- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-21824
---------------
HOLLYWOOD ENTERTAINMENT CORPORATION
(Exact name of registrant as specified in charter)
Oregon 93-0981138
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.)
25600 S.W. Parkway Center Drive, Wilsonville, Oregon 97070
(Address of principal executive office, including zip code)
(503) 570-1600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
As of August 8, 1997, there were 36,769,371 shares of the registrant's Common
Stock outstanding.
- --------------------------------------------------------------------------------
<PAGE>
Part I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
HOLLYWOOD ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data and number of stores)
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Rental revenue $ 93,035 $ 54,310 $ 184,715 $ 109,059
Product sales 16,967 9,639 35,762 19,963
---------- ---------- ----------- -----------
110,002 63,949 220,477 129,022
---------- ---------- ----------- -----------
Operating costs and expenses:
Cost of product sales 10,828 5,931 22,429 12,176
Operating and selling 80,204 46,517 157,253 92,734
General and administrative 6,197 4,033 12,166 8,489
Amortization of intangibles 1,596 1,483 3,123 3,007
---------- ---------- ---------- -----------
98,825 57,964 194,971 116,406
---------- ---------- ---------- -----------
Income from operations 11,177 5,985 25,506 12,616
Nonoperating income (expense):
Interest income 26 31 108 128
Interest expense (2,068) (1,007) (3,617) (1,625)
Litigation settlement -- -- (18,874) --
---------- ---------- ---------- -----------
Income before income taxes 9,135 5,009 3,123 11,119
Provision for income taxes (3,654) (2,004) (1,249) (4,387)
---------- ---------- ---------- -----------
Net income $ 5,481 $ 3,005 $ 1,874 $ 6,732
========== ========== ========== ===========
Net income per share $ 0.15 $ 0.09 $ 0.05 $ 0.19
========== ========== ========== ===========
Weighted average shares outstanding
37,577 34,804 37,465 34,916
---------- ---------- ---------- -----------
Number of stores at end of period 661 382 661 382
---------- ---------- ---------- -----------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
HOLLYWOOD ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share amounts)
June 30, December 31,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 5,782 $ 12,849
Construction and other receivables 23,792 25,785
Merchandise inventories 44,697 45,255
Deferred income taxes 4,029 --
Prepaid expenses and other current assets 4,673 3,232
----------- -----------
Total current assets 82,973 87,121
----------- -----------
Videocassette rental inventory, net 182,824 144,264
Property and equipment, net 154,639 115,812
Goodwill, net 96,517 99,229
Other assets, net 4,436 3,357
----------- -----------
Total assets $ 521,389 $ 449,783
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations $ 2,500 $ 205
Accounts payable 61,029 67,207
Accrued liabilities 11,079 10,402
Income taxes payable -- 2,914
----------- -----------
Total current liabilities 74,608 80,728
----------- -----------
Long-term obligations, less current portion above 137,107 82,156
Other liabilities 13,604 12,196
Shareholders' equity
Preferred stock, 25,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock, no par value, 100,000,000 shares
authorized; 36,747,921 and 36,006,201 shares
issued and outstanding, respectively 257,382 238,021
Retained earnings 40,866 38,992
Intangible assets, net (2,178) (2,310)
----------- -----------
Total shareholders' equity 296,070 274,703
----------- -----------
Total liabilities and shareholders' equity $ 521,389 $ 449,783
=========== ===========
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
HOLLYWOOD ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months
Ended June 30,
-------------------------------
1997 1996
---------- ----------
<S> <C> <C>
Operating activities:
Net income $ 1,874 $ 6,732
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 61,811 39,411
Litigation settlement warrants 9,000 --
Change in deferred income taxes (4,121) 1,162
Net change in assets and liabilities:
Merchandise inventories 558 (3,780)
Accounts payable (6,178) (8,396)
Other assets and liabilities (2,210) 2,593
---------- ----------
Cash provided by operating activities 60,734 37,722
---------- ----------
Investing activities:
Construction and other receivables 1,993 5,087
Purchases of videocassette rental inventory, net (87,501) (41,724)
Purchase of property and equipment, net (48,557) (24,368)
Other (1,343) (618)
---------- ----------
Cash used in investing activities (135,408) (61,623)
---------- ----------
Financing activities:
Proceeds from the issuance of common stock, net 4,695 --
Proceeds from the issuance of long-term obligations 10,000 --
Repayments of long-term obligations (754) (7,288)
Tax benefit from exercise of stock options 2,252 (8)
Proceeds from exercise of stock options 3,414 164
Repurchase of mandatorily redeemable stock -- (54,250)
Increase in revolving loan, net 48,000 60,000
---------- ----------
Cash (used) provided by financing activities 67,607 (1,382)
---------- ----------
Decrease in cash (7,067) (25,283)
Cash at beginning of year 12,849 29,980
---------- ----------
Cash at end of second quarter $ 5,782 $ 4,697
========== ==========
</TABLE>
4
<PAGE>
HOLLYWOOD ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Financial Statement Presentation:
The consolidated financial statements as of June 30, 1997 and for the
periods ended June 30, 1997 and June 30, 1996 are unaudited and have been
prepared by Hollywood Entertainment Corporation ("the Company") pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. It is
recommended that these financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K for the year ended December 31, 1996.
The accompanying interim consolidated financial statements reflect all
adjustments which are, in the opinion of management, necessary to present fairly
the financial position as of June 30, 1997 and the results of operations and
cash flows for the six months ended June 30, 1997 and June 30, 1996. All such
adjustments are of a normal and recurring nature. The results of operations for
the interim periods presented are not necessarily indicative of the results to
be expected for the full year. In February 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
128 "Earnings per Share" ("SFAS 128") and Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure" ("SFAS
129") which are effective for fiscal years ending after December 15, 1997. The
Company believes the implementation of these statements will not have a material
effect on its results of operations or financial statement disclosures.
