
Basic $ (0.18) (0.06)
Diluted $ (0.18) (0.06)
Weighted average common shares outstanding
Basic 65,205,000 64,203,000
Diluted 65,205,000 64,203,000
</TABLE>
See accompanying notes to consolidated financial statements.
3
4
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(thousands of dollars, except per share data)
<TABLE>
<CAPTION>
May 5, April 29, February 3,
2001 2000 2001
---------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 47,670 18,947 26,003
Receivables, net 78,011 58,421 84,505
Merchandise inventories 1,255,573 1,162,097 1,238,618
Prepaid expenses and other current assets 108,525 49,898 106,127
---------- ---------- ----------
Total current assets 1,489,779 1,289,363 1,455,253
---------- ---------- ----------
Property and equipment:
Land and land improvements 3,247 3,247 3,247
Buildings and leasehold improvements 402,760 415,144 436,289
Fixtures and equipment 657,142 582,274 682,444
---------- ---------- ----------
1,063,149 1,000,665 1,121,980
Less accumulated depreciation and amortization 518,238 447,335 555,760
---------- ---------- ----------
Net property and equipment 544,911 553,330 566,220
---------- ---------- ----------
Intangible assets, net 355,063 299,386 359,192
Investment in Barnes & Noble.com 122,280 222,933 136,595
Other noncurrent assets 46,044 62,354 40,216
---------- ---------- ----------
Total assets $2,558,077 2,427,366 2,557,476
========== ========== ==========
</TABLE>
(Continued)
4
5
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(thousands of dollars, except per share data)
<TABLE>
<CAPTION>
May 5, April 29, February 3,
2001 2000 2001
---------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 559,605 589,835 582,075
Accrued liabilities 259,856 221,132 353,000
---------- ---------- ----------
Total current liabilities 819,461 810,967 935,075
---------- ---------- ----------
Long-term debt 790,000 597,400 666,900
Deferred income taxes 72,432 121,249 74,289
Other long-term liabilities 102,907 90,484 103,535
Shareholders' equity:
Common stock; $.001 par value; 300,000,000
shares authorized; 70,995,594, 69,612,037
and 70,549,176 shares issued, respectively 71 70 71
Additional paid-in capital 682,831 655,510 673,122
Accumulated other comprehensive loss (8,491) (6,494) (5,874)
Retained earnings 216,243 275,557 227,735
Treasury stock, at cost, 5,504,700 shares (117,377) (117,377) (117,377)
---------- ---------- ----------
Total shareholders' equity 773,277 807,266 777,677
---------- ---------- ----------
Commitments and contingencies -- -- --
---------- ---------- ----------
Total liabilities and shareholders' equity $2,558,077 2,427,366 2,557,476
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
6
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
(thousands of dollars, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other Treasury
Common Paid-In Comprehensive Retained Stock at
Stock Capital Losses Earnings Cost Total
-------- -------- ------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at February 3, 2001 $ 71 $673,122 $(5,874) $ 227,735 $(117,377) $777,677
-------- -------- ------- --------- --------- --------
Comprehensive loss:
Net loss -- -- -- (11,492) --
Other comprehensive loss:
Unrealized loss on
available-for-sale securities
(net of deferred tax benefit
of $1,396) -- -- (1,968) -- --
Unrealized loss on derivative
instrument (net of deferred
tax benefit of $462) -- -- (649) -- --
Total comprehensive loss (14,109)
Exercise of 446,418 common stock
options (net of deferred tax benefit
of $1,740) -- 9,709 -- -- -- 9,709
-------- -------- ------- --------- --------- --------
Balance at May 5, 2001 $ 71 $682,831 $(8,491) $ 216,243 $(117,377) $773,277
======== ======== ======= ========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
6
7
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(thousands of dollars)
(unaudited)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
13 weeks ended
----------------------------
May 5, 2001 April 29,2000
----------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (11,492) (4,144)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization (including amortization of
deferred financing fees) 37,144 33,313
Loss on disposal of property and equipment 671 108
Increase in other long-term liabilities for scheduled rent
increases in long-term leases 2,238 2,541
Other expense, net 5,385 2,534
Equity in net loss of Barnes & Noble.com 14,315 17,598
Changes in operating assets and liabilities, net (135,208) (164,874)
--------- ---------
Net cash flows from operating activities (86,947) (112,924)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (12,982) (15,823)
Proceeds from the partial sale of Chapters Inc. 6,072 --
Acquisition of consolidated subsidiary (3,555) --
Purchase of investments (2,500) (8,000)
Net increase in other noncurrent assets (9,490) (4,513)
--------- ---------
Net cash flows from investing activities (22,455) (28,336)
--------- ---------
Cash flows from financing activities:
Net increase (decrease) in revolving credit facility (176,900) 165,800
Proceeds from issuance of long-term debt 300,000 --
Proceeds from exercise of common stock options 7,969 740
Purchase of treasury stock through repurchase program -- (30,580)
--------- ---------
Net cash flows from financing activities 131,069 135,960
--------- ---------
Net increase (decrease) in cash and cash equivalents 21,667 (5,300)
Cash and cash equivalents at beginning of period 26,003 24,247
--------- ---------
Cash and cash equivalents at end of period $ 47,670 18,947
========= =========
Changes in operating assets and liabilities, net:
Receivables, net $ 6,494 (181)
Merchandise inventories (16,955) (59,644)
Prepaid expenses and other current assets (2,398) 6,681
Accounts payable and accrued liabilities (122,349) (111,730)
--------- ---------
Changes in operating assets and liabilities, net $(135,208) (164,874)
========= =========
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 9,304 4,590
Income taxes $ 27,540 36,632
Supplemental disclosure of subsidiaries acquired:
Assets acquired $ 3,555
Liabilities assumed --
---------
Cash $ 3,555
=========
</TABLE>
See accompanying notes to consolidated financial statements.
7
8
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements For the
13 weeks ended May 5, 2001 and April 29, 2000
(thousands of dollars, except per share data)
(unaudited)
The unaudited consolidated financial statements include the accounts of Barnes &
Noble, Inc. and its wholly and majority-owned subsidiaries (collectively, the
Company).
In the opinion of the Company's management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly its consolidated
financial position as of May 5, 2001 and the results of its operations and its
cash flows for the 13 weeks then ended. These consolidated financial statements
are condensed and therefore do not include all of the information and footnotes
required by generally accepted accounting principles. The consolidated financial
statements should be read in conjunction with the Company's annual report on
Form 10-K for the 53 weeks ended February 3, 2001 (fiscal 2000). The Company
follows the same accounting policies in preparation of interim reports.
Due to the seasonal nature of the business, the results of operations for the 13
weeks ended May 5, 2001 are not indicative of the results to be expected for the
52 weeks ending February 2, 2002.
(1) Merchandise Inventories
Merchandise inventories are stated at the lower of cost or market. Cost
is determined using the retail inventory method on the first-in, first-out
(FIFO) basis for 82 percent, 83 percent and 82 percent of the Company's
merchandise inventories as of May 5, 2001, April 29, 2000 and February 3, 2001,
respectively. Merchandise inventories of Babbage's Etc. LLC and GameStop, Inc.
(f/k/a Funco, Inc.) (Video Game & Entertainment Software) stores and Calendar
Club represent 9 percent, 7 percent and 9 percent of merchandise inventories as
of May 5, 2001, April 29, 2000 and February 3, 2001, respectively and are
recorded based on the average cost method. The remaining merchandise inventories
are valued on the last-in, first-out (LIFO) method.
If substantially all of the merchandise inventories currently valued at
LIFO costs were valued at current costs, merchandise inventories would remain
unchanged as of May 5, 2001, April 29, 2000 and February 3, 2001.
(2) Convertible Subordinated Notes
In March of 2001, the Company announced the successful completion of
the sale of $300,000, 5.25 percent convertible subordinated notes due March 15,
2009. The notes are convertible into the Company's common stock at a conversion
price of $32.512 per share.
(3) Reclassifications
Certain prior period amounts have been reclassified to conform to the
current period presentation.
(4) Income Taxes
The tax provisions for the 13 weeks ended May 5, 2001 and April 29,
2000 are based upon management's estimate of the Company's annualized effective
tax rate.
8
9
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements For the
13 weeks ended May 5, 2001 and April 29, 2000
(thousands of dollars, except per share data)
(unaudited)
(5) Derivative Financial Instruments
On February 4, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133), as amended, which requires that all derivative
instruments be recorded on the balance sheet at their fair value. The impact of
adopting SFAS 133 on the Company's consolidated financial statements was not
material.
Under an agreement expiring February 2, 2003, the Company uses an
interest rate swap as a derivative to modify the interest characteristics of its
outstanding floating rate long-term debt, to reduce its exposure to fluctuations
in interest rates. The Company's accounting policy is based on its designation
of such instruments as cash flow hedges. The Company does not enter into such
contracts for speculative purposes. The swap has a notional amount of $55,000.
The effective portion of the gain or loss on the derivative instrument is
initially reported as a component of comprehensive loss in the Company's
Statement of Shareholders' Equity, and later reflected in earnings in the period
in which the related transactions occur. In the first quarter of 2001, the
Company recorded an unrealized loss of $(649), net of taxes. Ineffectiveness
results when gains and losses on the hedged item are not completely offset by
gains and losses in the derivative instrument. No ineffectiveness was recognized
in the first quarter of fiscal 2001 related to these instruments.
