_____________________________________________________________________
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 JULY 30, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
___ SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-14818
TRANS WORLD MUSIC CORP.
(Exact name of registrant as specified in its charter)
New York 14-1541629
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
38 Corporate Circle
Albany, New York 12203
(Address of principal executive offices, including zip code)
(518) 452-1242
(Registrant's telephone number, including area code)
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for 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
____ ____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $.01 par value,
9,687,814 shares outstanding as of September 7, 1994
_____________________________________________________________________
TRANS WORLD MUSIC CORP. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets -- July 30, 1994,
January 29, 1994 and July 31, 1993 3
Condensed Consolidated Statements of Income -- Thirteen
Weeks and Twenty-Six Weeks Ended July 30, 1994
and July 31, 1993 4
Condensed Consolidated Statements of Cash Flows --
Twenty-Six Weeks Ended July 30, 1994 and July 31, 1993 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II.
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
2
TRANS WORLD MUSIC CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)
July 30, January 29, July 31,
ASSETS 1994 1994 1993
______ ________ __________ ________
CURRENT ASSETS:
Cash and cash equivalents $8,011 $26,046 $5,814
Merchandise inventory 221,985 238,949 183,811
Other current assets 12,841 12,764 7,710
_________ __________ ________
Total current assets 242,837 277,759 197,335
_________ __________ ________
VIDEOCASSETTE RENTAL INVENTORY, NET 6,472 6,166 6,477
FIXED ASSETS:
Property, plant and equipment 175,312 167,203 147,570
Less allowances for depreciation
and amortization 80,413 73,157 68,450
_________ _________ ________
94,899 94,046 79,120
_________ _________ ________
OTHER ASSETS 2,949 2,293 1,119
_________ _________ ________
TOTAL ASSETS $347,157 $380,264 $284,051
========= ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
_________________________________________
CURRENT LIABILITIES:
Accounts payable $75,419 $156,263 $72,116
Notes payable 64,439 - - - 8,269
Other current liabilities 20,572 19,958 11,143
________ _________ ________
Total current liabilities 160,430 176,221 91,528
________ _________ ________
LONG-TERM DEBT, less
current portion 54,101 66,054 67,888
CAPITAL LEASE OBLIGATIONS,
less current portion 6,866 7,044 7,221
OTHER LIABILITIES 4,714 4,871 3,452
SHAREHOLDERS' EQUITY
Common stock ($.01 par value;
20,000,000 shares authorized;
9,731,208 issued) 97 97 97
Treasury stock, at cost (43,394,
12,000 & 5,000 shares,
respectively) (503) (162) (69)
Other shareholders'equity 121,452 126,139 113,934
________ ________ ________
Total shareholders' equity 121,046 126,074 113,962
________ ________ ________
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $347,157 $380,264 $284,051
======== ======== ========
See Notes to Condensed Consolidated Financial Statements.
3
TRANS WORLD MUSIC CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
Thirteen Weeks Ended
________________________
July 30, July 31,
1994 1993
_________ ________
Sales $106,978 $96,643
Cost of sales 67,503 60,687
_________ ________
Gross profit 39,475 35,956
Selling, general and administrative expenses 37,329 34,300
Depreciation and amortization 4,146 3,484
_________ ________
Loss from operations (2,000) (1,828)
Interest expense 2,667 1,512
_________ ________
Loss before income tax benefit (4,667) (3,340)
Income tax benefit (1,862) (1,292)
_________ ________
NET LOSS ($2,805) ($2,048)
========= ========
LOSS PER SHARE ($0.29) ($0.21)
========= ========
Weighted average number of common
shares outstanding 9,708 9,726
========= ========
Twenty-Six Weeks Ended
_______________________
July 30, July 31,
1994 1993
_________ ________
Sales $216,178 $199,867
Cost of sales 135,873 125,810
_________ ________
Gross profit 80,305 74,057
Selling, general and administrative expenses 74,891 68,328
Depreciation and amortization 8,314 7,017
_________ ________
Loss from operations (2,900) (1,288)
Interest expense 4,899 2,586
_________ ________
Loss before income tax benefit (7,799) (3,874)
Income tax benefit (3,112) (1,499)
_________ ________
NET LOSS ($4,687) ($2,375)
========= ========
LOSS PER SHARE ($0.48) ($0.24)
========= ========
Weighted average number of common
shares outstanding 9,713 9,724
========= ========
See Notes to Condensed Consolidated Financial Statements.
