UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10Q
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(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
-----------Exchange Act of 1934
For the quarterly period ended March 31, 2001
OR
Transition report pursuant to Section 13 or 15 (d) of the Securities
-----------Exchange Act of 1934
Commission File Number: 000-19370
Curative Health Services, Inc.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1503914
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
150 Motor Parkway
Hauppauge, NY 11788-5108
(Address of principal executive offices)
Telephone Number (631) 232-7000
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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 ______
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As of April 30, 2001 there were 7,065,403 shares of the Registrant's Common
Stock, $.01 par value, outstanding.
INDEX
Part I Financial Information Page No.
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Item 1 Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Operations
Three Months ended March 31, 2001 and 2000 3
Condensed Consolidated Balance Sheets
March 31, 2001 and December 31, 2000 4
Condensed Consolidated Statements of Cash Flows
Three Months ended March 31, 2001 and 2000 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3 Quantitative and Qualitative Disclosures About Market Risk 12
Part II Other Information Page No.
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Item 1 Legal Proceedings 14
Item 6 Exhibits and Reports on Form 8-K 15
Signatures 16
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Curative Health Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended March 31,
2001 2000
---- ----
Revenues $13,517 $22,200
Cost and Expenses:
Cost of product sales and services 8,097 13,984
Selling, general and administrative 5,129 6,535
----- -----
Total costs and operating expenses 13,226 20,519
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Income from operations 291 1,681
Interest income 557 624
--- ---
Income before income taxes 848 2,305
Income taxes 356 916
--- ---
Net income $ 492 $ 1,389
=== =====
Net income per common share, basic $ .07 $ .14
=== ===
Net income per common share, diluted $ .07 $ .14
=== ===
Weighted average common shares, basic 7,121 10,011
===== ======
Weighted average common shares, diluted 7,355 10,108
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Curative Health Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, 2001 December 31, 2000
----------------------------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 6,670 $ 19,016
Marketable securities held-to-maturity - 26,978
Accounts receivable, net 19,223 9,843
Deferred tax assets 3,131 2,806
Note receivable 1,483 -
Assets available for sale - 3,683
Inventory 1,012 -
Prepaid and other current assets 824 1,664
--- -----
Total current assets 32,343 63,990
Property and equipment, net 6,915 7,065
Goodwill 34,182 2,988
Other assets 1,306 1,123
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Total assets $ 74,746 $ 75,166
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LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 10,994 $ 7,308
Accrued expenses 8,543 12,288
----- ------
Total current liabilities 19,537 19,596
Stockholders' equity
Common stock 70 71
Additional paid in capital 30,044 30,896
Retained earnings 25,095 24,603
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Total stockholders' equity 55,209 55,570
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Total liabilities and stockholders' equity $ 74,746 $ 75,166
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Curative Health Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended March 31,
2001 2000
---- ----
OPERATING ACTIVITIES:
Net income $ 492 $ 1,389
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in operations of investee 111 97
Depreciation and amortization 579 1,212
Changes in operating assets and liabilities (3,146) 1,236
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NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (1,964) 3,934
INVESTING ACTIVITIES:
Notes receivable 2,200 -
Acquisition of Millennium Health, Inc. (38,535) -
Purchase of property and equipment (171) (308)
Sales of marketable securities 26,978 2,030
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NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (9,528) 1,722
FINANCING ACTIVITIES:
Stock repurchases (1,118) (4,756)
Proceeds from exercise of stock options 264 36
--- --
NET CASH USED IN FINANCING ACTIVITIES (854) (4,720)
----- ------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (12,346) 936
Cash and cash equivalents at beginning of period 19,016 16,215
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,670 $ 17,151
===== ======
SUPPLEMENTAL INFORMATION PERTAINING TO NONCASH
INVESTING AND FINANCING ACTIVITIES
In March 2000, the Company recorded an increase of $1,417,000 to its investment
in Accordant Health Services, Inc. and a corresponding increase to paid in
capital related to an increase in the value of the Company's equity interest in
Accordant.
Curative Health Services, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The condensed consolidated financial statements are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements for the year ended December 31, 2000 and
notes thereto contained in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission. The results of operations for
the three months ended March 31, 2001 are not necessarily indicative of the
results to be expected for the entire fiscal year ending December 31, 2001.
Note 2. Net Income per Common Share
Net income per common share, basic, is computed by dividing the net income by
the weighted average number of common shares outstanding. Net income per
common share, diluted, is computed by dividing net income by the weighted
average number of shares outstanding plus dilutive common share equivalents.
