UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended October 2, 1999
COMMISSION FILE NO. 0-25121
--------------------
SELECT COMFORT CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1597886
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10400 VIKING DRIVE, SUITE 400
MINNEAPOLIS, MINNESOTA 55344
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (612) 918-3000
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. X YES NO
As of October 2, 1999, 18,037,043 shares of Common Stock of the Registrant
were outstanding.
<PAGE>
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
INDEX
Page No.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
October 2, 1999 and January 2, 1999............................... 3
Consolidated Statements of Operations
for the Three Months and Nine Months ended October 2, 1999
and October 3, 1998............................................... 4
Consolidated Statements of Cash Flows
for the Nine Months ended October 2, 1999
and October 3, 1998............................................... 5
Notes to Consolidated Financial Statements........................ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk........ 13
PART II: OTHER INFORMATION
Item 1. Legal Proceedings............................................... 14
Item 2. Changes in Securities and Use of Proceeds....................... 14
Item 3. Defaults Upon Senior Securities................................. 14
Item 4. Submission of Matters to a Vote of Security Holders............. 14
Item 5. Other Information............................................... 14
Item 6. Exhibits and Reports on Form 8-K................................ 15
<PAGE>
PART I: FINANCIAL INFORMATION
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
OCTOBER 2, JANUARY 2,
ASSETS 1999 1999
---------- ----------
Current assets:
Cash and cash equivalents $13,321 $45,561
Marketable securities 24,250 -
Accounts receivable, net of allowance for doubtful
accounts of $399, and $2,750, respectively (note 3) 1,578 10,624
Inventories (note 4) 11,164 10,136
Prepaid expenses 3,798 4,048
Income taxes 2,780 -
Deferred tax assets 6,039 5,448
---------- ----------
Total current assets 62,930 75,817
---------- ----------
Property and equipment, net 35,192 29,125
Deferred tax assets 1,154 440
Other assets 2,682 852
---------- ----------
Total assets $101,958 $106,234
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $253 $930
Accounts payable 17,097 12,079
Accruals:
Sales returns 5,246 6,021
Warranty costs 5,645 4,486
Compensation, taxes and benefits 5,183 4,843
Income taxes - 648
Other 4,587 4,561
---------- ----------
Total current liabilities 38,011 33,568
Long-term debt, less current maturities 42 29
Other liabilities 2,496 1,946
---------- ----------
Total liabilities 40,549 35,543
---------- ----------
Shareholders' equity:
Undesignated preferred stock; 5,000,000 shares
authorized, no shares issued and outstanding - -
Common stock, $.01 par value; 95,000,000 shares
authorized, 18,037,043 and 18,435,687 shares
issued and outstanding, respectively 180 184
Additional paid-in capital 80,503 87,619
Accumulated deficit (19,274) (17,112)
---------- ----------
Total shareholders' equity 61,409 70,691
---------- ----------
Total liabilities and shareholders' equity $101,958 $106,234
========== ==========
See accompanying notes to consolidated financial statements.
3
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SELECT COMFORT CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------- ---------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Net sales $68,281 $60,035 $205,663 $178,835
Cost of sales 23,944 20,744 71,053 62,290
---------- ---------- ---------- ----------
Gross margin 44,337 39,291 134,610 116,545
---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing 42,816 31,640 120,705 95,596
General and administrative 7,871 4,972 18,677 13,567
---------- ---------- ---------- ----------
Total operating expenses 50,687 36,612 139,382 109,163
---------- ---------- ---------- ----------
Operating income (loss) (6,350) 2,679 (4,772) 7,382
---------- ---------- ---------- ----------
Other income (expense):
Interest income 537 166 1,496 548
Interest expense (10) (4,256) (61) (6,992)
Other, net (47) 1 (94) (1)
---------- ---------- ---------- ----------
Other income (expense), net 480 (4,089) 1,341 (6,445)
---------- ---------- ---------- ----------
Income (loss) before income taxes (5,870) (1,410) (3,431) 937
Income tax expense (benefit) (2,172) 493 (1,269) 1,348
---------- ---------- ---------- ----------
Net loss ($3,698) ($1,903) ($2,162) ($411)
========== ========== ========== ==========
Net loss per share - basic and
diluted $(0.20) $(0.72) $(0.12) $(0.40)
========== ========== ========== ==========
Weighted average share - basic
and diluted 18,148 2,939 18,348 2,746
See accompanying notes to consolidated financial statements.
4
<PAGE>
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
----------------------
OCTOBER 2, OCTOBER 3,
1999 1998
---------- ----------
Cash flows from operating activities:
Net loss ($2,162) ($411)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 4,616 3,909
Deferred tax assets (1,305) (388)
Interest expense from put warrant valuation - 5,220
Change in operating assets and liabilities:
Accounts receivable, net 9,046 (3,002)
Inventories (1,028) (2,567)
Prepaid expenses 250 (223)
Income taxes (3,428) 29
Accounts payable 5,018 205
Accrued sales returns (775) 296
Accrued warranty costs 1,159 605
Accrued compensation, taxes and benefits 340 (100)
Other accrued liabilities 26 (848)
Other assets 150 (544)
Other liabilities 550 455
---------- ----------
Net cash provided by operating activities 12,457 2,636
---------- ----------
Cash flows used in investing activities:
Purchases of property and equipment (10,663) (6,660)
Investment in marketable securities (24,250) -
Investment in affiliate (2,000) -
---------- ----------
Net cash used in investing activities (36,913) (6,660)
---------- ----------
Cash flows from financing activities:
Principal payments on debt (664) (739)
Repurchase of common stock (10,438) -
Proceeds from issuance of common 3,318 1,672
---------- ----------
Net cash provided by (used in)
financing activities (7,784) 933
---------- ----------
Decrease in cash and cash equivalents (32,240) (3,091)
Cash and cash equivalents, at beginning of period 45,561 12,670
---------- ----------
Cash and cash equivalents, at end of period $13,321 $9,579
========== ==========
See accompanying notes to consolidated financial statements.
5
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SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements for the three months and nine months ended
October 2, 1999 and October 3, 1998 of Select Comfort Corporation and
subsidiaries ("Select Comfort" or the "Company"), have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission and reflect, in the opinion of management, all normal
recurring adjustments necessary to present fairly the financial position of the
Company as of October 2, 1999 and January 2, 1999 and the results of operations
and cash flow for the periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
management believes the disclosures are adequate to make the information
presented not misleading. These consolidated financial statements should be read
in conjunction with the Company's most recent audited consolidated financial
statements and related notes included in the Company's Annual Report to
Shareholders and its Form 10-K for the fiscal year ended January 2, 1999.
Operating results for the Company on a quarterly basis may not be indicative of
operating results for the full year.
(2) INVESTMENT
In May 1999, the Company invested $2.0 million in a less than 20% owned
affiliate that will be the provider of the Company's sofa sleeper product. This
investment is accounted for under the cost method.
(3) ACCOUNTS RECEIVABLE
Effective July 1999, we terminated our revolving third-party credit arrangement
with Monogram Bank, an affiliate of General Electric Capital Corporation ("GE")
and entered into a third-party credit arrangement with Green Tree Financial
Corporation ("Green Tree"). These arrangements have been used to provide
financing for our customers' use in purchasing our products. In connection with
all purchases financed under these arrangements, the provider pays an amount
equal to the total amount of purchases net of promotional discounts. The
provider sets the rate, annual fees and all other terms and conditions relating
to the customers' accounts, including collection policies and procedures, and is
the owner of the receivables. In July 1999, Green Tree purchased substantially
all of the outstanding receivables from GE. As a result of this transaction, the
Company received $9.8 million that had been retained by GE and which had been
included in accounts receivable. There are no retainage requirements as part of
the new agreement.
(4) INVENTORIES
Inventories consist of the following (in thousands):
OCTOBER 2, 1999 JANUARY 2, 1999
--------------- ---------------
Raw materials $7,004 $6,533
Work in progress 71 67
Finished goods 4,089 3,536
--------------- ---------------
$11,164 $10,136
=============== ===============
6
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SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) NET INCOME PER COMMON SHARE
The following computations reconcile net loss with net loss per common
share-basic and diluted (in thousands except per share amounts).
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------- ---------------------------------
NET PER SHARE NET PER SHARE
OCTOBER 2, 1999 LOSS SHARES AMOUNT LOSS SHARES AMOUNT
--------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net loss ($3,698) ($2,162)
BASIC AND DILUTED EPS
Net loss available to common shareholders ($3,698) 18,148 ($0.20) ($2,162) 18,348 ($0.12)
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------- ---------------------------------
NET PER SHARE NET PER SHARE
OCTOBER 3, 1998 LOSS SHARES AMOUNT LOSS SHARES AMOUNT
--------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net loss ($1,903) ($411)
Less: Cumulative preferred dividend (225) (675)
---------- ----------
BASIC AND DILUTED EPS
Net loss available to common shareholders ($2,128) 2,939 ($0.72) ($1,086) 2,745 ($0.40)
========== ========== ========== ========== ========== ==========
</TABLE>
(6) STOCK REPURCHASE
In May 1999, the Board of Directors authorized management to repurchase up to
$10 million in shares of the Company's common stock in the open market. The
Company subsequently repurchased 575,000 shares for approximately $8.5 million.
In August 1999, the Board of Directors authorized management to repurchase up to
$4 million in shares of the Company's common stock. As of October 2, 1999 the
Company had repurchased 275,000 shares for approximately $1.9 million under this
program. The Company believes cash generated from operations, together with
existing cash balances, will be sufficient to satisfy anticipated short-term
working capital requirements and long-term liquidity needs. $2.1 million
remained available under the program as of October 2, 1999.
(7) LITIGATION
The Company and certain of its former officers and directors have been named as
defendants in a class action lawsuit filed on behalf of Company shareholders in
U.S. District Court in Minnesota. The named plaintiffs, who purport to act on
behalf of a class of purchasers of the Company's common stock during the period
from December 4, 1998 to June 7, 1999, charge the defendants with violations of
federal securities laws. The suit alleges that the Company and the named
directors and officers failed to disclose or misrepresented certain information
concerning the Company during the class period. The complaint does not specify
an amount of damages claimed. The Company believes that the complaint is without
merit and intends to vigorously defend the claims.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED HEREIN. THIS
QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THE STATEMENTS
REGARDING SELECT COMFORT CORPORATION CONTAINED IN THIS REPORT THAT ARE NOT
HISTORICAL IN NATURE, PARTICULARLY THOSE THAT UTILIZE TERMINOLOGY SUCH AS "MAY,"
"WILL," "SHOULD," "EXPECTS," "ANTICIPATES," "ESTIMATES," "BELIEVES" OR "PLANS,"
OR COMPARABLE TERMINOLOGY, ARE FORWARD-LOOKING STATEMENTS BASED ON CURRENT
EXPECTATIONS AND ASSUMPTIONS, AND ENTAIL VARIOUS RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN SUCH
FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS KNOWN TO SELECT COMFORT THAT COULD
CAUSE SUCH MATERIAL DIFFERENCES ARE IDENTIFIED AND DISCUSSED IN PART I, ITEM 1
OF OUR ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 2, 1999,
WHICH DISCUSSION IS INCORPORATED HEREIN BY REFERENCE. SUCH IMPORTANT FACTORS
INCLUDE OUR ABILITY TO CREATE PRODUCT AND BRAND NAME AWARENESS, THE
EFFECTIVENESS AND EFFICIENCY OF OUR ADVERTISING, THE LEVEL OF CONSUMER
ACCEPTANCE OF OUR PRODUCTS, THE NUMBER AND TIMING OF NEW RETAIL STORE OPENINGS,
THE PERFORMANCE OF OUR EXISTING AND NEW RETAIL STORES, OUR ABILITY TO MANAGE OUR
PLANNED RAPID STORE EXPANSION, OUR ABILITY TO MAINTAIN COST-EFFECTIVE PRODUCTION
AND DELIVERY OF PRODUCTS, OUR ABILITY TO SUCCESSFULLY IDENTIFY AND RESPOND TO
EMERGING TRENDS IN THE MATTRESS INDUSTRY, THE LEVEL OF COMPETITION IN THE
MATTRESS INDUSTRY, AND GENERAL ECONOMIC CONDITIONS AND CONSUMER CONFIDENCE.
OVERVIEW
Select Comfort is the leading vertically integrated manufacturer, specialty
retailer and direct marketer of innovative air beds and sleep-related products.
Since the introduction of our first air bed product in 1987, management has
focused on improving our product, expanding our product line, building
manufacturing and distribution systems and growing our four sales channels:
retail, direct marketing, event marketing and e-commerce. Vertically integrated
operations and control over four separate but complementary sales channels
enable us to develop and maintain direct customer relationships as well as
leverage advertising dollars. Sales generation is driven primarily by targeted
print, radio and television media that generate customer inquiries, as well as
by our multiple, complementary distribution channels, which are designed to
provide multiple opportunities for customers to purchase our products.
Retail operations included 320 stores at October 2, 1999, including 32 leased
departments within Bed Bath & Beyond stores, and 264 stores at January 2, 1999,
including 14 leased departments. The Company plans to open a minimum of 20
retail stores during the remainder of 1999, including expansion of the leased
department concept. Three of the 19 retail store openings in the third quarter
of 1999 were in new markets. We have closed a total of six stores since
inception.