5
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The following table sets forth, for the periods indicated, (1) selected income
statement data expressed as a percentage of total revenue and (ii) the number of
stores open at the end of each period:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
--------- --------- --------- ---------
(Unaudited) (Unaudited)
(In percent) (In percent)
<S> <C> <C> <C> <C>
Revenue:
Rental revenue 84.6 84.9 83.8 84.5
Product sales 15.4 15.1 16.2 15.5
--------- --------- --------- ---------
100.0 100.0 100.0 100.0
Operating costs and expenses:
Cost of product sales 9.8 9.3 10.2 9.4
Operating and selling 72.9 72.7 71.3 71.9
General and administrative 5.6 6.3 5.5 6.6
Amortization of intangibles 1.5 2.3 1.4 2.3
--------- --------- --------- ---------
89.8 90.6 88.4 90.2
Income from operations 10.2 9.4 11.6 9.8
Nonoperating income (expense), net (1.9) (1.6) (10.2) (1.2)
--------- --------- --------- ---------
Income before income taxes 8.3 7.8 1.4 8.6
Provision for income taxes (3.3) (3.1) (0.6) (3.4)
--------- --------- --------- ---------
Net income 5.0 4.7 0.8 5.2
========= ========= ========= =========
Number of stores 661 382 661 382
</TABLE>
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996
Revenue
Revenue increased $46.1 million, or 72%, in the current year second quarter
compared to the prior year second quarter primarily due to the increase in the
number of superstores operated by the Company. During the three months ended
June 30, 1997, the Company added 60 new superstores, ending the period with 661
superstores in 33 states compared to 382 stores in 25
6
<PAGE>
states at the end of the corresponding period in 1996. Revenues were also
favorably impacted by a 5% increase in comparable store revenue. The Company's
pricing of videocassette rentals and merchandise for sale has not changed
significantly compared to the second quarter of 1996.
Operating Costs and Expenses:
Cost of Product Sales
The cost of product sales as a percentage of product sales increased from 61.5%
in the prior year second quarter to 63.8% in the current year second quarter.
The Company's gross margin on product sales is affected by the proportion of hit
sell-through titles, since the hit titles generally have a lower gross margin
markup. The Company's gross margin was negatively impacted due to the Company
selling more of the hit sell-through titles in the current year second quarter
as compared to the corresponding period of the prior year.
Operating and Selling
Operating expenses, which principally consist of all store expenses including
payroll, occupancy, advertising, depreciation and rental revenue sharing,
increased slightly as a percentage of total revenue to 72.9% for the second
quarter of 1997, compared to 72.7% for the same period last year. The percentage
increase in operating expenses was primarily due to an increase in lease costs
resulting from the Company's decision to finance certain furniture, fixtures and
equipment purchased in 1996, mostly offset by lower depreciation expenses as a
percentage of total revenue and a decline in other store operating expenses.
Other store operating expenses decreased due to the continued emphasis by the
Company on reducing costs incurred at the store.
General and Administrative
General and administrative expenses increased from $4.0 million, or 6.3% of
total
revenue, for the three months ended June 30, 1996 to $6.2 million, or 5.6% of
total revenue, for the three months ended June 30, 1997. The dollar increase was
primarily due to the cost of managing additional stores and the ongoing staffing
of the Company's corporate and regional zone offices. The Company continues to
expect general and administrative expenses to decrease as a percentage of sales.
Amortization of Intangibles
Amortization of intangibles increased slightly from $1.5 million, or 2.3% of
total revenue, for the three months ended June 30, 1996 to $1.6 million, or 1.5%
of total revenue, for the three months ended June 30, 1997.
7
<PAGE>
Interest Expense
Interest expense increased from $1.0 million for the three months ended June 30,
1996 to $2.1 million for the three months ended June 30, 1997. This increase was
primarily attributable to the Company's higher level of borrowing under its
revolving line of credit in the current year second quarter compared to the
prior year second quarter.
Income Taxes
The effective tax rate for the Company was 40% for both the current year second
quarter and the prior year second quarter.
Liquidity and Capital Resources
The Company's principal capital requirements are for opening new stores, the
purchase of new release rental inventory and the possible acquisition of
existing stores. The Company has funded its operations primarily through cash
from operations, the proceeds of five public equity offerings, loans under the
Company's revolving bank line of credit, trade credit and equipment leases.
At March 31, 1997, the Company had cash and cash equivalents of approximately
$13.6 million and working capital of $17.3 million.
The Company ended the period with $5.8 million in cash. Working capital as of
June 30, 1997 totaled $8.4 million compared to $6.4 million at December 31,
1996. Videocassette rental inventories are accounted for as noncurrent assets
under generally accepted accounting principles because they are not assets which
are reasonably expected to be completely realized in cash or sold in the normal
business cycle. Although the rental of this inventory generates a substantial
portion of the Company's revenue, the classification of these assets as
noncurrent excludes them from the computation of working capital. The
acquisition cost of videocassette rental inventories, however, is reported as a
current liability until paid and, accordingly, included in the computation of
working capital. Consequently, the Company believes working capital is not as
significant a measure of financial condition for companies in the video retail
industry as it is for companies in other industries. Because of the accounting
treatment of videocassette rental inventory as a noncurrent asset, the Company
may, from time to time, operate with a working capital deficit.
Net cash provided by operating activities increased by $23.0 million in the
current year first two quarters compared to the corresponding period of the
prior year. This increase was primarily due to improved results of operations,
net of the noncash impact of the warrants (issued with respect to the settlement
of the class action litigation) and depreciation and amortization expense,
combined with a net favorable change in other working capital accounts. The
above increases were partially offset by a net unfavorable change in deferred
income taxes resulting from the current deductibility of expenses associated
with the settlement of the class action litigation.
8
<PAGE>
Net cash used by investing activities increased by $73.8 million in the current
year first two quarters compared to the prior year first two quarters, primarily
due to increased purchases of videocassette rental inventory for new and
existing stores and capital expenditures with respect to new store construction,
remodeling of certain existing stores and for the continued development of
information management systems.
Cash provided by financing activities increased by $69.0 million in the current
year first two quarters compared to the prior year first two quarters. The prior
year included the repurchase of mandatory redeemable stock, combined with an
increase in cash generated from the exercise of stock options and related tax
benefit in the current year. In addition, the Company had lower debt service
requirements in the current year.
In February 1997, the Company replaced its previous revolving credit agreement
with a new $150 million revolving credit agreement. Under the agreement funds
borrowed bear interest, at the Company's option, at IBOR or the bank's base
rate, plus approximately 1.25%, depending on the amount of borrowings. The
Company must also pay a fee of 0.3% per annum on the available and unused
portion of the credit facility. Amounts outstanding under the credit line are
collateralized by substantially all the assets of the Company. The availability
of borrowings under the revolving credit agreement is based on the level of
eligible inventory, the Company's financial performance and compliance with
certain covenants and financial ratios. The credit line effectively expires on
September 30, 1997.
On July 18, 1997, the Company received a commitment letter from a syndicate of
banks to provide a new $300.0 million revolving credit facility (the "New Credit
Facility"). This credit facility will replace the Company's existing $150.0
revolving bank credit agreement and will become effective upon execution of
definitive documentation and the satisfaction of customary closing conditions.
The transaction is expected to be completed by the end of August 1997.