4
TRANS WORLD MUSIC CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Twenty-Six Weeks Ended
_________________________
July 30, July 31,
1994 1993
_________ _________
NET CASH USED BY OPERATING ACTIVITIES ($68,551) ($48,927)
_________ _________
INVESTING ACTIVITIES:
Acquisition of property and equipment (10,197) (11,050)
Purchases of videocassette rental
inventory, net of amortization (306) (320)
_________ _________
Net cash used by investing activities (10,503) (11,370)
_________ _________
FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt - - - 50,000
Payments of long-term debt and capital
lease obligations (3,079) (359)
Net increase in revolving line of credit 64,439 8,269
Other (341) 8
_________ ________
Net cash provided by financing activities 61,019 57,918
_________ ________
Net decrease in cash and cash equivalents (18,035) (2,379)
Cash and cash equivalents, beginning of period 26,046 8,193
________ ________
Cash and cash equivalents, end of period $8,011 $5,814
======== ========
See Notes to Condensed Consolidated Financial Statements.
5
TRANS WORLD MUSIC CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
consist of Trans World Music Corp. and its subsidiaries (the "Company"), all of
which are wholly owned. All significant intercompany accounts and transactions
have been eliminated. Joint venture investments, none of which were material,
are accounted for using the equity method. The Company's previously reported
store count of 698 has been revised to 693 in order to be consistent with the
equity method of accounting, removing the five Joint Venture units from the
store count.
The condensed consolidated financial statements for the interim periods
presented are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. The information
furnished in the condensed consolidated financial statements reflects all
normal, recurring adjustments which, in the opinion of management, are
necessary for a fair presentation of such financial statements. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to rules and regulations applicable to
interim financial statements.
These condensed consolidated financial statements should be read in
conjunction with the audited financial statements included in the Company's
Annual Report on Form 10-K for the fiscal year ended January 29, 1994.
Note 2. Seasonality
The Company's business is seasonal in nature, with the highest sales and
earnings occurring in the fourth fiscal quarter. In the past three fiscal
years, the fourth quarter has represented substantially all of the Company's
net income for the year.
Note 3. Earnings (Loss) Per Share
Earnings (Loss) per share is based on the weighted average number of common
shares outstanding during each fiscal period. Common stock equivalents, which
relate to employee stock options, are excluded from the calculations, as their
inclusion would have an anti-dilutive impact on the loss per share.
6
TRANS WORLD MUSIC CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - CONTINUED
Note 4. Treasury Stock
In 1992, the Company's Board of Directors authorized the repurchase of up to
500,000 shares of its Common Stock through open market purchases or privately
negotiated transactions. During the second quarter of 1994, the Company
repurchased a total of 31,394 shares of its Common Stock. At July 30, 1994,
the Company held 43,394 shares in treasury.
Note 5. Stock Option Plan
On April 29, 1994, the Board of Directors of the Company approved the 1994
Stock Option Plan, which was subsequently approved by shareholders of the
Company on June 10, 1994. Under the 1994 Stock Option Plan, 1,000,000 shares
of Common Stock are authorized for issuance pursuant to the exercise of stock
options granted thereunder. At July 30, 1994, stock options exercisable into
195,000 shares of Common Stock have been granted under the 1994 Stock Option
Plan.
Note 6. Subsequent Event
On June 10, 1994, the Company's shareholders approved an amendment to the
Restated Certificate of Incorporation to change the parent company's corporate
name to "Trans World Entertainment Corporation". The Company's name change
will become effective on or about September 22, 1994.
7
TRANS WORLD MUSIC CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Thirteen Weeks Ended July 30, 1994 Compared to Thirteen Weeks Ended July 31,1993
________________________________________________________________________________
Sales. The Company's sales increased 10.7% for the thirteen weeks ended
July 30, 1994 over the thirteen weeks ended July 31, 1993. The $10.3 million
sales increase is primarily due to the sales generated from new stores opened
by the Company since July 31, 1993. Comparable store sales increased 1% in the
second quarter 1994 over the prior year. Although the comparable store sales
trend was positive, the second quarter results compare with weak comparable
store sales of negative 3% and negative 2% in the second quarters of 1993 and
1992, respectively.
