THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING SECURITIES
THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
MUSICLAND STORES CORPORATION
1998 STOCK INCENTIVE PLAN
ADOPTED: January 26, 1998
SHAREHOLDER APPROVAL: MAY 11, 1998
AMENDED JANUARY 24, 2000,
SHAREHOLDER APPROVAL: MAY 8, 2000
AMENDED May 8, 2000
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Table of Contents
SECTION 1.1 Name and Purpose of the Plan............................ 1
SECTION 1.2 Certain Definitions..................................... 1
SECTION 2.1 Authority and Duties of Committee....................... 4
SECTION 2.2 Delegation of Authority................................. 5
SECTION 3.1 Total Shares Limitation................................. 6
SECTION 3.2 Other Shares Limitations................................ 6
SECTION 3.3 Awards Not Exercised.................................... 6
SECTION 3.4 Dilution and Other Adjustments.......................... 6
SECTION 4.1 Participant Eligibility................................. 7
SECTION 5.1 Stock Option Grant and Agreement......................... 7
SECTION 5.2 Stock Option Terms and Conditions........................ 7
SECTION 5.3 Grant of Reload Options................................. 9
SECTION 5.4 Termination of Stock Options............................ 9
SECTION 6.1 ISO Eligibility......................................... 11
SECTION 6.2 Special ISO Rules....................................... 12
SECTION 6.3 IRS Code Amendments..................................... 12
SECTION 7.1 SAR Grant and Agreement................................. 13
SECTION 7.2 Term of SARs............................................ 13
SECTION 7.3 SAR Exercise............................................ 13
SECTION 7.4 SAR Grant Terms and Conditions.......................... 13
SECTION 8.1 Restricted Stock Grant and Agreement.................... 14
SECTION 8.2 Restricted Stock Terms and Conditions................... 14
SECTION 9.1 Performance Stock Grant and Agreement................... 16
SECTION 9.2 Performance Objectives.................................. 16
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SECTION 9.3 Adjustment of Performance Objectives.................... 16
SECTION 9.4 Other Terms and Conditions.............................. 17
SECTION 10.1 Transfer of Participant................................ 18
SECTION 10.2 Effect of Leave of Absence............................. 18
SECTION 11.1 Change in Control Defined.............................. 18
SECTION 11.2 Acceleration of Awards................................. 19
SECTION 12.1 Awards Deemed Non-transferable......................... 20
SECTION 12.2 Limited Transferability of NQSOs....................... 20
SECTION 13.1 Amendment and Discontinuation of Plan.................. 20
SECTION 13.2 Amendment of Grants..................................... 21
SECTION 14.1 Unfunded Status of Plan................................ 21
SECTION 15.1 Delivery of Stock Certificates......................... 21
SECTION 15.2 Applicable Restrictions on Stock........................ 22
SECTION 15.3 Book Entry............................................. 22
SECTION 16.1 No Implied Rights to Awards or Employment.............. 22
SECTION 16.2 Other Compensation Plans............................... 22
SECTION 16.3 Tax Withholding........................................ 22
SECTION 16.4 Arbitration............................................ 23
SECTION 16.5 Rule 16b-3 Compliance.................................. 23
SECTION 16.6 Deferrals 23
SECTION 16.7 Successors............................................. 23
SECTION 16.8 Severability........................................... 23
SECTION 16.9 Governing Law.......................................... 23
SECTION 17.1 Plan Adoption.......................................... 24
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MUSICLAND STORES CORPORATION
1998 STOCK INCENTIVE PLAN
ARTICLE I
General Purpose of Plan; Definitions
SECTION 1.1. Name and Purpose. The name of this plan is the
Musicland Stores Corporation 1998 Stock Incentive Plan (the "Plan"). The purpose
of the Plan is to enable Musicland Stores Corporation and its Affiliates to (i)
attract and retain directors, officers and other employees who contribute to the
Company's success by providing incentive compensation opportunities competitive
with other companies, (ii) motivate Plan participants to achieve long term
success and growth of the Company, and (iii) align the interests of the Plan
participants with those of the Company's public shareholders.
SECTION 1.2. Certain Definitions. For purposes of the Plan,
the following terms are defined as set forth below:
(a) "Affiliate" means any corporation, partnership, joint
venture or other entity controlling, controlled by, or under common
control with the Company as determined by the Board of Directors in its
discretion.
(b) "Award" means any grant under this Plan of a Stock Option,
Stock Appreciation Right, Restricted Stock or Performance Stock to any
Plan participant.
(c) "Board of Directors" means the Board of Directors of
Musicland Stores Corporation, with any individual members thereof being
referred to as a "Director."
(d) "Cause" means any failure by a participant to perform
substantially his or her duties with the Company, after reasonable
notice to the participant of such failure, conduct by a participant
that is in material competition with the Company or conduct by a
participant that breaches his or her duty of loyalty to the Company or
that is materially injurious to the Company, monetarily or otherwise,
which conduct may include, but is not limited to, (i) disclosing or
misusing any confidential information pertaining to the Company or an
Affiliate; (ii) attempting, directly or indirectly, to induce any
employee or agent of the Company to be employed or perform services
elsewhere or (iii) disparaging the Company or any of its respective
officers or directors. The determination of whether any conduct, action
or failure to act constitutes "Cause" is made by the Committee in its
sole discretion, provided
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that, with respect to any Director, "Cause" only refers to removal of
the Director by the shareholders for cause under Delaware law.
(e) "Code" means the Internal Revenue Code of 1986, as
amended. A reference to any provision of the Code includes a reference
to any regulation promulgated thereunder and to any successor
provision.
(f) "Committee" means the entity administering the Plan as
provided in Section 2.1 of the Plan or, if none has been appointed,
then the Board of Directors as a whole.
(g) "Company" means Musicland Stores Corporation, a
corporation organized under the laws of the State of Delaware (or any
successor corporation) and its consolidated subsidiaries.
(h) "Date of Grant" means the date on which the Committee
grants an Award or a future date that the Committee designates at the
time of the Award.