On August 13, 1997, the Company sold $200.0 million aggregate principal amount
of 10-5/8% senior subordinated notes due 2004 (the "Notes"). The Company intends
to use the net proceeds from the sale of the Notes to repay the amount
outstanding under the Company's existing credit facility, which was $130.0
million as of June 30, 1997. The remaining funds will be used to fund expansion
and for working capital and other general corporate purposes.
If the new Credit Facility is established, the Company believes the amounts
available for borrowing under the New Credit Facility and the proceeds of the
Notes, together with projected cash flow from operations, cash on hand and
equipment leases and trade credit, will be sufficient to fund its expansion
through at least 1999. If the New Credit Facility is not established and if the
Company is able to obtain an amendment to the Existing Credit Facility extending
its term or arrange for similar financing in the aggregate amount of at least
$150 million, the Company believes the amounts available for borrowing under the
Existing Credit Facility or such alternative arrangement and the proceeds of the
Notes, together with projected cash flow from operations, cash on hand and
equipment leases and trade credit, will permit it to achieve its planned
expansion in 1997 and 1998, but the Company will need to obtain additional
financing to achieve its expansion goals thereafter. If the New Credit Facility
is not established and the Existing Credit Facility is not extended or an
alternative credit arrangement is not secured, the Company believes it will need
to find additional funding sources to continue its planned expansion beyond the
end of 1997.
9
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
In March 1997 the Company reached a settlement of the securities litigation
initiated in December 1995. The settlement was approved by the Court on July 31,
1997 and is subject to appeal for 30 days by members of the plaintiff class. The
settlement consists of warrants valued at $9.0 million to purchase the Company's
common stock and $6.0 million in cash or, at the Company's option, $15 million
in cash. It is anticipated that the warrants will be issued in September 1997,
will have a one-year term, and will have an exercise price of approximately
$5.00 per share in excess of the Company's common stock price at the time of
issuance. The Company may, however, at its option reduce the spread between the
stock price and the exercise price and/or lengthen the exercise period so long
as the value of the warrants remains at $9.0 million on the date of issuance.
The Company agreed to the settlement to avoid further litigation expense and
inconvenience and to put an end to all controversy and claims related to the
subject of litigation. In the settlement, the Company has specifically
disclaimed and denied any liability or wrongdoing and that any person has
suffered any harm or damage as a result of any of the matters alleged in the
litigation.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting on May 28, 1997, the holders of the Company's
outstanding Common Stock took the actions described below. At the Annual Meeting
36,646,646 shares of Common Stock were issued and outstanding and entitled to
vote.
1. The shareholders elected each of Mark J. Wattles, Donald J. Ekman, James
N. Cutler, Jr. and Richard A. Galanti to the Company's Board of Directors, by
the votes indicated below, to serve for the ensuing year.
Mark J. Wattles
---------------
32,570,115 shares in favor
139,614 shares against or withheld
0 abstentions
0 broker nonvotes
Donald J. Ekman
---------------
32,570,515 shares in favor
139,214 shares against or withheld
0 abstentions
0 broker nonvotes
James N. Cutler, Jr.
--------------------
32,570,615 shares in favor
139,114 shares against or withheld
0 abstentions
0 broker nonvotes
Richard A. Galanti
------------------
32,569,365 shares in favor
139,364 shares against or withheld
0 abstentions
0 broker nonvotes
2. The shareholders adopted, by the vote indicated below, amendments to the
Company's 1993 Stock Incentive Plan to increase the number of shares reserved
for issuance from 5,200,000 to 10,000,000 shares, to change per employee limits
on grants and to make certain technical adjustments to the plan.
17,164,344 shares in favor
12,788,692 shares against or withheld
25,701 abstentions
2,730,992 broker nonvotes
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 - Hollywood Entertainment Corporation 1993
Stock Incentive Plan, as amended
27. - Financial data schedule submitted in
Electronic format Only
(b) Reports on Form 8-K
None filed during the Quarter
10
<PAGE>
HOLLYWOOD ENTERTAINMENT CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOLLYWOOD ENTERTAINMENT CORPORATION
-----------------------------------
(Registrant)
August 14, 1996 /s/ FORREST MARK WOLFINGER
- ----------------------- -----------------------------------
(Date) Forrest Mark Wolfinger
Chief Financial Officer
(Principal financial and accounting
officer of the registrant)
11
<PAGE>
EXHIBIT INDEX
Sequential
Ex. No. Description Page No.
- ------- ----------- --------
10.1 Hollywood Entertainment Corporation 1993
Stock Incentive Plan, as amended
27 Financial Data Schedule
HOLLYWOOD ENTERTAINMENT CORPORATION
1993 STOCK INCENTIVE PLAN*
1. Purpose. The purpose of this Stock Incentive Plan (the "Plan") is to
enable Hollywood Entertainment Corporation (the "Company") to attract and retain
the services of (1) selected employees, officers and directors of the Company or
of any subsidiary of the Company and (2) selected nonemployee agents,
consultants, advisors, persons involved in the sale or distribution of the
Company's products and independent contractors of the Company or any subsidiary.
2. Shares Subject to the Plan. Subject to adjustment as provided below and
in paragraph 13, the shares to be offered under the Plan shall consist of Common
Stock of the Company, and the total number of shares of Common Stock that may be
issued under the Plan shall not exceed 10,000,000 shares. The shares issued
under the Plan may be authorized and unissued shares or reacquired shares. If an
option, stock appreciation right or performance unit granted under the Plan
expires, terminates or is cancelled, the unissued shares subject to such option,
stock appreciation right or performance unit shall again be available under the
Plan. If shares sold or awarded as a bonus under the Plan are forfeited to the
Company or repurchased by the Company, the number of shares forfeited or
repurchased shall again be available under the Plan.
3. Effective Date and Duration of Plan.
(a) Effective Date. The Plan shall become effective as of May 1, 1993.
No option, stock appreciation right or performance unit granted under the Plan
shall become exercisable, however, until the Plan is approved by the affirmative
vote of the holders of a majority of the shares of Common Stock represented at a
shareholders meeting at which a quorum is present and any such awards under the
Plan prior to such approval shall be conditioned on and subject to such
approval. Subject to this limitation, options, stock appreciation rights and
performance units may be granted and shares may be awarded as bonuses or sold
under the Plan at any time after the effective date and before termination of
the Plan.
(b) Duration. The Plan shall continue in effect until all shares
available for issuance under the Plan have been issued and all restrictions on
such shares have lapsed. The Board of Directors may suspend or terminate the
Plan at any time except with respect to options, performance units and shares
subject to restrictions then outstanding under the Plan. Termination shall not
affect any outstanding options, any right of the Company to repurchase shares or
the forfeitability of shares issued under the Plan.