In the Company's music division, comparable store sales were slightly
negative in the second quarter. The Company attributes the sales results to
poor product assortments in its stores, a condition that continues to improve
through merchandise returns to vendors and better utilization of its inventory
management system. In addition, the Company faces increasing competition from
electronics retailers and books superstores that are expanding in the music
business. Comparable store sales in the video sell-through division were
relatively strong in the second quarter, principally due to new inventory
assortments in the video category.
Gross Profit. Gross profit as a percentage of sales decreased from 37.2% to
36.9% in the thirteen week period ended July 30, 1994, compared to 1993. The
decrease in the gross profit rate was primarily due to a competitive price
program implemented in the second quarter in many of the Company's markets.
Competitive pricing is expected to put continued downward pressure on the gross
margin rate in the second half of the year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") as a percentage of sales decreased from 35.5%
to 34.9% in the thirteen week period ended July 30, 1994 when compared to 1993.
The decrease in SG&A as a percent of sales was primarily due to the leverage of
overhead expenses because of the increase in total sales of 10.7% over the
prior year.
Interest Expense. Interest expense increased $1.2 million in the thirteen
week period ended July 30, 1994 compared to 1993. The increase is due to the
increase in the Company's average borrowings and a higher weighted average
borrowing rate.
8
TRANS WORLD MUSIC CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Net Loss. The $2.8 million net loss for the thirteen week period ended July
30, 1994 compares to a $2.0 million net loss in 1993. The increased loss is
due to the combined impact of cost growth in the stores and soft sales trends
in the second quarters over the past three fiscal years. To achieve a
profitable fiscal quarter, comparable store sales growth would have had to
improve substantially over the 1% sales growth realized in 1994's second
quarter.
Twenty-Six Weeks Ended July 30, 1994 Compared to Twenty-Six Weeks Ended
July 31, 1993
_________________________________________________________________________
Sales. The Company's sales increased 8.2% for the twenty-six weeks ended
July 30, 1994 over the twenty-six weeks ended July 31, 1993. During the first
half of the year, comparable store sales decreased approximately 2%. Comparable
store sales decreased 4% in the first quarter and improved to a 1% increase in
the second quarter. The Company currently expects this trend will continue as
the Company balances its inventories and improves its merchandise in-stock
position in the stores.
Gross Profit. Gross profit as a percentage of sales remained at 37.1% for
the twenty-six week period ended July 30, 1994, when compared to 1993. However,
the Company implemented a competitive price program in many of its markets,
which will put downward pressure on the gross margin rate in the second half of
fiscal 1994.
Selling, General and Administrative Expenses. SG&A as a percentage of sales
increased slightly from 34.2% to 34.6% in the twenty-six week period ended July
30, 1994 when compared to 1993. The increase was primarily due to the decline
in comparable store sales, somewhat offset by better leverage of overhead
expenses.
Interest Expense. Interest expense increased $2.3 million in the twenty-six
week period ended July 30, 1994 compared to 1993. The increase is attributed to
both an increase in the Company's average borrowings and an increase in the
Company's weighted average borrowing rate.
Net Loss. The $4.7 million net loss for the twenty-six week period ended
July 30, 1994 compares to a $2.4 million net loss in 1993. The increased loss
is due to the negative comparable store sales for the year to date period,
combined with the impact of expense growth in the stores, along with the
increase in interest expense.
9
TRANS WORLD MUSIC CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Sources of Capital. Cash used by operating and investing
activities in the first half of the fiscal year are financed through borrowings
under the Company's revolving credit facilities, which permit aggregate
borrowings of up to $75 million.
The Company's cash flow from operating activities typically decreases
significantly during the second quarter and year to date periods due to
repayments of accounts payable and lower sales at this time of year. During the
twenty-six week period ended July 30, 1994 the Company's cash flow used by
operations was $68.5 million, significantly higher than the corresponding
period in 1993 because of the increased loss before anticipated income tax
benefits and the lower proportion of accounts payable to merchandise
inventory, or inventory leverage. The most significant uses of cash in the
period were the $80.8 million and $5.4 million normal reductions in accounts
payable and income taxes payable, respectively, along with $10.2 million in
capital expenditures, primarily related to the Company's store expansion
program. Accordingly, the Company's utilization of its revolving credit
facilities increased from $8.3 million at July 31, 1993 to $64.4 million
outstanding at July 30, 1994.