For the three months ended October 2, 1999, the Company reported comparable
store sales growth of 3.6% as compared to 23.3% for the three months ended
October 3, 1998. Comparable store sales increased by 7.9% for the nine months
ended October 2, 1999 and 24.7% for the nine months ended October 3, 1998.
Comparable store sales results have been and will continue to be influenced by a
variety of factors, including levels of awareness of our products and brand
name, levels of consumer acceptance of our existing and new products, our
ability to successfully introduce new products and product line extensions,
comparable store sales performance in prior periods, the maturation of our store
base, the amount, effectiveness and efficiency of retail advertising
expenditures and promotional activity, the amount of competitive activity, our
ability to effectively integrate our direct and retail distribution channels,
the evolution of store operations, including improvements in store design, the
quality and tenure of store-level managers and sales professionals, and general
economic conditions and consumer confidence.
Quarterly and annual operating results may fluctuate significantly as a result
of a variety of factors, including increases or decreases in comparable store
sales, the timing, amount and effectiveness of advertising expenditures, any
changes in return rates, the timing of new store openings and related expenses,
net sales contributed by new stores, any disruptions in third-party delivery
services, competitive factors and general economic conditions and consumer
confidence. Our business is also subject to some seasonal influences, with
heavier concentrations of sales during the fourth quarter holiday season due to
increased mall traffic.
8
<PAGE>
A substantial portion of operating expenses is related to sales and marketing
expenses, including costs associated with opening new stores, operating existing
stores, and advertising and marketing expenditures. The level of such spending
cannot be adjusted quickly and is based, in significant part, on expectations of
future customer inquiries and net sales. Furthermore, a substantial portion of
net sales is often realized in the last month of a quarter, with such net sales
frequently concentrated in the last weeks or days of a quarter, due in part to
our promotional schedule. Should the Company experience a shortfall in expected
net sales or in the conversion rate of customer inquiries, we may be unable to
adjust spending in a timely manner and our business, financial condition and
operating results may be materially adversely affected. Our historical results
of operations may not be indicative of the results that may be achieved for any
future fiscal period.
Results of Operations
The following table sets forth, for the periods indicated, our results of
operations expressed as percentages of net sales. Percentage amounts may not
total due to rounding.
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------- ---------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 35.1 34.6 34.5 34.8
---------- ---------- ---------- ----------
Gross margin 64.9 65.4 65.5 65.2
---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing 62.7 52.7 58.7 53.5
General and administrative 11.5 8.3 9.1 7.6
---------- ---------- ---------- ----------
Total operating expenses 74.2 61.0 67.8 61.0
---------- ---------- ---------- ----------
Operating income (loss) (9.3) 4.5 (2.3) 4.1
Other income (expense), net 0.7 (6.8) 0.7 (3.6)
---------- ---------- ---------- ----------
Income (loss) before income taxes (8.6) (2.3) (1.7) 0.5
Income tax expense (benefit) (3.2) 0.8 (0.6) 0.8
---------- ---------- ---------- ----------
Net loss (5.4)% (3.2)% (1.1)% (0.2)%
========== ========== ========== ==========
The overall decrease in operating earnings for 1999 as compared to 1998 relates
to increases in operating expenses, as a percentage of net sales, to support
long-term growth plans. In addition, direct marketing sales declined by $1.8
million in the third quarter of 1999 compared to the third quarter of 1998.
Retail sales, which were positively influenced in those markets in which retail
advertising has been expanded, were lower than expected in those markets without
increased advertising. A substantial portion of the Company's operating expenses
is relatively fixed on a short-term basis and is necessary for long-term growth,
including increased retail advertising, certain selling expenses associated with
retail store operations, direct marketing selling expenses, and general and
administrative costs. The Company has also initiated several strategic studies
that have added to general and administrative costs. These studies are expected
to be completed in the fourth quarter of 1999.
COMPARISON OF THREE MONTHS ENDED OCTOBER 2, 1999 WITH THREE MONTHS ENDED
OCTOBER 3, 1998
NET SALES
Net sales increased 13.7% to $68.2 million for the three months ended October 2,
1999 from $60.0 million for the three months ended October 3, 1998 primarily due
to an increase in unit sales. Net sales were favorably impacted by (i) an $8.5
million increase from the opening of 76 new retail stores during the past 12
months and (ii) a $1.3 million increase from a 3.6% increase in comparable store
sales, primarily due to increased advertising in selected markets. These sales
increases were offset by a $1.8 million decrease in direct marketing sales.
9
<PAGE>
GROSS MARGIN
Gross margin decreased to 64.9% for the three months ended October 2, 1999 from
65.4% for the three months ended October 3, 1998 primarily due to increased
costs of promotional programs and a shift in product mix to lower margin
products, partially offset by improved purchasing through volume discounts and
better relationships with key suppliers and improved leverage of fixed
manufacturing costs over higher unit volumes.
SALES AND MARKETING
Sales and marketing expenses increased 35.3% to $42.8 million for the three
months ended October 2, 1999 from $31.6 million for the three months ended
October 3, 1998, and increased as a percentage of net sales to 62.7% from 52.7%
for the comparable prior-year period. The increase in the dollar amount of sales
and marketing expenses for the three month period was primarily due to (i) the
opening of 76 new retail stores during the last 12 months, (ii) an increase in
advertising expenditures of $4.4 million to support the Company's growth and
(iii) higher commissions, percentage rents and freight expense related to the
higher net sales. Sales and marketing expenses increased as a percentage of net
sales primarily due to (i) increased advertising focused on longer term sales
growth through brand and retail store awareness, (ii) lower direct marketing
sales and (iii) selling expenses in new stores increasing at a greater rate than
net sales.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 58.3% to $7.9 million for the
three months ended October 2, 1999 from $5.0 million for the three months ended
October 3, 1998. The increase in general and administrative expenses was
primarily due to increased spending on infrastructure to support long-term
growth plans and strategic consulting studies undertaken to determine and refine
ongoing business strategies.
OTHER INCOME (EXPENSE), NET
Other income increased $4.6 million to approximately $480,000 for the three
months ended October 2, 1999 from ($4.1) million expense for the three months
ended October 3, 1998. The increase was primarily due to (i) the inclusion of
$3.7 million of non-cash interest expense in the three months ended October 3,
1998 relating to the change in the fair value of an outstanding put warrant and
(ii) an increase in interest income due to the increase in cash obtained from
the completion of our initial public offering in December 1998. The put
provision associated with the warrant was eliminated effective on completion of
the initial public offering.
INCOME TAX EXPENSE (BENEFIT)
Income tax benefit changed to a ($2.2) million benefit for the three months
ended October 2, 1999 from $493,000 expense for the three months ended October
3, 1998 due to a decrease in taxable income in 1999, partially offset by the use
of available net operating loss carryforwards in 1998.
COMPARISON OF NINE MONTHS ENDED OCTOBER 2, 1999 WITH NINE MONTHS ENDED
OCTOBER 3, 1998
NET SALES
Net sales increased 15.0% to $205.6 million for the nine months ended October 2,
1999 from $178.8 million for the nine months ended October 3, 1998 primarily due
to an increase in unit sales. Net sales were favorably impacted by (i) an $18.6
million increase from the opening of 76 new retail stores during the past 12
months and (ii) an $8.1 million increase from a 7.9% increase in comparable
store sales, primarily due to the continuing maturation of stores and increased
advertising in selected markets. These sales increases were offset by a $7.0
million decrease in direct marketing sales.
GROSS MARGIN
Gross margin increased to 65.5% for the nine months ended October 2, 1999 from
65.2% for the nine months ended October 3, 1998 due to improved purchasing
through volume discounts and better relationships with key suppliers and
improved leverage of fixed manufacturing costs over higher unit volumes,
partially offset by an increase in costs of promotional programs.
10
<PAGE>
SALES AND MARKETING
Sales and marketing expenses increased 26.3% to $120.7 million for the nine
months ended October 2, 1999 from $95.6 million for the nine-months ended
October 3, 1998, and increased as a percentage of net sales to 58.7% from 53.5%
for the comparable prior-year period. The increase in the dollar amount of sales
and marketing expenses for the nine month period was primarily due to (i) the
opening of 76 new retail stores during the last 12 months, (ii) an increase in
advertising expenditures of $9.0 million to support the Company's growth and
(iii) higher commissions, percentage rents and freight expense related to higher
net sales. Sales and marketing expenses increased as a percentage of net sales
primarily due to (i) increased advertising focused on longer term sales growth
through brand and retail store awareness, (ii) lower direct marketing sales and
(iii) selling expenses in new stores increasing at a greater rate than net
sales.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 37.7% to $18.7 million for the
nine months ended October 2, 1999 from $13.6 million for the nine months ended
October 3, 1998. The increase in general and administrative expenses was
primarily due to increased spending on infrastructure to support long-term
growth plans and strategic consulting studies undertaken to determine and refine
ongoing business strategies.
OTHER INCOME (EXPENSE), NET
Other income increased $7.7 million to approximately $1.3 million for the nine
months ended October 2, 1999 from ($6.4) million expense for the nine months
ended October 3, 1998. The increase was primarily due to (i) the inclusion of
$5.2 million of non-cash interest expense in the nine months ended October 3,
1998 relating to the change in the fair value of an outstanding put warrant and
(ii) an increase in interest income due to the increase in cash obtained from
the completion of our initial public offering in December 1998. The put
provision associated with the warrant was eliminated effective on completion of
the initial public offering.
INCOME TAX EXPENSE (BENEFIT)
Income tax expense decreased to ($1.3) million benefit for the nine months ended
October 2, 1999 from $1.3 million expense for the nine months ended October 3,
1998 due to a decrease in taxable income in 1999 partially offset by the use of
available net operating loss carryforwards in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity has been the sale of equity securities. We
completed our initial public offering in December 1998, resulting in net
proceeds of $44.6 million, which have been partially used for (i) the repayment
of $15.0 million of debt, (ii) expansion of retail stores, (iii) the build-out
of our third manufacturing plant and (iv) the repurchase of 1,065,000 shares of
Company common stock for $11.8 million. The Company had working capital of
approximately $24.9 million at October 2, 1999 and $42.2 million at January 2,
1999.
Net cash provided by operating activities for the nine months ended October 2,
1999 was approximately $12.5 million and consisted primarily of net loss
adjusted for non-cash expenses, decreases in accounts receivable as a result of
the GE revolving third party credit agreement and increases in accounts payable
and accrued liabilities, partially offset by increases in inventories. Net cash
provided by operating activities for the nine months ended October 3, 1998 was
approximately $2.6 million and consisted primarily of cash flows from operations
before non-cash expenses, partially offset by increases in accounts receivable
and decreases in accounts payable.
Effective as of July 1999, we terminated our revolving third-party credit
arrangement with Monogram Bank, an affiliate of General Electric Capital
Corporation ("GE") and entered into a third-party credit arrangement with Green
Tree Financial Corporation ("Green Tree"). These arrangements have been used to
provide financing for our customers' use in purchasing our products. In
connection with all purchases financed under these arrangements, the provider
pays an amount equal to the total amount of purchases net of promotional
discounts. The provider sets the rate, annual fees and all other terms and
conditions relating to the customers' accounts, including collection policies
and procedures, and is the owner of the receivables. In July 1999, Green Tree
purchased substantially all of the outstanding receivables from GE. As a result
of this transaction, we received $9.8 million that had been retained by GE and
included in our accounts receivable. There are no retainage requirements as part
of this new agreement.
11
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Net cash used in investing activities was approximately $36.9 million for the
nine months ended October 2, 1999 and $6.7 million for the nine months ended
October 3, 1998. Investing activities consisted of purchases of property and
equipment for new retail stores in both periods, and the investment of excess
cash in marketable securities with maturities in excess of 90 days in 1999.
Net cash used in financing activities was approximately $7.8 million for the
nine months ended October 2, 1999 and consisted primarily of $10.4 million used
to repurchase Company common stock and $0.5 million used to repay debt, offset
by stock option exercises. Net cash provided by financing activities was
approximately $900,000 for the nine months ended October 3, 1998 which consisted
of stock option exercises net of debt repayments.
In August 1999, the Board of Directors authorized management to repurchase up to
$4 million in shares of the Company's common stock due to the availability of
excess cash and the valuation of the Company's shares in the market. As of
November 9, 1999 we had repurchased 490,000 shares for approximately $3.3
million under this authorization. We believe that cash flow generated from
operations and existing cash resources will be sufficient to meet working
capital and liquidity requirements for the foreseeable future as we pursue our
long-term growth strategy, described in greater detail below. During 1999,
through November 9, 1999, we had repurchased 1,065,000 shares for approximately
$11.8 million.
LOOKING FORWARD
We have continued our strategic analysis of the business and have retained
several consulting groups to perform studies to evaluate product positioning,
marketing efforts, logistics and product distribution to be completed in the
fourth quarter. The results of these studies will be a significant consideration
in the refinement of our long-term strategy.
We currently are executing several strategic initiatives that we believe will
accelerate sales growth and improve operating results. These initiatives include
(i) developing a more integrated marketing approach that will concentrate a
higher percentage of advertising expenditures in our retail and e-commerce
channels, (ii) increasing the number of retail distribution points for our
products and (iii) expanding our product line.