(6) Comprehensive loss
Comprehensive loss is net loss, plus certain other items that are
recorded directly to shareholders' equity. The only such items currently
applicable to the Company are the unrealized losses on available-for-sale
securities and derivative instruments, as follows:
<TABLE>
<CAPTION>
13 weeks ended
----------------------------
May 5, 2001 April 29, 2000
----------- --------------
<S> <C> <C>
Net loss $(11,492) (4,144)
Other comprehensive loss:
Unrealized losses on available-for-sale securities:
Unrealized holding losses arising during the period (2,524) (5,296)
Less: reclassification adjustment 556 --
-------- --------
Net Unrealized losses, net of deferred income tax
benefit of $1,396 and $3,757 respectively (1,968) (5,296)
-------- --------
Unrealized loss on derivative instrument, net of
deferred income tax benefit of $462 and $0, respectively (649) --
-------- --------
Total comprehensive loss $(14,109) (9,440)
======== ========
</TABLE>
9
10
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements For the
13 weeks ended May 5, 2001 and April 29, 2000
(thousands of dollars, except per share data)
(unaudited)
(7) Other Expense
The following table sets forth the components of other expense, in
thousands of dollars:
<TABLE>
<CAPTION>
13 weeks ended
----------------------------
May 5, 2001 April 29, 2000
----------- --------------
<S> <C> <C>
ABA legal and settlement costs(a) $ (4,500) --
Equity in net losses of iUniverse.com(b) (1,020) (2,534)
Equity in net losses of BOOK(R) magazine(c) (200) --
Gain on partial sale of Chapters Inc.(d) 335 --
-------- --------
Total other expense $ (5,385) (2,534)
======== ========
</TABLE>
(a) In the first quarter of fiscal 2001, the Company recorded a pre-tax
charge of $4,500 in connection with a lawsuit brought by the American
Booksellers Association (ABA). The charges included a settlement of
$2,350 to be paid to the plaintiffs and approximately $2,150 in legal
expenses incurred by the Company during the quarter.
(b) In the first quarter of fiscal 2000, the Company held a 49 percent
ownership interest in iUniverse.com. During fiscal 2000, the Company
sold a portion of its investment in iUniverse.com decreasing its
percentage ownership interest to 29 percent. This investment is being
accounted for under the equity method and is reflected as a component
of other noncurrent assets.
(c) During fiscal 2000, the Company acquired an approximate 50 percent
interest in BOOK(R) magazine for $4,802. This investment is being
accounted for under the equity method and is reflected as a component
of other noncurrent assets.
(d) In the first quarter of fiscal 2001, the Company sold a portion of its
investment in Chapters Inc. (Chapters) resulting in a pre-tax gain of
$335.
(8) Segment Information
The Company's reportable segments are strategic groups that offer
different products. These groups have been aggregated into two segments:
bookstores and video game and entertainment software stores.
Bookstores
This segment includes 568 book "super" stores under the Barnes & Noble
Booksellers, Bookstop and Bookstar names which generally offer a comprehensive
title base, a cafe, a children's section, a music department, a magazine section
and a calendar of ongoing events, including author appearances and children's
activities. This segment also includes 335 small format mall-based stores under
the B. Dalton Bookseller, Doubleday Book Shops and Scribner's Bookstore trade
names. Additionally, this segment includes the operations of Calendar Club, the
Company's majority-owned subsidiary. Calendar Club is an operator of seasonal
calendar kiosks.
10
11
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 13 weeks ended May 5, 2001 and April 29, 2000
(thousands of dollars, except per share data)
(unaudited)
Video Game and Entertainment Software Stores
This segment includes 479 video game and entertainment software stores
operated under the Babbage's and Software Etc. trade names, 501 stores under the
FuncoLand and GameStop trade names, a Web site (gamestop.com) and Game Informer
magazine. The principal products of these stores are comprised of video game
hardware and software and PC entertainment software.
The accounting policies of the segments are the same as those for the
Company as a whole. Segment operating profit includes corporate expenses in each
operating segment. Barnes & Noble evaluates the performance of its segments and
allocates resources to them based on operating profit.
Segment information for the 13 weeks ended May 5, 2001 and April 29,
2000 follows:
<TABLE>
<CAPTION>
Sales May 5, 2001 April 29, 2000
-------------------------------------------- ----------- --------------
<S> <C> <C>
Bookstores $ 808,267 774,253
Video game and entertainment software stores 201,370 120,003
---------- ---------
Total $1,009,637 894,256
========== =========
</TABLE>
<TABLE>
<CAPTION>
Operating profit May 5, 2001 April 29, 2000
-------------------------------------------- ----------- --------------
<S> <C> <C>
Bookstores $ 16,673 22,125
Video game and entertainment software stores (5,340) 697
--------- --------
Total $ 11,333 22,822
========= ========
</TABLE>
Bookstores operating profit includes Calendar Club operating losses of
approximately $2,014 and $1,500 for the 13 weeks ended May 5, 2001 and April 29,
2000, respectively.
A reconciliation of operating profit reported by reportable segments to
loss before income taxes in the consolidated financial statements for the 13
weeks ended May 5, 2001 and April 29, 2000 is as follows:
<TABLE>
<CAPTION>
May 5, 2001 April 29, 2000
----------- --------------
<S> <C> <C>
Reportable segments operating profit $ 11,333 22,822
Interest, net (11,277) (9,773)
Equity in net loss of Barnes & Noble.com (14,315) (17,598)
Other expense (5,385) (2,534)
-------- --------
Consolidated loss before income taxes $(19,644) (7,083)
======== ========
</TABLE>
11
12
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 13 weeks ended May 5, 2001 and April 29, 2000
(thousands of dollars, except per share data)
(unaudited)
(9) Acquisition
On March 19, 2001, Barnes & Noble, Inc. acquired SparkNotes, a
publisher of academic, educational and informational materials for students for
$3,555. The SparkNotes collection currently consists of over 600 study guides on
high school and college level academic topics, including literature, history,
economics, math and chemistry. The acquisition was accounted for by the purchase
method of accounting and, accordingly, the results of operations for the period
subsequent to the acquisition are included in the consolidated financial
statements.
(10) Video Game & Entertainment Software Stores Incentive Plan
To provide incentives to motivate, attract and retain key employees of
the Video Game & Entertainment Software stores, Gamestop, Inc. has adopted an
Incentive Plan (the Plan). The Plan is administered by the Compensation
Committee of the Company's Board of Directors, the same committee that
administers the Company's other Incentive Plans. The Plan reserves 20% of
Gamestop's outstanding (nonvoting) common stock for grants as stock options
(which, for tax purposes, may be either qualified "incentive stock options" or
"nonqualified stock options"), restricted shares and other forms of incentive
grants.
12
13
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
The primary sources of the Company's cash are net cash flows from operating
activities, funds available under its senior credit facility and short-term
vendor financing.
The Company's cash and cash equivalents were $47.7 million as of May 5, 2001
compared with $18.9 million as of April 29, 2000. During the 13 weeks ended May
5, 2001, retail earnings before interest, taxes, depreciation and amortization
(EBITDA) decreased $9.2 million to $48.1 million from $57.3 million during the
comparable prior year period.
Merchandise inventories increased to $1,255.6 million as of May 5, 2001,
compared with $1,162.1 million as of April 29, 2000. Approximately $30.4 million
of the increase is due to the increase of Babbage's Etc. and GameStop, Inc.
(f/k/a Funco, Inc.) (Video Game & Entertainment Software) inventory. The
increase in book inventory of approximately $60.1 million supported the
Company's 4.4% book sales growth, the opening of 31 Barnes & Noble stores over
the last twelve months and the strategic increase in the distribution center
standing inventory to over 750,000 in-stock titles available for shipping within
24 hours to both online customers and the retail store network.
The Company's investing activities consist principally of capital expenditures
for new store construction, system enhancements and store relocations/remodels.
Capital expenditures totaled $13.0 million and $15.8 million during the 13 weeks
ended May 5, 2001 and April 29, 2000, respectively.
In March of 2001, the Company announced the successful completion of the sale of
$300.0 million, 5.25 percent convertible subordinated notes due March 15, 2009,
further strengthening its balance sheet. The notes are convertible into the
Company's common stock at a conversion price of $32.512 per share.
Total debt increased 32.2% to $790.0 million as of May 5, 2001 from $597.4
million as of April 29, 2000. Average borrowings under the Company's senior
credit facility and subordinated notes were $752.7 million and $584.3 million
during the 13 weeks ended May 5, 2001 and April 29, 2000, respectively, and
peaked at $870.0 million and $627.6 million during the same periods. The
increase was primarily attributable to the funding of the acquisitions of
Babbage's Etc. in October 1999 and Funco in June 2000 (the Acquisitions). As a
result of the above transactions, the ratio of debt to equity increased to
1.02:1.00 as of May 5, 2001, compared with 0.74:1.00 as of April 29, 2000.
Based upon the Company's current operating levels, management believes net cash
flows from operating activities and the capacity under its $850.0 million senior
credit facility will be sufficient to meet the Company's normal working capital
and debt service requirements for at least the next twelve months.
The Company did not declare or pay any cash dividends during the 13-week periods
ended May 5, 2001 and April 29, 2000.
13
14
Seasonality
The Company's business, like that of many retailers, is seasonal, with
the major portion of sales and operating profit realized during the quarter
which includes the Christmas selling season.
Results of Operations
13 weeks ended May 5, 2001 compared with the 13 weeks ended April 29, 2000
Sales
During the 13 weeks ended May 5, 2001, the Company's sales increased $115.3
million or 12.9% to $1,009.6 million from $894.3 million during the 13 weeks
ended April 29, 2000. Contributing to this improvement was an increase of $81.4
million from Video Game & Entertainment Software stores. During the first
quarter, Barnes & Noble "super" store sales rose 6.7% to $738.6 million from
$692.5 million during the same period a year ago and accounted for 73.2% of
total Company sales or 91.4% of total bookstore sales.
During the first quarter, the 6.7% increase in Barnes & Noble bookstore sales
was primarily attributable to a same store sales gain of 2.3% coupled with 31
new stores opened since April 29, 2000 which contributed to a 5.3% increase in
square footage. Sales were strong across most book categories, particularly
children's books, hardcover, bargain books and educational books (teaching aids
and workbooks for the growing home school market), as well as music and cafes.
During the first quarter, B. Dalton sales declined 15.6% and represented 6.6% of
total Company sales. The decrease was primarily a result of 54 store closings
and a 13.8% reduction in its square footage since April 29, 2000. In addition,
B. Dalton's same store sales declined 1.8% during the first quarter.
During the first quarter, Video Game & Entertainment Software sales increased
67.8%. This increase was primarily attributable to the increase in the number of
stores resulting from the acquisition of Funco as well as a same store sales
gain of 13.2%.