The Company currently expects that inventory leverage will improve through
higher merchandise inventory returns to vendors in the third fiscal quarter,
improving sales trends and the seasonally high fourth quarter sales. The level
of the revolving credit facilities is considered adequate to finance the
seasonally higher inventory requirements in the second half of the year. At
fiscal year end and through the first half of fiscal 1995, continued inventory
reduction and the corresponding improvement to inventory leverage will be
important to maintain or reduce the absolute level of borrowings on the
Company's revolving credit facilities.
The Company is currently in compliance with all covenants under its credit
agreements as of and for the periods ended July 30, 1994. As disclosed in its
Annual Report on Form 10-K for the fiscal year ended January 29, 1994, the
Company's earnings for the full fiscal year 1994 will have to increase
approximately 20% over 1993's earnings of $1.01 per share to maintain
compliance with the fixed charge ratio covenant in the Company's revolving
credit and long-term debt agreements. The Company currently anticipates that
it would have to seek a waiver of the fixed charge ratio covenant from its
lenders if operating results in the third quarter 1994 do not improve over the
$.16 loss per share recorded in the third quarter 1993.
10
TRANS WORLD MUSIC CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
CAPITAL EXPENDITURES
The Company opened eight new stores and closed seven stores in the second
quarter of 1994, ending the period with 693 stores in operation and total
retail square footage of 2.5 million. The Company is also a joint venture
partner in 5 stores. Management plans to open approximately 20 stores in the
third quarter and 50 to 60 stores for the entire fiscal year, approximately
20 of which are relocations of existing stores. Total retail square footage is
estimated to be approximately 2.6 million at the end of the 1994 fiscal year.
New store openings, combined with the Company's ongoing store renovation
program and other capital improvements, will require approximately $24
million in capital expenditures in 1994. In addition, the store expansion
program will require an increase in merchandise inventory of approximately
$350,000 per new store, which will be partially funded by trade payables.
The terms of the Company's revolving credit and long-term debt agreements
require the Company to meet customary financial and operating ratios, and limit
the Company's ability, among other things, to incur indebtedness, to make
certain investments and to pay dividends. The foregoing restrictions, as well
as the possibility that certain of the financial ratios may not be maintained,
could limit the Company's ability to meet its expansion objectives, to obtain
future financing and to engage in certain corporate activities.
11
TRANS WORLD MUSIC CORP. AND SUBSIDIARIES
PART II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
____________________________________________________
The Company's 1994 Annual Meeting of Shareholders was held on
June 10, 1994. At the meeting, all of management's nominees
for directors were elected to the Board of Directors. In
addition, two other matters were approved by shareholders.
The parent company's name was approved for change to "Trans
World Entertainment Corporation", with 7,863,602 votes for,
5,096 votes against, and 80,990 abstentions. The 1994 Stock
Option Plan was approved, with 6,525,119 votes for, 623,513
votes against, and 84,048 abstentions.
Item 6. Exhibits and Reports on Form 8-K.
_________________________________
(A) Exhibits
Exhibit No. Description Page No.
___________ ___________ ________
10.1 1994 Stock Option Plan 14
(B) Reports on Form 8-K - The Company filed a Current Report on
Form 8-K on August 31, 1994, reporting a change in the
Registrant's Certifying Accountant from Ernst & Young LLP to
KPMG Peat Marwick LLP.
Omitted from this Part II are items which are not applicable or to which the
answer is negative for the periods covered.
12
TRANS WORLD MUSIC CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANS WORLD MUSIC CORP.
September 13, 1994 By: /s/ ROBERT A. HELPERT
__________________ _____________________________
DATE Robert A. Helpert
Executive Vice President and
Chief Administrative Officer
(Duly authorized officer)
September 13, 1994 By: /s/ JOHN J. SULLIVAN
__________________ ____________________________
DATE John J. Sullivan
Vice President - Finance
(Chief Accounting Officer)
13
EXHIBIT 10.1
TRANS WORLD ENTERTAINMENT CORPORATION
1994 STOCK OPTION PLAN
1. PURPOSE
(a) The purpose of this 1994 Stock Option Plan (the "Plan") is to
encourage and enable selected management and other key employees of Trans World
Entertainment Corporation (the "Company") or a parent or subsidiary of the
Company to acquire a proprietary interest in the Company through the ownership
of stock in the Company. Pursuant to the Plan, eligible employees will be
offered the opportunity to acquire such common stock through the grant of
Incentive Stock Options, other statutory options and Non-Qualified Stock
Options (Incentive Stock Options and Non-Qualified Stock Options granted under
the plan are collectively referred to herein as "Options"), with or without
tandem Stock Appreciation Rights ("SARs").