Store sales in markets in which we have expanded our media advertising
expenditures have outperformed store sales in non-media markets. We will
continue to evaluate overall advertising effectiveness and spending levels.
We expect to open a minimum of 20 stores during the fourth quarter of 1999.
Beyond 1999, growth in retail stores, as well as expansion into different retail
venues or formats, will be based in part on findings of the ongoing strategic
studies. Store openings in future years will most likely include additional mall
stores and leased departments, possibly with one or more partnerships in
addition to our partnership with Bed Bath & Beyond, and may include different
venues or formats, including possibly strip mall stores, furniture stores,
department stores or sleep stores.
Product line expansion will initially be achieved through test marketing of the
sofa sleeper product as well as a portable air bed. We have elected to
terminate, effective as of February 1, 2000, the license agreement under which
we had developed and test-marketed our adjustable frame product. We will
continue to explore alternatives for development and commercialization of an
adjustable frame product for our air beds, but we currently do not anticipate a
broad-based rollout of an adjustable frame product in 2000.
The success of our strategy will depend on many factors including (i) the
effectiveness and efficiency of our advertising in creating awareness of our
products and brand name and generating sales, (ii) our ability to successfully
open additional stores and leased departments in new and existing markets, as
well as in both existing and new venues and formats, (iii) the level of consumer
acceptance of our existing and new products, (iv) our ability to successfully
commercialize significant product line extensions, (v) our ability to generate
consumer inquiries and drive consumer traffic to retail stores, (vi) competition
in the mattress industry and (vii) general economic factors and consumer
confidence.
The strategic initiatives and additional business analyses are directed toward
improving our long-term performance and are not expected to contribute
significantly to growth in sales and earnings for the remainder of 1999, and may
negatively impact earnings in the remainder of 1999 and 2000.
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IMPACT OF YEAR 2000
STATE OF READINESS
Beginning in early 1996, we included certain Year 2000 initiatives and
remediation plans in our broader information systems strategic plan. In early
1998 we retained an independent consultant to assess the adequacy of Year 2000
initiatives and remediation plans. All essential information technology ("IT")
systems have been inventoried and remediation plans for any Year 2000 issues
have been implemented. Remediation plans included the development of Year 2000
compliant applications for order entry, customer service and point of sale
systems in fall 1996. In the third quarter of 1997, we purchased and implemented
an enterprise information system used in manufacturing operations, material
planning, inventory management, order processing, financial management and human
resources applications, which was upgraded to be Year 2000 compliant in February
1999. We purchased Year 2000 compliant upgrades to our payroll applications in
1997 and our telephone system in 1998. Year 2000 compliant upgrades for software
applications for processing and tracking warranty claims and returns were
implemented in October 1999. Year 2000 compliant upgrades for our customer
inquiries applications have been developed and will be implemented in November
1999. With the implementation of these applications and upgrades, we expect that
all core applications and IT systems will be Year 2000 compliant by the end of
the fourth quarter of 1999.
In August 1998, we formed a Year 2000 project team ("Year 2000 Project Team") to
identify and address Year 2000 compliance matters, including significant non-IT
systems which are comprised of the embedded technology used in our buildings,
plant, equipment and other infrastructure. All material Year 2000 issues in
non-IT systems have been inventoried and remedial action has been completed.
During the first quarter of 1998, we initiated discussions with significant
suppliers regarding their plans to remediate Year 2000 issues. We sent each of
the significant suppliers a questionnaire inquiring as to the magnitude of their
Year 2000 issues and the status of their readiness. We have received assurances
from a majority of these suppliers that they will become Year 2000 compliant in
a timely manner. We have not received responses from all of the third parties
with which we do business. In addition to the questionnaires, a supplier
certification program has been established under which suppliers must meet
rigorous standards relating to quality, service, the ability to deliver
materials on a timely basis and Year 2000 compliance. To date, 12 key suppliers
have been certified and other authorized suppliers are in the process of seeking
certification. All key suppliers, including our Eastern European supplier of air
chambers, have notified us that they are or will be Year 2000 compliant during
1999.
In addition to suppliers, we also rely upon governmental agencies, utility
companies, telecommunication service companies and other service providers
outside of our control. There can be no assurance that such governmental
agencies or other third parties will not suffer a Year 2000 business disruption
that could have a material adverse effect on our business, financial condition
or operating results.
COSTS TO ADDRESS THE YEAR 2000 ISSUE
We have incurred $165,000 in 1999 to complete our remediation plans required for
IT systems, including systems software costs and consulting fees. We do not
anticipate incurring future significant costs.
RISKS PRESENTED BY THE YEAR 2000 ISSUE
If any third party who provides goods or services essential to our business
activities fails to appropriately address Year 2000 issues, such failure could
have a material adverse effect on our business, financial condition or operating
results. For example, a Year 2000 related disruption on the part of the
financial institutions which process our credit card sales could have a material
adverse effect on our business, financial condition or operating results.
CONTINGENCY PLANS
The Year 2000 Project Team's initiatives include the development of contingency
plans in the event we have not completed all remediation plans in a timely
manner. In addition, the Year 2000 Project Team is in the process of developing
contingency plans in the event that any third party who provides goods or
services essential to our business fails to appropriately address Year 2000
issues.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes.
13
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PART II: OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company and certain of its former officers and directors have been
named as defendants in a class action lawsuit filed on behalf of Company
shareholders in U.S. District Court in Minnesota. The named plaintiffs,
who purport to act on behalf of a class of purchasers of the Company's
common stock during the period from December 4, 1998 to June 7, 1999,
charge the defendants with violations of federal securities laws. The
suit alleges that the Company and the named directors and officers failed
to disclose or misrepresented certain information concerning the Company
during the class period. The complaint does not specify an amount of
damages claimed. The Company believes that the complaint is without merit
and intends to vigorously defend the claims.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
In May 1999, the Board of Directors authorized management to repurchase up
to $10 million in shares of the Company's common stock in the open market.
The Company subsequently repurchased 575,000 shares for approximately $8.5
million. In August 1999, the Board of Directors authorized management to
repurchase up to an additional $4 million in shares of the Company's
common stock. Through November 9, 1999, the Company has repurchased
490,000 shares for approximately $3.3 million under this program. We
believe cash generated from operations, together with existing cash
balances, will be sufficient to satisfy anticipated short-term working
capital requirements and long-term liquidity needs.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5 - OTHER INFORMATION
In July 1999, the Board of Directors of the Company approved the amendment
of the Company's 1990 Omnibus Stock Option Plan and 1997 Stock Incentive
Plan (collectively, the "Plans") to modify the change in control
provisions applicable to options granted on or after July 27, 1999. Under
the Plans, a transaction constituting a "change in control" will result in
the immediate vesting in full of options granted under the Plans and such
options will continue to be exercisable for the remaining term of the
options. Prior to the amendments approved in July 1999, the Plans provided
that a transaction that would otherwise constitute a change in control
would not constitute a change in control if the transaction was approved
by at least a majority of the "continuity" Directors (which includes
members of the Board of Directors on the effective date of the Plan and
Directors nominated by such Directors for subsequent election to the
Board). The foregoing provision will continue to be applicable to options
issued and outstanding prior to July 27, 1999. As to options granted on or
after July 27, 1999, a transaction constituting a change in control as
defined under the Plans will constitute a change in control, resulting in
acceleration of the vesting of options, regardless of whether the
transaction has been approved by a majority of the continuity Directors.
The foregoing description of the change in control provisions of the Plans
is qualified in its entirety by reference to the complete text of the
Plans, which are included in this filing as exhibits.
14
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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description
------- -----------
10.1 1990 Omnibus Stock Option Plan, as amended and restated
10.2 1997 Stock Incentive Plan, as amended and restated
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
15
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SELECT COMFORT CORPORATION
/s/Patrick A. Hopf
-------------------------------------
November 15, 1999 Patrick A. Hopf
Chairman and Interim President and
Chief Executive Officer (principal
executive officer)
/s/James C. Raabe
-------------------------------------
James C. Raabe
Chief Financial Officer (principal
financial and accounting officer)
16
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EXHIBIT INDEX
Exhibit Number Description Location
-------------- ----------------------------- -----------------------------
10.1 Select Comfort Corporation Filed herewith electronically
1990 Option Plan, as amended
and restated
10.2 Select Comfort Corporation Filed herewith electronically
1997 Option Plan, as amended
and restated
27.1 Financial Data Schedule Filed herewith electronically
17
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EXHIBIT 10.1
SELECT COMFORT CORPORATION
1990 OMNIBUS STOCK OPTION PLAN
(As Amended and Restated through July 27, 1999)
ARTICLE 1. ESTABLISHMENT AND PURPOSE
1.1 ESTABLISHMENT. Select Comfort Corporation (the "Company") hereby
establishes a plan providing for the grant of stock options to certain eligible
employees, directors and consultants of the Company and its subsidiaries. This
plan shall be known as the 1990 Omnibus Stock Option Plan (the "Plan").
1.2 PURPOSE. The purpose of the Plan is to advance the interests of the
Company and its shareholders by enabling the Company and its subsidiaries to
attract and retain persons of ability as employees, directors and consultants,
by providing an incentive to such individuals through equity participation in
the Company and by rewarding such individuals who contribute to the achievement
by the Company of its long-term economic objectives.
ARTICLE 2. DEFINITIONS
The following terms shall have the meanings set forth below, unless the
context clearly otherwise requires:
2.1 "BOARD" means the Board of Directors of the Company.
2.2 "CHANGE IN CONTROL" means an event described in Section 11.1 below.
2.3 "CODE" means the Internal Revenue Code of 1986, as amended.
2.4 "COMMITTEE" means the entity administering the Plan, as provided in
Article 3 below.
2.5 "COMMON STOCK" means the common stock of the Company, par value $.0l
per share, or the number and kind of shares of stock or other securities into
which such Common Stock may be changed in accordance with Section 4.3 below.
2.6 "DISABILITY" means the occurrence of an event which constitutes
permanent and total disability within the meaning of Section 22(e)(3) of the
Code.
2.7 "ELIGIBLE PERSONS" means individuals who are (a) full-time or part-time
employees (including, without limitation, officers and directors who are also
employees) of the Company or any Subsidiary, (b) non-employee directors, or (c)
consultants to the Company or any Subsidiary.
2.8 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
2.9 "FAIR MARKET VALUE" means, with respect to the Common Stock, as of any
date:
<PAGE>
(a) if the Common Stock is listed or admitted to unlisted trading
privileges on any national securities exchange or is not so listed or
admitted but transactions in the Common Stock are reported on the NASDAQ
National Market System, the mean between the reported high and low sale
prices of the Common Stock on such exchange or by the NASDAQ National
Market System as of such date (or, if no shares were traded on such day, as
of the next preceding day on which there was such a trade); or
(b) if the Common Stock is not so listed or admitted to unlisted
trading privileges or reported on the NASDAQ National Market System, and
bid and asked prices there for in the over-the-counter market are reported
by the NASDAQ System or the National Quotation Bureau, Inc. (or any
comparable reporting service), the mean of the closing bid and asked prices
as of such date, as so reported by the NASDAQ System, or, if not so
reported thereon, as reported by the National Quotation Bureau, Inc. (or
such comparable reporting service); or
(c) if the Common Stock is not so listed or admitted to unlisted
trading privileges, or reported on the NASDAQ National Market System, and
such bid and asked prices are not so reported, such price as the Committee
determines in good faith in the exercise of its reasonable discretion.
2.10 "INCENTIVE STOCK OPTION" means a right to purchase Common Stock
granted to an Optionee pursuant to Section 6.5 of the Plan that qualifies as an
incentive stock option within the meaning of Section 422A of the Code.
2.11 "NON-STATUTORY STOCK OPTION" means a right to purchase Common Stock
granted to an Optionee pursuant to Section 6.6 of the Plan that does not qualify
as an Incentive Stock Option.
2.12 "OPTION" means an Incentive Stock Option or a Non-Statutory Stock
Option.
2.13 "OPTIONEE" means an Eligible Person who receives one or more Incentive
Stock Options or Non-Statutory Stock Options under the Plan.
2.14 "PERSON" means any individual, corporation, partnership, group,
association or other "person" (as such term is used in Section 14(d) of the
Exchange Act), other than the Company, a wholly owned subsidiary of the Company
or any employee benefit plan sponsored by the Company.
2.15 "RETIREMENT" means the retirement of an Optionee pursuant to and in
accordance with the regular retirement plan or practice of the Company or the
Subsidiary employing the Optionee.
2.16 "SECURITIES ACT" means the Securities Act of 1933, as amended.
2.17 "SUBSIDIARY" means any corporation that is a subsidiary corporation of
the Company (within the meaning of Section 425(f) of the Code).
2
<PAGE>
2.18 "TAX DATE" means a date defined in Section 6.6(c) of the Plan.