During the first quarter, the Company opened two Barnes & Noble stores and
closed three, bringing its total number of Barnes & Noble bookstores to 568 with
13.4 million square feet. The Company closed four B. Dalton stores, ending the
period with 335 B. Dalton stores and 1.3 million square feet. The Company opened
seven GameStop stores, one smaller format store, closed two Babbage's stores and
closed four FuncoLand stores, bringing its total to 980 video game and
entertainment software stores with 1.5 million square feet. As of May 5, 2001,
the Company operated 1,883 stores in fifty states, the District of Columbia,
Puerto Rico and Guam.
Cost of Sales and Occupancy
During the 13 weeks ended May 5, 2001, cost of sales and occupancy increased
$96.4 million, or 14.7%, to $750.6 million from $654.2 million during the 13
weeks ended April 29, 2000 primarily due to growth in the Video Game &
Entertainment Software segment as a result of the Acquisitions.
As a percentage of sales, cost of sales and occupancy increased to 74.3% from
73.2% during the same period one year ago. This increase was primarily
attributable to lower gross margins in the Video Game & Entertainment Software
stores, partially offset by improved leverage on bookstore occupancy costs.
14
15
Selling and Administrative Expenses
Selling and administrative expenses increased $28.9 million to $210.2 million
during the 13 weeks ended May 5, 2001 from $181.3 million during the 13 weeks
ended April 29, 2000 primarily due to growth in the Video Game & Entertainment
Software segment as a result of the Acquisitions. During the first quarter,
selling and administrative expenses increased as a percentage of sales to 20.8%
from 20.3% during the prior year period.
Depreciation and Amortization
During the first quarter, depreciation and amortization increased $3.7 million,
or 11.3%, to $36.7 million from $33.0 million during the same period last year.
The increase was primarily the result of the increase in depreciation and
amortization in the Video Game & Entertainment Software segment as a result of
the Acquisitions, as well as depreciation related to the 31 new Barnes & Noble
stores opened since April 29, 2000.
Pre-opening Expenses
Pre-opening expenses decreased $0.7 million, or 44.4%, to $0.8 million during
the 13 weeks ended May 5, 2001 from $1.5 million for the 13 weeks ended April
29, 2000.
Operating Profit
The Company's consolidated operating profit decreased to $11.3 million during
the 13 weeks ended May 5, 2001 from $24.3 million during the 13 weeks ended
April 29, 2000.
Interest Expense, Net and Amortization of Deferred Financing Fees
Net interest expense and amortization of deferred financing fees increased to
$11.3 million during the 13 weeks ended May 5, 2001 from $9.8 million during the
13 weeks ended April 29, 2000. This increase was primarily the result of the
increased borrowings used to support the Company's strategic growth initiatives
including the Acquisitions.
Other Expense
Other expense of $5.4 million in the first quarter of 2001 was primarily due to
$4.5 million in legal and settlement costs associated with the lawsuit brought
by the American Booksellers Association (ABA) and $1.0 million in equity losses
in iUniverse.com. Other expense of $2.5 million in the first quarter of 2000 was
due to equity losses in iUniverse.com.
Benefit for Income Taxes
The benefit for income taxes during the 13 weeks ended May 5, 2001 was $8.2
million compared with $2.9 million during the 13 weeks ended April 29, 2000. Tax
benefits were based upon management's estimate of the Company's annualized
effective tax rates. The Company's effective tax rate was 41.5% for the first
quarter of 2001 and 2000.
15
16
Net Loss
As a result of the factors discussed above, the Company reported a consolidated
net loss of ($11.5) million (or ($0.18) per share) during the 13 weeks ended May
5, 2001, compared with a net loss of ($4.1) million (or ($0.06) per share)
during the 13 weeks ended April 29, 2000. Components of earnings per share are
as follows:
<TABLE>
<CAPTION>
13 weeks ended
----------------------------
May 5, 2001 April 29, 2000
----------- --------------
<S> <C> <C>
Retail Earnings Per Share
Bookstores $ 0.12 0.16
Video Game & Entertainment Software stores (0.10) (0.02)
-------- --------
Retail EPS $ 0.02 0.14
EPS Impact of Investing Activities
Share of net losses of Barnes & Noble.com $ (0.13) (0.16)
Share of net losses from other investments (0.03) (0.04)
-------- --------
Total Investing Activities $ (0.16) (0.20)
Other Adjustments
ABA legal and settlement costs $ (0.04) --
-------- --------
Total Other Adjustments $ (0.04) --
-------- --------
Consolidated EPS $ (0.18) (0.06)
======== ========
</TABLE>
16
17
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report may contain certain forward-looking statements (as such
term is defined in the Private Securities Litigation Reform Act of 1995) and
information relating to the Company that are based on the beliefs of the
management of the Company as well as assumptions made by and information
currently available to the management of the Company. When used in this report,
the words "anticipate," "believe," "estimate," "expect," "intend," "plan" and
similar expressions, as they relate to the Company or the management of the
Company, identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future events, the outcome of which
is subject to certain risks, including among others general economic and market
conditions, decreased consumer demand for the Company's products, possible
disruptions in the Company's computer or telephone systems, possible work
stoppages or increases in labor costs, possible increases in shipping rates or
interruptions in shipping service, effects of competition, possible disruptions
or delays in the opening of new stores or the inability to obtain suitable sites
for new stores, higher than anticipated store closing or relocation costs,
higher interest rates, the performance of the Company's online initiatives such
as Barnes & Noble.com, the performance and successful integration of acquired
businesses, the success of the Company's strategic investments, unanticipated
increases in merchandise or occupancy costs, unanticipated adverse litigation
results or effects, and other factors which may be outside of the Company's
control. In addition, the video game market has historically been cyclical in
nature and dependent upon the introduction of new generation systems and related
interactive software. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results or
outcomes may vary materially from those described as anticipated, believed,
estimated, expected, intended or planned. Subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the cautionary statements in
this paragraph.
17
18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In March 1998, the American Booksellers Association (ABA) and 26
independent bookstores filed a lawsuit in the United States District Court for
the Northern District of California against the Company and Borders Group, Inc.
alleging violations of the Robinson-Patman Act, the California Unfair Trade
Practice Act and the California Unfair Competition Law. On March 20, 2001, the
court granted the Company summary judgment dismissing all claims for damages
under federal and state law. On April 19, 2001, the parties settled the
litigation of all other remaining claims.
For a more descriptive summary of the litigation and terms of the
settlement, see Item 3 in the Company's Annual Report on Form 10-K for the
fiscal year ended February 3, 2001 which was filed with the Securities and
Exchange Commission (SEC) on May 4, 2001.
Item 2. Changes in Securities and Use of Proceeds
On March 14, 2001, the Company consummated the sale of its 5.25 percent
convertible subordinated notes due March 15, 2009 (the Notes) in the aggregate
principal amount of $275,000,000. Credit Suisse First Boston Corporation and
Merrill Lynch, Pierce, Fenner & Smith Incorporated acted as initial purchasers.
The initial purchasers were granted a 30-day option to purchase up to an
additional $25,000,000 principal amount of Notes, which option was exercised on
March 30, 2001, bringing the total amount of the sale to $300,000,000.
The Notes are convertible, in whole or in part, at any time prior to
maturity, at the option of the holders, unless previously redeemed or
repurchased, into shares of the Company's common stock, $0.001 par value per
share, at a conversion price per share of $32.512, subject to adjustments. The
Notes are redeemable, in whole or in part, at the option of the Company at any
time on or after March 20, 2004, at premiums declining to par on March 15, 2008.
The Notes are being issued under an Indenture, dated as of March 14,
2001, between the Company and United States Trust Company of New York, as
Trustee.
The Notes were offered to a limited number of purchasers pursuant to a
private placement in accordance with Rule 144A under the Securities Act of 1933,
as amended (the 1933 Act). The net proceeds to the Company of approximately
$291,000,000 were used to reduce borrowings under the Company's existing senior
credit facility.
The Notes were issued in a transaction exempt from registration under
the 1933 Act and may not be offered or sold in the United States absent
registration with the SEC or the availability of an applicable exemption from
such registration requirements.
18
19
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed with this Form 10-Q:
<TABLE>
<S> <C>
10.1 Indenture, dated as of March 14, 2001, between Barnes
& Noble, Inc. and United States Trust Company of New
York, as Trustee.*
10.2 Registration Rights Agreement, dated as of March 8,
2001, between Barnes & Noble, Inc. and Credit Suisse
First Boston Corporation and Merrill Lynch, Pierce,
Fenner & Smith Incorporated.*
10.3 Gamestop, Inc. (f/k/a Funco, Inc.) 2000 Incentive
Plan.
</TABLE>
(b) The following report on Form 8-K was filed during the
Company's quarter ended May 5, 2001:
On March 22, 2001, the Company filed a Form 8-K under Item 5
reporting the consummated sale of its 5.25% Convertible
Subordinated Notes due March 15, 2009.
* Previously filed as an exhibit to the Company's Form 8-K filed with the SEC on
March 22, 2001 and incorporated herein by reference.
19
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BARNES & NOBLE, INC.
--------------------
(Registrant)
By: /s/ Maureen O'Connell
-----------------------
Maureen O'Connell
Chief Financial Officer
June 18, 2001
1
EXHIBIT 10.3
GAMESTOP, INC. (F/K/A FUNCO, INC.)
2000 INCENTIVE PLAN
GAMESTOP, INC., a Minnesota corporation f/k/a Funco, Inc. (the
"Company"), hereby establishes and adopts the following 2000 Incentive Plan (the
"Plan").
RECITALS
WHEREAS, the Company desires to encourage high levels of
performance by those individuals who are key to the success of the Company and
its parent, subsidiaries and affiliates, to attract new individuals who are
highly motivated and who will contribute to the success of the Company and to
encourage such individuals to remain as officers, employees, consultants,
advisors and/or directors of the Company and its parent, subsidiaries and
affiliates by increasing their proprietary interest in the Company's growth and
success.