(b) As used herein, the term "parent" or "subsidiary" shall mean any
present or future corporation which is or would be a "parent corporation" or
"subsidiary corporation" of the Company as the term is defined in Section 424
of the Internal Revenue Code of 1986, as amended (the "Code") (determined as if
the Company were the employer corporation). "Incentive Stock Options" shall
have the meaning ascribed to them in Section 422 of the Code.
2. ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Compensation Committee of the Board
of Directors, or such other committee appointed by the Board of Directors (the
"Committee"), consisting of three or more disinterested, independent directors.
Each member of the Committee will meet the requirements set forth in Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as amended (the"Exchange
Act"), and the proposed regulations issued under Section 162(m) of the Internal
Revenue Code of 1986, as amended. No member of the Committee will be eligible
to participate in the Plan or shall have been eligible to participate in the
Plan during a one-year period prior to appointment. The Committee is
authorized: (a) to adopt, alter and repeal administrative rules, guidelines
and regulations for carrying out the Plan; (b) to select the employees eligible
for participation under the Plan; (c) to determine whether and to what extent
Options and SARs are to be granted under the Plan; (d) to substitute new
Options for previously granted Options, including previously granted Options
having higher exercise prices; (e) to determine the other terms, conditions and
provisions of grants under the Plan; (f) to accelerate the vesting or extend
the exercise period (up to a maximum of ten years); and in all cases in the
Committee's sole discretion consistent with the Plan provisions. The
interpretation of and decisions with regard to any questions arising under
the Plan made by the Committee shall be final and conclusive.
3. SHARES OF STOCK SUBJECT TO THE PLAN
(a) Shares Subject to Issuance. There shall be 1,000,000 shares of the
Company's common stock, par value $.01 per share (the "Common Stock"),
authorized for issuance under the Plan. Such shares may be authorized and
unissued shares or previously issued shares acquired or to be acquired by the
Company and held in the treasury. Any shares subject to an Option which for
any reason expires or is terminated unexercised may again be subject to an
Option under the Plan. The aggregate fair market value (determined at the time
the Option is granted) of the Common Stock with respect to which Incentive
Stock Options are exercisable for the first time by any optionee during any
calendar year (under all plans of the Company and any parent or subsidiary of
the Company which plans provide for granting of Incentive Stock Options within
the meaning of Section 422 of the Code) shall not exceed $100,000.
14
(b) Antidilution Adjustments. In the event of a reorganization,
recapitalization, stock split, reverse stock split, stock dividend, combination
of shares, merger, consolidation, reclassification or other change in corporate
structure, there shall be an appropriate adjustment to the number of shares
authorized for issuance under the Plan pursuant to the provisions of Section 8
hereof.
4. ELIGIBILITY
Options may be granted only to executive officers, management and other
key employees who are employed by the Company or a parent or subsidiary of the
Company, in each case as designated by the Committee. An Option may be granted
to a director of the Company or a parent or subsidiary of the Company who is
not also a member of the Committee, provided that the director is also an
officer or key employee.
5. GRANTING OF INCENTIVES
(a) Term of Plan and Option Grants. All Options granted pursuant to this
Plan shall be granted within 10 years from April 29, 1994. The date of the
grant of any Option shall be the effective date on which the Committee
authorizes the grant of such Option. In no event, however, shall any Option be
exercisable beyond 10 years from the date it is granted.
(b) Limits Applicable to any one Employee. The maximum number of shares
of Common Stock with respect to which Options or SARs may be granted to any one
employee from this Plan is 300,000, subject to adjustment in accordance with
the provisions of Section 8 hereof.
(c) Executive Officers. Options granted to any executive officer or
employee governed by the provisions of Section 16 under the Exchange Act shall
not be exercisable earlier than six months from the date of grant.
(d) Stock Appreciation Rights. The Committee may in its sole discretion
grant an Option together with an SAR. In the case of such a grant the employee
may either (i) exercise the Option and receive Common Stock of the Company, or
(ii) receive in cash or other property, in the sole discretion of the Committee,
the difference between the exercise price of the underlying option and the fair
market value of the Common Stock at the time the SAR is exercised. An
Incentive Stock Option granted together with an SAR shall be subject to the
limitations of the Plan and such additional limitations as may be imposed under
Section 422 of the Code, which limitations are necessary or appropriate to
cause such Incentive Stock Option or another Incentive Stock Option to qualify
as an "incentive stock option" within the meaning of Section 422 of the Code.