ARTICLE 3. PLAN ADMINISTRATION
The Plan shall be administered by the Board or by a committee of the Board
consisting of not less then two persons; provided, however, that from and after
the date on which the Company first registers a class of its equity securities
under Section 12 of the Exchange Act the Plan shall be administered by the
Board, a majority of which Board and a majority of whom acting on any matter
under the Plan shall be "disinterested persons" as defined by Rule l6b-3 of the
Rules and Regulations of the Securities and Exchange Commission or by a
committee consisting solely of not less than three members of the Board who are
"disinterested persons" within the meaning of Rule l6b-3 of the Rules and
Regulations of the Securities and Exchange Commission. Members of such a
committee, if established, shall be appointed from time to time by the Board,
shall serve at the pleasure of the Board and may resign at any time upon written
notice to the Board. A majority of the members of such a committee shall
constitute a quorum. Such a committee shall act by majority approval of its
members, shall keep minutes of its meetings and shall provide copies of such
minutes to the Board. Action of such a committee may be taken without a meeting
if unanimous written consent thereto is given. Copies of minutes of such a
committee's meetings and of its actions by written consent shall be provided to
the Board and kept with the corporate records of the Company. As used in this
Plan, the term "Committee" will refer either to the Board or to such a
committee, if established. From and after the date on which the Company first
registers a class of its equity securities under Section 12 of the Exchange Act,
no member of the Committee shall be eligible, or shall have been eligible at any
time within the lesser of one year or the period since the Company first
registered a class of its equity securities under Section 12 of the Exchange
Act, to receive an Incentive Stock Option or a Non-Statutory Stock Option under
the Plan.
In accordance with and subject to the provisions of the Plan, with respect
to Incentive Stock Options and Non-Statutory Stock Options, the Committee shall
select the Optionees from Eligible Persons; shall determine the number of shares
of Common Stock to be subject to such Options granted pursuant to the Plan, the
time at which such Options are granted, the Option exercise price, Option period
and the manner in which each such Option becomes exercisable; and shall fix such
other provisions of such Options as the Committee may deem necessary or
desirable and as consistent with the terms of the Plan. The Committee shall
determine the form or forms of the agreements with Optionees which shall
evidence the particular terms, conditions, rights and duties of the Company and
the Optionees under Options granted pursuant to the Plan. The Committee shall
have the authority, subject to the provisions of the Plan, to establish, adopt
and revise such rules and regulations relating to the Plan as it may deem
necessary or advisable for the administration of the Plan. With the consent of
the Optionee affected thereby, the Committee may amend or modify the terms of
any outstanding Incentive Stock Option or Non-Statutory Stock Option in any
manner, provided that the amended or modified terms are permitted by the Plan as
then in effect. Without limiting the generality of the foregoing sentence, the
Committee may, with the consent of the Optionee affected thereby, modify,
extend, renew or accept the surrender of any outstanding Incentive Stock Option
or Non-Statutory Stock Option, to the extent not previously exercised, and the
Committee may authorize the grant of new Options in substitution therefor to the
extent not previously exercised.
3
<PAGE>
Each determination, interpretation or other action made or taken by the
Committee pursuant to the provisions of the Plan shall be conclusive and binding
for all purposes and on all persons, including, without limitation, the Company
and its Subsidiaries, the shareholders of the Company, the Committee and each of
the members thereof, the directors, officers and employees of the Company and
its Subsidiaries, and the Optionees and their respective successors in interest
(except that the Committee shall have no right to exercise any discretion with
respect to Director Sock Options). No member of the Committee shall be liable
for any action or determination made in good faith with respect to the Plan or
any Option granted under the Plan.
From and after the date on which the Company first registers a class of its
equity securities under Section 12 of the Exchange Act, any member of the Board
who is an Eligible Person under the Plan shall have no vote on (a) any proposed
amendment to the Plan or (b) any other matter that might affect such member's
individual interest under the Plan; nor shall such member's presence be counted
in determining whether a quorum is present at any meeting at which a vote
involving the Plan or individual rights thereunder is taken.
ARTICLE 4. STOCK SUBJECT TO THE PLAN
4.1 NUMBER. The maximum number of shares of Common Stock that shall be
reserved for issuance under the Plan shall be 400,000, subject to adjustment
upon changes in capitalization of the Company as provided in Section 4.3 below.
The maximum number of shares authorized may be increased from time to time by
approval of the Board and the shareholders of the Company. Shares of Common
Stock that may be issued upon exercise of Options shall be applied to reduce the
maximum number of shares of Common Stock remaining available for use under the
Plan.
4.2 UNUSED STOCK. Any shares of Common Stock that are subject to an Option
(or any portion thereof) that lapses, expires or for any reason is terminated
unexercised shall automatically again become available for use under the Plan.
4.3 CAPITAL ADJUSTMENTS. If the number of outstanding shares of Common
Stock is increased or decreased or changed into or exchanged for a different
number or kind of shares of stock or other securities of the Company or of
another corporation by reason of any reorganization, merger, consolidation,
recapitalization, reclassification, stock dividend, stock split, combination of
shares, rights offering or any other change in the corporate structure or shares
of the Company, the Committee (or, if the Company is not the surviving
corporation in any such transaction, the board of directors of the surviving
corporation) shall make appropriate adjustment as to the number and kind of
securities subject to and reserved under the Plan and, in order to prevent
dilution or enlargement of the rights of Optionees, the number and kind of
securities subject to outstanding Options. Any such adjustment in any
outstanding Option shall be made without change in the aggregate purchase price
applicable to the unexercised portion of the Option but with an appropriate
adjustment in the price for each share or other unit of any security covered by
the Option. However, no change shall be made in the terms of any outstanding
Incentive Stock Option as a result of any such change in the corporate structure
or shares of the Company, without the consent of the Optionee affected thereby,
that would disqualify such Incentive Stock Option from treatment under Section
422A of the Code or would
4
<PAGE>
be considered a modification, extension or renewal of an option under Section
425(h) of the Code.
ARTICLE 5. PARTICIPATION
Optionees who are selected to receive grants of Incentive Stock Options or
Non-Statutory Stock Options shall be those Eligible Persons who, in the judgment
of the Committee, are performing, or during the term of an Option, will perform,
vital services in the management, operation and development of the Company or a
Subsidiary, and significantly contribute or are expected to significantly
contribute to the achievement of long-term corporate economic objectives.
Optionees may be granted from time to time one or more Non-Statutory Stock
Options under the Plan, and Optionees who are employees of the Company or a
Subsidiary may be granted from time to time one or more Incentive Stock Options
under the Plan, in any case as may be determined by the Committee in its sole
discretion. The number, type, terms and conditions of Options granted to various
Eligible Persons need not be uniform, consistent or in accordance with any plan,
whether or not such Eligible Persons are similarly situated. Upon determination
by the Committee that an Option is to be granted to an Optionee, written notice
shall be given such person specifying such terms, conditions, rights and duties
related thereto. Each Optionee shall enter into an agreement with the Company,
in such form as the Committee shall determine and which is consistent with the
provisions of the Plan, specifying the terms, conditions, rights and duties of
Incentive Stock Options and Non-Statutory Stock Options granted under the Plan.
Options shall be deemed to be granted as of the date specified in the grant
resolution of the Committee, which date shall be the date of the related
agreement with the Optionee.
ARTICLE 6. TERMS OF OPTIONS
6.1 GRANT OF OPTIONS. An Optionee may be granted one or more Incentive
Stock Options or Non-Statutory Stock Options under the Plan, and the Committee
in its sole discretion may designate whether an Option is to be considered an
Incentive Stock Option or a Non-Statutory Stock Option; provided, however, that
only Optionees who are employees of the Company or a Subsidiary shall be
eligible to be granted Incentive Stock Options. The Committee may grant both an
Incentive Stock Option and a Non-Statutory Stock Option to the same Optionee at
the same time or at different times. Incentive Stock Options and Non-Statutory
Stock Options, whether granted at the same or different times, shall be deemed
to have been awarded in separate grants, shall be clearly identified, and in no
event will the exercise of one Option affect the right to exercise any other
Option or affect the number of shares of Common Stock for which any other Option
may be exercised.
6.2 MANNER OF OPTION EXERCISE. An Option may be exercised by an Optionee in
whole or in part from time to time, subject to the conditions contained herein
and in the agreement evidencing such Option, by delivery, in person or through
certified or registered mail, of written notice of exercise to the Company at
its principal executive office in Maple Grove, Minnesota (Attention: Secretary),
and by paying in full the total Option exercise price for the shares of Common
Stock purchased. Such notice shall be in a form satisfactory to the Committee
and shall specify the particular Option (or portion thereof) that is being
exercised and the number of shares with respect to which the Option is being
exercised. Subject to Section 9.1,
5
<PAGE>
the exercise of the Option shall be deemed effective upon receipt of such notice
and payment. As soon as practicable after the effective exercise of the Option,
the Optionee shall be recorded on the stock transfer books of the Company as the
owner of the shares purchased and the Company shall deliver to the Optionee one
or more duly issued stock certificates evidencing such ownership.
6.3 PAYMENT OF OPTION EXERCISE PRICE. At the time of the exercise of an
Incentive Stock Option or a Non-Statutory Stock Option, the Optionee may
determine whether the total purchase price of the shares to be purchased shall
be paid solely in cash or by transfer from the Optionee to the Company of
previously acquired shares of Common Stock, or by a combination thereof. In the
event the Optionee elects to pay the purchase price in whole or in part with
previously acquired shares of Common Stock, the value of such shares shall be
equal to their Fair Market Value on the date of exercise. The Committee may
reject an Optionee's election to pay all or part of the purchase price with
previously acquired shares of Common Stock and require such purchase price to be
paid entirely in cash. For purposes of this Section 6.3, "previously acquired
shares" shall include both shares of Common Stock that are already owned by the
Optionee at the time of exercise and shares of Common Stock that are to be
acquired pursuant to the exercise of the Option concerned. In its sole
discretion, the Committee may determine either at the time of grant or exercise
of an Incentive Stock Option or a Non-Statutory Stock Option, to permit an
Optionee to pay all or any portion of the purchase price by delivery of a
promissory note in form and substance acceptable to the Committee.
6.4 RIGHTS AS A SHAREHOLDER. The Optionee shall have no rights as a
shareholder with respect to any shares of Common Stock covered by an Option
until the Optionee shall have become the holder of record of such shares, and no
adjustments shall be made for dividends or other distributions or other rights
as to which there is a record date preceding the date the Optionee becomes the
holder of record of such shares except as the Committee may determine pursuant
to Section 4.3.
6.5 INCENTIVE STOCK OPTIONS.
(a) INCENTIVE STOCK OPTION EXERCISE PRICE. The per share price to be
paid by the Optionee at the time an Incentive Stock Option is exercised
will be determined by the Committee, but shall not be less than (i) 100% of
the Fair Market Value of one share of Common Stock on the date the Option
is granted, (ii) 110% of the Fair Market Value of one share of Common Stock
on the date the Option is granted if, at that time the Option is granted,
the Optionee owns, directly or indirectly (as determined pursuant to
Section 425(d) of the Code), more than 10% of the total combined voting
power of all classes of stock of the Company, any Subsidiary or any parent
corporation of the Company (within the meaning of Section 425(e) of the
Code).
(b) AGGREGATE LIMITATION OF STOCK SUBJECT TO INCENTIVE STOCK OPTIONS.
Notwithstanding any other provision of the Plan, the aggregate Fair Market
Value (determined as of the date an Incentive Stock Option is granted) of
the shares of Common Stock with respect to which incentive stock options
(within the meaning of Section 422A of the Code) are exercisable for the
first time by an Optionee during any calendar year (under the Plan and any
other incentive stock option plans of the Company,
6
<PAGE>
any Subsidiary or any parent corporation of the Company (within the meaning
of Section 425(e) of the Code)) shall not exceed $100,000.
(c) DURATION OF INCENTIVE STOCK OPTIONS. The period during which an
Incentive Stock Option may be exercised shall be fixed by the Committee at
the time such Option is granted, but in no event shall such period exceed
ten years from the date the Option is granted or, in the case of an
Optionee that owns, directly or indirectly (as determined pursuant to
Section 425(d) of the Code) more than 10% of the total combined voting
power of all classes of stock of the Company, any Subsidiary or any parent
corporation of the Company (within the meaning of Section 425(e) of the
Code), five years from the date the Incentive Stock Option is granted. An
Incentive Stock Option shall become exercisable at such times and in such
installments (which may be cumulative) as shall be determined by the
Committee at the time the Option is granted. Upon the completion of its
exercise period, an Incentive Stock Option, to the extent not then
exercised, shall expire. Except as otherwise provided in Articles 7 or 11,
all Incentive Stock Options granted to an Optionee hereunder shall
terminate and may no longer be exercised if the Optionee ceases to be an
employee of the Company and all Subsidiaries or if the Optionee is an
employee of a Subsidiary and the Subsidiary ceases to be a Subsidiary of
the Company (unless the Optionee continues as an employee of the Company or
another Subsidiary).