WHEREAS, to attain these ends, the Company has formulated the
Plan embodied herein to authorize the granting of incentive awards through
grants of options to purchase shares ("Options"), grants of share appreciation
rights, grants of Share Purchase Awards (hereafter defined), grants of
Restricted Share Awards (hereafter defined), or any other award made under the
Plan to those persons (each such person a "Participant") whose judgment,
initiative and efforts are, have been, or will be responsible for the success of
the Company.
NOW, THEREFORE, the Company hereby constitutes,
establishes and adopts the following Plan and agrees to the following
provisions:
ARTICLE 1.
PURPOSE OF THE PLAN
1.1. Purpose. The purpose of the Plan is to assist the Company in
attracting and retaining selected individuals to serve as directors, officers,
consultants, advisors, and employees of the Company who will contribute to the
Company's success and to achieve long-term objectives which will inure to the
benefit of all shareholders of the Company through the additional incentive
inherent in the ownership of the Company's Class B Common Stock, par value $.01
per share (the "Shares"). Options granted under the Plan will be either
"incentive stock options," intended to qualify as such under the provisions of
section 422 of the Internal Revenue Code of 1986, as from time to time amended
(the "Code"), or "nonqualified stock options." For purposes of the Plan, the
terms "subsidiary" and "parent" shall mean "subsidiary corporation" and "parent
corporation," respectively, as such terms are defined in sections 424(f) and
424(e) of the Code, and "affiliate" shall have the meaning set forth in Rule
12b-2 of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
For purposes of the Plan, the term "Award" shall include a grant of an Option, a
grant of a share appreciation right, a grant of a Share Purchase Award, a grant
of a Restricted Share Award, or any other award made under the terms of the
Plan.
2
ARTICLE 2.
SHARES SUBJECT TO AWARDS
2.1. Number of Shares. Subject to the adjustment provisions of
Section 9.9 hereof, the aggregate number of Shares which may be issued under
Awards under the Plan, whether pursuant to Options, Share Purchase Awards,
Restricted Share Awards or any other award under the Plan shall not exceed
1,000,000 Shares. No Options to purchase fractional Shares shall be granted and
no fractional shares shall be issued under the Plan. For purposes of this
Section 2.1, the Shares that shall be counted toward such limitation shall
include all Shares:
(1) issued or issuable pursuant to Options that have been or may
be exercised;
(2) issued or issuable pursuant to Share Purchase Awards;
(3) issued as, or subject to issuance as a Restricted Share
Award; and
(4) issued or issuable under any other award granted under the
terms of the Plan.
2.2. Shares Subject to Terminated Awards. The Shares covered by
any unexercised portions of terminated Options granted under Articles 4 and 6,
Shares forfeited as provided in Section 8.2(a) and Shares subject to any Awards
which are otherwise surrendered by the Participant without receiving any payment
or other benefit with respect thereto may again be subject to new Awards under
the Plan, other than grants of Options intended to qualify as incentive stock
options. In the event the purchase price of an Option is paid in whole or in
part through the delivery of Shares, the number of Shares issuable in connection
with the exercise of the Option shall not again be available for the grant of
Awards under the Plan. Shares subject to Options, or portions thereof, which
have been surrendered in connection with the exercise of share appreciation
rights shall not again be available for the grant of Awards under the Plan.
2.3. Character of Shares. Shares delivered under the Plan may be
authorized and unissued Shares or Shares acquired by the Company, or both.
2.4. Limitations on Grants to Individual Participant. Subject to
adjustments pursuant to the provisions of Section 9.9 hereof, the maximum number
of Shares with respect to which Options or stock appreciation rights may be
granted hereunder to any employee during any fiscal year of the Company shall be
500,000 Shares (the "Limitation"). If an Option is canceled, the canceled Option
shall continue to be counted toward the Limitation for the year granted. An
Option (or a share appreciation right) that is repriced during any fiscal year
is treated as the cancellation of the Option (or share appreciation right) and a
grant of a new Option (or share appreciation right) for purposes of the
Limitation for that fiscal year.
-2-
3
ARTICLE 3.
ELIGIBILITY AND ADMINISTRATION
3.1. Awards to Employees, Directors and Others. (a) Participants
who receive Options under Articles 4 and 6 hereof (including share appreciation
rights under Article 5) ("Optionees"), Share Purchase Awards under Article 7 or
Restricted Share Awards or other Share-based awards under Article 8 (in either
case, a "Participant") shall consist of such key officers, employees,
consultants, advisors and directors of the Company or any parent, subsidiary or
affiliate of the Company as the Committee (hereinafter defined) shall select
from time to time. The Committee's designation of an Optionee or Participant in
any year shall not require the Committee to designate such person to receive
Awards or grants in any other year. The designation of an Optionee or
Participant to receive Awards or grants under one portion of the Plan shall not
require the Committee to include such Optionee or Participant under other
portions of the Plan.
(b) No Option that is intended to qualify as an "incentive stock
option" may be granted (x) to any individual that is not an employee of the
Company or any parent or subsidiary thereof, or (y) to any employee who, at the
time of such grant, owns, directly or indirectly (within the meaning of Sections
422(b)(6) and 424(d) of the Code), shares possessing more than 10% of the total
combined voting power of all classes of shares of the Company or any subsidiary
or parent, unless at the time of such grant, (i) the option price is fixed at
not less than 110% of the Fair Market Value (as defined below) of the Shares
subject to such Option, determined on the date of the grant, and (ii) the
exercise of such Option is prohibited by its terms after the expiration of five
years from the date such Option is granted.
3.2. Administration. (a) The Plan shall be administered by a
committee (the "Committee") consisting of not fewer than two directors of the
Company (the directors of the Company being hereinafter referred to as the
"Directors"), as designated by the Directors. The Directors may remove from, add
members to, or fill vacancies in the Committee. Unless otherwise determined by
the Directors, each member of the Committee is intended to be a "Non-Employee
Director" within the meaning of Rule 16b-3 (or any successor rule) of the
Exchange Act and an "outside director" within the meaning of Section
162(m)(4)(C)(i) of the Code and the regulations thereunder.
Any Award to a member of the Committee shall be on terms
consistent with Awards made to other Directors who are not members of the
Committee and who are not employees, except where the Award is approved or
ratified by the Compensation Committee (excluding persons who are also members
of the Committee) of the Board of Directors of the Company.
(b) The Committee is authorized, subject to the provisions of the
Plan, to establish such rules and regulations as it may deem appropriate for the
conduct of meetings and proper administration of the Plan. All actions of the
Committee shall be taken by majority vote of its members. The Committee is also
authorized, subject to the provisions of the Plan, to
-3-
4
make provisions in various Awards pertaining to a "change of control" of the
Company and to amend or modify existing Awards.
(c) Subject to the provisions of the Plan, the Committee shall
have authority, in its sole discretion, to interpret the provisions of the Plan
and any Award thereunder and, subject to the requirements of applicable law,
including Rule 16b-3 of the Exchange Act, to prescribe, amend, and rescind rules
and regulations relating to the Plan or any Award thereunder as it may deem
necessary or advisable. All decisions made by the Committee pursuant to the
provisions of the Plan shall be final, conclusive and binding on all persons,
including the Company, its shareholders, Directors and employees, and Plan
participants and beneficiaries.
3.3. Designation of Consultants/Liability. (a) The Committee may
designate employees of the Company and professional advisors to assist the
Committee in the administration of this Plan and may grant authority to
employees to execute agreements or other documents on behalf of the Committee.
(b) The Committee may employ such legal counsel, consultants and
agents as it may deem desirable for the administration of this Plan and may rely
upon any opinion received from any such counsel or consultant and any
computation received from any such consultant or agent. Expenses incurred by the
Committee or the Board in the engagement of any such counsel, consultant or
agent shall be paid by the Company. The Committee, its members and any person
designated pursuant to Section 3.3(a) shall not be liable for any action or
determination made in good faith with respect to this Plan. To the maximum
extent permitted by applicable law, no officer or former officer of the Company
or member or former member of the Committee or of the Board shall be liable for
any action or determination made in good faith with respect to this Plan or any
Award granted under it. To the maximum extent permitted by applicable law and to
the extent not covered by insurance, each officer or former officer and member
or former member of the Committee or of the Board shall be indemnified and held
harmless by the Company against any cost or expense (including reasonable fees
of counsel reasonably acceptable to the Company) or liability (including any sum
paid in settlement of a claim with the approval of the Company), and advanced
amounts necessary to pay the foregoing at the earliest time and to the fullest
extent permitted, arising out of any act or omission to act in connection with
this Plan, except to the extent arising out of such officer's or former
officer's, member's or former member's own fraud or bad faith. Such
indemnification shall be in addition to any rights of indemnification the
officers, directors or members or former officers, directors or members may have
under applicable law. Notwithstanding anything else herein, this indemnification
will not apply to the actions or determinations made by an individual with
regard to Awards granted to him or her under this Plan.
ARTICLE 4.
OPTIONS
4.1. Grant of Options. The Committee shall determine, within the
limitations of the Plan, those key officers, employees, consultants, advisors
and Directors of the Company and
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5
its parent, subsidiaries and affiliates to whom Options are to be granted under
the Plan, the number of Shares that may be purchased under each such Option, the
option price and other terms of each such Option, and shall designate such
Options at the time of the grant as either "incentive stock options" or
"nonqualified stock options"; provided, however, that Options granted to
employees of an affiliate (that is not also a parent or a subsidiary) or to
non-employees of the Company may only be "nonqualified stock options."
All Options granted pursuant to this Article 4 and Article 6
herein shall be authorized by the Committee and shall be evidenced in writing by
share option agreements ("Share Option Agreements") in such form and containing
such terms and conditions as the Committee shall determine that are not
inconsistent with the provisions of the Plan, and, with respect to any Share
Option Agreement granting Options that are intended to qualify as "incentive
stock options," are not inconsistent with Section 422 of the Code. The granting
of an Option pursuant to the Plan shall impose no obligation on the recipient to
exercise such Option. Any individual who is granted an Option pursuant to this
Article 4 and Article 6 herein may hold more than one Option granted pursuant to
such Articles at the same time and may hold both "incentive stock options" and
"nonqualified stock options" at the same time. To the extent that any Option
does not qualify as an "incentive stock option" (whether because of its
provisions, the time or manner of its exercise or otherwise) such Option or the
portion thereof which does not so qualify shall constitute a separate
"nonqualified stock option."