<PAGE>
4. Administration.
(a) Board of Directors. The Plan shall be administered by the Board of
Directors of the Company, which shall determine and designate from time to time
the individuals to whom awards shall be made, the amount of the awards and the
other terms and conditions of the awards. Subject to the provisions of the Plan,
the Board of Directors may from time to time adopt and amend rules and
regulations relating to administration of the Plan, advance the lapse of any
waiting period, accelerate any exercise date, waive or modify any restriction
applicable to shares (except those restrictions imposed by law) and make all
other determinations in the judgment of the Board of Directors necessary or
desirable for the administration of the Plan. The interpretation and
construction of the provisions of the Plan and related agreements by the Board
of Directors shall be final and conclusive. The Board of Directors may correct
any defect or supply any omission or reconcile any inconsistency in the Plan or
in any related agreement in the manner and to the extent it shall deem expedient
to carry the Plan into effect, and it shall be the sole and final judge of such
expediency.
(b) Committee. The Board of Directors may delegate to a committee of
the Board of Directors or specified officers of the Company, or both (the
"Committee") any or all authority for administration of the Plan. If authority
is delegated to a Committee, all references to the Board of Directors in the
Plan shall mean and relate to the Committee except (i) as otherwise provided by
the Board of Directors, and (ii) that only the Board of Directors may amend or
terminate the Plan as provided in paragraphs 3 and 16.
5. Types of Awards; Eligibility. The Board of Directors may, from time to
time, take the following action, separately or in combination, under the Plan:
(i) grant Incentive Stock Options, as defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), as provided in paragraphs 6(a)
and 6(b); (ii) grant options other than Incentive Stock Options ("Non-Statutory
Stock Options") as provided in paragraphs 6(a) and 6(c); (iii) award stock
bonuses as provided in paragraph 7; (iv) sell shares subject to restrictions as
provided in paragraph 8; (v) grant stock appreciation rights as provided in
paragraph 9; (vi) grant cash bonus rights as provided in paragraph 10; (vii)
grant performance units as provided in paragraph 11 and (viii) grant foreign
qualified awards as provided in paragraph 12. Any such awards may be made to
employees, including employees who are officers or directors, and to other
individuals described in paragraph 1 who the Board of Directors believes have
made or will make an important contribution to the Company or any subsidiary of
the Company; provided, however, that only employees of the Company shall be
eligible to receive Incentive Stock Options under the Plan. The Board of
Directors shall select the individuals to whom awards shall be made and shall
specify the action taken with respect to each individual to whom an award is
made. At the discretion of the Board of Directors, an individual may be given an
election to surrender an award in exchange for the grant of a new award. No
employee may be granted options or stock appreciation rights under the Plan for
more than an aggregate of 1,500,000 shares of Common Stock in connection with
the hiring of the employee or 500,000 shares of Common Stock in any 30-month
period thereafter.
2
<PAGE>
6. Option Grants.
(a) General Rules Relating to Options.
(i) Terms of Grant. The Board of Directors may grant options
under the Plan. With respect to each option grant, the Board of Directors
shall determine the number of shares subject to the option, the option
price, the period of the option, the time or times at which the option may
be exercised and whether the option is an Incentive Stock Option or a
Non-Statutory Stock Option. At the time of the grant of an option or at any
time thereafter, the Board of Directors may provide that an optionee who
exercised an option with Common Stock of the Company shall automatically
receive a new option to purchase additional shares equal to the number of
shares surrendered and may specify the terms and conditions of such new
options.
(ii) Exercise of Options. Except as provided in paragraph
6(a)(iv) or as determined by the Board of Directors, no option granted
under the Plan may be exercised unless at the time of such exercise the
optionee is employed by or in the service of the Company or any subsidiary
of the Company and shall have been so employed or provided such service
continuously since the date such option was granted. Absence on leave or on
account of illness or disability under rules established by the Board of
Directors shall not, however, be deemed an interruption of employment or
service for this purpose. Unless otherwise determined by the Board of
Directors, vesting of options shall not continue during an absence on leave
(including an extended illness) or on account of disability. Except as
provided in paragraphs 6(a)(iv) and 13, options granted under the Plan may
be exercised from time to time over the period stated in each option in
such amounts and at such times as shall be prescribed by the Board of
Directors, provided that options shall not be exercised for fractional
shares. Unless otherwise determined by the Board of Directors, if the
optionee does not exercise an option in any one year with respect to the
full number of shares to which the optionee is entitled in that year, the
optionee's rights shall be cumulative and the optionee may purchase those
shares in any subsequent year during the term of the option.
(iii) Nontransferability. Each Incentive Stock Option and, unless
otherwise determined by the Board of Directors, each other option granted
under the Plan by its terms shall be nonassignable and nontransferable by
the optionee, either voluntarily or by operation of law, except by will or
by the laws of descent and distribution of the state or country of the
optionee's domicile at the time of death or, for options other than
Incentive Stock Options, pursuant to a qualified domestic relations order
as defined under the Code or Title I of the Employee Retirement Income
Security Act.
3
<PAGE>
(iv) Termination of Employment or Service.
(A) General Rule. Unless otherwise determined by the Board
of Directors, in the event the employment or service of the optionee
with the Company or a subsidiary terminates for any reason other than
because of physical disability or death as provided in subparagraphs
6(a)(iv)(B) and (C), the option may be exercised at any time prior to
the expiration date of the option or the expiration of 30 days after
the date of such termination, whichever is the shorter period, but
only if and to the extent the optionee was entitled to exercise the
option at the date of such termination.
(B) Termination Because of Total Disability. Unless
otherwise determined by the Board of Directors, in the event of the
termination of employment or service because of total disability, the
option may be exercised at any time prior to the expiration date of
the option or the expiration of 12 months after the date of such
termination, whichever is the shorter period, but only if and to the
extent the optionee was entitled to exercise the option at the date of
such termination. The term "total disability" means a mental or
physical impairment which is expected to result in death or which has
lasted or is expected to last for a continuous period of 12 months or
more and which causes the optionee to be unable, in the opinion of the
Company and two independent physicians, to perform his or her duties
as an employee, director, officer or consultant of the Company and to
be engaged in any substantial gainful activity. Total disability shall
be deemed to have occurred on the first day after the Company and the
two independent physicians have furnished their opinion of total
disability to the Company.
(C) Termination Because of Death. Unless otherwise
determined by the Board of Directors, in the event of the death of an
optionee while employed by or providing service to the Company or a
subsidiary, the option may be exercised at any time prior to the
expiration date of the option or the expiration of 12 months after the
date of death, whichever is the shorter period, but only if and to the
extent the optionee was entitled to exercise the option at the date of
death and only by the person or persons to whom such optionee's rights
under the option shall pass by the optionee's will or by the laws of
descent and distribution of the state or country of domicile at the
time of death.
