Exhibit 10.3
Execution Copy
AHC I Acquisition Corp.
120 East 56th Street
New York, New York 10022
June 17, 1998
Roger L. Barnett
120 East 56th Street
New York, New York 10022
Re: Grant of Incentive Stock Option
Dear Mr. Barnett:
The Board of Directors of AHC I Acquisition Corp. (the
"Company") has authorized and approved the 1998 Stock Option Plan (the "Plan"),
which has been submitted to the stockholders of the Company for their approval.
The Plan provides for the grant of options to certain key employees and
directors of the Company and any parent and subsidiary corporations of the
Company. Pursuant to the Plan, the Compensation Committee of the Board of
Directors of the Company (the "Committee") has approved the grant to you of an
option to purchase shares of Common Stock, par value $.01 per share, of the
Company (the "Shares") on the terms and subject to the conditions set forth in
the Plan and in this grant letter; provided that if the Plan is not approved by
the stockholders of the Company, this grant letter shall nevertheless be
effective as of the date hereof as a stand-alone option, subject to the terms
and conditions set forth herein and the terms and conditions of the Plan, which
are hereby incorporated by reference into this grant letter for purposes of
this proviso. A copy of the Plan is annexed hereto as Exhibit A and shall be
deemed a part hereof as if fully set forth herein. Unless the context otherwise
requires, all terms defined in the Plan shall have the same meanings when used
herein. The Shares purchasable pursuant to this Option are subject to
restrictions set forth in the Stockholders Agreement (as defined in Paragraph 8
hereof). Such Shares may be required to be surrendered to the Company under
certain circumstances described in the Stockholders Agreement.
1. Grant of Option. The Company hereby grants to you, as a
matter of separate inducement and not in lieu of any salary or other
compensation for your services, the right and option (the "Option") to
purchase, in accordance with the terms and conditions set forth in the Plan,
but subject to the limitations set forth herein and in the Plan, an aggregate
of 16,250 Shares of the Company (the "Total Shares") at a price of $1.00 per
Share, such option price being, in the judgment of the Committee, not less than
one hundred percent (100%) of the fair market value of such Share at the date
hereof. Except to the extent that in a given year the Option vests with respect
to Shares having a value greater than $100,000 (computed as of the date of
grant), the Option is intended to qualify as an "incentive stock option" within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended,
but it is specifically understood that no warranty is made to you as to such
qualification.
2. Vesting of Option. Subject to the provisions and
limitations set forth herein and in the Plan, the number of Shares of stock for
which this Option may be exercised shall be determined in accordance with this
Section 2.
a. Establishment of EBITDA Targets. For each of the fiscal
years ending on June 30, of 1999, 2000 and 2001, the Company has established
target amounts (each a "Target Amount"), floor amounts (each, a "Floor Amount")
and ceiling amounts (each, a "Ceiling Amount") for EBITDA (as defined below)
set forth below:
Fiscal Year Floor Amount Target Amount Ceiling Amount
- ----------- ------------ ------------- --------------
1999 $24,300,000 $27,000,000 $29,700,000
2000 27,000,000 30,000,000 33,000,000
2001 28,800,000 32,000,000 35,200,000
b. If EBITDA Equals Target Amount. Subject to adjustment in
accordance with Section 2(e) and subject to Section 2(g), if the EBITDA of the
Company for a fiscal year is equal to or greater than the Target Amount for
such fiscal year, this Option may be exercised to purchase 5,417 Shares (5,416
Shares with respect to the fiscal year ended June 30, 2001) (i.e., one-third of
the Total Shares).
c. If EBITDA Is At Least Equal to Floor Amount But Less Than
Target Amount. Subject to adjustment in accordance with Section 2(e) and
subject to Section 2(g), if the EBITDA of the Company for a fiscal year is at
least equal to the Floor Amount, but less than the Target Amount, for such
fiscal year, then this Option may be exercised to purchase a number of Shares
equal to the product of (x) 5,417 (5,416 Shares with respect to the fiscal year
ended June 30, 2001) (i.e., one-third of the Total Shares) and (y) a fraction,
the numerator of which shall be equal to the excess of the EBITDA of the
Company for such fiscal year over the Floor Amount for such fiscal year and the
denominator of which is equal to the excess of Target
2
Amount for such fiscal year over the Floor Amount for such fiscal year.