4.2. Option Price. (a) Subject to Section 3.1(b), the option
exercise price per each Share purchasable under any "incentive stock option"
granted pursuant to this Article 4, any "nonqualified stock option" granted
pursuant to Article 6 herein, or Options intended to be performance-based under
Section 162(m) of the Code shall not be less than 100% of the Fair Market Value
(as hereinafter defined) of such Share on the date of the grant of such Option.
(b) The option price per share of each Share purchasable under
any "nonqualified stock option" that is not intended to be performance-based
under Section 162(m) of the Code and is granted pursuant to this Article 4 shall
be such amount as the Committee shall determine at the time of the grant of such
Option.
4.3. Other Provisions. Options granted pursuant to this Article 4
shall be made in accordance with the terms and provisions of Article 9 hereof
and any other applicable terms and provisions of the Plan.
ARTICLE 5.
SHARE APPRECIATION RIGHTS
5.1. Grant and Exercise. Share appreciation rights may be granted
in conjunction with all or part of any Option granted under the Plan provided
such rights are granted at the time of the grant of such Option. A "share
appreciation right" is a right to receive cash or whole Shares, as provided in
this Article 5, in lieu of the purchase of a Share under a related Option. A
share appreciation right or applicable portion thereof shall terminate and no
longer be exercisable upon the termination or exercise of the related Option,
and a share appreciation right granted
-5-
6
with respect to less than the full number of Shares covered by a related Option
shall not be reduced until, and then only to the extent that, the exercise or
termination of the related Option exceeds the number of Shares not covered by
the share appreciation right. A share appreciation right may be exercised by the
holder thereof (the "Holder"), in accordance with Section 5.2 of this Article 5,
by giving written notice thereof to the Company and surrendering the applicable
portion of the related Option. Upon giving such notice and surrender, the Holder
shall be entitled to receive an amount determined in the manner prescribed in
Section 5.2 of this Article 5. Options which have been so surrendered, in whole
or in part, shall no longer be exercisable to the extent the related share
appreciation rights have been exercised.
5.2. Terms and Conditions. Share 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:
(a) Share appreciation rights shall be exercisable
only at such time or times and to the extent that the Options to
which they relate shall be exercisable in accordance with the
provisions of the Plan.
(b) Upon the exercise of a share appreciation
right, a Holder shall be entitled to receive up to, but no more
than, an amount in cash or whole Shares equal to the excess of
the then Fair Market Value of one Share over the option exercise
price per Share specified in the related Option multiplied by the
number of Shares in respect of which the share appreciation right
shall have been exercised. The Holder shall specify in his
written notice of exercise, whether payment shall be made in cash
or in whole Shares (unless otherwise provided in the agreement
governing the share appreciation right). Each share appreciation
right may be exercised only at the time and so long as a related
Option, if any, would be exercisable or as otherwise permitted by
applicable law.
(c) Upon the exercise of a share appreciation
right, the Option or part thereof to which such share
appreciation right is related shall be deemed to have been
exercised for the purpose of the limitation of the number of
Shares to be issued under the Plan, as set forth in Section 2.1
of the Plan.
(d) With respect to share appreciation rights
granted in connection with an Option that is intended to be an
"incentive stock option," the following shall apply:
(i) No share appreciation right
shall be transferable by a Holder otherwise than
by will or by the laws of descent and
distribution, and share appreciation rights shall
be exercisable, during the Holder's lifetime, only
by the Holder.
(ii) Share appreciation rights
granted in connection with an Option may be
exercised only when the Fair Market Value of the
Shares subject to the Option exceeds the option
exercise price at which Shares can be acquired
pursuant to the Option.
-6-
7
ARTICLE 6.
RELOAD OPTIONS
6.1. Authorization of Reload Options. Concurrently with the award
of any Option (such Option hereinafter referred to as the "Underlying Option")
to any Participant in the Plan, the Committee may grant one or more reload
options (each, a "Reload Option") to such Participant to purchase for cash or
Shares (held for at least six months or such other period to avoid accounting
charges against the Company's earnings) a number of Shares as specified below. A
Reload Option shall be exercisable for an amount of Shares equal to (i) the
number of Shares delivered by the Optionee to the Company to exercise the
Underlying Option, and (ii) to the extent authorized by the Committee, the
number of Shares used to satisfy any tax withholding requirement incident to the
exercise of the Underlying Option, subject to the availability of Shares under
the Plan at the time of such exercise. Any Reload Option may provide for the
grant, when exercised, of subsequent Reload Options to the extent and upon such
terms and conditions consistent with this Article 6, as the Committee in its
sole discretion shall specify at or after the time of grant of such Reload
Option. Except as otherwise determined by the Committee, a Reload Option will
vest and become exercisable six months after the exercise of an Underlying
Option or Reload Option whereby the Participant delivers to the Company Shares
held by the Optionee for at least six months in payment of the exercise price
and/or tax withholding obligations. Notwithstanding the fact that the Underlying
Option may be an "incentive stock option," a Reload Option is not intended to
qualify as an "incentive stock option" under Section 422 of the Code.
6.2. Reload Option Amendment. Each Share Option Agreement shall
state whether the Committee has authorized Reload Options with respect to the
Underlying Option. Upon the exercise of an Underlying Option or other Reload
Option, the Reload Option will be evidenced by an amendment to the underlying
Share Option Agreement.
6.3. Reload Option Price. The option exercise price per Share
deliverable upon the exercise of a Reload Option shall be the Fair Market Value
of a Share on the date the corresponding Underlying Option is exercised.
6.4. Term and Exercise. Except as otherwise determined by the
Committee, each Reload Option vests and is fully exercisable six months after
its grant (i.e., six months after the corresponding Underlying Option is
exercised). The term of each Reload Option shall be equal to the remaining
option term of the Underlying Option.
6.5. Termination of Employment. No additional Reload Options
shall be granted to Optionees when Options and/or Reload Options are exercised
pursuant to the terms of this Plan following termination of the Optionee's
employment unless the Committee, in its sole discretion, shall determine
otherwise.
6.6. Applicability of Other Sections. Except as otherwise
provided in this Article 6, the provisions of Article 9 applicable to Options
shall apply equally to Reload Options.
-7-
8
ARTICLE 7.
SHARE PURCHASE AWARDS
7.1. Grant of Share Purchase Award. The term "Share Purchase
Award" means the right to purchase Shares of the Company and to pay for such
Shares through a loan made by the Company to the Participant (a "Purchase Loan")
as set forth in this Article 7.
7.2. Terms of Purchase Loans. (a) Purchase Loan. Each Purchase
Loan shall be evidenced by a promissory note. The term of the Purchase Loan
shall be for a period of years, as determined by the Committee, and the proceeds
of the Purchase Loan shall be used exclusively by the Participant for purchase
of Shares from the Company at a purchase price equal to the Fair Market Value on
the date of the Share Purchase Award.
(b) Interest on Purchase Loan. A Purchase Loan shall be
non-interest bearing or shall bear interest at whatever rate the Committee shall
determine (but not in excess of the maximum rate permissible under applicable
law), payable in a manner and at such times as the Committee shall determine.
Those terms and provisions as the Committee shall determine shall be
incorporated into the promissory note evidencing the Purchase Loan.
(c) Forgiveness of Purchase Loan. Subject to Section 7.4 hereof,
the Company may forgive the repayment of up to 100% of the principal amount of
the Purchase Loan, subject to such terms and conditions as the Committee shall
determine and set forth in the promissory note evidencing the Purchase Loan. A
Participant's Purchase Loan can be prepaid at any time, and from time to time,
without penalty.
7.3. Security for Loans. (a) Stock Power and Pledge. Purchase
Loans granted to Participants shall be secured by a pledge of the Shares
acquired pursuant to the Share Purchase Award. Such pledge shall be evidenced by
a pledge agreement (the "Pledge Agreement") containing such terms and conditions
as the Committee shall determine. The share certificates for the Shares
purchased by a Participant pursuant to a Share Purchase Award shall be issued in
the Participant's name, but shall be held by the Company as security for
repayment of the Participant's Purchase Loan together with a stock power
executed in blank by the Participant (the execution and delivery of which by the
Participant shall be a condition to the issuance of the Share Purchase Award).
Unless otherwise determined by the Committee, the Participant shall be entitled
to exercise all rights applicable to such Shares, including, but not limited to,
the right to vote such Shares and the right to receive dividends and other
distributions made with respect to such Shares. When the Purchase Loan and any
accrued but unpaid interest thereon has been repaid or otherwise satisfied in
full, the Company shall deliver to the Participant the share certificates for
the Shares purchased by a Participant under the Share Purchase Award. Purchase
Loans shall be recourse or non-recourse with respect to a Participant, as
determined by the Committee.
(b) Release and Delivery of Share Certificates During the Term of
the Purchase Loan. The Company shall release and deliver to each Participant
certificates for Shares purchased by a Participant pursuant to a Share Purchase
Award, in such amounts and on
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such terms and conditions as the Committee shall determine, which shall be set
forth in the Pledge Agreement.
(c) Release and Delivery of Share Certificates Upon Repayment of
the Purchase Loan. The Company shall release and deliver to each Participant
certificates for the Shares purchased by the Participant under the Share
Purchase Award and then held by the Company, provided the Participant has paid
or otherwise satisfied in full the balance of the Purchase Loan and any accrued
but unpaid interest thereon. In the event the balance of the Purchase Loan is
not repaid, forgiven or otherwise satisfied within 90 days after (i) the date
repayment of the Purchase Loan is due (whether in accordance with its term, by
reason of acceleration or otherwise), or (ii) such longer time as the Committee,
in its discretion, shall provide for repayment or satisfaction, the Company
shall retain those Shares then held by the Company in accordance with the Pledge
Agreement.
(d) Recourse Purchase Loans. Notwithstanding Sections 7.3(a), (b)
and (c) above, in the case of a recourse Purchase Loan, the Committee may make a
Purchase Loan on such terms as it determines, including without limitation, not
requiring a pledge of the acquired Shares.