(i) "Disability" means a participant's physical or mental
incapacity resulting from personal injury, disease, illness or other
condition, which (i) prevents him or her from performing his or her
duties for the Company, as the same is determined by the Committee or
its designee after reviewing any medical evidence or requiring any
medical examinations which the Committee or its designee considers
necessary to its determination, and (ii) results in a termination of
his or her employment with the Company.
(j) "Early Retirement" means a participant's retirement from
active employment with the Company on or after the age of 60 with at
least ten years of service or on or after the age of 55 with at least
15 years of service.
(k) "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
(l) "Exercise Price" means the purchase price of a share of
Stock covered by a Stock Option.
(m) "Fair Market Value" means the last closing price of the
Stock (as reported on the Composite Tape of the New York Stock
Exchange, Inc. or as reported by a successor exchange on which the
Stock may be listed) prior to the Date of Grant, or the closing price
on the Date of Grant if the grant is made after the market closes for
such day, or the fair market value as determined by any other method
adopted by the Committee, from time to time, which the
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Committee may deem appropriate under the circumstances, or as may be
required in order to comply with or to conform to the requirements of
applicable laws or regulations.
(n) "Incentive Stock Option" or "ISO" means a Stock Option
that is designated by the Committee as such at the time of grant and
which meets the requirements of Section 422 of the Code, or any
successor provision, and therefore qualifies for favorable tax
treatment.
(o) "Nonqualified Stock Option" or "NQSO" means a Stock Option
that does not meet the requirements of Section 422 of the Code and
which is governed by Section 83 of the Code.
(p) "Normal Retirement" means retirement from active
employment with the Company on or after the age of 65.
(q) "Outside Director" means a Director who meets the
definition of "outside director" set forth in Section 162(m) of the
Code and regulations promulgated thereunder and the definition of
"non-employee director" set forth in Rule 16b-3 under the Securities
Exchange Act of 1934, as amended, or any successor definitions adopted
by the Internal Revenue Service and Securities and Exchange Commission,
respectively.
(r) "Performance Stock" is defined in Article IX.
(s) "QUADRO" means a qualified domestic relations order as
defined by the Code or Title I of ERISA.
(t) "Reload Option" is defined in Section 5.3.
(u) "Retirement" means both Normal Retirement and Early
Retirement.
(v) "Restricted Stock" is defined in Article VIII.
(w) "Stock" means the Common Stock, par value $.01 per share,
of Musicland Stores Corporation.
(x) "Stock Appreciation Rights" or "SAR" means the right
pursuant to an Award granted under Article VII herein to surrender to
the Company all or a portion of a Stock Option in exchange for an
amount, paid in cash or in Stock, equal to the excess of (i) the Fair
Market Value, as of the date such Stock Option or such portion thereof
is surrendered, of the shares of Stock covered by
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such Stock Option or such portion thereof, over (ii) the aggregate
exercise price of such Stock Option or such portion thereof.
(y) "Stock Option" means any right to purchase a specified
number of shares of Stock at a specified price which is granted
pursuant to Articles V and VI herein and may be either an Incentive
Stock Option, a Nonqualified Stock Option or a Reload Option.
(z) "Vested" means that the time has been reached, in
connection with Stock Options and Stock Appreciation Rights, when the
option to purchase stock first becomes exercisable and any accompanying
appreciation right may be surrendered for payment and, in connection
with Restricted Stock, when the shares are no longer subject to
forfeiture and restrictions on transferability.
ARTICLE II
Administration
SECTION 2. 1. Authority and Duties of the Committee.
(a) The Plan is administered by a Committee of not less than
two Directors who are appointed by the Board of Directors and serve at
its pleasure. Unless otherwise determined by the Board of Directors,
all of the members of the Committee are Outside Directors.
(b) The Board of Directors as a whole grants Awards to
Directors who are not employed by the Company and determines all terms
and conditions relating to such Awards.
(c) The Committee has the power and authority to grant Awards
pursuant to the terms of the Plan to officers and other employees
(including those who also serve as Directors).
(d) In particular, the Committee has the authority, subject to
any limitations specifically set forth in this Plan, to:
(i) select the officers and other employees of the
Company and its Affiliates to whom Awards are granted;
(ii) determine the types of Awards granted and the
timing of such Awards;
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(iii) determine the number of shares to be covered by
each Award granted hereunder;
(iv) determine the other terms and conditions, not
inconsistent with the terms of the Plan and any operative
employment agreement, of any Award granted hereunder;
(v) determine whether any conditions or objectives
related to Awards have been met;
(vi) subsequently modify or waive any terms and
conditions of Awards, not inconsistent with the terms of the
Plan and any operative employment agreement;
(vii) determine whether, to what extent and under what
circumstances, Stock and other amounts payable with respect to
any Award is deferred either automatically or at the election
of the participant;
(viii) adopt, alter and repeal such administrative rules,
guidelines and practices governing the Plan as it deems
advisable from time to time;
(ix) interpret the terms and provisions of the Plan and
any Award (and any agreements relating thereto); and
(x) otherwise supervise the administration of the Plan.
(e) All decisions made by the Committee pursuant to the
provisions of the Plan are final and binding on all persons, including
the Company, its shareholders and Plan participants.
SECTION 2.2. Delegation of Authority. The Committee may
delegate its powers and duties under the Plan to the Chief Executive Officer of
the Company, subject to such terms, conditions and limitations as the Committee
may establish in its sole discretion, provided, however, that the Committee may
not delegate its powers and duties under the Plan with regard to Awards to the
Company's executive officers. In addition, the Committee may delegate to any
other person or persons ministerial duties, and it may employ attorneys,
consultants, accountants or other professional advisers.
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ARTICLE III
Stock Subject to Plan
SECTION 3.1. Total Shares Limitation. Subject to the
provisions of this Article III, the maximum number of shares of Stock reserved
and available for distribution under this Plan is 3,700,000 shares plus up to
500,000 additional shares, to the extent authorized by the Board of Directors.