(D) Amendment of Exercise Period Applicable to Termination.
The Board of Directors, at the time of grant or at any time
thereafter, may extend the 30-day and 12-month exercise periods any
length of time not longer than the original expiration date of the
option, and may increase the portion of an option that is exercisable,
subject to such terms and conditions as the Board of Directors may
determine.
4
<PAGE>
(E) Failure to Exercise Option. To the extent that the
option of any deceased optionee or of any optionee whose employment or
service terminates is not exercised within the applicable period, all
further rights to purchase shares pursuant to such option shall cease
and terminate.
(v) Purchase of Shares. Unless the Board of Directors determines
otherwise, shares may be acquired pursuant to an option granted under the
Plan only upon receipt by the Company of notice in writing from the
optionee of the optionee's intention to exercise, specifying the number of
shares as to which the optionee desires to exercise the option and the date
on which the optionee desires to complete the transaction, and if required
in order to comply with the Securities Act of 1933, as amended, containing
a representation that it is the optionee's present intention to acquire the
shares for investment and not with a view to distribution. Unless the Board
of Directors determines otherwise, on or before the date specified for
completion of the purchase of shares pursuant to an option, the optionee
must have paid the Company the full purchase price of such shares in cash
(including, with the consent of the Board of Directors, cash that may be
the proceeds of a loan from the Company) or, with the consent of the Board
of Directors, in whole or in part, in Common Stock of the Company valued at
fair market value, restricted stock, performance units or other contingent
awards denominated in either stock or cash, promissory notes and other
forms of consideration. The fair market value of Common Stock provided in
payment of the purchase price shall be determined by the Board of
Directors. If the Common Stock of the Company is not publicly traded on the
date the option is exercised, the Board of Directors may consider any
valuation methods it deems appropriate and may, but is not required to,
obtain one or more independent appraisals of the Company. If the Common
Stock of the Company is publicly traded on the date the option is
exercised, the fair market value of Common Stock provided in payment of the
purchase price shall be the closing price of the Common Stock as reported
in The Wall Street Journal on the trading day preceding the date the option
is exercised, or such other reported value of the Common Stock as shall be
specified by the Board of Directors. No shares shall be issued until full
payment for the shares has been made. With the consent of the Board of
Directors, an optionee may request the Company to apply automatically the
shares to be received upon the exercise of a portion of a stock option
(even though stock certificates have not yet been issued) to satisfy the
purchase price for additional portions of the option. Each optionee who has
exercised an option shall immediately upon notification of the amount due,
if any, pay to the Company in cash amounts necessary to satisfy any
applicable federal, state and local tax withholding requirements. If
additional withholding is or becomes required beyond any amount deposited
before delivery of the certificates, the optionee shall pay such amount to
the Company on demand. If the optionee fails to pay the amount demanded,
the Company may withhold that amount from other amounts payable by the
Company to the optionee, including salary, subject to applicable law. With
the consent of the Board of Directors an optionee may satisfy this
obligation, in whole or in part, by having the Company withhold from the
shares to be issued upon the exercise that number of shares that
5
<PAGE>
would satisfy the withholding amount due or by delivering to the Company
Common Stock to satisfy the withholding amount. Upon the exercise of an
option, the number of shares reserved for issuance under the Plan shall be
reduced by the number of shares issued upon exercise of the option.
(b) Incentive Stock Options. Incentive Stock Options shall be subject
to the following additional terms and conditions:
(i) Limitation on Amount of Grants. No employee may be granted
Incentive Stock Options under the Plan if the aggregate fair market value,
on the date of grant, of the Common Stock with respect to which Incentive
Stock Options are exercisable for the first time by that employee during
any calendar year under the Plan and under any other incentive stock option
plan (within the meaning of Section 422 of the Code) of the Company or any
parent or subsidiary of the Company exceeds $100,000.
(ii) Limitations on Grants to 10 Percent Shareholders. An
Incentive Stock Option may be granted under the Plan to an employee
possessing more than 10 percent of the total combined voting power of all
classes of stock of the Company or of any parent or subsidiary of the
Company only if the option price is at least 110 percent of the fair market
value of the Common Stock subject to the option on the date it is granted,
as described in paragraph 6(b)(iv), and the option by its terms is not
exercisable after the expiration of five years from the date it is granted.
(iii) Duration of Options. Subject to paragraphs 6(a)(ii) and
6(b)(ii), Incentive Stock Options granted under the Plan shall continue in
effect for the period fixed by the Board of Directors, except that no
Incentive Stock Option shall be exercisable after the expiration of 10
years from the date it is granted.
(iv) Option Price. The option price per share shall be determined
by the Board of Directors at the time of grant. Except as provided in
paragraph 6(b)(ii), the option price shall not be less than 100 percent of
the fair market value of the Common Stock covered by the Incentive Stock
Option at the date the option is granted. The fair market value shall be
determined by the Board of Directors. If the Common Stock of the Company is
not publicly traded on the date the option is granted, the Board of
Directors may consider any valuation methods it deems appropriate and may,
but is not required to, obtain one or more independent appraisals of the
Company. If the Common Stock of the Company is publicly traded on the date
the option is exercised, the fair market value shall be deemed to be the
closing price of the Common Stock as reported in The Wall Street Journal on
the day preceding the date the option is granted, or if there has been no
sale on that date, on the last preceding date on which a sale occurred, or
such other value of the Common Stock as shall be specified by the Board of
Directors.
6
<PAGE>
(v) Limitation on Time of Grant. No Incentive Stock Option shall
be granted on or after the tenth anniversary of the last action by the
Board of Directors approving an increase in the number of shares available
for issuance under the Plan, which action was subsequently approved within
12 months by the shareholders.
(vi) Conversion of Incentive Stock Options. The Board of
Directors may at any time without the consent of the optionee convert an
Incentive Stock Option to a Non-Statutory Stock Option.
(c) Non-Statutory Stock Options. Non-Statutory Stock Options shall be
subject to the following terms and conditions in addition to those set forth in
Section 6(a) above:
(i) Option Price. The option price for Non-Statutory Stock
Options shall be determined by the Board of Directors at the time of grant
and may be any amount determined by the Board of Directors.
(ii) Duration of Options. Non-Statutory Stock Options granted
under the Plan shall continue in effect for the period fixed by the Board
of Directors.