The following table sets forth the computation of basic and diluted earnings
per share:
2001 2000
---- ----
Weighted average shares, basic 7,121 10,011
Effect of diluted stock options 234 97
--- --
Weighted average shares, diluted 7,355 10,108
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Note 3. Purchase of Millennium Health, Inc.
On March 31, 2001 the Company purchased all of the outstanding capital stock
of eBiocare.com, Inc. which does business as Millennium Health,
Inc.("Millennium") for $32.3 million in cash and the assumption and repayment
of approximately $5 million in debt. The transaction was accounted for as a
stock purchase and the accounts of Millennium and related goodwill are
included in the consolidated financial statements at March 31, 2001.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Revenues. The Company's revenues for the first quarter of fiscal year 2001
decreased 39 percent to $13,517,000 compared to $22,200,000 for the first
quarter of the prior fiscal year. The revenue decrease is attributable to the
termination of 42 hospital based programs during the last 12 months,
renegotiation of existing contracts which resulted in reduced revenue to the
Company, the conversion of 15 under arrangement model programs to management
models which have lower revenue and expenses, and a reduction of Procuren
revenues as a result of a decline in Procuren patients. The reduction in revenue
was partially offset by the opening of 9 new programs over the last 12 months.
The Company ended the first quarter of 2001 with 119 hospital based Wound Care
Centers operating compared to 153 at the end of the first quarter 2000. Revenues
at existing centers declined 24 percent in the first quarter of 2001 as compared
to the same period in 2000, primarily due to such contract renegotiations and
declining Procuren revenues. At any time during the year, 10% to 20% of the
Company's contracts are being renegotiated with the client hospital for a
variety of contractual terms or issues. Historically, some contracts have
expired without renewal and others have been terminated by the Company or the
client hospital for various reasons prior to their scheduled expiration.
Hospitals are currently facing financial challenges associated with lower
occupancy rates and reduced revenue streams due to pricing pressures from third
party payors. Program terminations by client hospitals have been effected for
such reasons as reduced reimbursement, financial restructuring, layoffs,
bankruptcies or even hospital closings. Further, the Medicare program
implemented a new reimbursement system during 2000 for hospital outpatient
services which has reduced reimbursement rates to hospitals. The termination,
non-renewal or renegotiation of a material number of management contracts could
result in a continued decline in the Company's revenue. As the result of the
recent legal action against the Company, further unanticipated terminations or
non-renewals may take place. Additionally, new business development has been
slower than normal given the legal uncertainties facing the Company. Any
inability of the Company to develop new Wound Care Centers could continue the
revenue decline. The Company has and expects that it will continue to modify its
management contracts with many of its hospital customers which could result in
reduced revenue to the Company or even contract terminations. Further, the
Company has been notified by Cytomedix, Inc. that it intends to exercise its
option under the asset purchase agreement to close its Procuren processing
facilities by July 2001. As a result, there will be no revenue or expenses
related to Procuren subsequent to the expected closing date. Although the
Company does not expect that this event will have a material effect on its
operations or financial condition other than reducing revenues, there can be no
assurance that this event will not result in the termination of hospital
contracts. The Company has a number of initiatives to counter the decline in
revenue, although there can be no assurance that the initiatives will be
successful. Total new patients decreased 15 percent from 15,636 in the first
quarter of 2000 to 13,260 for the same period in 2001. The total number of new
patients receiving Procuren(R) therapy decreased from 1,018 in the first quarter
of 2000 to 436 in the first quarter of 2001. The percentage of patients
receiving Procuren(R) therapy decreased during the first quarter of 2001 to 3
percent from 7 percent for the same period in 2000.
Costs of Product Sales and Services. Costs of product sales and services for the
first quarter decreased from $13,984,000 in 2000 to $8,097,000 in 2001, a
decrease of 42 percent. The decrease is attributable to reduced staffing and
operating expenses of approximately $1,559,000 related to the operation of 119
programs at the end of the first quarter 2001 compared with 153 programs
operating at the end of the first quarter 2000, and reduced expenditures of
approximately $835,000 related to Procuren production. Additionally there were
23 fewer under-arrangement programs in operation at the end of the first quarter
of 2001 as compared to the same period for 2000 at which the services component
of costs is higher than at the Company's other centers due to the additional
clinical staffing and expenses that these models require. For the first quarter
of 2001 this reduction in the number of under-arrangement programs accounted for
approximately $1,501,000 of the decrease in product costs and services. During
2000, the Company eliminated 58 sales positions which resulted in a reduction of
approximately $1,315,000 in product costs and services for the first quarter of
2001 as compared with the same period in 2000. As a percentage of revenues,
costs of product sales and services for the first quarter of 2001 was 60 percent
compared to 63 percent for the same period in 2000. The decrease is attributed
to the lower number of under arrangement programs in operation during the first
quarter of 2001 and the elimination of sales positions.