Such shares may consist, in whole or in part, of authorized and unissued shares
or treasury shares.
SECTION 3.2. Other Limitations.
(a) ISO Limitation. The maximum number of shares of Stock
available with respect to all options granted under this Plan that are
intended to be Incentive Stock Options is 750,000 shares.
(b) Stock Award Limitation. The maximum number of shares of
Stock available with respect to all Restricted Stock and Performance
Stock Awards granted under this Plan is 500,000 shares.
(c) Participant Limitation. The aggregate number of shares of
Stock underlying Awards granted under this Plan to any one participant
in any calendar year, regardless of whether such awards are thereafter
canceled, forfeited or terminated, cannot exceed 500,000 shares. The
foregoing annual limitation is intended to include the grant of all
Awards representing "qualified performance-based compensation" within
the meaning of Section 162(m) of the Code.
SECTION 3.3. Awards Not Exercised. In the event any
outstanding Award, or portion thereof, expires, or is terminated, canceled or
forfeited, the shares of Stock that would otherwise be issuable with respect to
the unexercised portion of such expired, terminated, canceled or forfeited Award
are available for subsequent Awards under the Plan.
SECTION 3.4. Dilution and Other Adjustments. In the event that
the Committee determines that any dividend or other distribution (whether in the
form of cash, Stock, other securities or other property), recapitalization,
stock split, reverse stock split, reorganization, merger, consolidation,
split-up, spin-off, combination, repurchase or exchange of Stock or other
securities of the Company, issuance of warrants or other rights to purchase
Stock or other securities of the Company or other similar corporate transaction
or event affects the Stock such that an adjustment is determined by the
Committee to be appropriate in order to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the Plan,
then the Committee may, in such manner as it deems equitable, adjust any or all
of (i) the number and type of Stock (or other securities or other property)
which
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thereafter may be made the subject of Awards, (ii) the number and type of Stock
(or other securities or other property) subject to outstanding Awards, (iii) the
limitations set forth above, and (iv) the purchase or exercise price or any
performance measure with respect to any Award; provided, however, that the
number of shares of Stock or other securities covered by any Award or to which
such Award relates is always a whole number.
ARTICLE IV
Participants
SECTION 4. 1. Eligibility. Directors, officers and other
regular active employees of the Company and its Affiliates are eligible to
participate in this Plan by receiving, as a reward for past performance and as
an incentive for future performance, Awards under the Plan. Other than for
non-employee Directors whose Awards are determined by the Board of Directors as
a whole, the Plan participants may be selected from time to time by the
Committee in its sole discretion, or, with respect to employees other than
executive officers, by the Chief Executive Officer with proper delegation from
the Committee. (See Article XVII of the Plan with respect to shareholder
approval requirement.)
ARTICLE V
Stock Option Awards
SECTION 5.1. Option Grant and Agreement. Each Stock Option
granted under the Plan (or delegation of authority to the Chief Executive
Officer to grant Stock Options) will be evidenced by minutes of a meeting, or by
a unanimous written consent without a meeting, of the Committee and by a written
agreement dated as of the Date of Grant and executed by the Company and by the
Plan participant. With respect to non-employee Directors, the Board of Directors
may establish by resolution or unanimous consent a formula for periodic Stock
Option grants and may change the formula at any time and from time to time.
SECTION 5.2. Terms and Conditions of Grants. Stock Options
granted under the Plan are subject to the following terms and conditions and may
contain such additional terms, conditions, restrictions and contingencies with
respect to exercisability and/or with respect to the shares of Stock acquired
upon exercise, not inconsistent with the terms of the Plan and any operative
employment agreement, as the Committee deems desirable:
(a) Exercise Price. The Exercise Price fixed at the time of
grant will not be less than 100% of the Fair Market Value of the Stock
as of the Date of Grant. If a variable Exercise Price price is
specified at the time of grant, the
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Exercise Price may vary pursuant to a formula or other method
established by the Committee which provides a floor of Fair Market
Value as of the Date of Grant. Unless pursuant to the antidilution
provisions of Section 3.4 of this Plan, no subsequent amendment of an
outstanding Stock Option may reduce the Exercise Price to be less than
100% of the Fair Market Value of the Stock as of the Date of Grant.
(b) Option Term. Any unexercised portion of a Stock Option
granted hereunder expires at the end of the stated term of the Stock
Option. The Committee determines the term of each Stock Option at the
time of grant and may thereafter extend the term in its discretion. If
a definite term is not specified by the Committee at the time of grant,
then the term is deemed to be ten years.
(c) Vesting. Stock Options, or portions thereof, are
exercisable at such time or times as determined by the Committee in its
discretion at or after grant. If the Committee provides that any Stock
Option becomes Vested over a period of time, in full or in
installments, the Committee may waive such Vesting provisions at any
time. If no other Vesting provision is specified by the Committee at
the time of grant, then the Stock Option is deemed to Vest in three
installments (as equal as possible to the whole share) on the second,
third and fourth anniversaries of the Date of Grant. (Also see Change
in Control provisions in Article XI.)
(d) Method of Exercise. Vested portions of any Stock Option
may be exercised in whole or in part at any time during the option term
by giving written notice of exercise to the Company specifying the
number of shares to be purchased. The notice must be accompanied by
payment in full of the Exercise Price, along with any required tax
withholding pursuant to Section 16.3 of this Plan. The Exercise Price
may be paid:
(i) in cash in any manner satisfactory to the Company;
(ii) by tendering (by either actual delivery of shares
or by attestation) previously owned shares of Stock acquired
at least six months prior to such tender and having an
aggregate Fair Market Value on the date of exercise equal to
the Exercise Price applicable to such Stock Option exercise,
and, with respect to the exercise of NQSO's, including
Restricted Stock granted at least six months prior to such
tender;
(iii) by a combination of cash and Common Stock; or
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(iv) by authorizing a broker to sell, on behalf of the
participant, the appropriate number of shares otherwise
issuable to the participant upon the exercise of a Stock
Option with the proceeds of sale applied to pay the Exercise
Price and tax withholding, provided that the Company has
implemented such a broker-handled same day sale program.