(d) DISPOSITION OF COMMON STOCK ACQUIRED PURSUANT TO THE EXERCISE OF
INCENTIVE STOCK OPTIONS. Prior to making a disposition (as defined in
Section 425(c) of the Code) of any shares of Common Stock acquired pursuant
to the exercise of an Incentive Stock Option granted under the Plan before
the expiration of two years after the date on which the Option was granted
or before the expiration of one year after the date on which such shares of
Common Stock were transferred to the Optionee pursuant to exercise of the
Option, the Optionee shall send written notice to the Company of the
proposed date of such disposition, the number of shares to be disposed of,
the amount of proceeds to be received from such disposition and any other
information relating to such disposition that the Company may reasonably
request. The right of an Optionee to make any such disposition shall be
conditioned on the receipt by the Company of all amounts necessary to
satisfy any federal, state or local withholding tax requirements
attributable to such disposition. The Committee shall have the right, in
its sole discretion, to endorse the certificates representing such shares
with a legend restricting transfer and to cause a stop transfer order to be
entered with the Company's transfer agent until such time as the Company
receives the amounts necessary to satisfy such withholding requirements or
until the later of the expiration of two years from the date the Option was
granted or one year from the date on which such shares were transferred to
the Optionee pursuant to the exercise of the Option.
(e) WITHHOLDING TAXES. The Company is entitled to withhold and deduct
from future wages of the Optionee, or make other arrangements for the
collection of, all legally required amounts necessary to satisfy any
federal, state or local withholding tax requirements attributable to any
action by the Optionee, including, without limitation, a disposition of
shares of Common Stock described in Section 6.5(d) above, that causes the
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Incentive Stock Option to cease to qualify as an incentive stock option
within the meaning of Section 422A of the Code.
6.6 NON-STATUTORY STOCK OPTIONS.
(a) OPTION EXERCISE PRICE. The per share price to be paid by the
Optionee at the time a Non-Statutory Stock Option is exercised will be
determined by the Committee, but shall not be less than 85% of the Fair
Market Value of one share of Common Stock on the date the Option is
granted.
(b) DURATION OF NON-STATUTORY STOCK OPTIONS. The period during which a
Non-Statutory Stock Option may be exercised shall be fixed by the Committee
at the time such option is granted, but in no event shall such period
exceed 10 years and one month from the date the Option is granted. A
Non-Statutory Stock Option shall become exercisable at such times and in
such installments (which may be cumulative) as shall be determined by the
Committee at the time the Option is granted. Upon the completion of its
exercise period, a Non-Statutory Stock Option, to the extent not then
exercised, shall expire. Except as otherwise provided in Articles 7 or 11,
all Non-Statutory Stock Options granted hereunder to an Optionee who is an
employee of the Company and all Subsidiaries shall terminate and may no
longer be exercised if the Optionee ceases to be an employee of the Company
or a Subsidiary or if the Optionee is an employee of a Subsidiary and the
Subsidiary ceases to be a Subsidiary of the Company (unless the Optionee
continues as an employee of the Company or another Subsidiary). A
Non-Statutory Stock Option granted hereunder to an Optionee who is not an
employee of the Company or a Subsidiary will terminate as determined by the
Committee at the time of grant.
(c) WITHHOLDING TAXES.
(i) The Company is entitled to (aa) withhold and deduct from
future wages of the Optionee, or make other arrangements for the
collection of, all legally required amounts necessary to satisfy any
federal, state or local withholding tax requirements attributable to
the Optionee's exercise of a Non-Statutory Stock Option or otherwise
incurred with respect to the Option, or (bb) require the Optionee
promptly to remit the amount of such withholding to the Company before
acting on the Optionee's notice of exercise of the Option.
(ii) The Committee may, in its discretion and subject to such
rules as the Committee may adopt, permit an Optionee to satisfy, in
whole or in part, any withholding tax obligation which may arise in
connection with the exercise of a Non-Statutory Stock Option either by
electing to have the Company withhold from the shares of Common Stock
to be issued upon exercise that number of shares of Common Stock, or
by electing to deliver to the Company already-owned shares of Common
Stock, in either case having a Fair Market Value, on the date such tax
is determined under the Code (the "Tax Date"), equal to the amount
necessary to satisfy the withholding amount due. An Optionee's
election to have the Company withhold shares of Common Stock or to
deliver already-owned shares of Common Stock upon
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exercise is irrevocable and is subject to the consent or disapproval
of the Committee. If the Optionee is an officer, director or
beneficial owner of more than 10% of the outstanding Common Stock of
the Company and at the time of exercise of the Option the Company has
a class of equity securities registered under Section 12 of the
Exchange Act, such election may not be made within six months of the
date the Non-Statutory Stock Option is granted (unless the death or
Disability of the Optionee occurs prior to the expiration of such
six-month period), and must be made either six months prior to the Tax
Date or between the third and twelfth business days following public
release of any of the Company's quarterly or annual summary earnings
statements. When shares of Common Stock are issued prior to the Tax
Date to an Optionee making such an election, the Optionee shall agree
in writing to surrender that number of shares on the Tax Date having
an aggregate Fair Market Value equal to the tax due.
ARTICLE 7. EFFECT OF TERMINATION OF EMPLOYMENT ON OPTIONS
7.1 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY OR RETIREMENT. In
the event an Optionee's employment is terminated with the Company and all
Subsidiaries by reason of his death, Disability or Retirement, all outstanding
Incentive Stock Options and Non-Statutory Stock Options then held by the
Optionee shall become immediately exercisable in full and remain exercisable for
a period of three months in the case of Retirement and one year in the case of
death or Disability, but notwithstanding the foregoing, exercise may not occur
after the expiration date of any such Option.
7.2 TERMINATION OF EMPLOYMENT FOR REASONS OTHER THAN DEATH, DISABILITY OR
RETIREMENT.
(a) Except as otherwise provided in Article 11 and subsection (b)
below, in the event an Optionee's employment is terminated with the Company
and all Subsidiaries for any reason other than his death, Disability or
Retirement, all rights of the Optionee under the Plan shall immediately
terminate without notice of any kind and no Incentive Stock Option or
Non-Statutory Stock Option then held by the Optionee shall thereafter be
exercisable.
(b) Notwithstanding the provisions of Subsection (a) above, upon an
Optionee's termination of employment with the Company and all Subsidiaries,
the Committee may, in its sole discretion (which may be exercised before or
following such termination), cause Incentive Stock Options and
Non-Statutory Stock Options then held by such Optionee to become
exercisable and to remain exercisable following such termination of
employment in the manner determined by the Committee; provided, however,
that no Option shall be exercisable after the expiration date thereof and
no Incentive Stock Option may be exercisable more than three months
following termination of employment.
7.3 DATE OF EMPLOYMENT TERMINATION. For purposes of the Plan, an Optionee's
employment shall be deemed to have terminated on the last day of the pay period
covered by the Optionee's final paycheck. Notwithstanding the foregoing, the
Optionee shall not be deemed to
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have ceased to be an employee for purposes of the Plan until the later of the
91st day of any bona fide leave of absence approved by the Company or a
Subsidiary for the Optionee (including, without limitation, any layoff) or the
expiration of the period of any bona fide leave of absence approved by the
Company or a Subsidiary for the Optionee (including without limitation any
layoff) during which the Optionee's right to reemployment is guaranteed either
by statute or contract.
ARTICLE 8. RIGHTS OF EMPLOYEES; OPTIONEES.
8.1 EMPLOYMENT. Nothing in the Plan shall interfere with or limit in any
way the right of the Company or any Subsidiary to terminate the employment of
any Eligible Person or Optionee at any time, nor confer upon any Eligible Person
or Optionee any right to continue in the employ of the Company or any
Subsidiary.
8.2 NONTRANSFERABILITY. No right or interest of any Optionee in an Option
granted pursuant to the Plan shall be assignable or transferable during the
lifetime of the Optionee, either voluntarily or involuntarily, or subjected to
any lien, directly or indirectly, by operation of law, or otherwise, including
execution, levy, garnishment, attachment, pledge or bankruptcy. In the event of
an Optionee's death, an Optionee's rights and interest in any Options shall be
transferable by testamentary will or the laws of descent and distribution, and
payment of any amounts due under the Plan shall be made to, and exercise of any
Options (to the extent permitted pursuant to Section 7.1) may be made by, the
Optionee's legal representatives, heirs or legatees. If in the opinion of the
Committee an Optionee holding any Option is disabled from caring for his or her
affairs because of mental condition, physical condition or age, any payments due
the Optionee may be made to, and any rights of the Optionee under the Plan shall
be exercised by, such Optionee's guardian, conservator or other legal personal
representative upon furnishing the Committee with evidence satisfactory to the
Committee of such status.
8.3 NON-EXCLUSIVITY OF THE PLAN. Nothing contained in the Plan is intended
to amend, modify or rescind any previously approved compensation plans or
programs entered into by the Company. The Plan will be construed to be an
addition to any and all such other plans or programs. Neither the adoption of
the Plan nor the submission of the Plan to the shareholders of the Company for
approval will be construed as creating any limitations on the power or authority
of the Board to adopt such additional or other compensation arrangements as the
Board may deem necessary or desirable.
ARTICLE 9. SHARE ISSUANCE AND TRANSFER RESTRICTIONS
9.1 SHARE ISSUANCES. Notwithstanding any other provision of the Plan or any
agreements entered into pursuant hereto, the Company shall not be required to
issue or deliver any certificate for shares of Common Stock under this Plan (and
an Option shall not be considered to be exercised, notwithstanding the tender by
the Optionee of any consideration there for), unless and until each of the
following conditions has been fulfilled:
(a)(i) there shall be in effect with respect to such shares a
registration statement under the Securities Act and any applicable state
securities laws if the Committee, in its sole discretion, shall have
determined to file, cause to become effective
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and maintain the effectiveness of such registration statement; or (ii) if
the Committee has determined not to so register the shares of Common Stock
to be issued under the Plan, (A) exemptions from registration under the
Securities Act and applicable state securities laws shall be available for
such issuance (as determined by counsel to the Company) and (B) there shall
have been received from the Optionee (or, in the event of death or
disability, the Optionee's heir(s) or legal representative(s)) any
representations or agreements requested by the Company in order to permit
such issuance to be made pursuant to such exemptions; and
(b) there shall have been obtained any other consent, approval or
permit from any state or federal governmental agency which the Committee
shall, in its sole discretion upon the advice of counsel, deem necessary or
advisable.
9.2 SHARE TRANSFERS. Shares of Common Stock issued pursuant to the exercise
of Options granted under the Plan may not be sold, assigned, transferred,
pledged, encumbered or otherwise disposed of (whether voluntarily or
involuntarily) except pursuant to registration under the Securities Act and
applicable state securities laws or pursuant to exemptions from such
registrations. The Company may condition the sale, assignment, transfer, pledge,
encumbrance or other disposition of such shares not issued pursuant to an
effective and current registration statement under the Securities Act and all
applicable state securities laws on the receipt from the party to whom the
shares of Common Stock are to be so transferred of any representations or
agreements requested by the Company in order to permit such transfer to be made
pursuant to exemptions from registration under the Securities Act and applicable
state securities laws.
9.3 LEGENDS. Unless a registration statement under the Securities Act is in
effect with respect to the issuance or transfer of shares of Common Stock issued
under the Plan, each certificate representing any such shares shall be endorsed
with a legend in substantially the following form, unless counsel for the
Company is of the opinion as to any such certificate that such legend is
unnecessary:
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED ("THE ACT"), OR UNDER APPLICABLE STATE
SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY
NOT BE OFFERED FOR SALE, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED
OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT AND SUCH STATE LAWS OR PURSUANT TO AN EXEMPTION
FROM REGISTRATION UNDER THE ACT AND SUCH STATE LAWS, THE AVAILABILITY OF
WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF THE COMPANY.
ARTICLE 10. PLAN AMENDMENT, MODIFICATION AND TERMINATION
The Board may suspend or terminate the Plan or any portion thereof at any
time, and may amend the Plan from time to time in such respects as the Board may
deem advisable in order that Incentive Stock Options and Non-Statutory Stock
Options under the Plan shall conform to any change in applicable laws or
regulations or in any other respect the Board may
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deem to be in the best interests of the Company; provided, however, that no such
amendment, without approval of the shareholders of the Company, may (a)
materially increase the benefits accruing to Optionees under the Plan, (b)
increase the total number of shares of Common Stock as to which Options may be
granted under the Plan, except as provided in Section 4.3 of the Plan, or (c)
materially modify the requirements as to eligibility for participation in the
Plan. No termination, suspension or amendment of the Plan shall alter or impair
any outstanding Option without the consent of the Optionee affected thereby;
provided, however, that this sentence shall not impair the right of the
Committee to take whatever action it deems appropriate under Section 4.3.