7. Stock Bonuses. The Board of Directors may award shares under the Plan as
stock bonuses. Shares awarded as a bonus shall be subject to the terms,
conditions, and restrictions determined by the Board of Directors. The
restrictions may include restrictions concerning transfer-ability and forfeiture
of the shares awarded, together with such other restrictions as may be
determined by the Board of Directors. The Board of Directors may require the
recipient to sign an agreement as a condition of the award, but may not require
the recipient to pay any monetary consideration other than amounts necessary to
satisfy tax withholding requirements. The agreement may contain any terms,
conditions, restrictions, representations and warranties required by the Board
of Directors. The certificates representing the shares awarded shall bear any
legends required by the Board of Directors. The Company may require any
recipient of a stock bonus to pay to the Company in cash upon demand amounts
necessary to satisfy any applicable federal, state or local tax withholding
requirements. If the recipient fails to pay the amount demanded, the Company may
withhold that amount from other amounts payable by the Company to the recipient,
including salary or fees for services, subject to applicable law. With the
consent of the Board of Directors, a recipient may deliver Common Stock to the
Company to satisfy this withholding obligation. Upon the issuance of a stock
bonus, the number of shares reserved for issuance under the Plan shall be
reduced by the number of shares issued.
8. Restricted Stock. The Board of Directors may issue shares under the Plan
for such consideration (including promissory notes and services) as determined
by the Board of Directors. Shares issued under the Plan shall be subject to the
terms, conditions and restrictions determined by the Board of Directors. The
restrictions may include restrictions concerning transferability, repurchase by
the Company and forfeiture of the shares issued, together with such other
restrictions as may be determined by the Board of Directors. All
7
<PAGE>
Common Stock issued pursuant to this paragraph 8 shall be subject to a purchase
agreement, which shall be executed by the Company and the prospective recipient
of the shares prior to the delivery of certificates representing such shares to
the recipient. The purchase agreement may contain any terms, conditions,
restrictions, representations and warranties required by the Board of Directors.
The certificates representing the shares shall bear any legends required by the
Board of Directors. The Company may require any purchaser of restricted stock to
pay to the Company in cash upon demand amounts necessary to satisfy any
applicable federal, state or local tax withholding requirements. If the
purchaser fails to pay the amount demanded, the Company may withhold that amount
from other amounts payable by the Company to the purchaser, including salary,
subject to applicable law. With the consent of the Board of Directors, a
purchaser may deliver Common Stock to the Company to satisfy this withholding
obligation. Upon the issuance of restricted stock, the number of shares reserved
for issuance under the Plan shall be reduced by the number of shares issued.
9. Stock Appreciation Rights.
(a) Grant. Stock appreciation rights may be granted under the Plan by
the Board of Directors, subject to such rules, terms, and conditions as the
Board of Directors prescribes.
(b) Exercise.
(i) Each stock appreciation right shall entitle the holder, upon
exercise, to receive from the Company in exchange therefor an amount equal
in value to the excess of the fair market value on the date of exercise of
one share of Common Stock of the Company over its fair market value on the
date of grant (or, in the case of a stock appreciation right granted in
connection with an option, the excess of the fair market value of one share
of Common Stock of the Company over the option price per share under the
option to which the stock appreciation right relates), multiplied by the
number of shares covered by the stock appreciation right or the option, or
portion thereof, that is surrendered. Payment by the Company upon exercise
of a stock appreciation right may be made in Common Stock valued at fair
market value, in cash, or partly in Common Stock and partly in cash, all as
determined by the Board of Directors.
(ii) A stock appreciation right shall be exercisable only at the
time or times established by the Board of Directors. If a stock
appreciation right is granted in connection with an option, the following
rules shall apply: (1) the stock appreciation right shall be exercisable
only to the extent and on the same conditions that the related option could
be exercised; (2) upon exercise of the stock appreciation right, the option
or portion thereof to which the stock appreciation right relates
terminates; and (3) upon exercise of the option, the related stock
appreciation right or portion thereof terminates.
8
<PAGE>
(iii) The Board of Directors may withdraw any stock appreciation
right granted under the Plan at any time and may impose any conditions upon
the exercise of a stock appreciation right or adopt rules and regulations
from time to time affecting the rights of holders of stock appreciation
rights. Such rules and regulations may govern the right to exercise stock
appreciation rights granted prior to adoption or amendment of such rules
and regulations as well as stock appreciation rights granted thereafter.
(iv) For purposes of this paragraph 9, the fair market value of
the Common Stock shall be determined as of the date the stock appreciation
right is exercised, under the methods set forth in paragraph 6(b)(iv).
(v) No fractional shares shall be issued upon exercise of a stock
appreciation right. In lieu thereof, cash may be paid in an amount equal to
the value of the fraction or, if the Board of Directors shall determine,
the number of shares may be rounded downward to the next whole share.
(vi) Each stock appreciation right granted in connection with an
Incentive Stock Option, and unless otherwise determined by the Board of
Directors, each other stock appreciation right granted under the Plan by
its terms shall be nonassignable and nontransferable by the holder, either
voluntarily or by operation of law, except by will or by the laws of
descent and distribution of the state or country of the holder's domicile
at the time of death, and each stock appreciation right by its terms shall
be exercisable during the holder's lifetime only by the holder; provided,
however, that a stock appreciation right not granted in connection with an
Incentive Stock Option shall also be transferrable pursuant to a qualified
domestic relations order as defined under the Code or Title I of the
Employee Retirement Income Security Act.
(vii) Each participant who has exercised a stock appreciation
right shall, upon notification of the amount due, pay to the Company in
cash amounts necessary to satisfy any applicable federal, state and local
tax withholding requirements. If the participant fails to pay the amount
demanded, the Company may withhold that amount from other amounts payable
by the Company to the participant including salary, subject to applicable
law. With the consent of the Board of Directors a participant may satisfy
this obligation, in whole or in part, by having the Company withhold from
any shares to be issued upon the exercise that number of shares that would
satisfy the withholding amount due or by delivering Common Stock to the
Company to satisfy the withholding amount.
(viii) Upon the exercise of a stock appreciation right for
shares, the number of shares reserved for issuance under the Plan shall be
reduced by the number of shares issued. Cash payments of stock appreciation
rights shall not reduce the number of shares of Common Stock reserved for
issuance under the Plan.
9
<PAGE>
10. Cash Bonus Rights.
(a) Grant. The Board of Directors may grant cash bonus rights under
the Plan in connection with (i) options granted or previously granted, (ii)
stock appreciation rights granted or previously granted, (iii) stock bonuses
awarded or previously awarded and (iv) shares sold or previously sold under the
Plan. Cash bonus rights will be subject to rules, terms and conditions as the
Board of Directors may prescribe. Unless otherwise determined by the Board of
Directors, each cash bonus right granted under the Plan by its terms shall be
nonassignable and nontransferable by the holder, either voluntarily or by
operation of law, except by will or by the laws of descent and distribution of
the state or country of the holder's domicile at the time of death or pursuant
to a qualified domestic relations order as defined under the Code or Title I of
the Employee Retirement Income Security Act. The payment of a cash bonus shall
not reduce the number of shares of Common Stock reserved for issuance under the
Plan.