If the Exercise Price of a NQSO is paid by tendering Restricted Stock,
then the shares of Stock received upon the exercise will contain
identical restrictions as the Restricted Stock so tendered. Required
tax withholding can only be paid by cash received from the optionee or
through a same day sale transaction.
(e) Issuance of Stock. No shares of Stock will be issued until
full payment has been made. An optionee will have the rights to
dividends and other rights of a shareholder with respect to shares
subject to a Stock Option only after the optionee has become the holder
of record of such shares issued upon the proper exercise of the Stock
Option.
(f) Form. Unless the grant of a Stock Option is designated at
the time of grant as an ISO, it is deemed to be an NQSO. ISOs are
subject to the terms and conditions stated in Article VI of this Plan.
SECTION 5.3. Grant of Reload Options. If the Committee so
provides in its discretion at or after grant, an optionee who exercises all or
part of a Nonqualified Stock Option by payment of the Exercise Price with
previously owned shares of Stock will be granted an additional Stock Option (a
"Reload Option") for a number of shares of Stock equal to the number of shares
tendered in the exercise of the original Stock Option. Each Reload Option will
have a Date of Grant which is the date as of which the original Stock Option to
which it applies is exercised and will Vest on the six-month anniversary of Date
of Grant. The Reload Option will have the same expiration and all other terms
and conditions as the original Stock Option to which it applies, except that the
Exercise Price will be equal to at least 100% of the Fair Market Value as of the
Date of Grant.
SECTION 5.4. Termination of Grants Prior to Expiration. Unless
otherwise provided in an employment agreement entered into between the holder of
a Stock Option and the Company and approved by the Committee, either before or
after the Date of Grant, or otherwise specified at or after the time of grant,
and subject to Article VI hereof with respect to ISOs, the following early
termination provisions apply to all Stock Options:
(a) Termination by Death. If an optionee's employment by the
Company or its Affiliates terminates by reason of his or her death, all
Stock Options held by such optionee immediately become Vested but
thereafter may
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only be exercised (by the legal representative of the optionee's
estate, or by the legatee or heir of the optionee pursuant to a will or
the laws of descent and distribution) for a period of three years (or
such other period as the Committee may specify at or after the time of
grant) from the date of such death, or until the expiration of the
original term of the Stock Option, whichever period is the shorter.
(b) Termination by Reason of Disability. If an optionee's
employment by the Company or its Affiliates terminates by reason of his
or her Disability, all Stock Options held by such optionee immediately
become Vested but thereafter may only be exercised for a period of
three years (or such other period as the Committee may specify at or
after the time of grant) from the date of such termination of
employment, or until the expiration of the original term of the Stock
Option, whichever period is the shorter. If the optionee dies within
such three-year period (or such other period as applicable), any
unexercised Stock Option held by such optionee will thereafter be
exercisable by the legal representative of the optionee's estate, or by
the legatee or heir of the optionee pursuant to a will or the laws of
descent and distribution, for the greater of the remainder of the
three-year period (or other period as applicable) or for a period of
twelve months from the date of such death, but in no event shall any
portion of the Stock Option be exercisable after its original stated
expiration date.
(c) Termination by Reason of Retirement. If an optionee's
employment by the Company or its Affiliates terminates by reason of his
or her Retirement, all Stock Options held by such optionee immediately
become Vested but thereafter may only be exercised for a period of
three years (or such other period as the Committee may specify at or
after the time of grant) from the date of such termination of
employment, or until the expiration of the original term of the Stock
Option, whichever period is the shorter. If the optionee dies within
such three-year period (or such other period as applicable), any
unexercised Stock Option held by such optionee will thereafter be
exercisable by the legal representative of the optionee's estate, or by
the legatee or heir of the optionee pursuant to a will or the laws of
descent and distribution, for the greater of the remainder of the
three-year period (or such other period as applicable) or for a period
of twelve months from the date of such death, but in no event shall any
portion of the Stock Option be exercisable after its original stated
expiration date.
(d) Involuntary Termination for Cause. If an optionee's
employment by the Company or its Affiliates is terminated for Cause,
all Stock Options (or portions thereof) which have not been exercised,
whether Vested or not, are automatically forfeited upon the close of
business on the last day of employment.
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(e) Other Termination. If an optionee's employment by the
Company or its Affiliates terminates, voluntarily or involuntarily, for
any reason other than death, Disability, Retirement or for Cause, any
Vested portions of Stock Options held by such optionee at the time of
termination may be exercised by the optionee for a period of three
months (or such other period as the Committee may specify at or after
the time of grant) from the date of such termination or until the
expiration of the original term of the Stock Option, whichever period
is the shorter. No portion of any Stock Option which is not Vested at
the time of such termination will thereafter become Vested.
(f) Non-employee Directors. If a non-employee Director dies or
becomes disabled (as determined by the Board of Directors) while
serving as a member of the Board of Directors, all Stock Options held
by such Director immediately become Vested but thereafter may only be
exercised for a period of three years (or such other period as the
Board of Directors may specify at or after the time of grant) from the
date of such death or resignation due to disability, or until the
expiration of the original term of the Stock Option, whichever period
is the shorter. If a non-employee Director's resignation (or failure to
stand for reelection) occurs for any other reason, any Vested portions
of Stock Options held by the Director at the time of resignation (or
failure to stand for reelection) may be exercised for a period of three
months (or such other period as the Board of Directors may specify at
or after the time of grant) from such date or until the expiration of
the original term of the Stock Option, whichever period is the shorter.
No portion of any Stock Option which is not Vested at the time of such
resignation (or failure to stand for reelection) will thereafter become
Vested.
ARTICLE VI
Special Rules Applicable to Incentive Stock Options
SECTION 6.1. Eligibility. Notwithstanding any other provision
of this Plan to the contrary, an ISO may only be granted to full or part-time
employees (including officers and directors who are also employees) of the
Company or of an Affiliate, provided that the Affiliate is also a "subsidiary
corporation" within the meaning of Section 424(f) of the Code.