Upon exercise of an SAR, the underlying option shall be deemed to have been
exercised to the extent of the shares with respect to which the SAR is
exercised, and such shares shall no longer be available for issuance pursuant
to the Plan.
(e) Limited Stock Appreciation Rights. The Committee in its discretion
may include provisions in any Option or SAR granted to an employee that become
effective upon a Change in Control (as defined in Section 8 of the Plan) of the
Company and that provide for the acceleration of the exercisability of the
Option or SAR. Such provisions may also include the right, in lieu of
exercising the Option or SAR, to elect to surrender all or part of such Option
or SAR to the Company and to receive cash in an amount equal to the excess of
(i) the higher of (x) the Fair Market Value of a share of Common Stock on the
date such right is exercised and (y) the highest price paid for Common Stock
or, in the case of securities convertible into Common Stock or carrying a right
to acquire Common Stock, the highest effective price (based on the prices paid
for such securities) at which such securities are convertible into Common Stock
or at which Common Stock may be acquired, by any person or group whose
acquisition of voting securities has resulted in a Change in Control of the
Company, over (ii) the exercise price per share under the Option or SAR,
multiplied by the number of shares of Common Stock with respect to which such
right is exercised. The provisions authorized by this Section 5(e) may be
included in an Option or SAR at the time of grant or thereafter.
15
6. TERMS AND CONDITIONS OF OPTIONS
(a) Option Price. The purchase price under each Option shall be at least
100% of the Fair Market Value of the Common Stock at the time the Option is
granted, but not less than the par value of such Common Stock. In the case of
an Incentive Stock Option granted to an employee owning more than 10% of the
total combined voting power of all classes of stock of the Company or of any
parent or subsidiary of the Company, actually or constructively under Section
424(d) of the Code, the option price shall not be less than 110% of the Fair
Market Value of the Common Stock subject to the Option at the time of its
grant. The "Fair Market Value" of the Common Stock shall mean the closing price
of the Common Stock on the NASDAQ National Market System or principal stock
exchange that the shares may be traded on as of the date of grant, or if such
day is not a trading day, the next succeeding trading day.
(b) Medium and Time of Payment. Common Stock purchased pursuant to the
exercise of an Option shall at the time of purchase be paid for in full in
cash, or with shares of Common Stock, or a combination of cash and such Common
Stock, to be valued at the Fair Market Value thereof on the date of such
exercise. Common Stock to be used by executive officers and other employees
subject to the reporting provisions of Section 16 of the Exchange Act must have
been held by such optionee for a minimum of 6 months. If the optionee intends
to obtain a permissible broker loan or a simultaneous order to sell the shares
issuable upon exercise of any Options, upon the giving of at least 48 hours
prior written notice to the Company, exercise thereof shall not be deemed to
occur until the Company receives the proceeds of the recipient's broker loan or
other permitted transaction. Upon receipt of payment the Company shall,
without stock transfer tax to the optionee or other person entitled to exercise
the Option, deliver to the person exercising the Option a certificate or
certificates for such shares. It shall be a condition to the performance of
the Company's obligation to issue or transfer Common Stock upon exercise of an
Option or Options that the optionee pay, or make provision satisfactory to the
Company for the payment of, any withholding taxes which the Company is
obligated to collect with respect to the issuance or transfer of Common Stock
upon such exercise.
(c) Vesting and Exercise Period. The vesting period of time before
exercising an Option shall be prescribed by the Committee in each particular
case, in the Committee's sole discretion except that the vesting period shall
be at least 6 months from the date of grant for executive officers and other
employees subject to the reporting provisions of Section 16 of the Exchange
Act. No Option may be exercised more than 10 years from the date it is
granted. Unless otherwise specified by the Committee, Options shall vest and
become exercisable with respect to 25% of the shares subject thereto on each of
the first, second, third and fourth anniversaries of the date of the grant.
In the event of the death or permanent disability of an optionee, all
outstanding Options shall immediately vest and become exercisable, except for
those Options granted within six months of such date. Unless otherwise
specified, all Options shall be for a term of ten years from the date of
grant. However, in the case of an Incentive Stock Option granted to a 10%
shareholder (as defined in Section 6(a) hereof), such option, by its terms,
shall be exercisable only within five years from the date of grant.