Selling, General and Administrative. Selling, general and administrative
expenses for the first quarter decreased from $6,535,000 in 2000 to $5,129,000
in 2001 a decrease of 22 percent. The decrease is primarily attributable to the
positions eliminated at the Company during 2000 as well as the closing of the
Company's Dallas field office. As a percentage of revenues, selling, general and
administrative expenses were 38 percent in the first quarter of 2001 compared to
29 percent for 2000. The increase is due to the reduced revenue base in 2001.
Net Income. Net income was $492,000 or $0.07 per diluted share in the first
quarter of 2001 compared to $1,389,000 or $0.14 per diluted share in the first
quarter of 2000. The decrease in earnings of $897,000 for the three months ended
March 31, 2001 as compared to March 31, 2000 is attributable to reduced revenues
offset by lower expenses. The net income per diluted share for the first quarter
of 2001 was positively affected as compared to the first quarter of 2000 by a
2.8 million share decrease in the weighted average common shares, diluted. This
decrease was primarily attributable to the Company's repurchase of shares.
Liquidity and Capital Resources.
Working capital was $12.8 million at March 31, 2001 compared to $44.4 million at
December 31, 2000. Total cash and cash equivalents as of March 31, 2001 was $6.7
million and was invested primarily in highly liquid money market funds,
commercial paper and government securities. The Company's cash and cash
equivalents and marketable securities held-to-maturity declined from $46 million
at December 31, 2000 to $6.7 million at March 31, 2001. The decline is primarily
attributable to the use of $38.5 million for the purchase of Millennium Health,
Inc. on March 30, 2001. The ratio of current assets to current liabilities was
3.3:1 at December 31, 2000 and 1.7:1 at March 31, 2001.
Cash flows used in operating activities for the first three months of 2001
totaled $1,964,000 primarily attributable to the payment of severance and other
accrued expenses. Cash flows used in investing activities totaled $9,528,000
primarily attributable to the purchase of Millennium Health, Inc. offset by the
sale of marketable securities. Cash flows used in financing activities totaled
$854,000, primarily attributable to the Company's repurchase of shares of common
stock.
For the first three months of 2001, the Company experienced a net increase in
accounts receivable of $9,380,000 primarily attributable to the purchase of
Millennium Health. Accounts receivable days outstanding were 71 days as of
March 31, 2001 as compared to 61 days at December 31, 2000. Days outstanding
for the wound care business was 59 days and for the specialty pharmacy business
87 days at March 31, 2001.
The Company's longer term cash requirements include working capital for the
expansion of its wound care and specialty pharmacy businesses. Other cash
requirements are anticipated for capital expenditures in the normal course of
business, the acquisition of software, computers and equipment related to the
Company's management information systems. Additionally the Company expects to
incur significant legal costs related to the Department of Justice actions and
shareholder class action lawsuits filed against the Company (See Legal
Proceedings, Part II Item 1). The Company expects that based on its current
business plan, its existing cash and cash equivalents will be sufficient to
satisfy its current working capital needs. The Company anticipates obtaining a
revolving line of credit to supplement its working capital needs as the result
of the Millennium acquisition and the Department of Justice's letter of credit
request (See Legal Proceedings, Part II, Item 1). The effects of inflation and
foreign currency translation risks are considered immaterial.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company does not have operations subject to risks of material foreign
currency fluctuations, nor does it use derivative financial instruments in its
operations or investment portfolios. The Company places its investments in
instruments that meet high credit quality standards, as specified in the
Company's investment policy guidelines. The Company does not expect any material
loss with respect to its investment portfolio or exposure to market risks
associated with interest rates.
Curative Health Services, Inc. and Subsidiaries
Part II. Other Information
Item 1. Legal Proceedings
With respect to the Company's pending litigation and legal actions previously
disclosed, there have been no material developments other than disclosed in Item
3 - "Legal Proceedings" in the Company's Annual Report on form 10K filed for the
year ended December 31, 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.24 Curative Health Services, Inc. 2000 Stock Incentive Plan.