7.4. Termination of Employment. (a) Termination of Employment by
Death, Disability or by the Company Without Cause; Change of Control. In the
event of a Participant's termination of employment by reason of death,
"disability" or by the Company without "cause," or in the event of a "change of
control," the Committee shall have the right (but shall not be required) to
forgive the remaining unpaid amount (principal and interest) of the Purchase
Loan in whole or in part as of the date of such occurrence. "Change of Control,"
"disability" and "cause" shall have the respective meanings as set forth in the
promissory note evidencing the Purchase Loan.
(b) Termination of Employment. Subject to Section 7.4(a) above,
in the event of a Participant's termination of employment for any reason, the
Participant shall repay to the Company the entire balance of the Purchase Loan
and any accrued but unpaid interest thereon, which amounts shall become
immediately due and payable, provided, however, that if the Participant
voluntarily resigns as an employee in good standing, such amounts will become
due and payable on the 90th day after the effective date of such resignation.
7.5. Restrictions on Transfer. No Share Purchase Award or Shares
purchased through such an Award and pledged to the Company as collateral
security for the Participant's Purchase Loan (and accrued by unpaid interest
thereon) may be otherwise pledged, sold, assigned or transferred (other than by
will or by the laws of descent and distribution).
ARTICLE 8.
SHARE AWARDS
8.1. Restricted Share Awards. (a) A grant of Shares made pursuant
to Sections 8.1 and 8.2 is referred to as a "Restricted Share Award." The
Committee may grant to any Participant an amount of Shares in such manner, and
subject to such terms and conditions
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relating to vesting, forfeitability and restrictions on delivery and transfer
(whether based on performance standards, periods of service or otherwise) as the
Committee shall establish (such Shares, "Restricted Shares"). The terms of any
Restricted Share Award granted under this Plan shall be set forth in a written
agreement (a "Restricted Share Agreement") which shall contain provisions
determined by the Committee and not inconsistent with this Plan. The provisions
of Restricted Share Awards need not be the same for each Participant receiving
such Awards.
(b) Issuance of Restricted Shares. As soon as practicable after
the date of grant of a Restricted Share Award by the Committee, the Company
shall cause to be transferred on the books of the Company, Shares registered in
the name of the Company, as nominee for the Participant, evidencing the
Restricted Shares covered by the Award, but subject to forfeiture to the Company
retroactive to the date of grant, if a Restricted Share Agreement delivered to
the Participant by the Company with respect to the Restricted Shares covered by
the Award is not duly executed by the Participant and timely returned to the
Company. All Restricted Shares covered by Awards under this Article 8 shall be
subject to the restrictions, terms and conditions contained in the Plan and the
Restricted Share Agreement entered into by and between the Company and the
Participant. Until the lapse or release of all restrictions applicable to an
Award of Restricted Shares, the share certificates representing such Restricted
Shares shall be held in custody by the Company or its designee.
(c) Shareholder Rights. Beginning on the date of grant of the
Restricted Share Award and subject to execution of the Restricted Share
Agreement as provided in Sections 8.1(a) and (b), the Participant shall become a
shareholder of the Company with respect to all Shares subject to the Restricted
Share Agreement and shall have all of the rights of a shareholder, including,
but not limited to, the right to vote such Shares and the right to receive
distributions made with respect to such Shares; provided, however, that any
Shares or any other property (other than cash) distributed as a dividend or
otherwise with respect to any Restricted Shares as to which the restrictions
have not yet lapsed shall be subject to the same restrictions as such Restricted
Shares and shall be represented by book entry and held as prescribed in Section
8.1(b).
(d) Restriction on Transferability. None of the Restricted Shares
may be assigned or transferred (other than by will or the laws of descent and
distribution), pledged or sold prior to lapse or release of the restrictions
applicable thereto.
(e) Delivery of Shares Upon Release of Restrictions. Upon
expiration or earlier termination of the forfeiture period without a forfeiture
and the satisfaction of or release from any other conditions prescribed by the
Committee, the restrictions applicable to the Restricted Shares shall lapse. As
promptly as administratively feasible thereafter, subject to the requirements of
Section 10.1, the Company shall deliver to the Participant or, in case of the
Participant's death, to the Participant's beneficiary, one or more stock
certificates for the appropriate number of Shares, free of all such
restrictions, except for any restrictions that may be imposed by law.
8.2. Terms of Restricted Shares. (a) Forfeiture of Restricted
Shares. Subject to Section 8.2(b), all Restricted Shares shall be forfeited and
returned to the Company and all rights
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of the Participant with respect to such Restricted Shares shall terminate unless
the Participant continues in the service of the Company as an employee until the
expiration of the forfeiture period for such Restricted Shares and satisfies any
and all other conditions set forth in the Restricted Share Agreement. The
Committee in its sole discretion, shall determine the forfeiture period (which
may, but need not, lapse in installments) and any other terms and conditions
applicable with respect to any Restricted Share Award.
(b) Waiver of Forfeiture Period. Notwithstanding anything
contained in this Article 8 to the contrary, the Committee may, in its sole
discretion and subject to the limitations imposed under Code Section 162(m) and
the Treasury Regulations thereunder in the case of a Restricted Share Award
intended to comply with the performance based exception under Code Section
162(m), waive the forfeiture period and any other conditions set forth at grant
in any Restricted Share Agreement under appropriate circumstances (including the
death, disability or retirement of the Participant or a material change in
circumstances arising after the date of an Award) as determined by the Committee
in its sole discretion and subject to such terms and conditions (including
forfeiture of a proportionate number of the Restricted Shares) as the Committee
shall deem appropriate.
8.3. Other Share-Based Awards. The Committee is authorized to
grant other Share-based awards that are payable in, valued in whole or in part
by reference to, or otherwise based on or related to Shares, including but not
limited to, Shares awarded purely as a bonus and not subject to any restrictions
or conditions, Shares in payment of the amounts due under an incentive or
performance plan sponsored or maintained by the Company or an affiliate, share
appreciation rights (in tandem with Options), stock equivalent units, and Awards
valued by reference to book value of Shares. Subject to the provisions of this
Plan, the Committee shall have authority to determine the persons to whom and
the time or times at which such Awards shall be made, the number of Shares to be
awarded pursuant to or referenced by such Awards, and all other conditions of
the Awards. Grants of other Share-based awards may be subject to such
conditions, restrictions and contingencies as the Committee may determine which
may include, but are not limited to, continuous service with the Company or an
affiliate and/or the achievement of performance goals.
8.4. Objective Performance Goals, Formulae or Standards. If the
grant of Restricted Shares or other Share-based awards or the lapse of
restrictions or vesting of Restricted Shares or other Share-based awards is
based on the attainment of performance goals, the Committee shall establish the
performance goals and the applicable vesting percentage of the Restricted Share
Award or other Share-based award applicable to each Participant or class of
Participants in writing prior to the beginning of the applicable fiscal year or
at such later date as otherwise determined by the Committee and while the
outcome of the performance goals are substantially uncertain. Such performance
goals may incorporate provisions for disregarding (or adjusting for) changes in
accounting methods, corporate transactions (including, without limitation,
dispositions and acquisitions) and other similar type events or circumstances.
With regard to a Restricted Share Award or other Share-based award that is
intended to comply with Section 162(m) of the Code, to the extent any such
provision would create impermissible discretion under Section 162(m) of the Code
or otherwise violate Section 162(m) of the Code, such provision shall be of no
force or effect. The applicable performance goals shall be based on
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one or more of the Performance Criteria set forth in Exhibit A hereto. Other
performance goals may be used to the extent such goals satisfy Section 162(m) of
the Code or the Award is not intended to satisfy the requirements of Section
162(m) of the Code.
8.5. Annual Limitation on Grants of Shares. Subject to
adjustments pursuant to the provisions of Section 9.9 hereof, the maximum number
of Shares subject to specified performance goals intended to satisfy the
requirements of Section 162(m) of the Code and in accordance with Section 8.4
hereof that may be granted as Restricted Shares to any employee or subject to
any other Share-based awards to any employee during any fiscal year of the
Company shall be 500,000 Shares.
ARTICLE 9.
GENERALLY APPLICABLE PROVISIONS
9.1. Option Period. Subject to Section 3.1(b), the period for
which an Option is exercisable shall be set by the Committee and shall not
exceed ten years from the date such Option is granted. After the Option is
granted, the option period may not be reduced, subject to expiration due to
termination of employment.
9.2. Fair Market Value. If the Shares are listed or admitted to
trading on a securities exchange registered under the Exchange Act, unless
otherwise required by any applicable provision of the Code the "Fair Market
Value" of a Share as of a specified date shall mean the average of the high and
low price of the shares for the day immediately preceding the date as of which
Fair Market Value is being determined (or if there was no reported sale on such
date, on the last preceding date on which any reported sale occurred) reported
on the principal securities exchange on which the Shares are listed or admitted
to trading. If the Shares are not listed or admitted to trading on any such
exchange but are listed as a national market security on the Nasdaq Stock
Market, Inc. ("NASDAQ"), traded in the over-the-counter market or listed or
traded on any similar system then in use, the Fair Market Value of a Share shall
be the average of the high and low sales price for the day immediately preceding
the date as of which the Fair Market Value is being determined (or if there was
no reported sale on such date, on the last preceding date on which any reported
sale occurred) reported on such system. If the Shares are not listed or admitted
to trading on any such exchange, are not listed as a national market security on
NASDAQ and are not traded in the over-the-counter market or listed or traded on
any similar system then in use, but are quoted on NASDAQ or any similar system
then in use, the Fair Market Value of a Share shall be the average of the
closing high bid and low asked quotations on such system for the Shares on the
date in question. If the Shares are not publicly traded, the method for
determining Fair Market Value shall be determined in good faith by the Committee
in its sole discretion. An Option shall be considered granted on the date the
Committee acts to grant the Option or such later date as the Committee shall
specify.