d. Carryback to Prior Year. If the EBITDA of the Company for
the fiscal year ended June 30, 2000 or 2001 exceeds the Target Amount for such
fiscal year (such excess, less any amount carried forward pursuant to Section
2.e. below, an "Excess Amount"), and the Target Amount for the immediately
preceding fiscal year (the "Prior Year") exceeded the EBITDA of the Company for
the Prior Year (such excess, a "Prior Year Shortfall Amount"), the (i) Excess
Amount for such fiscal year may be carried back to the Prior Year (but in an
amount not in excess of the lesser of (x) the Prior Year Shortfall Amount and
(y) the difference between the Ceiling Amount and the Target Amount for such
fiscal year), (ii) the EBITDA for such Prior Year shall be redetermined, and
(iii) the number of Shares for which this Option may be exercised shall be
increased based upon the EBITDA for the Prior Year as so redetermined.
e. Carryforward from Prior Year. If (i) the Floor Amount for
the fiscal year ended June 30, 2000 or 2001 (a "Current Year") exceeds the
EBITDA of the Company for such Current Year, this Option shall not become
exercisable for any Shares in respect of such Current Year and (ii) if the
EBITDA of the Company for a fiscal year is at least equal to the Floor Amount,
but less than the Target Amount, for such fiscal year, this Option may be
exercised to purchase a number of Shares as determined in accordance with
clause (c) above; provided, however, that if the EBITDA of the Company for the
Prior Year exceeded the Target Amount for the Prior Year (such excess, less any
amount carried back pursuant to Section 2.d. above, a "Carryforward Amount"),
then you may elect that (i) the Carryforward Amount for the Prior Year shall be
carried forward to such Current Year (but in an amount not in excess of the
lesser of (x) the amount by which the Target Amount for the Current Year
exceeds the EBITDA of the Company for such Current Year and (y) the difference
between the Ceiling Amount and the Target Amount for the Prior Year), (ii) the
EBITDA for the Current Year shall be redetermined to be an amount equal to the
sum of the EBITDA for such Current Year and the amount so carried forward
pursuant to clause (i), (iii) the EBITDA for the Prior Year shall be
redetermined to be an amount equal to the EBITDA for such Prior Year, reduced
by the amount carried forward pursuant to clause (i), and (iv) the number of
Shares for which this Option may be exercised shall be adjusted based upon the
EBITDA for the Current Year and the Prior Year as so redetermined in accordance
with clauses (ii) and (iii), respectively.
f. Change In Control. For purposes hereof, a "Change In
Control" of the Company occurs if: (a) any "Person" (as such term is used in
Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended
("Exchange Act")), other than (i) DLJ Merchant Banking II, Inc. or any of its
affiliates or any combination thereof (collectively, the "DLJ Entities"), (ii)
Roger L. Barnett or any of his affiliates or any combination thereof
(collectively, the "Barnett Parties"), or (iii) any combination of the DLJ
Entities and the Barnett Parties, is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of more
than 50% of the total combined voting power of all classes of capital stock of
3
the Company normally entitled to vote for the election of directors of the
Company; or (b) the Board of Directors shall approve a sale of all or
substantially all of the assets of the Company, in one transaction or a series
of related transactions, other than to an entity owned or controlled by the DLJ
Entities or the Barnett Parties or any combination thereof.
Upon a Change In Control, each Option may, at the discretion
of the Committee, be terminated within a specified number of days after notice
to the holder of such Option, in which case each such holder will receive, in
respect of each Share for which such Option then is exercisable after taking
into account the vesting of this Option as a result of such Change In Control
as provided herein, an amount equal to the excess of the then fair market value
of such Share over the exercise price per Share, payable in the same
consideration received by the stockholders of the Company upon the closing of
such transaction.