(b) Cash Bonus Rights in Connection With Options. A cash bonus right
granted in connection with an option will entitle an optionee to a cash bonus
when the related option is exercised (or terminates in connection with the
exercise of a stock appreciation right related to the option) in whole or in
part. If an optionee purchases shares upon exercise of an option and does not
exercise a related stock appreciation right, the amount of the bonus shall be
determined by multiplying the excess of the total fair market value of the
shares to be acquired upon the exercise over the total option price for the
shares by the applicable bonus percentage. If the optionee exercises a related
stock appreciation right in connection with the termination of an option, the
amount of the bonus shall be determined by multiplying the total fair market
value of the shares and cash received pursuant to the exercise of the stock
appreciation right by the applicable bonus percentage. The bonus percentage
applicable to a bonus right shall be determined from time to time by the Board
of Directors but shall in no event exceed 75 percent.
(c) Cash Bonus Rights in Connection With Stock Bonus. A cash bonus
right granted in connection with a stock bonus will entitle the recipient to a
cash bonus payable when the stock bonus is awarded or restrictions, if any, to
which the stock is subject lapse. If bonus stock awarded is subject to
restrictions and is repurchased by the Company or forfeited by the holder, the
cash bonus right granted in connection with the stock bonus shall terminate and
may not be exercised. The amount and timing of payment of a cash bonus shall be
determined by the Board of Directors.
(d) Cash Bonus Rights in Connection With Stock Purchases. A cash bonus
right granted in connection with the purchase of stock pursuant to paragraph 8
will entitle the recipient to a cash bonus when the shares are purchased or
restrictions, if any, to which the stock is subject lapse. Any cash bonus right
granted in connection with shares purchased pursuant to paragraph 8 shall
terminate and may not be exercised in the event the shares are repurchased by
the Company or forfeited by the holder pursuant to applicable restrictions. The
amount of any cash bonus to be awarded and timing of payment of a cash bonus
shall be determined by the Board of Directors.
10
<PAGE>
(e) Taxes. The Company shall withhold from any cash bonus paid
pursuant to paragraph 10 the amount necessary to satisfy any applicable federal,
state and local withholding requirements.
11. Performance Units. The Board of Directors may grant performance units
consisting of monetary units which may be earned in whole or in part if the
Company achieves certain goals established by the Board of Directors over a
designated period of time, but not in any event more than 10 years. The goals
established by the Board of Directors may include earnings per share, return on
shareholders' equity, return on invested capital, and such other goals as may be
established by the Board of Directors. In the event that the minimum performance
goal established by the Board of Directors is not achieved at the conclusion of
a period, no payment shall be made to the participants. In the event the maximum
corporate goal is achieved, 100 percent of the monetary value of the performance
units shall be paid to or vested in the participants. Partial achievement of the
maximum goal may result in a payment or vesting corresponding to the degree of
achievement as determined by the Board of Directors. Payment of an award earned
may be in cash or in Common Stock or in a combination of both, and may be made
when earned, or vested and deferred, as the Board of Directors determines.
Deferred awards shall earn interest on the terms and at a rate determined by the
Board of Directors. Unless otherwise determined by the Board of Directors, each
performance unit granted under the Plan by its terms shall be nonassignable and
nontransferable by the holder, either voluntarily or by operation of law, except
by will or by the laws of descent and distribution of the state or country of
the holder's domicile at the time of death or pursuant to a qualified domestic
relations order as defined under the Code or Title I of the Employee Retirement
Income Security Act. Each participant who has been awarded a performance unit
shall, upon notification of the amount due, pay to the Company in cash amounts
necessary to satisfy any applicable federal, state and local tax withholding
requirements. If the participant fails to pay the amount demanded, the Company
may withhold that amount from other amounts payable by the Company to the
participant, including salary or fees for services, subject to applicable law.
With the consent of the Board of Directors a participant may satisfy this
obligation, in whole or in part, by having the Company withhold from any shares
to be issued that number of shares that would satisfy the withholding amount due
or by delivering Common Stock to the Company to satisfy the withholding amount.
The payment of a performance unit in cash shall not reduce the number of shares
of Common Stock reserved for issuance under the Plan. The number of shares
reserved for issuance under the Plan shall be reduced by the number of shares
issued upon payment of an award.
12. Foreign Qualified Grants. Awards under the Plan may be granted to such
officers and employees of the Company and its subsidiaries and such other
persons described in paragraph 1 residing in foreign jurisdictions as the Board
of Directors may determine from time to time. The Board of Directors may adopt
such supplements to the Plan as may be necessary to comply with the applicable
laws of such foreign jurisdictions and to afford participants favorable
treatment under such laws; provided, however, that no award shall be granted
under any such supplement with terms which are more beneficial to the
participants than the terms permitted by the Plan.
11
<PAGE>
13. Changes in Capital Structure.
(a) Stock Splits; Stock Dividends. If the outstanding Common Stock of
the Company is hereafter increased or decreased or changed into or exchanged for
a different number or kind of shares or other securities of the Company by
reason of any stock split, combination of shares or dividend payable in shares,
recapitalization or reclassification appropriate adjustment shall be made by the
Board of Directors in the number and kind of shares available for grants under
the Plan. In addition, the Board of Directors shall make appropriate adjustment
in the number and kind of shares as to which outstanding options, or portions
thereof then unexercised, shall be exercisable, so that the optionee's
proportionate interest before and after the occurrence of the event is
maintained. Notwithstanding the foregoing, the Board of Directors shall have no
obligation to effect any adjustment that would or might result in the issuance
of fractional shares, and any fractional shares resulting from any adjustment
may be disregarded or provided for in any manner determined by the Board of
Directors. Any such adjustments made by the Board of Directors shall be
conclusive.
(b) Mergers, Reorganizations, Etc. In the event of a merger,
consolidation or plan of exchange to which the Company is a party or a sale of
all or substantially all of the Company's assets (each, a "Transaction"), the
Board of Directors shall, in its sole discretion and to the extent possible
under the structure of the Transaction, select one of the following alternatives
for treating outstanding options under the Plan:
(i) Outstanding options shall remain in effect in accordance with
their terms.