ARTICLE 11. CHANGE IN CONTROL
11.1 CHANGE IN CONTROL. For purposes of this Section 11.1, a "Change in
Control" of the Company shall mean (a) the sale, lease, exchange or other
transfer of all or substantially all of the assets of the Company (in one
transaction or in a series of related transactions) to a corporation that is not
controlled by the Company, (b) the approval by the shareholders of the Company
of any plan or proposal for the liquidation or dissolution of the Company, or
(c) a change in control of a nature that would be required to be reported
(assuming such event has not been "previously reported") in response to Item
1(a) of the Current Report on Form 8-K, as in effect on the effective date of
the Plan, pursuant to Section 13 or 15(d) of the Exchange Act, whether or not
the Company is then subject to such reporting requirement; provided that,
without limitation, such a Change in Control shall be deemed to have occurred at
such time as (x) any Person, other than any Person who owns any shares of Common
Stock on the effective date of the Plan, becomes after the effective date of the
Plan the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act)
directly or indirectly, of 50% or more of the combined voting power of the
Company's outstanding securities ordinarily having the right to vote at
elections of directors or (y) individuals who constitute the Board of Directors
on the effective date of the Plan cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
effective date of the Plan whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least a majority of the
directors comprising the Board of Directors on the effective date of the Plan
(either by a specific vote or by approval of the proxy statement of the Company
in which such person is named as a nominee for director, without objection to
such nomination) shall be, for purposes of this clause (y) and the following
sentence, considered as though such person were a member of the Board of
Directors on the effective date of the Plan. Notwithstanding anything in the
foregoing to the contrary, solely for purposes of any Option issued and
outstanding prior to July 27, 1999, no Change in Control shall be deemed to have
occurred for purposes of this Section 11.1 by virtue of any transaction which
shall have been approved by the affirmative vote of at least a majority of the
members of the Board of Directors on the effective date of the Plan. The
foregoing sentence shall not apply to any Option granted on or after July 27,
1999.
11.2 ACCELERATION OF VESTING. If any of the events described in Section
11.1 above constituting a Change in Control of the Company shall occur, then,
without any action by the Committee or the Board, all outstanding Options shall
become immediately exercisable in full and shall remain exercisable during the
remaining term thereof, whether or not the Optionees to whom such options have
been granted remain employees of the Company or a Subsidiary or, in the case of
Directors, remain members of the Board (and any Incentive Stock Options
remaining
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unexercised more than three months following termination of employment shall
thereafter be deemed Non-Statutory Stock Options).
11.3 LIMITATION ON ACCELERATION OF VESTING. Notwithstanding anything in
Section 11.2 above to the contrary, if, with respect to an Optionee,
acceleration of the vesting of Options as provided in Section 11.2 above (which
acceleration could be deemed a payment within the meaning of Section 280G(b) (2)
of the Code), together with any other payments which such Optionee has the right
to receive from the Company or any corporation which is a member of an
"affiliated group" (as defined in Section 1504 (a) of the Code without regard to
Section 1504(b) of the Code) of which the Company is a member, would constitute
a "parachute payment" (as defined in Section 280G(b) (2) of the Code), the
payments to such Optionee pursuant to Section 11.2 above shall be reduced to the
largest amount as will result in no portion of such payments being subject to
the excise tax imposed by Section 4999 of the Code.
ARTICLE 12. EFFECTIVE DATE OF THE PLAN
12.1 EFFECTIVE DATE. The Plan is effective as of May 30, 1990, the date it
was adopted by the Board subject to the approval of the shareholders. Options
may be granted under the Plan prior to shareholder approval if made subject to
shareholder approval.
12.2 DURATION OF THE PLAN. The Plan shall terminate at midnight on May 29,
2000, and may be terminated prior thereto by Board action, and no Options shall
be granted after such termination. Options outstanding upon termination of the
Plan may continue to be exercised in accordance with their terms.
ARTICLE 13. MISCELLANEOUS
13.1 GOVERNING LAW. The Plan and all agreements hereunder shall be
construed in accordance with and governed by the laws of the State of Minnesota.
13.2 GENDER AND NUMBER. Except when otherwise indicated by the context,
reference to the masculine gender in the Plan shall include, when used, the
feminine gender and any term used in the singular shall also include the plural.
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EXHIBIT 10.2
SELECT COMFORT CORPORATION
1997 STOCK INCENTIVE PLAN
(As Amended and Restated through July 28, 1999)
1. PURPOSE OF PLAN.
The purpose of the Select Comfort Corporation 1997 Stock Incentive Plan
(the "Plan") is to advance the interests of Select Comfort Corporation (the
"Company") and its shareholders by enabling the Company and its Subsidiaries to
attract and retain persons of ability to perform services for the Company and
its Subsidiaries by providing an incentive to such individuals through equity
participation in the Company and by rewarding such individuals who contribute to
the achievement by the Company of its economic objectives.
2. DEFINITIONS.
The following terms will have the meanings set forth below, unless the
context clearly otherwise requires:
2.1 "BOARD" means the Board of Directors of the Company.
2.2 "BROKER EXERCISE NOTICE" means a written notice pursuant to which a
Participant, upon exercise of an Option, irrevocably instructs a broker or
dealer to sell a sufficient number of shares or loan a sufficient amount of
money to pay all or a portion of the exercise price of the Option and/or any
related withholding tax obligations and remit such sums to the Company and
directs the Company to deliver stock certificates to be issued upon such
exercise directly to such broker or dealer.
2.3 "CHANGE IN CONTROL" means an event described in Section 13.1 of the
Plan.
2.4 "CODE" means the Internal Revenue Code of 1986, as amended.
2.5 "COMMITTEE" means the group of individuals administering the Plan, as
provided in Section 3 of the Plan.
2.6 "COMMON STOCK" means the common stock of the Company, $0.01 par value,
or the number and kind of shares of stock or other securities into which such
common stock may be changed in accordance with Section 4.3 of the Plan.
2.7 "DISABILITY" means the disability of the Participant such as would
entitle the Participant to receive disability income benefits pursuant to the
long-term disability plan of the Company or Subsidiary then covering the
Participant or, if no such plan exists or is applicable to the Participant, the
permanent and total disability of the Participant within the meaning of Section
22(e)(3) of the Code.
<PAGE>
2.8 "ELIGIBLE RECIPIENTS" means all employees of the Company or any
Subsidiary and any non-employee directors, consultants and independent
contractors of the Company or any Subsidiary.
2.9 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
2.10 "FAIR MARKET VALUE" means, with respect to the Common Stock, as of any
date (or, if no shares were traded or quoted on such date, as of the next
preceding date on which there was such a trade or quote) (a) the mean between
the reported high and low sale prices of the Common Stock if the Common Stock is
listed, admitted to unlisted trading privileges or reported on any foreign or
national securities exchange or on the Nasdaq National Market or an equivalent
foreign market on which sale prices are reported; (b) if the Common Stock is not
so listed, admitted to unlisted trading privileges or reported, the closing bid
price as reported by the Nasdaq SmallCap Market, OTC Bulletin Board or the
National Quotation Bureau, Inc. or other comparable service; or (c) if the
Common Stock is not so listed or reported, such price as the Committee
determines in good faith in the exercise of its reasonable discretion. If
determined by the Committee, such determination will be final, conclusive and
binding for all purposes and on all persons, including, without limitation, the
Company, the shareholders of the Company, the Participants and their respective
successors-in-interest. No member of the Committee will be liable for any
determination regarding the fair market value of the Common Stock that is made
in good faith.
2.11 "INCENTIVE AWARD" means an Option, Stock Appreciation Right,
Restricted Stock Award, Performance Unit or Stock Bonus granted to an Eligible
Recipient pursuant to the Plan.
2.12 "INCENTIVE STOCK OPTION" means a right to purchase Common Stock
granted to an Eligible Recipient pursuant to Section 6 of the Plan that
qualifies as an "incentive stock option" within the meaning of Section 422 of
the Code.
2.13 "NON-STATUTORY STOCK OPTION" means a right to purchase Common Stock
granted to an Eligible Recipient pursuant to Section 6 of the Plan that does not
qualify as an Incentive Stock Option.
2.14 "OPTION" means an Incentive Stock Option or a Non-Statutory Stock
Option.
2.15 "PARTICIPANT" means an Eligible Recipient who receives one or more
Incentive Awards under the Plan.
2.16 "PERFORMANCE UNIT" means a right granted to an Eligible Recipient
pursuant to Section 9 of the Plan to receive a payment from the Company, in the
form of stock, cash or a combination of both, upon the achievement of
established employment, service, performance or other goals.
2.17 "PREVIOUSLY ACQUIRED SHARES" means shares of Common Stock or Preferred
Stock that are already owned by the Participant or, with respect to any
Incentive Award, that are to be issued upon the grant, exercise or vesting of
such Incentive Award.
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2.18 "RESTRICTED STOCK AWARD" means an award of Common Stock granted to an
Eligible Recipient pursuant to Section 8 of the Plan that is subject to the
restrictions on transferability and the risk of forfeiture imposed by the
provisions of such Section 8.
2.19 "RETIREMENT" means termination of employment or service pursuant to
and in accordance with the regular (or, if approved by the Board for purposes of
the Plan, early) retirement/pension plan or practice of the Company or
Subsidiary then covering the Participant, provided that if the Participant is
not covered by any such plan or practice, the Participant will be deemed to be
covered by the Company's plan or practice for purposes of this determination.
2.20 "SECURITIES ACT" means the Securities Act of 1933, as amended.
2.21 "STOCK APPRECIATION RIGHT" means a right granted to an Eligible
Recipient pursuant to Section 7 of the Plan to receive a payment from the
Company, in the form of stock, cash or a combination of both, equal to the
difference between the Fair Market Value of one or more shares of Common Stock
and the exercise price of such shares under the terms of such Stock Appreciation
Right.
2.22 "STOCK BONUS" means an award of Common Stock granted to an Eligible
Recipient pursuant to Section 10 of the Plan.
2.23 "SUBSIDIARY" means any entity that is directly or indirectly
controlled by the Company or any entity in which the Company has a significant
equity interest, as determined by the Committee.
2.24 "TAX DATE" means the date any withholding tax obligation arises under
the Code or other applicable tax statute for a Participant with respect to an
Incentive Award.
3. PLAN ADMINISTRATION.
3.1 THE COMMITTEE. The Plan will be administered by the Board or by a
committee of the Board. So long as the Company has a class of its equity
securities registered under Section 12 of the Exchange Act, any committee
administering the Plan will consist solely of two or more members of the Board
who are "non-employee directors" within the meaning of Rule 16b-3 under the
Exchange Act and, if the Board so determines in its sole discretion, who are
"outside directors" within the meaning of Section 162(m) of the Code. Such a
committee, if established, will act by majority approval of the members (but may
also take action with the written consent of a majority of the members of such
committee), and a majority of the members of such a committee will constitute a
quorum. As used in the Plan, "Committee" will refer to the Board or to such a
committee, if established. To the extent consistent with corporate law, the
Committee may delegate to any officers of the Company the duties, power and
authority of the Committee under the Plan pursuant to such conditions or
limitations as the Committee may establish; provided, however, that only the
Committee may exercise such duties, power and authority with respect to Eligible
Recipients who are subject to Section 16 of the Exchange Act. The Committee may
exercise its duties, power and authority under the Plan in its sole and absolute
discretion without the consent of any Participant or other party, unless the
Plan specifically provides otherwise. Each determination, interpretation or
other action made or taken by the
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Committee pursuant to the provisions of the Plan will be conclusive and binding
for all purposes and on all persons, and no member of the Committee will be
liable for any action or determination made in good faith with respect to the
Plan or any Incentive Award granted under the Plan.
3.2 AUTHORITY OF THE COMMITTEE.
(a) In accordance with and subject to the provisions of the Plan, the
Committee will have the authority to determine all provisions of Incentive
Awards as the Committee may deem necessary or desirable and as consistent
with the terms of the Plan, including, without limitation, the following:
(i) the Eligible Recipients to be selected as Participants; (ii) the nature
and extent of the Incentive Awards to be made to each Participant
(including the number of shares of Common Stock to be subject to each
Incentive Award, any exercise price, the manner in which Incentive Awards
will vest or become exercisable and whether Incentive Awards will be
granted in tandem with other Incentive Awards) and the form of written
agreement, if any, evidencing such Incentive Award; (iii) the time or times
when Incentive Awards will be granted; (iv) the duration of each Incentive
Award; and (v) the restrictions and other conditions to which the payment
or vesting of Incentive Awards may be subject. In addition, the Committee
will have the authority under the Plan in its sole discretion to pay the
economic value of any Incentive Award in the form of cash, Common Stock or
any combination of both.
(b) The Committee will have the authority under the Plan to amend or
modify the terms of any outstanding Incentive Award in any manner,
including, without limitation, the authority to modify the number of shares
or other terms and conditions of an Incentive Award, extend the term of an
Incentive Award, accelerate the exercisability or vesting or otherwise
terminate any restrictions relating to an Incentive Award, accept the
surrender of any outstanding Incentive Award or, to the extent not
previously exercised or vested, authorize the grant of new Incentive Awards
in substitution for surrendered Incentive Awards; provided, however that
the amended or modified terms are permitted by the Plan as then in effect
and that any Participant adversely affected by such amended or modified
terms has consented to such amendment or modification. No amendment or
modification to an Incentive Award, however, whether pursuant to this
Section 3.2 or any other provisions of the Plan, will be deemed to be a
re-grant of such Incentive Award for purposes of this Plan.