To the extent not previously exercised or exercisable, upon a
Change In Control, this Option shall immediately become exercisable to purchase
that number of Shares of the Company subject to the Option hereunder that would
otherwise be exercisable upon the achievement of Target Amounts of EBITDA for
fiscal years of the Company that have not been concluded at the time of the
Change In Control; provided, however, that upon such a Change In Control the
DLJ Entities shall have realized aggregate cash proceeds from the sale or other
disposition of their equity interests (whether common or preferred) in the
Company to third parties not affiliated with the DLJ Entities of at least the
following:
(i) if the Change In Control occurs prior to
December 15, 1999, the DLJ Entities shall have realized an amount equal to at
least 200% of their Equity Investment (as defined);
(ii) if the Change In Control occurs on or after
December 15, 1999 but prior to December 15, 2000, the DLJ Entities shall have
realized an amount equal to at least 300% of their Equity Investment; and
(iii) if the Change In Control occurs on or after
December 15, 2000, the DLJ Entities shall have realized an amount equal to at
least 350% of their Equity Investment.
"Equity Investment" shall mean the aggregate amount invested by the
DLJ Entities in equity interests (whether common or preferred) in the Company
or any of its affiliates.
g. Maximum Limitation. Notwithstanding anything to the
contrary set forth herein but subject to Section 11 of the Plan, in no event
shall this Option become exercisable for more than 16,250 Shares (i.e., 100% of
the Total Shares) in the aggregate.
h. Definition of EBITDA. For purposes of this Section 2,
"EBITDA" for a fiscal
4
year (i) shall mean the income from operations of the Company and its
subsidiaries for such fiscal year, determined in accordance with U.S. generally
accepted accounting principles consistently applied in accordance with the
accounting methodologies and procedures of the Company and its subsidiaries
plus depreciation and amortization of the Company and its subsidiaries for such
period to the extent any such expense was deducted in computing such income
from operations, (ii) shall exclude any expense or charge relating to the "Cash
Bonus," if any, earned by you pursuant to, and as such term is defined in, that
certain Executive Employment Agreement between an indirect subsidiary of the
Company and you dated the date hereof, and (iii) shall be subject to adjustment
as set forth in paragraph i. below.
i. Determinations of the Committee. From time to time, in
administering the Plan the Committee shall make adjustments in the EBITDA for a
fiscal year, which adjustments shall be in amounts as determined in the
Committee's reasonable discretion, so that extraordinary charges or credits
(provided that all adjustments, if any, in respect of acquired businesses shall
be governed by paragraph (j) below) do not distort or affect the operation of
the Plan in a manner inconsistent with its purpose, which inconsistency shall
be determined by the Committee in its reasonable discretion. The determinations
of the Committee as provided above shall be final, conclusive and binding on
all parties, including optionholders, absent proof of error.
j. Adjustment to Floor Amount, Target Amount and Ceiling
Amount. An adjustment to the Floor Amount, Target Amount and Ceiling Amount
shall be made for each fiscal year (including the fiscal year in which the
transaction occurs) following any acquisition, merger, consolidation or other
similar corporate transaction that is consummated, such adjustment to the
Target Amount to be equal to management's forecast (as presented to the Board)
of incremental acquired EBITDA for such fiscal year (or portion thereof with
respect to the fiscal year in which the transaction occurs) and appropriate
adjustments to the corresponding Floor Amount and Ceiling Amount, where (1) the
Company or any direct or indirect parent or subsidiary corporation is the
acquiror and (2) DLJ Merchant Banking Partners II, L.P. or any of its
affiliated funds and entities make an additional investment in an amount
exceeding $1 million in the aggregate (an "Additional Investment") in the
equity (whether common or preferred) of the Company or any direct or indirect
parent or subsidiary corporation of the Company. No such adjustment to Floor
Amounts, Target Amounts and Ceiling Amounts shall be made following any
acquisition, merger, consolidation or other similar corporate transaction,
where (1) the Company or any direct or indirect parent or subsidiary
corporation is the acquiror and (2) no Additional Investment is made. An
Additional Investment shall not be deemed to have been made with respect to the
potential acquisition of the sampling assets of Big Flower Press or its
subsidiaries unless the aggregate amount of such investment is at least equal
to $10 million in the aggregate.
k. Notice. As soon as practicable following receipt by the
Company of audited financial statements of the Company for a fiscal year, the
Company shall notify you of the
5
amount of EBITDA achieved by the Company for such fiscal year. Upon receipt of
such notice by you, this Option shall become exercisable in respect of the
number of Shares determined in accordance with Section 2 hereof.
l. Vesting of Remaining Shares. Notwithstanding anything to
the contrary herein, on June 16, 2006, this Option shall become exercisable for
the excess of (i) the number of Total Shares over (ii) the number of Shares, if
any, for which this Option shall have become exercisable pursuant to paragraphs
b., c., d., e. or f. of this Section 2.
m. Fractional Shares. In no event shall you exercise this
Option for a fraction of a Share.