Exhibit 10.30 Stock Purchase Agreement, dated as of March 19, 2001, by and
among Curative Health Services, Inc. and certain stockholders of
eBiocare.com, Inc.(Incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K filed on April 13, 2001)
Exhibit 10.31 Form of Stockholder Purchase Agreement, between Curative Health
Services, Inc. and all other stockholders of eBiocare.com, Inc.(Incorporated
by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K filed
on April 13, 2001)
Exhibit 10.32 Form of Option/Warrant Repurchase and Surrender Agreement,
between eBiocare.com, Inc. and the holders of options and warrants to
purchase common stock of eBiocare (Incorporated by reference to Exhibit 2.3
to the Company's Current Report on Form 8-K filed on April 13, 2001)
(b) Forms 8-K
There were no reports on Form 8-K during the quarter ended March 31, 2001.
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.
Dated: May 15, 2001
Curative Health Services, Inc.
(Registrant)
/s/ John C. Prior
---------------------------------------
John C. Prior
President
/s/ Thomas Axmacher
----------------------------------------
Thomas Axmacher
Chief Financial Officer
(Principal Financial and Accounting Officer)
Exhibit 10.24
CURATIVE HEALTH SERVICES, INC.
2000 STOCK INCENTIVE PLAN
Section 1. Purpose of Plan; Effect on Prior Plan.
(a) Purpose. The purpose of the Plan (as defined below) is to promote the
interests of Curative Health Services, Inc., a Minnesota corporation, and its
shareholders by aiding the Company in attracting and retaining employees,
officers, consultants, independent contractors and non-employee directors
capable of assuring the future success of the Company, to offer such persons
incentives to put forth maximum efforts for the success of the Company's
business and to afford such persons an opportunity to acquire a proprietary
interest in the Company.
(b) Effect on Prior Plan. From and after the Effective Date, no stock options or
other awards shall be granted under the Company's 1991 Stock Option Plan, as
amended (the "Prior Plan"). All stock options granted and outstanding thereunder
prior to the Effective Date shall remain outstanding in accordance with the
terms of the Prior Plan.
Section 2. Definitions.
As used in the Plan, the following terms shall have the meanings set forth
below:
(a) "Affiliate" shall mean (i) any entity that, directly or indirectly through
one or more intermediaries, is controlled by the Company and (ii) any entity in
which the Company has a significant equity interest, in each case as determined
by the Committee.
(b) "Award" shall mean any Option, Stock Appreciation Right, Restricted Stock,
Restricted Stock Unit, Performance Award, Other Stock Grant or Other Stock-Based
Award granted under the Plan.
(c) "Award Agreement" shall mean any written agreement, contract or other
instrument or document evidencing any Award granted under the Plan.
(d) "Board" shall mean the Board of Directors of the Company.
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to
time, and any regulations promulgated thereunder.
(f) "Committee" shall mean a committee of Directors designated by the Board to
administer the Plan. The Committee shall be comprised of not less than such
number of Directors as shall be required to permit Awards granted under the Plan
to qualify under Rule 16b-3, and each member of the Committee shall be a
"Non-Employee Director" within the meaning of Rule 16b-3 and an "outside
director" within the meaning of Section 162(m) of the Code. The Company expects
to have the Plan administered in accordance with the requirements for the award
of ?qualified performance-based compensation" within the meaning of Section
162(m) of the Code.
(g) "Company" shall mean Curative Health Services, Inc., a Minnesota
corporation, and any successor corporation.
(h) "Director" shall mean a member of the Board.
(i) "Effective Date" shall mean the date given in Section 10 of the Plan.
(j) "Eligible Person" shall mean any employee, officer, consultant, independent
contractor or Director providing services to the Company or any Affiliate whom
the Committee determines to be an Eligible Person.
(k) "Fair Market Value" shall mean, with respect to any property (including,
without limitation, any Shares or other securities), the fair market value of
such property determined by such methods or procedures as shall be reasonably
established in good faith from time to time by the Committee.
(l) "Incentive Stock Option" shall mean an option granted under Section 6(a) of
the Plan that is intended to meet the requirements of Section 422 of the Code or
any successor provision.
(m) "Non-Qualified Stock Option" shall mean an option granted under Section 6(a)
of the Plan that is not intended to be an Incentive Stock Option.
(n) "Option" shall mean an Incentive Stock Option or a Non-Qualified Stock
Option, and shall include Reload Options.
(o) "Other Stock Grant" shall mean any right granted under Section 6(e) of the
Plan.