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SECTION 6.2 Special ISO Rules.
(a) Term. No ISO may be exercisable on or after the tenth
anniversary of the Date of Grant, and no ISO may be granted under this
Plan on or after the tenth anniversary of the effective date of the
Plan. (See Section 17.1 of the Plan.)
(b) Ten Percent Stockholder. No grantee may receive an ISO
under the Plan if such grantee, at the time the Award is granted, owns
(after application of the rules contained in Section 424(d) of the
Code) stock possessing more than 10% of the total combined voting power
of all classes of the Company's stock, unless (i) the option price for
such ISO is at least 110% of the Fair Market Value on the Date of Grant
and (ii) such ISO is not exercisable on or after the fifth anniversary
of the Date of Grant.
(c) Limitation on Grants. The aggregate fair market value
(determined with respect to each ISO at the time such ISO is granted)
of the shares of Stock with respect to which ISOs are exercisable for
the first time by a grantee during any calendar year (under this Plan
or any other plan adopted by the Company) shall not exceed $100,000.
(d) Non-transferability. No ISO granted hereunder may be
transferred except by will or by the laws of descent and distribution.
(e) Termination of Employment. No ISO may be exercisable more
than three months following termination of employment for any reason
(including retirement) other than death or disability, nor more than
one year following termination of employment for the reason of
disability (as defined in Section 422 of the Code).
(f) Holding Period. Stock acquired upon the exercise of an ISO
must be held for a minimum period of two years from the Date of Grant
and one year from the date of exercise, otherwise the disposition
constitutes a taxable "disqualifying disposition."
SECTION 6.3. Subject to Code Amendments. The foregoing
limitations are designed to comply with the requirements of Section 422 of the
Code and are automatically amended or modified to comply with amendments or
modifications to Section 422 or any successor provisions. Any ISO which fails to
comply with Section 422 of the Code is automatically treated as a NQSO under
this Plan.
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ARTICLE VII
Stock Appreciation Rights
SECTION 7.1. SAR Grant and Agreement. Stock Appreciation Rights may be
granted in conjunction with all or part of any Stock Option granted under the
Plan, either at the same time or after the grant of the Stock Option. Each SAR
granted under the Plan (or delegation of authority to the Chief Executive
Office to grant SARs) will be evidenced by minutes of a meeting, or by a
unanimous written consent without a meeting, of the Committee and by a written
agreement dated as of the Date of Grant and executed by the Company and by the
Plan participant.
SECTION 7.2. Term of SARs. A Stock Appreciation Right, or applicable
portion thereof, granted with respect to a given Stock Option or potion thereof
terminates and is no longer exercisable upon the termination or exercise of the
related Stock Option, or applicable portion thereof.
SECTION 7.3. SAR Exercise. A Stock Appreciation Right may be exercised
by an optionee by surrendering the applicable portion of the related Stock
Option. Stock Options which have been so surrendered, in whole or in part, are
no longer exercisable to the extent the related Stock Appreciation Rights have
been exercised and are deemed to have been exercised for the purpose of the
limitation set forth in Article III of this Plan on the number of shares of
Stock to be issued under the Plan, but only to the extent of the number of
shares of Stock actually issued under the Stock Appreciation Right at the time
of exercise. Upon exercise and surrender, the optionee is entitled to receive an
amount determined in the manner prescribed in Section 7.4 below. However, the
participant is responsible for the payment of any required tax withholding as
provided in Section 16.3 herein.
SECTION 7.4. Terms and Conditions of SAR Grants. Stock
Appreciation Rights are subject to the following terms and conditions:
(a) Stock Appreciation Rights are exercisable only at such
time or times and to the extent that the Stock Options to which they
relate are Vested and exercisable in accordance with the provisions of
Article V of this Plan or otherwise as the Committee may determine at
or after the time of grant;
(b) Upon the exercise of a Stock Appreciation Right, an
optionee is entitled to receive up to, but not more than, an amount in
cash or shares of Stock equal in value to the excess of the Fair Market
Value of one share of Stock over the Exercise Price per share specified
in the related Stock Option multiplied by the number of shares in
respect of which the Stock Appreciation Right is exercised, with the
Committee having the right in its discretion to determine the form of
payment;
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(c) Stock Appreciation Rights are transferable only when and
to the extent that the underlying Stock Option would be transferable
under Article XII of this Plan; and
(d) Such other terms and conditions, not inconsistent with the
provisions of this Plan and any operative employment agreement, as are
determined from time to time by the Committee.
ARTICLE VIII
Restricted Stock Awards
SECTION 8.1. Restricted Stock Grant and Agreement. Restricted Stock
Awards consist of shares of Stock which are issued by the Company to a
participant at a purchase price which may be well below their fair market value
but are subject to forfeiture and restrictions on their sale or other transfer
by the participant. Each Restricted Stock Award granted under the Plan will be
evidenced by minutes of a meeting, or by a unanimous written consent without a
meeting, of the Committee and by a written agreement dated as of the Date of
Grant and executed by the Company and by the Plan participant. The timing of
Restricted Stock Awards and the number of shares to be issued (subject to
Section 3.2(b) of this Plan) is to be determined by the Committee in its
discretion. By accepting a grant of Restricted Stock, the participant agrees to
remit to the Company when due any required tax withholding as provided in
Section 16.3 herein.
SECTION 8.2. Terms and Conditions of Restricted Stock Grants.
Restricted Stock granted under the Plan is subject to the following terms and
conditions, which need not be the same for each participant, and may contain
such additional terms, conditions, restrictions and contingencies not
inconsistent with the terms of the Plan and any operative employment agreement,
as the Committee deems desirable:
(a) Purchase Price. The Committee determines the prices at
which shares of Restricted Stock are to be issued to a participant,
which may vary from time to time and among participants and which may
be below the Fair Market Value of such shares of Stock at the date of
grant but may not be less than the par value of the Stock.