(ii) Outstanding options shall be converted into options to
purchase stock in the corporation that is the surviving or acquiring
corporation in the Transaction. The amount, type of securities subject
thereto and exercise price of the converted options shall be determined by
the Board of Directors of the Company, taking into account the relative
values of the companies involved in the Transaction and the exchange rate,
if any, used in determining shares of the surviving corporation to be
issued to holders of shares of the Company. Unless otherwise determined by
the Board of Directors, the converted options shall be vested only to the
extent that the vesting requirements relating to options granted hereunder
have been satisfied.
(iii) The Board of Directors provides a 30-day period prior to
the consummation of the Transaction during which outstanding options shall
be exercisable to the extent vested without regard to whether an
Exercisability Event has occurred and upon the expiration of such 30-day
period, all unexercised options shall immediately terminate. The Board of
Directors may, in its sole discretion, accelerate the exercisability of
options so that they are exercisable in full during such 30-day period.
12
<PAGE>
(c) Dissolution of the Company. In the event of the dissolution
of the Company, options shall be treated in accordance with paragraph
13(b)(iii).
14. Corporate Mergers, Acquisitions, etc. The Board of Directors may also
grant options, stock appreciation rights, performance units, stock bonuses and
cash bonuses and issue restricted stock under the Plan having terms, conditions
and provisions that vary from those specified in this Plan provided that any
such awards are granted in substitution for, or in connection with the
assumption of, existing options, stock appreciation rights, stock bonuses, cash
bonuses, restricted stock and performance units granted, awarded or issued by
another corporation and assumed or otherwise agreed to be provided for by the
Company pursuant to or by reason of a transaction involving a corporate merger,
consolidation, acquisition of property or stock, separation, reorganization or
liquidation to which the Company or a subsidiary is a party.
15. Amendment of Plan. The Board of Directors may at any time, and from
time to time, modify or amend the Plan in such respects as it shall deem
advisable because of changes in the law while the Plan is in effect or for any
other reason. Except as provided in paragraphs 6(a)(iv), 9 and 13, however, no
change in an award already granted shall be made without the written consent of
the holder of such award.
16. Approvals. The obligations of the Company under the Plan are subject to
the approval of state and federal authorities or agencies with jurisdiction in
the matter. The Company will use its best efforts to take steps required by
state or federal law or applicable regulations, including rules and regulations
of the Securities and Exchange Commission and any stock exchange on which the
Company's shares may then be listed, in connection with the grants under the
Plan. The foregoing notwithstanding, the Company shall not be obligated to issue
or deliver Common Stock under the Plan if such issuance or delivery would
violate applicable state or federal securities laws.
17. Employment and Service Rights. Nothing in the Plan or any award
pursuant to the Plan shall (i) confer upon any employee any right to be
continued in the employment of the Company or any subsidiary or interfere in any
way with the right of the Company or any subsidiary by whom such employee is
employed to terminate such employee's employment at any time, for any reason,
with or without cause, or to decrease such employee's compensation or benefits,
or (ii) confer upon any person engaged by the Company any right to be retained
or employed by the Company or to the continuation, extension, renewal, or
modification of any compensation, contract, or arrangement with or by the
Company.
18. Rights as a Shareholder. The recipient of any award under the Plan
shall have no rights as a shareholder with respect to any Common Stock until the
date of issue to the recipient of a stock certificate for such shares. Except as
otherwise expressly provided in the Plan, no adjustment shall be made for
dividends or other rights for which the record date occurs prior to the date
such stock certificate is issued.
13
<PAGE>
19. Option Grants to Non-Employee Directors.
(a) Initial Board Grants. Each person who becomes a Non-Employee
Director on or after June 23, 1994 shall be automatically granted an option to
purchase 15,000 shares of Common Stock on the date he or she becomes a
Non-Employee Director. A "Non-Employee Director" is a director who is not an
employee of the Company or any of its subsidiaries and has not been an employee
of the Company or any of its subsidiaries within one year of any date as of
which a determination of eligibility is made.
(b) Additional Board Grants. Beginning with the 1996 Annual Meeting,
each Non-Employee Director shall be automatically granted an option to purchase
additional shares of Common Stock on the date of each annual meeting of the
Company's shareholders subsequent to the date on which such Non-Employee
Director became a director, provided that the Non-Employee Director is reelected
to serve in such capacity at such annual meeting. The number of shares subject
to each additional grant shall be 15,000 shares.
(c) Exercise Price. The exercise price of the options granted pursuant
to this paragraph 19 shall be equal to 100 percent of the fair market value of
the Common Stock determined pursuant to paragraph 6(b)(iv).
(d) Term of Option. The term of each option granted pursuant to this
paragraph 19 shall be 10 years from the date of grant.
(e) Exercisability. Until an option expires or is terminated and
except as provided in paragraphs 19(f) and 13, an option granted under this
paragraph 19 shall be exercisable according to the following schedule:
Period of Non-Employee
Directors' Continuous Service
as a Director of the
Company from the Date Portion of Total Option
the Option is Granted Which is Exercisable
--------------------- --------------------
Less than 12 months 0%
After 12 months 100%
(f) Termination As a Director. If an optionee ceases to be a director
of the Company for any reason, including death, the option may be exercised at
any time prior to the expiration date of the option or the expiration of 30 days
(or 12 months in the event of death) after the last day the optionee served as a
director, whichever is the shorter period, but only if and to the extent the
optionee was entitled to exercise the option as of the last day the optionee
served as a director.
14
<PAGE>
(g) Nontransferability. Each option by its terms shall be
nonassignable and nontransferable by the optionee, either voluntarily or by
operation of law, except by will or by the laws of descent and distribution of
the state or country of the optionee's domicile at the time of death, and each
option by its terms shall be exercisable during the optionee's lifetime only by
the optionee.
(h) Exercise of Options. Options may be exercised upon payment of cash
or shares of Common Stock of the Company in accordance with paragraph
6(a)(v).
15
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 5,782
<SECURITIES> 0
<RECEIVABLES> 23,792
<ALLOWANCES> 0
<INVENTORY> 44,697
<CURRENT-ASSETS> 82,973
<PP&E> 154,639
<DEPRECIATION> 61,811
<TOTAL-ASSETS> 521,389
<CURRENT-LIABILITIES> 74,608
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0
0
<COMMON> 257,382
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<TOTAL-LIABILITY-AND-EQUITY> 521,389
<SALES> 35,762
<TOTAL-REVENUES> 220,477
<CGS> 22,429
<TOTAL-COSTS> 194,971
<OTHER-EXPENSES> 18,874
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,509
<INCOME-PRETAX> 3,123
<INCOME-TAX> 1,249
<INCOME-CONTINUING> 1,874
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,874
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