(p) "Other Stock-Based Award" shall mean any right granted under Section 6(f) of
the Plan.
(q) "Participant" shall mean an Eligible Person designated to be granted an
Award under the Plan.
(r) "Performance Award" shall mean any right granted under Section 6(d) of the
Plan.
(s) "Person" shall mean any individual, corporation, partnership, association
or trust.
(t) "Plan" shall mean the Curative Health Services, Inc. 2000 Stock
Incentive Plan, as amended from time to time, the provisions of which are set
forth herein.
(u) "Reload Option" shall mean any Option granted under Section 6(a)(iv) of
the Plan.
(v) "Restricted Stock" shall mean any Shares granted under Section 6(c) of
the Plan.
(w) "Restricted Stock Unit" shall mean any unit granted under Section 6(c) of
the Plan evidencing the right to receive a Share (or a cash payment equal to the
Fair Market Value of a Share) at some future date.
(x) "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended, or
any successor rule or regulation.
(y) "Shares" shall mean shares of Common Stock, $.01 par value per share, of the
Company or such other securities or property as may become subject to Awards
pursuant to an adjustment made under Section 4(c) of the Plan.
(z) "Stock Appreciation Right" shall mean any right granted under Section 6(b)
of the Plan.
Section 3. Administration.
(a) Power and Authority of the Committee. The Plan shall be administered by the
Committee. Subject to the express provisions of the Plan and to applicable law,
the Committee shall have full power and authority to: (i) designate
Participants; (ii) determine the type or types of Awards to be granted to each
Participant under the Plan; (iii) determine the number of Shares to be covered
by (or with respect to which payments, rights or other matters are to be
calculated in connection with) each Award; (iv) determine the terms and
conditions of any Award or Award Agreement; (v) amend the terms and conditions
of any Award or Award Agreement and accelerate the exercisability of Options or
the lapse of restrictions relating to Restricted Stock, Restricted Stock Units
or other Awards; (vi) determine whether, to what extent and under what
circumstances Awards may be exercised in cash, Shares, other securities, other
Awards or other property, or canceled, forfeited or suspended; (vii) determine
whether, to what extent and under what circumstances cash, Shares, promissory
notes, other securities, other Awards, other property and other amounts payable
with respect to an Award under the Plan shall be deferred either automatically
or at the election of the holder thereof or the Committee; (viii) interpret and
administer the Plan and any instrument or agreement, including an Award
Agreement, relating to the Plan; (ix) establish, amend, suspend or waive such
rules and regulations and appoint such agents as it shall deem appropriate for
the proper administration of the Plan; and (x) make any other determination and
take any other action that the Committee deems necessary or desirable for the
administration of the Plan, subject to the exclusive authority of the Board
under Section 7(a) herein to amend or terminate this Plan. Unless otherwise
expressly provided in the Plan or unless otherwise disapproved by the Board, all
designations, determinations, interpretations and other decisions under or with
respect to the Plan or any Award shall be within the sole discretion of the
Committee, may be made at any time and shall be final, conclusive and binding
upon any Participant, any holder or beneficiary of any Award and any employee of
the Company or any Affiliate.
(b) Delegation. The Committee may delegate its powers and duties under the Plan
to one or more officers of the Company or any Affiliate or a committee of such
officers, subject to such terms, conditions and limitations as the Committee may
establish in its sole discretion, provided, however, that the Committee shall
not delegate its powers and duties under the Plan (i) with regard to officers or
directors of the Company or any Affiliate who are subject to Section 16 of the
Securities Exchange Act of 1934, as amended or (ii) in such a manner as would
cause the Plan not to comply with the requirements of Section 162(m) of the
Code.
(c) Power and Authority of the Board of Directors. Notwithstanding anything to
the contrary contained herein, the Board may, at any time and from time to time,
without any further action of the Committee, exercise the powers and duties of
the Committee under the Plan.
Section 4. Shares Available for Awards.
(a) Shares Available. Subject to adjustment as provided in Section 4(c) of the
Plan, the aggregate number of Shares that may be issued under all Awards under
the Plan shall be 1,600,000. Shares to be issued under the Plan may be either
authorized but unissued Shares or Shares acquired in the open market or
otherwise. Any Shares that are used by a Participant as full or partial payment
to the Company of the purchase price relating to an Award, or in connection with
the satisfaction of tax obligations relating to an Award, shall again be
available for granting Awards (other than Incentive Stock Options) under the
Plan. In addition, if any Shares covered by an Award or to which an Award
relates are not purchased or are forfeited, or if an Award otherwise terminates
without delivery of any Shares, then the number of Shares counted against the
aggregate number of Shares available under the Plan with respect to such Award,
to the extent of any such forfeiture or termination, shall again be available
for granting Awards under the Plan. Notwithstanding the foregoing, the number of
Shares available for granting Incentive Stock Options under the Plan shall not
exceed 1,600,000, subject to adjustment as provided in the Plan and subject to
the provisions of Section 422 or 424 of the Code or any successor provision.