(b) Restrictions. All shares of Restricted Stock issued under
this Plan will be subject to such restrictions as the Committee may
determine, including, without limitation, the following:
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(i) a prohibition against the sale, transfer, pledge or
other encumbrance of the shares of Restricted Stock, such
prohibition to lapse at such time or times as the Committee
determines (whether in installments, at the time of the death,
Disability or Retirement of the holder of such shares, or
otherwise, but see Change in Control provisions in Article
XI);
(ii) a requirement that the participant forfeit such
shares of Restricted Stock in the event of termination of the
participant's employment prior to Vesting; and
(iii) a prohibition against employment of the
participant by any competitor of the Company or its
affiliates, or against dissemination by the participant of any
secret or confidential information belonging to the Company or
a subsidiary of the Company.
The Committee may at any time waive such restrictions or accelerate the
date or dates on which the restrictions will lapse. However, if the
Committee determines that restrictions lapse upon the attainment of
specified performance objectives then the provisions of Section 9.2 and
9.3 below will apply.
(c) Delivery of Shares. Shares of Restricted Stock will be
registered in the name of the participant and deposited, together with
a stock power endorsed in blank, with the Company. Each such
certificate will bear a legend in substantially the following form:
"The transferability of this certificate and the shares of
Common Stock represented by it are subject to the terms and
conditions (including conditions of forfeiture) contained in
the 1998 Stock Incentive Plan of the Company, and an agreement
entered into between the registered owner and the Company. A
copy of the Plan and agreement is on file in the office of the
Secretary of the Company."
At the end of any time period during which the shares of Restricted
Stock are subject to forfeiture and restrictions on transfer, such
shares will be delivered free of all restrictions to the participant.
(d) Forfeiture of Shares. If a participant who holds shares of
Restricted Stock fails to satisfy the restrictions and other conditions
relating to the Restricted Stock prior to the lapse or waiver of such
restrictions and conditions, the participant is required to forfeit the
shares and transfer them back to the Company in exchange for a refund
of the consideration paid by the participant or such other amount which
may be specifically set forth in the Award agreement.
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(e) Voting and Other Rights. During any period in which shares
of Restricted Stock are subject to forfeiture and restrictions on
transfer, the participant holding such Restricted Stock has all the
rights of a stockholder with respect to shares of Stock, including,
without limitation, the right to vote such shares and the right to
receive any dividends paid with respect to such shares.
ARTICLE IX
Performance Stock Awards
SECTION 9.1. Performance Stock Grant and Agreement. A
Performance Stock Award is a right to receive shares of Stock in the future
conditioned upon the attainment of specified performance objectives and such
other conditions, restrictions and contingencies as the Committee may determine.
Each Performance Stock Award granted under the Plan will be evidenced by minutes
of a meeting, or by a unanimous written consent without a meeting, of the
Committee and by a written agreement dated as of the Date of Grant and executed
by the Company and by the Plan participant. The timing of Performance Stock
Awards and the number of shares covered by each Award (subject to Section 3.2(b)
of this Plan) is to be determined by the Committee in its discretion. By
accepting a grant of Performance Stock, the participant agrees to remit to the
Company when due any required tax withholding as provided in Section 16.3
herein.
SECTION 9.2. Performance Objectives. At the time of grant of a
Performance Stock Award, the Committee will specify the performance objectives
which, depending on the extent to which they are met, will determine the number
of shares that will be paid out to the participant. The Committee will also
specify the time period or periods (the "Performance Period") during which the
performance objectives must be met. The performance objectives and periods need
not be the same for each participant nor for each grant. The Committee may use
performance objectives based on one or more of the following targets: cash
generation, profit, revenue, market share, profit or investment return ratios,
shareholder returns and/or specific, objective and measurable non-financial
objectives. The Committee may designate a single goal criterion or multiple goal
criteria for performance measurement purposes, with the measurement based on
absolute Company or business unit performance and/or on performance as compared
with that of other publicly-traded companies.
SECTION 9.3. Adjustment of Performance Objectives. The
Committee may modify, amend or otherwise adjust the performance objectives
specified for outstanding Performance Stock Awards if it determines that an
adjustment would be consistent with the objectives of the Plan and taking into
account the interests of the participants and the public shareholders of the
Company. Any such adjustments must
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comply with the requirements of Section 162(m) of the Code. The types of events
which could cause an adjustment in the performance objectives include, without
limitation, accounting changes which substantially affect the determination of
performance objectives, changes in applicable laws or regulations which affect
the performance objectives, and divisive corporate reorganizations, including
spin-offs and other distributions of property or stock.
SECTION 9.4. Other Terms and Conditions. Performance Stock
Awards granted under the Plan are subject to the following terms and conditions
and may contain such additional terms, conditions, restrictions and
contingencies not inconsistent with the terms of the Plan and any operative
employment agreement, as the Committee deems desirable:
(a) Delivery of Shares. As soon as practicable after the
applicable Performance Period has ended, the participant will receive a
payout of the number of shares of Stock earned during the Performance
Period, depending upon the extent to which the applicable performance
objectives were achieved. Such shares will be registered in the name of
the participant and will be free of all restrictions except for any
pursuant to Section 15.2 of this Plan.
(b) Termination. A Performance Stock Award or unearned portion
thereof will terminate without the issuance of shares on the
termination date specified at the time of grant or upon the termination
of employment of the participant during the Performance Period. If a
participant's employment by the Company or its Affiliates terminates by
reason of his or her death, Disability or Retirement, the Committee in
its discretion at or after the time of grant may determine that the
participant (or the heir, legatee or legal representative of the
participant's estate) will receive a payout of a portion of the
participant's then outstanding Performance Stock Awards in an amount
which is not more than the number of shares which would have been
earned by the participant if 100% of the performance objectives for the
current Performance Period had been achieved prorated based on the
ratio of the number of months of active employment in the Performance
Period to the total number of months in the Performance Period.