(d) No Rights to Employment or as a Shareholder. Nothing in the Plan
or in any Option shall confer any right to continue in the employ of the
Company or any parent or subsidiary of the Company or interfere in any way
with the right of the Company or any parent or subsidiary of the Company to
terminate the employment of the optionee at will at any time, in accordance
with the provisions of applicable law. An optionee shall have no rights as
a shareholder of the Company with respect to any shares issuable or
transferable upon exercise thereof until the date a stock certificate is
issued to him for shares of Common Stock.
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7. EXERCISE AFTER SEPARATION OF EMPLOYMENT OR DEATH
(a) Retirement, Death or Disability. In the event of the retirement with
the consent of the Company, the Options or unexercised portions thereof that
were otherwise exercisable on the date of retirement shall be exercisable
during their specified terms but prior to three years after the date of
retirement, whichever occurs earlier. In the event of the death or permanent
disability (as that term is defined in Section 22(e)(3) of the Code, as now
in effect or as subsequently amended), of the recipient, all Options other
than those granted within six months of such date shall become vested and
immediately exercisable by the optionee, or if he is not living, by his heirs,
legatees or legal representatives (as the case may be), during their specified
terms, but prior to the expiration of three years after the date of death or
permanent disability, whichever occurs earlier.
(b) Separation of Employment. With respect to any separation of
employment from the Company, other than by reason of retirement, death, or
permanent disability, as provided in Section 7(a), Options, if vested on the
date of termination, may be exercised during their specified terms but prior to
the expiration of three months after separation of employment with the Company,
whichever occurs earlier, or, for Non-Qualified Stock Options, such period in
excess of three months but prior to the expiration date originally scheduled
for such Option as the Committee may, in its sole and absolute discretion,
determine and provide.
(c) Leave of Absence. If an optionee takes an approved leave of absence,
the Committee may, if it determines that to do so would be in the best
interests of the Company, provide in a specific case for continuation of Options
during such leave of absence, such continuation to be on such terms and
conditions as the Committee determines to be appropriate.
(d) Certain Investment Restrictions. Each Option granted under the Plan
shall be subject to the requirement that, if at any time the Board of Directors
shall determine, in its discretion, that the listing, registration or
qualification of the shares issuable or transferable upon exercise thereof upon
any securities exchange or under any state or federal law, or the consent or
approval of any governmental regulatory body is necessary or desirable as a
condition of, or in connection with, the granting of such Option or the issue,
transfer or purchase of shares thereunder, such Option may not be exercised in
whole or in part unless such listing, registration, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to the Board of Directors. The Company shall not be obligated to
sell or issue any shares of Common Stock in any manner in contravention of the
Securities Act of 1933, as amended, or any state securities law.
8. ADJUSTMENTS
(a) Recapitalization. The number of shares subject to the Plan shall be
increased or decreased proportionately, as the case may be, in the event that
dividends payable in Common Stock during any fiscal year of the Company exceed
in the aggregate five percent of the Common Stock issued and outstanding at the
beginning of the fiscal year, or in the event there is during any fiscal year
of the Company one or more splits, reverse splits, subdivisions, or
combinations of shares of Common Stock resulting in an increase or decrease
by more than five percent of the shares outstanding at the beginning of the
year. Common stock dividends, splits, reverse splits, subdivisions or
combinations during any fiscal year that are equal to or are less than, in the
aggregate, five percent of the Common Stock issued and outstanding at the
beginning of such fiscal year, shall be ignored for purposes of the Plan.
In the event of any such adjustment the number of underlying shares and the
purchase price per share applicable to options previously granted shall be
proportionately adjusted. All adjustments shall be made as of the day such
action necessitating such adjustment becomes effective.
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(b) Sale or Reorganization. In case the Company is merged or consolidated
with another corporation, or in case substantially all of the property, stock
or assets of the Company is to be acquired by another corporation, or in case
of a separation, reorganization, or liquidation of the Company, the Board of
Directors of the Company, or the board of directors of any corporation assuming
the obligations of the Company hereunder, shall either: (i) make appropriate
provisions for the protection of any outstanding Options by the substitution on
an equitable basis of cash or comparable stock or stock options of the Company,
or cash or comparable stock or stock options of the merged, consolidated or
otherwise reorganized corporation, or (ii) make a cash payment equal to the
difference between the exercise price of all vested Options and the Fair Market
Value of the Common Stock on the date of such transaction, as determined by the
highest sale price of the Common Stock quoted by the market or exchange on
which the security is traded.