(b) Accounting for Awards. For purposes of this Section 4, if an Award entitles
the holder thereof to receive or purchase Shares, the number of Shares covered
by such Award or to which such Award relates shall be counted on the date of
grant of such Award against the aggregate number of Shares available for
granting Awards under the Plan.
(c) Adjustments. In the event that the Committee shall determine that any
dividend or other distribution (whether in the form of cash, Shares, other
securities or other property), recapitalization, stock split, reverse stock
split, reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase or exchange of Shares or other securities of the Company, issuance of
warrants or other rights to purchase Shares or other securities of the Company
or other similar corporate transaction or event affects the Shares such that an
adjustment is determined by the Committee to be appropriate in order to prevent
dilution or enlargement of the benefits or potential benefits intended to be
made available under the Plan, then the Committee shall, in such manner as it
may deem equitable, adjust any or all of (i) the number and type of Shares (or
other securities or other property) that thereafter may be made the subject of
Awards, (ii) the number and type of Shares (or other securities or other
property) subject to outstanding Awards and (iii) the purchase or exercise price
with respect to any Award; provided, however, that the number of Shares covered
by any Award or to which such Award relates shall always be a whole number.
(d) Award Limitations Under the Plan. No Eligible Person may be granted any
Award or Awards under the Plan, the value of which Award or Awards is based
solely on an increase in the value of the Shares after the date of grant of such
Award or Awards, for more than 500,000 Shares (subject to adjustment as provided
for in Section 4(c) of the Plan), in the aggregate in any calendar year. The
foregoing annual limitation specifically includes the grant of any Award or
Awards representing "qualified performance-based compensation" within the
meaning of Section 162(m) of the Code.
Section 5. Eligibility.
Any Eligible Person shall be eligible to be designated a Participant. In
determining which Eligible Persons shall receive an Award and the terms of any
Award, the Committee may take into account the nature of the services rendered
by the respective Eligible Persons, their present and potential contributions to
the success of the Company or such other factors as the Committee, in its
discretion, shall deem relevant. Notwithstanding the foregoing, an Incentive
Stock Option may only be granted to full or part-time employees (which term as
used herein includes, without limitation, officers and Directors who are also
employees), and an Incentive Stock Option shall not be granted to an employee of
an Affiliate unless such Affiliate is also a "subsidiary corporation" of the
Company within the meaning of Section 424(f) of the Code or any successor
provision.
Section 6. Awards.
(a) Options. The Committee is hereby authorized to grant Options to Participants
with the following terms and conditions and with such additional terms and
conditions not inconsistent with the provisions of the Plan as the Committee
shall determine:
(i) Exercise Price. The purchase price per Share purchasable under an Option
shall be determined by the Committee; provided, however, that such purchase
price shall not be less than 100% of the Fair Market Value of a Share on the
date of grant of such Option.
(ii) Option Term. The term of each Option shall be fixed by the Committee.
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(iii) Time and Method of Exercise. The Committee shall determine the time or
times at which an Option may be exercised in whole or in part and the method or
methods by which, and the form or forms (including, without limitation, cash,
Shares, promissory notes, other securities, other Awards or other property, or
any combination thereof, having a Fair Market Value on the exercise date equal
to the relevant exercise price) in which, payment of the exercise price with
respect thereto may be made or deemed to have been made.
(iv) Reload Options. The Committee may grant Reload Options, separately or
together with another Option, pursuant to which, subject to the terms and
conditions established by the Committee, the Participant would be granted a new
Option when the payment of the exercise price of a previously granted option is
made by the delivery of Shares owned by the Participant pursuant to Section
6(a)(iii) of the Plan or the relevant provisions of another plan of the Company,
and/or when Shares are tendered or withheld as payment of the amount to be
withheld under applicable income tax laws in connection with the exercise of an
Option, which new Option would be an Option to purchase the number of Shares not
exceeding the sum of (A) the number of Shares so provided as consideration upon
the exercise of the previously granted option to which such Reload Option
relates and (B) the number of Shares, if any, tendered or withheld as payment of
the amount to be withheld under applicable tax laws in connection with the
exercise of the option to which such Reload Option relates pursuant to the
relevant provisions of the plan or agreement relating to such option. Reload
Options may be granted with respect to Options previously granted under the Plan
or any other stock option plan of the Company or may be granted in connection
with any Option granted under the Plan or any other stock option plan of the
Company at the time of such grant. Such Reload Options shall have a per share
exercise price equal to the Fair Market Value of one Share as of the date of
grant of the new Option. Any Reload Option shall be subject to availability of
sufficient Shares for grant under the Plan.