9.3. Exercise of Options. Vested Options granted under the Plan
shall be exercised by the Optionee thereof (or by his or her executors,
administrators, guardian or legal representative, or by a Permitted Assignee, as
provided in Sections 9.4, 9.6 and 9.7 hereof) as to
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all or part of the Shares covered thereby, by the giving of written notice of
exercise to the Company, specifying the number of Shares to be purchased,
accompanied by payment of the full purchase price for the Shares being
purchased. Full payment of such purchase price shall be made at the time of
exercise and shall be made (i) in cash or by certified check or bank check or
wire transfer of immediately available funds, (ii) with the consent of the
Committee, by delivery of a promissory note in favor of the Company upon such
terms and conditions as determined by the Committee, (iii) with the consent of
Committee, by tendering previously acquired Shares (valued at its Fair Market
Value, as determined by the Committee as of the date of tender) that have been
owned for a period of at least six months (or such other period to avoid
accounting charges against the Company's earnings), (iv) if Shares are traded on
a national securities exchange, the Nasdaq Stock Market, Inc. or quoted on a
national quotation system sponsored by the National Association of Securities
Dealers, Inc. and the Committee authorizes this method of exercise, through the
delivery of irrevocable instructions to a broker approved by the Committee to
deliver promptly to the Company an amount equal to the purchase price, or (v)
with the consent of the Committee, any combination of (i), (ii), (iii) and (iv).
In connection with a tender of previously acquired Shares pursuant to clause
(iii) above, the Committee, in its sole discretion, may permit the Optionee to
constructively exchange Shares already owned by the Optionee in lieu of actually
tendering such Shares to the Company, provided that adequate documentation
concerning the ownership of the Shares to be constructively tendered is
furnished in a form satisfactory to the Committee. The notice of exercise,
accompanied by such payment, shall be delivered to the Company at its principal
business office or such other office as the Committee may from time to time
direct, and shall be in such form, containing such further provisions consistent
with the provisions of the Plan, as the Committee may from time to time
prescribe. In no event may any Option granted hereunder be exercised for a
fraction of a Share. The Company shall, subject to Section 10.4 herein, effect
the transfer of Shares purchased pursuant to an Option as soon as practicable,
and, within a reasonable time thereafter, such transfer shall be evidenced on
the books of the Company. No person exercising an Option shall have any of the
rights of a holder of Shares subject to an Option until certificates for such
Shares shall have been issued following the exercise of such Option. No
adjustment shall be made for cash dividends or other rights for which the record
date is prior to the date of such issuance.
9.4. Non-Transferability. Except as otherwise specifically
provided herein, no Award shall be transferable by the Participant otherwise
than by will or by the laws of descent and distribution. All Options shall be
exercisable, during the Participant's lifetime, only by the Participant. Any
attempt to transfer any Award, except as specifically provided herein, shall be
void, and no such Award shall in any manner be subject to the debts, contracts,
liabilities, engagements or torts of any person who shall be entitled to such
Award, nor shall it be subject to attachment or legal process for or against
such person. Notwithstanding the foregoing, the Committee may determine at the
time of grant or thereafter that an Award (other than (x) an Option that is
intended to be an incentive stock option, (y) a share appreciation right covered
by Section 5.2(d)(i) and (z) a Restricted Share Award) that is otherwise not
transferable pursuant to this Section 9.4 is transferable to a Family Member
(defined below) in whole or in part and in such circumstances, and under such
conditions as specified by the Committee. An Award that is transferred to a
Family Member pursuant to the preceding sentence (i) may not be subsequently
transferred otherwise than by will or by the laws of descent and distribution
and (ii) remains subject to the terms of this Plan and the Award agreement.
"Family Member" means, solely to
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the extent provided for in Securities Act Form S-8, any child, stepchild,
grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling,
niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law,
brother-in-law, or sister-in-law, including adoptive relationships, any person
sharing the employee's household (other than a tenant or employee), a trust in
which these persons have more than 50% of the beneficial interest, a foundation
in which these persons (or the employee) control the management of assets, and
any other entity in which these persons (or the employee) own more than 50% of
the voting interests or as otherwise defined in Securities Act Form S-8.
9.5. Termination of Employment. Unless the Committee otherwise
determines, in the event of the termination of employment of an Optionee or the
termination or separation from service of an advisor, consultant or a Director
(who is an Optionee) for any reason (other than death or disability as provided
below), any Option(s) held by such Optionee (or its Permitted Assignee) under
this Plan and not previously exercised or expired, to the extent vested on the
date of such termination, shall be exercisable as of such termination for a
period not to exceed three months after the date of such termination or
separation, provided, however, that in no instance may the term of the Option,
as so extended, exceed the maximum term set forth in Section 3.1(b)(ii) or 9.1
above. Notwithstanding the foregoing, in the event of the separation from
service of a non-employee Director (who is an Optionee) by reason of death,
disability or under conditions satisfactory to both the Director and the
Company, any nonqualified stock options held by such Director (or its Permitted
Assignee) under the Plan (to the extent vested on the date of such termination)
and not previously exercised or expired shall be exercisable for a period not to
exceed five years after the date of such separation, provided, however, that in
no instance may the term of the Option, as so extended, exceed the maximum term
set forth in Section 9.1 above.
9.6. Death. In the event an Optionee dies while employed by the
Company or any of its parent, subsidiaries or affiliates any Option(s) held by
such Optionee (or its Permitted Assignee) and not previously expired or
exercised shall, to the extent exercisable on the date of death, be exercisable
by the estate of such Optionee or by any person who acquired such Option by
bequest or inheritance, or by the Permitted Assignee at any time within one year
after the death of the Optionee, unless earlier terminated pursuant to its
terms, provided, however, that if the term of such Option would expire by its
terms within six months after the Optionee's death, the term of such Option
shall be extended until six months after the Optionee's death, provided further,
however, that in no instance may the term of the Option, as so extended, exceed
the maximum term set forth in Section 3.1(b)(ii) or 9.1 above.
9.7. Disability. In the event of the termination of employment
(or separation from service) of an Optionee due to total disability, the
Optionee, or his guardian or legal representative, or a Permitted Assignee shall
have the unqualified right to exercise any Option that has not expired or been
previously exercised and that the Optionee was eligible to exercise as of the
first date of total disability (as determined by the Committee), at any time
within one year after such termination, unless earlier terminated pursuant to
its terms, provided, however, that if the term of such Option would expire by
its terms within six months after such termination, the term of such Option
shall be extended until six months after such termination, provided further,
however, that in no instance may the term of the Option, as so extended, exceed
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the maximum term set forth in Section 3.1(b)(ii) or 9.1 above. The term "total
disability" shall, for purposes of this Plan, be defined in the same manner as
such term is defined in Section 22(e)(3) of the Code.
9.8. Terms of Grant. Notwithstanding anything in Section 9.5, 9.6
or 9.7 to the contrary, the Committee may grant an Option under such terms and
conditions as may be provided in the Share Option Agreement given to the
Optionee and the Committee has the discretion to modify the terms and conditions
of an Option after grant as long as no rights of the Participant are impaired,
provided, however, that in no instance may the term of the Option, as so
extended, exceed the maximum term established pursuant to Section 3.1(b)(ii) or
9.1 above.
9.9. Adjustments. In the event that the Committee shall determine
that any dividend or other distribution (whether in the form of cash, Shares,
other securities, or other property), recapitalization, stock split, reverse
stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase, or exchange of Shares or other securities, the issuance
of warrants or other rights to purchase Shares or other securities, or other
similar corporate transaction or event affects the Shares with respect to which
Options have been or may be issued under the Plan, such that an adjustment is
determined in good faith by the Committee to be appropriate in order to prevent
dilution or enlargement of the benefits or potential benefits intended to be
made available under the Plan, then the Committee shall, in such manner as the
Committee may deem equitable, adjust any or all of (i) the number and type of
Shares that thereafter may be made the subject of Awards, (ii) the number and
type of Shares subject to outstanding Awards, and (iii) the grant or exercise
price with respect to any Option, or, if deemed appropriate, make provision for
a cash payment to the holder of any outstanding Option; provided, in each case,
that with respect to "incentive stock options," no such adjustment shall be
authorized to the extent that such adjustment would cause such options to
violate Section 422(b) of the Code or any successor provision; and provided
further, that the number of Shares subject to any Option denominated in Shares
shall always be a whole number. In the event of any reorganization, merger,
consolidation, split-up, spin-off, or other business combination involving the
Company (each, a "Reorganization"), the Committee may cause any Award
outstanding as of the effective date of the Reorganization to be canceled in
consideration of a cash payment or alternate Award made to the holder of such
canceled Award substantially equivalent in value to the fair market value of
such canceled Award. The determination of fair market value shall be made by the
Committee in its sole discretion.
9.10. Amendment and Modification of the Plan. The Compensation
Committee of the Board of Directors of the Company may, from time to time,
alter, amend, suspend or terminate the Plan as it shall deem advisable, subject
to any requirement for shareholder approval imposed by applicable law, including
without limitation Sections 162(m) and 422 of the Code, or any rule of any stock
exchange or quotation system on which Shares are listed or quoted; provided that
such Compensation Committee may not amend the Plan, without the approval of the
Company's shareholders, to increase the number of Shares that may be the subject
of Options under the Plan (except for adjustments pursuant to Section 9.9
hereof). In addition, no amendments to, or termination of, the Plan shall in any
way impair the rights of an Optionee or a Participant (or a Permitted Assignee
thereof) under any Award previously granted without such Optionee's or
Participant's consent.
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9.11. Validity of Awards. The validity of any Award or grant of
Options made pursuant to this Plan shall remain in full force and effect and
shall not be affected by the compliance or noncompliance with Section 162(m) of
the Code or Rule 16b-3 of the Exchange Act.
ARTICLE 10.
MISCELLANEOUS
10.1. Tax Withholding. The Company shall have the right to make
all payments or distributions made pursuant to the Plan to an Optionee or
Participant (or a Permitted Assignee thereof) net of any applicable federal,
state and local taxes required to be paid as a result of the grant of any Award,
exercise of an Option or stock appreciation rights or any other event occurring
pursuant to this Plan. The Company shall have the right to withhold from wages
or other payments otherwise payable to such Optionee or Participant (or a
Permitted Assignee thereof) such withholding taxes as may be required by law, or
to otherwise require the Optionee or Participant (or a Permitted Assignee
thereof) to pay such withholding taxes. If the Optionee or Participant (or a
Permitted Assignee thereof) shall fail to make such tax payments as are
required, the Company or its parent, 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 such Optionee or Participant or to take
such other action as may be necessary to satisfy such withholding obligations.