(c) In the event of (i) any reorganization, merger, consolidation,
recapitalization, liquidation, reclassification, stock dividend, stock
split, combination of shares, rights offering, extraordinary dividend or
divestiture (including a spin-off) or any other change in corporate
structure or shares, (ii) any purchase, acquisition, sale or disposition of
a significant amount of assets or a significant business, (iii) any change
in accounting principles or practices, or (iv) any other similar change, in
each case with respect to the Company or any other entity whose performance
is relevant to the grant or vesting of an Incentive Award, the Committee
(or, if the Company is not the surviving corporation in any such
transaction, the board of directors of the surviving corporation) may,
without the consent of any affected Participant, amend or modify the
vesting criteria of any outstanding Incentive Award that is based in whole
or in part on the financial
4
<PAGE>
performance of the Company (or any Subsidiary or division thereof) or such
other entity so as equitably to reflect such event, with the desired result
that the criteria for evaluating such financial performance of the Company
or such other entity will be substantially the same (in the sole discretion
of the Committee or the board of directors of the surviving corporation)
following such event as prior to such event; provided, however, that the
amended or modified terms are permitted by the Plan as then in effect.
4. SHARES AVAILABLE FOR ISSUANCE.
4.1 MAXIMUM NUMBER OF SHARES AVAILABLE. Subject to adjustment as provided
in Section 4.3 of the Plan, the maximum number of shares of Common Stock that
will be available for issuance under the Plan will be 2,500,000 shares of Common
Stock.
4.2 ACCOUNTING FOR INCENTIVE AWARDS. Shares of Common Stock that are issued
under the Plan or that are subject to outstanding Incentive Awards will be
applied to reduce the maximum number of shares of Common Stock remaining
available for issuance under the Plan. Any shares of Common Stock that are
subject to an Incentive Award that lapses, expires, is forfeited or for any
reason is terminated unexercised or unvested and any shares of Common Stock that
are subject to an Incentive Award that is settled or paid in cash or any form
other than shares of Common Stock will automatically again become available for
issuance under the Plan. Any shares of Common Stock that constitute the
forfeited portion of a Restricted Stock Award, however, will not become
available for further issuance under the Plan.
4.3 ADJUSTMENTS TO SHARES AND INCENTIVE AWARDS. In the event of any
reorganization, merger, consolidation, recapitalization, liquidation,
reclassification, stock dividend, stock split, combination of shares, rights
offering, divestiture or extraordinary dividend (including a spin-off) or any
other change in the corporate structure or shares of the Company, the Committee
(or, if the Company is not the surviving corporation in any such transaction,
the board of directors of the surviving corporation) will make appropriate
adjustment (which determination will be conclusive) as to the number and kind of
securities or other property (including cash) available for issuance or payment
under the Plan and, in order to prevent dilution or enlargement of the rights of
Participants, (a) the number and kind of securities or other property (including
cash) subject to outstanding Options, and (b) the exercise price of outstanding
Options.
5. PARTICIPATION.
Participants in the Plan will be those Eligible Recipients who, in the
judgment of the Committee, have contributed, are contributing or are expected to
contribute to the achievement of economic objectives of the Company or its
Subsidiaries. Eligible Recipients may be granted from time to time one or more
Incentive Awards, singly or in combination or in tandem with other Incentive
Awards, as may be determined by the Committee in its sole discretion. Incentive
Awards will be deemed to be granted as of the date specified in the grant
resolution of the Committee, which date will be the date of any related
agreement with the Participant.
6. OPTIONS.
5
<PAGE>
6.1 GRANT. An Eligible Recipient may be granted one or more Options under
the Plan, and such Options will be subject to such terms and conditions,
consistent with the other provisions of the Plan, as may be determined by the
Committee in its sole discretion. The Committee may designate whether an Option
is to be considered an Incentive Stock Option or a Non-Statutory Stock Option.
To the extent that any Incentive Stock Option granted under the Plan ceases for
any reason to qualify as an "incentive stock option" for purposes of Section 422
of the Code, such Incentive Stock Option will continue to be outstanding for
purposes of the Plan but will thereafter be deemed to be a Non-Statutory Stock
Option.
6.2 EXERCISE PRICE. The per share price to be paid by a Participant upon
exercise of an Option will be determined by the Committee in its discretion at
the time of the Option grant; provided, however, that (a) such price will not be
less than 100% of the Fair Market Value of one share of Common Stock on the date
of grant with respect to an Incentive Stock Option (110% of the Fair Market
Value if, at the time the Incentive Stock Option is granted, the Participant
owns, directly or indirectly, more than 10% of the total combined voting power
of all classes of stock of the Company or any parent or subsidiary corporation
of the Company), and (b) such price will not be less than 85% of the Fair Market
Value of one share of Common Stock on the date of grant with respect to a
Non-Statutory Stock Option.
6.3 EXERCISABILITY AND DURATION. An Option will become exercisable at such
times and in such installments as may be determined by the Committee in its sole
discretion at the time of grant; provided, however, that no Option may be
exercisable after 10 years from its date of grant.
6.4 PAYMENT OF EXERCISE PRICE. The total purchase price of the shares to be
purchased upon exercise of an Option will be paid entirely in cash (including
check, bank draft or money order); provided, however, that the Committee, in its
sole discretion and upon terms and conditions established by the Committee, may
allow such payments to be made, in whole or in part, by tender of a Broker
Exercise Notice, Previously Acquired Shares, a promissory note (on terms
acceptable to the Committee in its sole discretion) or by a combination of such
methods.
6.5 MANNER OF EXERCISE. An Option may be exercised by a Participant in
whole or in part from time to time, subject to the conditions contained in the
Plan and in the agreement evidencing such Option, by delivery in person, by
facsimile or electronic transmission or through the mail of written notice of
exercise to the Company (Attention: Chief Financial Officer) at its principal
executive office in Minneapolis, Minnesota and by paying in full the total
exercise price for the shares of Common Stock to be purchased in accordance with
Section 6.4 of the Plan.
6.6 AGGREGATE LIMITATION OF STOCK SUBJECT TO INCENTIVE STOCK OPTIONS. To
the extent that the aggregate Fair Market Value (determined as of the date an
Incentive Stock Option is granted) of the shares of Common Stock with respect to
which incentive stock options (within the meaning of Section 422 of the Code)
are exercisable for the first time by a Participant during any calendar year
(under the Plan and any other incentive stock option plans of the Company or any
subsidiary or parent corporation of the Company (within the meaning of the
Code)) exceeds $100,000 (or such other amount as may be prescribed by the Code
from time to time), such excess Options will be treated as Non-Statutory Stock
Options. The determination will be made
6
<PAGE>
by taking incentive stock options into account in the order in which they were
granted. If such excess only applies to a portion of an Incentive Stock Option,
the Committee, in its discretion, will designate which shares will be treated as
shares to be acquired upon exercise of an Incentive Stock Option.
7. STOCK APPRECIATION RIGHTS.
7.1 GRANT. An Eligible Recipient may be granted one or more Stock
Appreciation Rights under the Plan, and such Stock Appreciation Rights will be
subject to such terms and conditions, consistent with the other provisions of
the Plan, as may be determined by the Committee in its sole discretion.
7.2 EXERCISE PRICE. The exercise price of a Stock Appreciation Right will
be determined by the Committee, in its discretion, at the date of grant but may
not be less than 100% of the Fair Market Value of one share of Common Stock on
the date of grant.
7.3 EXERCISABILITY AND DURATION. A Stock Appreciation Right will become
exercisable at such time and in such installments as may be determined by the
Committee in its sole discretion at the time of grant; provided, however, that
no Stock Appreciation Right may be exercisable after 10 years from its date of
grant. A Stock Appreciation Right will be exercised by giving notice in the same
manner as for Options, as set forth in Section 6.5 of the Plan.
8. RESTRICTED STOCK AWARDS.
8.1 GRANT. An Eligible Recipient may be granted one or more Restricted
Stock Awards under the Plan, and such Restricted Stock Awards will be subject to
such terms and conditions, consistent with the other provisions of the Plan, as
may be determined by the Committee in its sole discretion. The Committee may
impose such restrictions or conditions, not inconsistent with the provisions of
the Plan, to the vesting of such Restricted Stock Awards as it deems
appropriate, including, without limitation, that the Participant remain in the
continuous employ or service of the Company or a Subsidiary for a certain period
or that the Participant or the Company (or any Subsidiary or division thereof)
satisfy certain performance goals or criteria.
8.2 RIGHTS AS A STOCKHOLDER; TRANSFERABILITY. Except as provided in
Sections 8.1, 8.3 and 14.3 of the Plan, a Participant will have all voting,
dividend, liquidation and other rights with respect to shares of Common Stock
issued to the Participant as a Restricted Stock Award under this Section 8 upon
the Participant becoming the holder of record of such shares as if such
Participant were a holder of record of shares of unrestricted Common Stock.
8.3 DIVIDENDS AND DISTRIBUTIONS. Unless the Committee determines otherwise
in its sole discretion (either in the agreement evidencing the Restricted Stock
Award at the time of grant or at any time after the grant of the Restricted
Stock Award), any dividends or distributions (including regular quarterly cash
dividends) paid with respect to shares of Common Stock subject to the unvested
portion of a Restricted Stock Award will be subject to the same restrictions as
the shares to which such dividends or distributions relate. In the event the
Committee determines not to pay such dividends or distributions currently, the
Committee will determine in its sole discretion whether any interest will be
paid on such dividends or
7
<PAGE>
distributions. In addition, the Committee in its sole discretion may require
such dividends and distributions to be reinvested (and in such case the
Participants consent to such reinvestment) in shares of Common Stock that will
be subject to the same restrictions as the shares to which such dividends or
distributions relate.
8.4 ENFORCEMENT OF RESTRICTIONS. To enforce the restrictions referred to in
this Section 8, the Committee may place a legend on the stock certificates
referring to such restrictions and may require the Participant, until the
restrictions have lapsed, to keep the stock certificates, together with duly
endorsed stock powers, in the custody of the Company or its transfer agent or to
maintain evidence of stock ownership, together with duly endorsed stock powers,
in a certificateless book-entry stock account with the Company's transfer agent.
9. PERFORMANCE UNITS.
An Eligible Recipient may be granted one or more Performance Units under
the Plan, and such Performance Units will be subject to such terms and
conditions, consistent with the other provisions of the Plan, as may be
determined by the Committee in its sole discretion. The Committee may impose
such restrictions or conditions, not inconsistent with the provisions of the
Plan, to the vesting of such Performance Units as it deems appropriate,
including, without limitation, that the Participant remain in the continuous
employ or service of the Company or any Subsidiary for a certain period or that
the Participant or the Company (or any Subsidiary or division thereof) satisfy
certain performance goals or criteria. The Committee will have the sole
discretion to determine the form in which payment of the economic value of
vested Performance Units will be made to the Participant (i.e., cash, Common
Stock or any combination thereof) or to consent to or disapprove the election by
the Participant of the form of such payment.
10. STOCK BONUSES.
An Eligible Recipient may be granted one or more Stock Bonuses under the
Plan, and such Stock Bonuses will be subject to such terms and conditions,
consistent with the other provisions of the Plan, as may be determined by the
Committee. The Participant will have all voting, dividend, liquidation and other
rights with respect to the shares of Common Stock issued to a Participant as a
Stock Bonus under this Section 10 upon the Participant becoming the holder of
record of such shares; provided, however, that the Committee may impose such
restrictions on the assignment or transfer of a Stock Bonus as it deems
appropriate.
11. EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE.
11.1 TERMINATION DUE TO DEATH, DISABILITY OR RETIREMENT. Unless otherwise
provided by the Committee in its sole discretion in the agreement evidencing an
Incentive Award, in the event a Participant's employment or other service with
the Company and all Subsidiaries is terminated by reason of death, Disability or
Retirement:
(a) All outstanding Options and Stock Appreciation Rights then held by
the Participant that are currently exercisable by the Participant as of the
time of such termination will remain exercisable for a period of one year
after such termination (but in no event after the expiration date of any
such Option or Stock Appreciation Right); and
8
<PAGE>
(b) All Restricted Stock Awards, Performance Units and Stock Bonuses
then held by the Participant will vest and/or continue to vest in the
manner determined by the Committee and set forth in the agreement
evidencing such Restricted Stock Awards, Performance Units or Stock
Bonuses.
11.2 TERMINATION FOR REASONS OTHER THAN DEATH, DISABILITY OR RETIREMENT.
(a) Unless otherwise provided by the Committee in its sole discretion
in the agreement evidencing an Incentive Award, in the event a
Participant's employment or other service is terminated with the Company
and all Subsidiaries for any reason other than death, Disability or
Retirement, or a Participant is in the employ or service of a Subsidiary
and the Subsidiary ceases to be a Subsidiary of the Company (unless the
Participant continues in the employ or service of the Company or another
Subsidiary), all rights of the Participant under the Plan and any
agreements evidencing an Incentive Award will immediately terminate without
notice of any kind, and no Options or Stock Appreciation Rights then held
by the Participant will thereafter be exercisable, all Restricted Stock
Awards then held by the Participant that have not vested will be terminated
and forfeited, and all Performance Units and Stock Bonuses then held by the
Participant will vest and/or continue to vest in the manner determined by
the Committee and set forth in the agreement evidencing such Performance
Units or Stock Bonuses; provided, however, that if such termination is due
to any reason other than termination by the Company or any Subsidiary for
"cause," all outstanding Options or Stock Appreciation Rights then held by
such Participant that are currently exercisable by the Participant as of
the time of such termination will remain exercisable for a period of three
months after such termination (but in no event after the expiration date of
any such Option or Stock Appreciation Right).