3. Termination of Option. The unexercised portion of the
Option granted herein will automatically and without notice terminate and
become null and void upon the earliest to occur of the following:
a. the expiration of ten (10) years from the date of grant of
this Option;
b. the date of termination of your employment if your
employment (i) is terminated by you or (ii) is terminated by the Company or
subsidiary corporation of the Company for cause (as defined in the Plan);
c. the expiration of 30 days from the date of termination by
the Company or its subsidiaries of your employment other than for cause (as
defined in the Plan), except that this Option will be exercisable during such
30-day period only to the extent that it would have been exercisable
immediately prior to the termination of your employment;
d. the expiration of 6 months after the termination of your
employment by reason of your disability (as defined in the Plan), except that
this Option will be exercisable during such 6-month period only to the extent
that it would have been exercisable immediately prior to the termination of
your employment; or
e. the expiration of one (1) year after your death if your
death occurs during your employment or during the six (6) month or thirty (30)
day period, as the case may be, specified in clauses (c) and/or (d) above,
except that this Option will be exercisable during such 1-year period only to
the extent that it would have been exercisable immediately prior to your death;
provided, however, that none of the events described above shall extend the
period of exercisability of this Option beyond the day immediately preceding
the tenth anniversary of the date hereof.
6
4. Non-transferability of Option. This Option is not
transferable by you otherwise than by will or the laws of descent and
distribution, and is exercisable, during your lifetime, only by you. This
Option may not be assigned, transferred (except by will or the laws of descent
and distribution), pledged or hypothecated in any way (whether by operation of
law or otherwise) and shall not be subject to execution, attachment or similar
proceeding. Any attempted assignment, transfer, pledge, hypothecation or other
disposition of this Option contrary to the provisions hereof, and the levy of
any attachment or similar proceeding upon the Option, shall be null and void
and without effect.
5. Exercise of Option.
a. Purchase of Shares. Any exercise of this Option shall be
in writing addressed to the Secretary of the Company at the principal place of
business of the Company, shall be substantially in the form attached hereto as
Exhibit B and shall be accompanied by (i) a certified or bank cashier's check
to the order of the Company in an amount equal to, or (ii) to the extent
permitted by applicable law, shares of common stock, par value $.01 per share,
of the Company (in proper form for transfer and accompanied by all requisite
stock transfer tax stamps or cash in lieu thereof) owned by you having a fair
market value (as defined in the Plan) as of the date immediately prior to the
exercise of the Option equal to, the full amount of the purchase price of the
Shares so purchased.
b. Legends. If the Company, in its sole discretion, shall
determine that it is necessary, to comply with applicable securities laws, the
certificate or certificates representing the Shares purchased pursuant to the
exercise of this Option shall bear an appropriate legend in form and substance,
as determined by the Company, giving notice of applicable restrictions on
transfer under or in respect of such laws. Further, you hereby acknowledge that
the Company may endorse a legend upon the certificate evidencing the Shares as
the Company, in its sole discretion, determines to be necessary and appropriate
to implement the terms of the Plan.
c. Investment Intent. You hereby covenant and agree with the
Company that if, at the time of exercise of this Option, there does not exist a
Registration Statement on an appropriate form under the Securities Act of 1933,
as amended (the "Act"), which Registration Statement shall have become
effective and shall include a prospectus which is current with respect to the
Shares subject to this Option (i) that you will represent that you are
purchasing the Shares for your own account and not with a view to the resale or
distribution thereof and (ii) that any subsequent offer for sale or sale of any
such Shares shall be made either pursuant to (x) a Registration Statement on an
appropriate form under the Act, which Registration Statement shall have become
effective and shall be current with respect to the shares being offered and
sold, or (y) a specific exemption from the registration requirements of the
Act, but in claiming such exemption, you shall, if requested by the Company,
prior to any offer for sale or sale of such Shares, obtain a favorable written
opinion from counsel for or approved by the Company as to
7
the applicability of such exemption.