(c) Voting and Other Rights. Awards of Performance Stock do
not provide the participant with voting rights or rights to dividends
prior to the participant becoming the holder of record of shares issued
pursuant to an Award. Prior to the issuance of shares, Performance
Stock Awards may not be sold, transferred, pledged, assigned or
otherwise encumbered.
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ARTICLE X
Transfers and Leaves of Absence
SECTION 10. 1. Transfer of Participant. For purposes of the
Plan, the transfer of a participant among the Company and its Affiliates is
deemed not to be a termination of employment.
SECTION 10.2. Effect of Leaves of Absence. For purposes of the
Plan, the following leaves of absences are deemed not to be a termination of
employment:
(a) a leave of absence, approved in writing by the Company,
for military service, sickness or any other purpose approved by the
Company, if the period of such leave does not exceed ninety (90) days;
(b) a leave of absence in excess of ninety (90) days, approved
in writing by the Company, but only if the employee's right to
reemployment is guaranteed either by a statute or by contract, and
provided that, in the case of any such leave of absence, the employee
returns to work within 30 days after the end of such leave; and
(c) any other absence determined by the Committee in its
discretion not to constitute a break in service.
ARTICLE XI
Effect of Change in Control
SECTION 11.1. Change in Control Defined. "Change of Control"
means the occurrence of any of the following:
(a) the acquisition by any person, entity or "group" within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange
Act of 1934, as amended ("the 1934 Act"), other than the Company or any
of its Affiliates, or any employee benefit plan of the Company and/or
its Affiliates, of beneficial ownership (within the meaning of Rule
13d-3 under the 1934 Act) of shares of Stock of the Company having
twenty five percent (25%) or more of the total number of votes that may
be cast for election of the Directors of the Company in a transaction
or series of transactions not approved in advance by a vote of at least
three-quarters of the Continuing Directors (as defined below);
(b) a change in the composition of the Board of Directors such
that at any time a majority of the Board are not Continuing Directors.
"Continuing Directors" refers to the individuals who serve as Directors
at the effective date of this Plan and any individual whose term of
office as a Director begins
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thereafter if the nomination or election of such Director was approved
in advance by a vote of at least three-quarters of the then serving
Continuing Directors (other than a nomination of an individual whose
initial assumption of office is in connection with an actual or
threatened solicitation with respect to the election or removal of the
Directors, as such terms are used in Rule 14a-11 of Regulation 14A
under the 1934 Act);
(c) the approval by the shareholders of the Company of a
reorganization, merger, consolidation, liquidation or dissolution of
the Company or of the sale (in one transaction or a series of
transactions) of all or substantially all of the assets of the Company
other than a reorganization, merger, consolidation, liquidation,
dissolution or sale approved in advance by a vote of at least
three-quarters of the Continuing Directors; or
(d) any other occurrence if at least a majority of the
Continuing Directors determine in their discretion that there has been
a change in Control of the Company.
SECTION 11.2. Acceleration of Awards. Except as otherwise
provided in this Plan or an Award agreement, immediately upon the occurrence of
a Change in Control:
(a) all outstanding Stock Options automatically become fully
exercisable;
(b) all Restricted Stock Awards automatically become fully
Vested; and
(c) all participants holding Performance Stock Awards become
entitled to receive a partial payout in an amount which is the number
of shares which would have been earned by the participant if 100% of
the performance objectives for the current Performance Period had been
achieved prorated based on the ratio of the number of months of active
employment in the Performance Period to the total number of months in
the Performance Period.
Notwithstanding the foregoing, the Committee will retain the right to revoke the
automatic acceleration of vesting in connection with any business combination if
the acceleration will cause the use of pooling of interests accounting to be
disallowed and such accounting is determined to be in the best interests of the
Company.
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ARTICLE XII
Transferability of Awards
SECTION 12.1. Awards Deemed Non-transferable. Other than
pursuant to Section 12.2 below, Awards are deemed to be non-transferable. Awards
may be exercised only by the participant and may not be transferred other than
by will or by the laws of descent and distribution or, with regard to Vested
Awards, pursuant to a QUADRO. Awards are exercisable during a participant's
lifetime only by the participant or, as permitted by applicable law, the
participant's guardian or other legal representative. No Award may be assigned,
pledged, hypothecated or otherwise alienated or encumbered (whether by operation
of law or otherwise) and any attempts to do so are null and void.
SECTION 12.2. Limited Transferability of NQSOs. The Committee
in its discretion may allow (at or after the time of grant) for the
transferability of Vested Nonqualified Stock Options (with or without
accompanying Stock Appreciation Rights) only by the participant for no
consideration to Immediate Family Members or to a bona fide trust, partnership
or other entity controlled by and for the benefit of one or more Immediate
Family Members or to a charitable organization qualified under Section 501(c) of
the Code. "Immediate Family Members" means the participant's spouse, children,
stepchildren, parents, siblings and grandchildren. With respect to children,
parents, siblings and grandchildren, the relationship may be natural or
adoptive. Any permitted transfer is conditioned on the participant and
transferee agreeing to abide by the Company's then current stock option transfer
guidelines.
ARTICLE XIII
Amendment and Discontinuation
SECTION 13. 1. Amendment or Discontinuation of the Plan. The
Board of Directors may amend, alter, or discontinue the Plan at any time,
provided that no amendment, alteration, or discontinuance may be made:
(a) which would adversely affect the rights of a participant
under any Award granted prior to the date such action is adopted by the
Board of Directors without the participant's express consent thereto;
and
(b) without shareholder approval, if shareholder approval is
required under applicable laws, regulations or exchange requirements
(including for the purpose of qualification under Section 162(m) of the
Code as "performance-based compensation").
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SECTION 13.2. Amendment of Grants. The Committee may amend,
prospectively or retroactively, the terms of any outstanding Award or substitute
new Awards for previously granted Awards, provided that no amendment or
substitution is inconsistent with the terms of this Plan or impairs the rights
of any holder without his or her consent.