(v) With respect to Incentive Stock Options granted under the Plan, to the
extent that the aggregate Fair Market Value (determined at the time the
Incentive Stock Option is granted) of the Shares with respect to which all
Incentive Stock Options are exercisable for the first time by an employee during
any calendar year exceeds $100,000, in accordance with Section 422A(d) of the
Code, such Options shall be treated as Non-Qualified Stock Options.
(b) Stock Appreciation Rights. The Committee is hereby authorized to grant Stock
Appreciation Rights to Participants subject to the terms of the Plan and any
applicable Award Agreement. A Stock Appreciation Right granted under the Plan
shall confer on the holder thereof a right to receive upon exercise thereof the
excess of (i) the Fair Market Value of one Share on the date of exercise (or, if
the Committee shall so determine, at any time during a specified period before
or after the date of exercise) over (ii) the grant price of the Stock
Appreciation Right as specified by the Committee, which price shall not be less
than 100% of the Fair Market Value of one Share on the date of grant of the
Stock Appreciation Right. Subject to the terms of the Plan and any applicable
Award Agreement, the grant price, term, methods of exercise, dates of exercise,
methods of settlement and any other terms and conditions of any Stock
Appreciation Right shall be as determined by the Committee. The Committee may
impose such conditions or restrictions on the exercise of any Stock Appreciation
Right as it may deem appropriate.
(c) Restricted Stock and Restricted Stock Units. The Committee is hereby
authorized to grant Restricted Stock and Restricted Stock Units to Participants
with the following terms and conditions and with such additional terms and
conditions not inconsistent with the provisions of the Plan as the Committee
shall determine:
(i) Restrictions. Shares of Restricted Stock and Restricted Stock Units shall be
subject to such restrictions as the Committee may impose (including, without
limitation, a waiver by the Participant of the right to vote or to receive any
dividend or other right or property with respect thereto), which restrictions
may lapse separately or in combination at such time or times, in such
installments or otherwise as the Committee may deem appropriate.
(ii) Stock Certificates. Any Restricted Stock granted under the Plan shall be
registered in the name of the Participant and shall bear an appropriate legend
referring to the terms, conditions and restrictions applicable to such
Restricted Stock. In the case of Restricted Stock Units, no Shares shall be
issued at the time such Awards are granted.
(iii) Forfeiture. Except as otherwise determined by the Committee, upon
termination of employment (as determined under criteria established by the
Committee) during the applicable restriction period, all Shares of Restricted
Stock and all Restricted Stock Units at such time subject to restriction shall
be forfeited and reacquired by the Company; provided, however, that the
Committee may, when it finds that a waiver would be in the best interest of the
Company, waive in whole or in part any or all remaining restrictions with
respect to Shares of Restricted Stock or Restricted Stock Units. Upon the lapse
or waiver of restrictions and the restricted period relating to Restricted Stock
Units evidencing the right to receive Shares, such Shares shall be issued and
delivered to the holders of the Restricted Stock Units.
(d) Performance Awards. The Committee is hereby authorized to grant Performance
Awards to Participants subject to the terms of the Plan and any applicable Award
Agreement. A Performance Award granted under the Plan (i) may be denominated or
payable in cash, Shares (including, without limitation, Restricted Stock and
Restricted Stock Units), other securities, other Awards or other property and
(ii) shall confer on the holder thereof the right to receive payments, in whole
or in part, upon the achievement of such performance goals during such
performance periods as the Committee shall establish. Subject to the terms of
the Plan and any applicable Award Agreement, the performance goals to be
achieved during any performance period, the length of any performance period,
the amount of any Performance Award granted, the amount of any payment or
transfer to be made pursuant to any Performance Award and any other terms and
conditions of any Performance Award shall be determined by the Committee.