6. Withholding Taxes. As provided in the Plan, the Company
may withhold or cause to be withheld from sums due or to become due to you from
the Company or a subsidiary corporation or affiliate thereof an amount
necessary to satisfy its obligation (if any) to withhold taxes incurred by
reason of the exercise of this Option or the disposition of Shares acquired
hereunder, or may require you to reimburse the Company in such amount and may
make such reimbursement a condition to the delivery of the Shares pursuant to
the exercise of this Option.
7. Agreement Subject to the Plan. You and the Company agree
that this agreement is subject to, and that you and the Company will both be
bound by, all terms, conditions, limitations and restrictions contained in the
Plan, which shall be controlling in the event of any conflicting or
inconsistent provisions; provided, that Section 2 hereof shall be controlling
in the event of any conflicting or inconsistent provisions of the Plan.
8. Stockholders Agreement. It is a condition to the
effectiveness of this Option and the obligation of the Company to issue any
Shares hereunder that you shall have executed, on or prior to the date hereof,
the Stockholders Agreement, dated as of December 15, 1997, as amended, by and
among the Company and the stockholders named therein, and it is hereby
acknowledged that you have executed such Stockholders Agreement.
Please indicate your acceptance of all the terms and
conditions of this Option and the Plan by signing and returning a copy of this
letter.
Very truly yours,
AHC I ACQUISITION CORP.
By:
-------------------------------------
David M. Wittels,
Vice President
ACCEPTED:
- ---------------------------------
Signature of Employee
- ---------------------------------
Name of Employee - Please Print
Date: , 1998
---------------
8
Exhibit A
1998 Employee Stock Option Plan
Exhibit B
Exercise Letter
[Date]
AHC I Acquisition Corp.
120 East 56th Street
New York, New York 10022
Attention: Corporate Secretary
Re: Standard Incentive Stock Option
Under the 1998 Stock Option Plan
Dear Sir:
I am the holder of a "Standard" Option granted to me under
the above-referenced Plan by AHC I Acquisition Corp. (the "Company") on
_______, ____ to purchase ____________ shares of Common Stock of the Company
("Shares") at a price of $____ per share. I hereby exercise that option with
respect to ___________ Shares, the total purchase price for which is
$____________.
On _______________ [a business day not more than 15 days from
the date of this letter], I will present [a certified check payable to the
order of the Company in the amount of $_____________] [shares of common stock,
par value $.01 per share, of the Company (in proper form for transfer and
accompanied by all requisite stock transfer tax stamps or cash in lieu thereof)
owned by me with a fair market value (as defined in the Plan)] representing the
total purchase price for the Shares. The certificate or certificates
representing the Shares should be registered in my name and upon the
presentation of [that check] [such shares of common stock], the Shares should
be [delivered to me] [forwarded to me at the address indicated below].
I hereby agree to pay the full amount of all withholding
taxes which the Company or any subsidiary or parent corporation is required to
withhold in connection with the exercise of this option or the disposition of
Shares acquired hereunder and further authorize the Company, or the subsidiary
or parent corporation, to withhold from any cash compensation paid to me or in
my behalf an amount sufficient to discharge the federal, state or local income,
employment or excise tax withholding obligation to which the Company, or the
subsidiary or parent corporation, becomes subject by reason of the exercise of
this option, but only to the extent I shall not have paid such amount to the
Company or any parent or subsidiary corporation. I agree that the
B-1
corporation by which I am employed may, in its discretion, hold the stock
certificate to which I become entitled upon exercise of this option, as
security for the payment of the aforementioned withholding tax liability, until
cash sufficient to pay that liability has been accumulated.
Please acknowledge receipt of the exercise of my stock option
on the attached copy of this letter.
Very truly yours,
-------------------------------------
Signature
-------------------------------------
Please Print Name
-------------------------------------
Address
-------------------------------------
-------------------------------------
-------------------------------------
Social Security Number
RECEIPT ACKNOWLEDGED:
AHC I ACQUISITION CORP.
By:
- -------------------------------------
Name:
- -------------------------------------
Title:
- -------------------------------------
B-2