ARTICLE XIV
Unfunded Status of the Plan
SECTION 14.1. Unfunded Status. The Plan is not funded and is
intended to constitute an "unfunded" plan for incentive and deferred
compensation. Nothing contained in this Plan gives any participant any rights
that are greater than those of a general creditor of the Company. In its
discretion, the Committee may authorize the creation of trusts or other
arrangements to meet the obligations created under the Plan with respect to
Awards hereunder, provided, however, that the existence of such trusts or other
arrangements is consistent with the unfunded status of the Plan and no
participant acquires any right in or title to any assets, funds or property of
the Company. Participants have only a contractual right to benefits under Vested
Awards unsecured by any assets of the Company.
ARTICLE XV
Stock Certificates
SECTION 15. 1. Delivery of Stock Certificates. The Company is
not required to issue or deliver any certificates for shares of Stock issuable
with respect to Awards under this Plan prior to the fulfillment of all of the
following conditions:
(a) payment in full for the shares and for any required tax
withholding (See Section 16.3 of the Plan);
(b) completion of any registration or other qualification of
such shares under any federal or state laws or under the rulings or
regulations of the Securities and Exchange Commission ("SEC") or any
other regulating body which the Committee in its discretion deems
necessary or advisable;
(c) admission of such shares to listing on all stock exchanges
on which the Stock is so listed;
(d) in the event the Stock is not registered under the
Securities Act of 1933, qualification as a private placement under said
Act; and
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(e) obtaining of any approval or other clearance from any
federal or state governmental agency which the Committee in its
discretion determines to be necessary or advisable.
SECTION 15.2. Applicable Restrictions on Stock. Shares of
Stock issued with respect to Awards may be subject to such stock transfer orders
and other restrictions as the Committee may determine necessary or advisable
under the rules, regulations and other requirements of the SEC, any stock
exchange upon which the Stock is then listed, and any applicable federal or
state securities law and will include any restrictive legends the Committee may
deem appropriate to include.
SECTION 15.3. Book Entry. In lieu of the issuance of stock
certificates evidencing shares of Sock, the Company may use a "book entry"
system in which a computerized or manual entry is made in the records of the
Company to evidence the issuance of such shares. Such Company records are,
absent manifest error, binding on all parties.
ARTICLE XVI
General Provisions
SECTION 16.1. No Implied Rights to Awards or Employment. No
potential participant has any claim or right to be granted an Award under the
Plan, and there is no obligation of uniformity of treatment of participants
under the Plan. Neither the Plan nor any Award thereunder shall be construed as
giving any employee any right to continued employment with the Company or any
Affiliate. The Plan does not constitute a contract of employment, and the
Company and each Affiliate expressly reserve the right at any time to dismiss a
participant free from liability, or any claim under the Plan, except as may be
specifically provided in this Plan or in an Award agreement.
SECTION 16.2. Other Compensation Plans. Nothing contained in
this Plan prevents the Board of Directors from adopting other or additional
compensation arrangements, subject to shareholder approval if such approval is
required, and such arrangements may be either generally applicable or applicable
only in specific cases.
SECTION 16.3. Tax Withholding. Each participant must, no later
than the date as of which the value of an Award first becomes includible in the
gross income of the participant for income tax purposes, pay to the Company, or
make arrangements satisfactory to the Company regarding payment of, any federal,
state or local taxes of any kind required by law to be withheld with respect to
the Award. The obligations of the Company under the Plan are conditional on such
payment, and the Company, to the extent permitted by law, has the right to
deduct any such taxes from any payment of any kind otherwise due to a
participant.
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SECTION 16.4. Arbitration. All Award agreements will include
appropriate provisions respecting mediation and/or arbitration of any disputes
thereunder. If arbitrated, notice of demand for arbitration must be given in
writing within a reasonable time after the claim or dispute has arisen. Any
decision rendered by an arbitrator must be made in accordance with the
provisions of the Plan, will be final and judgment may be entered upon it in
accordance with applicable law in any court having proper jurisdiction.
SECTION 16.5. Rule 16 b-3 Compliance. The Plan is intended to
comply with all applicable conditions of Rule 16b-3 of the 1934 Act, as such
rule may be amended from time to time. All transactions involving any
participant subject to Section 16(a) shall be subject to the conditions set
forth in Rule 16b-3, regardless of whether such conditions are expressly set
forth in the Plan. Any provision of the Plan that is contrary to Rule 16b-3 does
not apply to such participants.
SECTION 16.6. Deferrals. The Committee may unilaterally
postpone the exercising of Awards, the issuance or delivery of Stock under any
Award or any action permitted under the Plan to prevent the Company or any
Affiliate from being denied a Federal income tax deduction with respect to any
Award other than an Incentive Stock Option. The Committee, in its discretion,
may permit a participant to defer receipt of the payment of cash or the delivery
of Stock that would otherwise be delivered to a participant under the Plan. Any
deferral elections are subject to such rules and procedures as the Committee may
determine.
SECTION 16.7. Successors. All obligations of the Company with
respect to Awards granted under the Plan are binding on any successor to the
Company, whether as a result of a direct or indirect purchase, merger,
consolidation or otherwise of all or substantially all of the business and/or
assets of the Company.
SECTION 16.8. Severability. In the event any provision of the
Plan, or the application thereof to any person or circumstances, is held illegal
or invalid for any reason, the illegality or invalidity shall not affect the
remaining parts of the Plan, or other applications, and the Plan is to be
construed and enforced as if the illegal or invalid provision had not been
included.
SECTION 16.9. Governing Law. To the extent not preempted by
federal law, the Plan and all Award agreements pursuant thereto are construed in
accordance with and governed by the laws of the State of Minnesota, or, if
applicable, the General Corporation Law of the State of Delaware.
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ARTICLE XVII
Effective Date of the Plan
SECTION 17.1. Plan Adoption. Subject to the approval of the
shareholders of the Company at the Annual Meeting of Shareholders held in 1998,
the effective date of this Plan is the date of its adoption by the Board of
Directors on January 26, 1998. To the extent that Awards are made under the Plan
prior to its approval by shareholders, they shall be contingent on shareholder
approval of the Plan.
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