(c) Change in Control. Notwithstanding anything to the contrary in this
Plan, if there should be a "Change in Control" of the Company, all of the
Options granted under the Plan that are not currently exercisable shall become
immediately vested as of the date of such Change in Control. "Change in
Control" shall mean the occurrence of any one of the following events that
occur after the date, if ever, that fewer than twenty percent of the
outstanding shares of Common Stock in the aggregate are beneficially owned (as
defined in Rule 13d-3 under the Exchange Act) by Robert J. Higgins, members of
his immediate family and one or more trusts established for the benefit of such
individual or family members for a period of 60 consecutive calendar days:(i)
the sale of the Company substantially as an entirety (sale of assets, merger,
consolidation, liquidation, dissolution or similar occurrence) occurs, where
the shareholders of the Company, immediately prior to a consolidation or
merger, would not, immediately after the consolidation or merger, beneficially
own (as such term is defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, shares representing in the aggregate at least one-half of the
voting stock of the corporation issuing cash or securities in a consolidation
or merger (or its ultimate parent corporation, if any); (ii) any tender offer
or exchange offer subject to the regulations of the Securities and Exchange
Commission is made by which any person or group, other than Robert J. Higgins,
members of his immediate family and one or more trusts established for the
benefit of such individual or family members, as "person" or "group" is defined
within the meaning of Section 13(d) of the Exchange Act, which becomes the
beneficial owner, directly or indirectly, of more than one-half of the
outstanding shares of Common Stock; or (iii) fifty percent or more of the
directors elected to the Board of Directors are persons who were not
nominated by management or the Board of Directors in the most recent proxy
statement of the Company, excluding from such computation the replacement of
any director or directors who resign voluntarily and not as a result of any
disagreement expressed in writing with the Company's operations, policies or
practices.
Notwithstanding the foregoing, a "Change in Control" shall not be deemed
to have occurred for purposes of Section 8(c)(i) solely as the result of an
acquisition of securities by the Company which, by reducing the number of
shares of Common Stock outstanding, increases the proportionate number of
shares of Common Stock beneficially owned by any person to 40% more of the
shares of Common Stock then outstanding; provided, however, that if any person
referred to in this sentence shall thereafter become the beneficial owner of
any additional shares of Common Stock (other than pursuant to a stock split,
stock dividend or similar transaction), then a "Change in Control" shall be
deemed to have occurred for purposes hereof.
9. NON-TRANSFERABILITY OF OPTIONS
No Option shall be assignable or transferable by the optionee except by
will or by the laws of descent and distribution or pursuant to a qualified
domestic relations order as defined by the Code. During the lifetime of a
recipient, Options shall be exercisable only by the optionee.
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10. TERMINATION AND AMENDMENT OF THE PLAN
The Board of Directors shall have the right to amend, suspend or terminate
the Plan; provided, however, that no such action shall affect or in any way
impair the rights of a recipient under any option right theretofore granted
under the Plan, and no amendment may be made increasing the number of shares
authorized for issuance under the Plan, except as provided in Section 8 hereof,
without obtaining shareholder approval.
11. EFFECTIVE DATE OF THE PLAN
The Plan shall become effective April 29, 1994, the date of its adoption
by the Board of Directors of the Company, subject to approval by the
shareholders of the Company within 12 months thereafter. The Plan shall, in
all events, terminate on April 29, 2004, or such earlier date as the Board of
Directors of the Company may determine.
12. WRITTEN AGREEMENT
Each Option granted hereunder shall be embodied in a written agreement,
which shall be subject to the terms and conditions prescribed by the Plan, and
shall contain such other provisions as the Committee in its discretion shall
deem necessary or advisable. The agreements, which need not be identical,
shall be signed by the employee participant and by the Chairman of the Board,
the Vice Chairman, the President, the Secretary or any Vice President of the
Company for and in the name and on behalf of the Company.
13. GOVERNING LAW
This Plan and all determinations made and actions taken pursuant hereto
shall be governed by the laws of the State of New York, without reference to
its principles of conflict of laws, and shall be construed accordingly.
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