(b) For purposes of this Section 11.2, "cause" (as determined by the
Committee) will be as defined in any employment or other agreement or
policy applicable to the Participant or, if no such agreement or policy
exists, will mean (i) dishonesty, fraud, misrepresentation, embezzlement or
deliberate injury or attempted injury, in each case related to the Company
or any Subsidiary, (ii) any unlawful or criminal activity of a serious
nature, (iii) any intentional and deliberate breach of a duty or duties
that, individually or in the aggregate, are material in relation to the
Participant's overall duties, or (iv) any material breach of any
employment, service, confidentiality or non-compete agreement entered into
with the Company or any Subsidiary.
11.3 MODIFICATION OF RIGHTS UPON TERMINATION. Notwithstanding the other
provisions of this Section 11, upon a Participant's termination of employment or
other service with the Company and all Subsidiaries, the Committee may, in its
sole discretion (which may be exercised at any time on or after the date of
grant, including following such termination), cause Options and Stock
Appreciation Rights (or any part thereof) then held by such Participant to
become or continue to become exercisable and/or remain exercisable following
such termination of employment or service and Restricted Stock Awards,
Performance Units and Stock Bonuses then held by such Participant to vest and/or
continue to vest or become free of transfer restrictions, as the case may be,
following such termination of employment or service, in each
9
<PAGE>
case in the manner determined by the Committee; provided, however, that no
Option or Stock Appreciation Right may remain exercisable beyond its expiration
date.
11.4 BREACH OF CONFIDENTIALITY OR NONCOMPETE AGREEMENTS. Notwithstanding
anything in the Plan to the contrary, in the event that a Participant materially
breaches the terms of any confidentiality or non-compete agreement entered into
with the Company or any Subsidiary, whether such breach occurs before or after
termination of such Participant's employment or other service with the Company
or any Subsidiary, the Committee in its sole discretion may immediately
terminate all rights of the Participant under the Plan and any agreements
evidencing an Incentive Award then held by the Participant without notice of any
kind.
11.5 DATE OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE. Unless the
Committee otherwise determines in its sole discretion, a Participant's
employment or other service will, for purposes of the Plan, be deemed to have
terminated on the date recorded on the personnel or other records of the Company
or the Subsidiary for which the Participant provides employment or other
service, as determined by the Committee in its sole discretion based upon such
records.
12. PAYMENT OF WITHHOLDING TAXES.
12.1 GENERAL RULES. The Company is entitled to (a) withhold and deduct from
future wages of the Participant (or from other amounts that may be due and owing
to the Participant from the Company or a Subsidiary), or make other arrangements
for the collection of, all legally required amounts necessary to satisfy any and
all foreign, federal, state and local withholding and employment-related tax
requirements attributable to an Incentive Award, including, without limitation,
the grant, exercise or vesting of, or payment of dividends with respect to, an
Incentive Award or a disqualifying disposition of stock received upon exercise
of an Incentive Stock Option, or (b) require the Participant promptly to remit
the amount of such withholding to the Company before taking any action,
including issuing any shares of Common Stock, with respect to an Incentive
Award.
12.2 SPECIAL RULES. The Committee may, in its sole discretion and upon
terms and conditions established by the Committee, permit or require a
Participant to satisfy, in whole or in part, any withholding or
employment-related tax obligation described in Section 12.1 of the Plan by
electing to tender Previously Acquired Shares, a Broker Exercise Notice or a
promissory note (on terms acceptable to the Committee in its sole discretion),
or by a combination of such methods.
13. CHANGE IN CONTROL.
13.1 CHANGE IN CONTROL. For purposes of this Section 13, a "Change in
Control" of the Company shall mean (a) the sale, lease, exchange or other
transfer of all or substantially all of the assets of the Company (in one
transaction or in a series of related transactions) to a corporation that is not
controlled by the Company, (b) the approval by the shareholders of the Company
of any plan or proposal for the liquidation or dissolution of the Company, or
(c) a change in control of a nature that would be required to be reported
(assuming such event has not been "previously reported") in response to Item
1(a) of the Current Report on Form 8-K, as in
10
<PAGE>
effect on the effective date of the Plan, pursuant to Section 13 or 15(d) of the
Exchange Act, whether or not the Company is then subject to such reporting
requirement; provided that, without limitation, such a Change in Control shall
be deemed to have occurred at such time as (x) any Person, other than any Person
who owns any shares of Common Stock on the effective date of the Plan, becomes
after the effective date of the Plan the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act) directly or indirectly, of 50% or more of the
combined voting power of the Company's outstanding securities ordinarily having
the right to vote at elections of directors or (y) individuals who constitute
the Board of Directors on the effective date of the Plan cease for any reason to
constitute at least a majority thereof, provided that any person becoming a
director subsequent to the effective date of the Plan whose election, or
nomination for election by the Company's shareholders, was approved by a vote of
at least a majority of the directors comprising the Board of Directors on the
effective date of the Plan (either by a specific vote or by approval of the
proxy statement of the Company in which such person is named as a nominee for
director, without objection to such nomination) shall be, for purposes of this
clause (y) and the following sentence, considered as though such person were a
member of the Board of Directors on the effective date of the Plan.
Notwithstanding anything in the foregoing to the contrary, solely for purposes
of any Incentive Award issued and outstanding prior to July 27, 1999, no Change
in Control shall be deemed to have occurred for purposes of this Section 13 by
virtue of any transaction which shall have been approved by the affirmative vote
of at least a majority of the members of the Board of Directors on the effective
date of the Plan. The foregoing sentence shall not apply to Incentive Awards
granted on or after July 27, 1999.
13.2 ACCELERATION OF VESTING. Without limiting the authority of the
Committee under Sections 3.2 and 4.3 of the Plan, if a Change in Control of the
Company occurs, then, unless otherwise provided by the Committee in its sole
discretion either in the agreement evidencing an Incentive Award at the time of
grant or at any time after the grant of an Incentive Award, (a) all outstanding
Options and Stock Appreciation Rights will become immediately exercisable in
full and will remain exercisable for the remainder of their terms, regardless of
whether the Participant to whom such Options or Stock Appreciation Rights have
been granted remains in the employ or service of the Company or any Subsidiary;
(b) all outstanding Restricted Stock Awards will become immediately fully vested
and non-forfeitable; and (c) all outstanding Performance Units and Stock Bonuses
then held by the Participant will vest and/or continue to vest in the manner
determined by the Committee and set forth in the agreement evidencing such
Performance Units or Stock Bonuses.
13.3 CASH PAYMENT FOR OPTIONS. If a Change in Control of the Company
occurs, then the Committee, if approved by the Committee in its sole discretion
either in an agreement evidencing an Incentive Award at the time of grant or at
any time after the grant of an Incentive Award, and without the consent of any
Participant effected thereby, may determine that some or all Participants
holding outstanding Options will receive, with respect to some or all of the
shares of Common Stock subject to such Options, as of the effective date of any
such Change in Control of the Company, cash in an amount equal to the excess of
the Fair Market Value of such shares immediately prior to the effective date of
such Change in Control of the Company over the exercise price per share of such
Options.
13.4 LIMITATION ON CHANGE IN CONTROL PAYMENTS. Notwithstanding anything in
Section 13.2 or 13.3 of the Plan to the contrary, if, with respect to a
Participant, the acceleration
11
<PAGE>
of the vesting of an Incentive Award as provided in Section 13.2 or the payment
of cash in exchange for all or part of an Incentive Award as provided in Section
13.3 (which acceleration or payment could be deemed a "payment" within the
meaning of Section 280G(b)(2) of the Code), together with any other "payments"
that such Participant has the right to receive from the Company or any
corporation that is a member of an "affiliated group" (as defined in Section
1504(a) of the Code without regard to Section 1504(b) of the Code) of which the
Company is a member, would constitute a "parachute payment" (as defined in
Section 280G(b)(2) of the Code), then the "payments" to such Participant
pursuant to Section 13.2 or 13.3 of the Plan will be reduced to the largest
amount as will result in no portion of such "payments" being subject to the
excise tax imposed by Section 4999 of the Code; provided, however, that if a
Participant is subject to a separate agreement with the Company or a Subsidiary
that expressly addresses the potential application of Sections 280G or 4999 of
the Code (including, without limitation, that "payments" under such agreement or
otherwise will be reduced, that such "payments" will not be reduced or that the
Participant will have the discretion to determine which "payments" will be
reduced), then this Section 13.4 will not apply, and any "payments" to a
Participant pursuant to Section 13.2 or 13.3 of the Plan will be treated as
"payments" arising under such separate agreement.
14. RIGHTS OF ELIGIBLE RECIPIENTS AND PARTICIPANTS; TRANSFERABILITY.
14.1 EMPLOYMENT OR SERVICE. Nothing in the Plan will interfere with or
limit in any way the right of the Company or any Subsidiary to terminate the
employment or service of any Eligible Recipient or Participant at any time, nor
confer upon any Eligible Recipient or Participant any right to continue in the
employ or service of the Company or any Subsidiary.
14.2 RIGHTS AS A SHAREHOLDER. As a holder of Incentive Awards (other than
Restricted Stock Awards and Stock Bonuses), a Participant will have no rights as
a stockholder unless and until such Incentive Awards are exercised for, or paid
in the form of, shares of Common Stock and the Participant becomes the holder of
record of such shares. Except as otherwise provided in the Plan, no adjustment
will be made for dividends or distributions with respect to such Incentive
Awards as to which there is a record date preceding the date the Participant
becomes the holder of record of such shares, except as the Committee may
determine in its discretion.
14.3 RESTRICTIONS ON TRANSFER. Except pursuant to testamentary will or the
laws of descent and distribution or as otherwise expressly permitted by the
Plan, unless approved by the Committee in its sole discretion, no right or
interest of any Participant in an Incentive Award prior to the exercise or
vesting of such Incentive Award will be assignable or transferable, or subjected
to any lien, during the lifetime of the Participant, either voluntarily or
involuntarily, directly or indirectly, by operation of law or otherwise. A
Participant will, however, be entitled to designate a beneficiary to receive an
Incentive Award upon such Participant's death, and in the event of a
Participant's death, payment of any amounts due under the Plan will be made to,
and exercise of any Options (to the extent permitted pursuant to Section 11 of
the Plan) may be made by, the Participant's legal representatives, heirs and
legatees.
14.4 NON-EXCLUSIVITY OF THE PLAN. Nothing contained in the Plan is intended
to modify or rescind any previously approved compensation plans or programs of
the Company or
12
<PAGE>
create any limitations on the power or authority of the Board to adopt such
additional or other compensation arrangements as the Board may deem necessary or
desirable.
15. SECURITIES LAW AND OTHER RESTRICTIONS.
Notwithstanding any other provision of the Plan or any agreements entered
into pursuant to the Plan, the Company will not be required to issue any shares
of Common Stock under this Plan, and a Participant may not sell, assign,
transfer or otherwise dispose of shares of Common Stock issued pursuant to
Incentive Awards granted under the Plan, unless (a) there is in effect with
respect to such shares a registration statement under the Securities Act and any
applicable state or foreign securities laws or an exemption from such
registration under the Securities Act and applicable state or foreign securities
laws, and (b) there has been obtained any other consent, approval or permit from
any other regulatory body which the Committee, in its sole discretion, deems
necessary or advisable. The Company may condition such issuance, sale or
transfer upon the receipt of any representations or agreements from the parties
involved, and the placement of any legends on certificates representing shares
of Common Stock, as may be deemed necessary or advisable by the Company in order
to comply with such securities law or other restrictions.
16. PLAN AMENDMENT, MODIFICATION AND TERMINATION.
The Board may suspend or terminate the Plan or any portion thereof at any
time, and may amend the Plan from time to time in such respects as the Board may
deem advisable in order that Incentive Awards under the Plan will conform to any
change in applicable laws or regulations or in any other respect the Board may
deem to be in the best interests of the Company; provided, however, that no
amendments to the Plan will be effective without approval of the shareholders of
the Company if stockholder approval of the amendment is then required pursuant
to Section 422 of the Code or the rules of any stock exchange or Nasdaq or
similar regulatory body. No termination, suspension or amendment of the Plan may
adversely affect any outstanding Incentive Award without the consent of the
affected Participant; provided, however, that this sentence will not impair the
right of the Committee to take whatever action it deems appropriate under
Sections 3.2, 4.3 and 13 of the Plan.
17. EFFECTIVE DATE AND DURATION OF THE PLAN.
The Plan is effective as of March 28, 1997. The Plan will terminate at
midnight on March 28, 2007, and may be terminated prior to such time to by Board
action, and no Incentive Award will be granted after such termination. Incentive
Awards outstanding upon termination of the Plan may continue to be exercised, or
become free of restrictions, in accordance with their terms.
18. MISCELLANEOUS.
18.1 GOVERNING LAW. The validity, construction, interpretation,
administration and effect of the Plan and any rules, regulations and actions
relating to the Plan will be governed by and construed exclusively in accordance
with the laws of the State of Minnesota, notwithstanding the conflicts of laws
principles of any jurisdictions.
13
<PAGE>
18.2 SUCCESSORS AND ASSIGNS. The Plan will be binding upon and inure to the
benefit of the successors and permitted assigns of the Company and the
Participants.
14
<PAGE>
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