In satisfaction of the requirement to pay required withholding taxes, the
Optionee or Participant (or Permitted Assignee) may make a written election,
which may be accepted or rejected in the discretion of the Committee, to have
withheld a portion of the Shares then issuable to the Optionee (or Permitted
Assignee) pursuant to the Plan, having an aggregate Fair Market Value equal to
the required withholding taxes.
10.2. Right of Discharge Reserved. Nothing in the Plan nor the
grant of an Award hereunder shall confer upon any employee, Director or other
individual the right to continue in the employment or service of the Company or
any parent, subsidiary or affiliate of the Company or affect any right that the
Company or any parent, subsidiary or affiliate of the Company may have to
terminate the employment or service of (or to demote or to exclude from future
Awards under the Plan) any such employee, Director or other individual at any
time for any reason. Except as specifically provided by the Committee, the
Company shall not be liable for the loss of existing or potential profit with
respect to an Award in the event of termination of an employment or other
relationship even if the termination is in violation of an obligation of the
Company or any parent, subsidiary or affiliate of the Company to the
Participant.
10.3. Legend. All certificates for Shares delivered under this
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 Securities and Exchange Commission, any stock exchange upon
which the Shares are then listed or any national securities association system
upon whose system the Shares are then quoted, any applicable Federal or state
securities law, and any applicable corporate law, and the Committee may cause a
legend or legends to be put on any such certificates to make appropriate
reference to such restrictions.
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10.4. Listing and Other Conditions. (a) As long as the Shares are
listed on a national securities exchange or system sponsored by a national
securities association, the issue of any Shares pursuant to an Award shall be
conditioned upon such Shares being listed on such exchange or system. The
Company shall have no obligation to deliver such Shares unless and until such
Shares are so listed; provided, however, that any delay in the delivery of such
Shares shall be based solely on a reasonable business decision and the right to
exercise any Option with respect to such Shares shall be suspended until such
listing has been effected.
(b) If at any time counsel to the Company shall be of the opinion
that any sale or delivery of Shares pursuant to any Award is or may in the
circumstances be unlawful or result in the imposition of excise taxes on the
Company under the statutes, rules or regulations of any applicable jurisdiction,
the Company shall have no obligation to make such sale or delivery, or to make
any application or to effect or to maintain any qualification or registration
under the Securities Act of 1933, as amended, or otherwise with respect to
Shares or Award, and the right to any Award shall be suspended until, in the
opinion of said counsel, such sale or delivery shall be lawful or will not
result in the imposition of excise taxes on the Company.
(c) Upon termination of any period of suspension under this
Section 10.4, any Award affected by such suspension which shall not then have
expired or terminated shall be reinstated as to all shares available before such
suspension and as to shares which would otherwise have become available during
the period of such suspension, but no such suspension shall extend the term of
any Option.
(d) A Participant shall be required to supply the Company with
any certificates, representations and information that the Company requests and
otherwise cooperate with the Company in obtaining any listing, registration,
qualification, exemption, consent or approval the Company deems necessary or
appropriate.
10.5. Severability. If any provision of the Plan shall be held
unlawful or otherwise invalid or unenforceable in whole or in part, such
unlawfulness, invalidity or unenforceability shall not affect any other
provision of the Plan or part thereof, each of which shall remain in full force
and effect. If the making of any payment or the provision of any other benefit
required under the Plan shall be held unlawful or otherwise invalid or
unenforceable, such unlawfulness, invalidity or unenforceability shall not
prevent any other payment or benefit from being made or provided under the Plan,
and if the making of any payment in full or the provision of any other benefit
required under the Plan in full would be unlawful or otherwise invalid or
unenforceable, then such unlawfulness, invalidity or unenforceability shall not
prevent such payment or benefit from being made or provided in part, to the
extent that it would not be unlawful, invalid or unenforceable, and the maximum
payment or benefit that would not be unlawful, invalid or unenforceable shall be
made or provided under the Plan.
10.6. Gender and Number. In order to shorten and to improve the
understandability of the Plan document by eliminating the repeated usage of such
phrases as "his or her" and any masculine terminology herein shall also include
the feminine, and the definition of any term herein in the singular shall also
include the plural except when otherwise indicated by the context.
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10.7. Termination of Plan. The Plan shall be effective on the
date of the approval of the Plan by the holders of a majority of the shares
entitled to vote thereon, provided such approval is obtained within 12 months
after the date of adoption of the Plan by the Board of Directors. Awards may be
granted under the Plan at any time and from time to time after the effective
date of the Plan and on or prior to September 13, 2010, on which date the Plan
will expire except as to Awards and related share appreciation rights then
outstanding under the Plan. Such outstanding Awards and stock appreciation
rights shall remain in effect until they have been exercised or terminated, or
have expired.
10.8. Nature of Payments. All Awards made pursuant to the Plan
are in consideration of services performed for the Company and any parent,
subsidiary or affiliate of the Company. Any income or gain realized pursuant to
Awards under the Plan and any share appreciation rights constitutes a special
incentive payment to the Optionee, Participant or Holder and shall not be taken
into account, to the extent permissible under applicable law, as compensation
for purposes of any of the employee benefit plans of the Company or any parent,
subsidiary or affiliate of the Company, except as may be determined by the
Committee or by the Directors or directors of the applicable parent, subsidiary
or affiliate of the Company.
10.9. Captions. The captions in this Plan are for convenience of
reference only, and are not intended to narrow, limit or affect the substance or
interpretation of the provisions contained herein.
10.10. Successors and Assigns. This Plan shall be binding upon
and inure to the benefit of the respective successors and permitted assigns of
the Company and the Participants.
10.11. Governing Law. The Plan and all determinations made and
actions taken thereunder, to the extent not otherwise governed by the Code or
the laws of the United States, shall be governed by the laws of the State of
Minnesota and construed accordingly.
ARTICLE 11
PUBLIC OFFERING
In connection with any underwritten public offering by the
Company of its equity securities pursuant to an effective registration statement
filed under the Securities Act of 1933, including the Company's initial public
offering, the Committee may, in its discretion, determine that a person shall
not sell, make any short sale of, loan, hypothecate, pledge, grant any option
for the purchase of, or otherwise dispose of or transfer for value or otherwise
agree to engage in any of the foregoing transactions with respect to any Shares
issued pursuant to an Award granted under the Plan without the prior written
consent of the Company or its underwriters. Such limitations shall be in effect
for such period of time as may be requested by the Company or such underwriters
and agreed to by the Company's officers and directors with respect to their
Shares; provided, however, that in no event shall such period exceed 180 days.
The limitations of this Article 11 shall in all events terminate two years after
the effective date of the Company's initial public offering. Holders of Shares
issued pursuant to an Award granted under the Plan shall be
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subject to the provisions of this Article 11 only if the officers and directors
of the Company are also subject to similar arrangements.
In the event of any stock split, stock dividend,
recapitalization, combination of shares, exchange of Shares or other change
affecting the Company's outstanding common stock effected as a class without the
Company's receipt of consideration, any new, substituted or additional
securities distributed with respect to the purchased shares shall be immediately
subject to the provisions of this Article 11, to the same extent the purchased
shares are at such time covered by such provisions.
In order to enforce the limitations of this Article 11, the
Company may impose stop-transfer instructions with respect to the purchased
Shares until the end of the applicable period.
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EXHIBIT A
PERFORMANCE CRITERIA
Subject to the last sentence of Section 8.4 of the Plan,
performance goals established for purposes of conditioning the grant of an Award
of Restricted Shares or other Share-based awards based on performance or the
vesting of performance-based Awards of Restricted Shares shall be based on one
or more of the following performance criteria ("Performance Criteria"): (i) the
attainment of certain target levels of, or a specified percentage increase in,
revenues, income before income taxes and extraordinary items, net income,
earnings before income tax, earnings before interest, taxes, depreciation and
amortization, or a combination of any or all of the foregoing; (ii) the
attainment of certain target levels of, or a percentage increase in, after-tax
or pre-tax profits including, without limitation, that attributable to
continuing and/or other operations; (iii) the attainment of certain target
levels of, or a specified increase in, operational cash flow; (iv) the
achievement of a certain level of, reduction of, or other specified objectives
with regard to limiting the level of increase in, all or a portion of, the
Company's bank debt or other long-term or short-term public or private debt or
other similar financial obligations of the Company, which may be calculated net
of such cash balances and/or other offsets and adjustments as may be established
by the Committee; (v) the attainment of a specified percentage increase in
earnings per share or earnings per share from continuing operations; (vi) the
attainment of certain target levels of, or a specified increase in return on
capital employed or return on invested capital; (vii) the attainment of certain
target levels of, or a percentage increase in, after-tax or pre-tax return on
stockholders' equity; (viii) the attainment of certain target levels of, or a
specified increase in, economic value added targets based on a cash flow return
on investment formula; (ix) the attainment of certain target levels in the fair
market value of the shares of the Company's Shares and (x) the growth in the
value of an investment in the Company's Shares assuming the reinvestment of
dividends. For purposes of item (i) above, "extraordinary items" shall mean all
items of gain, loss or expense for the fiscal year determined to be
extraordinary or unusual in nature or infrequent in occurrence or related to a
corporate transaction (including, without limitation, a disposition or
acquisition) or related to a change in accounting principle, all as determined
in accordance with standards established by Opinion No. 30 of the Accounting
Principles Board.
In addition, such Performance Criteria may be based upon the
attainment of specified levels of Company (or affiliate, division or other
operational unit of the Company) performance under one or more of the measures
described above relative to the performance of other real estate investment
trusts. To the extent permitted under Code Section 162(m) (including, without
limitation, compliance with any requirements for stockholder approval), the
Committee may: (i) designate additional business criteria on which the
Performance Criteria may be based or (ii) adjust, modify or amend the
aforementioned business criteria.
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