(e) Other Stock Grants. The Committee is hereby authorized, subject to the terms
of the Plan and any applicable Award Agreement, to grant to Participants Shares
without restrictions thereon as are deemed by the Committee to be consistent
with the purpose of the Plan.
(f) Other Stock-Based Awards. The Committee is hereby authorized to grant to
Participants subject to the terms of the Plan and any applicable Award
Agreement, such other Awards that are denominated or payable in, valued in whole
or in part by reference to, or otherwise based on or related to, Shares
(including, without limitation, securities convertible into Shares), as are
deemed by the Committee to be consistent with the purpose of the Plan. Shares or
other securities delivered pursuant to a purchase right granted under this
Section 6(f) shall be purchased for such consideration, which may be paid by
such method or methods and in such form or forms (including, without limitation,
cash, Shares, promissory notes, other securities, other Awards or other property
or any combination thereof), as the Committee shall determine, the value of
which consideration, as established by the Committee, shall not be less than
100% of the Fair Market Value of such Shares or other securities as of the date
such purchase right is granted.
(g) General.
(i) No Cash Consideration for Awards. Awards shall be granted for no cash
consideration or for such minimal cash consideration as may be required by
applicable law.
(ii) Awards May Be Granted Separately or Together. Awards may, in the discretion
of the Committee, be granted either alone or in addition to, in tandem with or
in substitution for any other Award or any award granted under any plan of the
Company or any Affiliate other than the Plan. Awards granted in addition to or
in tandem with other Awards or in addition to or in tandem with awards granted
under any such other plan of the Company or any Affiliate may be granted either
at the same time as or at a different time from the grant of such other Awards
or awards.
(iii) Forms of Payment under Awards. Subject to the terms of the Plan and of any
applicable Award Agreement, payments or transfers to be made by the Company or
an Affiliate upon the grant, exercise or payment of an Award may be made in such
form or forms as the Committee shall determine (including, without limitation,
cash, Shares, promissory notes, other securities, other Awards or other property
or any combination thereof), and may be made in a single payment or transfer, in
installments or on a deferred basis, in each case in accordance with rules and
procedures established by the Committee. Such rules and procedures may include,
without limitation, provisions for the payment or crediting of reasonable
interest on installment or deferred payments or the grant or crediting of
dividend equivalents with respect to installment or deferred payments.
(iv) Limits on Transfer of Awards. No Award (other than Other Stock Grants) and
no right under any such Award shall be transferable by a Participant otherwise
than by will or by the laws of descent and distribution; provided, however,
that, if so determined by the Committee, a Participant may, in the manner
established by the Committee, transfer Options (other than Incentive Stock
Options) or designate a beneficiary or beneficiaries to exercise the rights of
the Participant and receive any property distributable with respect to any Award
upon the death of the Participant. Each Award or right under any Award shall be
exercisable during the Participant's lifetime only by the Participant or, if
permissible under applicable law, by the Participant's guardian or legal
representative. No Award or right under any such Award may be pledged,
alienated, attached or otherwise encumbered, and any purported pledge,
alienation, attachment or encumbrance thereof shall be void and unenforceable
against the Company or any Affiliate.
(v) Term of Awards. The term of each Award shall be for such period as may be
determined by the Committee.
(vi) Restrictions; Securities Exchange Listing. All Shares or other securities
delivered under the Plan pursuant to any Award or the exercise thereof shall be
subject to such restrictions as the Committee may deem advisable under the Plan,
applicable federal or state securities laws and regulatory requirements, and the
Committee may cause appropriate entries to be made or legends to be affixed to
reflect such restrictions. If any securities of the Company are traded on a
securities exchange, the Company shall not be required to deliver any Shares or
other securities covered by an Award unless and until such Shares or other
securities have been admitted for trading on such securities exchange.
Section 7. Amendment and Termination; Adjustments.
(a) Amendments to the Plan. The Board may amend, alter, suspend, discontinue or
terminate the Plan at any time; provided, however, that, notwithstanding any
other provision of the Plan or any Award Agreement, without the approval of the
shareholders of the Company, no such amendment, alteration, suspension,
discontinuation or termination shall be made that, absent such approval:
(i) would violate the rules or regulations of the Nasdaq National Market
System or any securities exchange that are applicable to the Company; or
(ii) would cause the Company to be unable, under the Code, to grant Incentive
Stock Options under the Plan.
(b) Amendments to Awards. The Committee may waive any conditions of or rights of
the Company under any outstanding Award, prospectively or retroactively. Except
as otherwise provided herein or in the Award Agreement, the Committee may not
amend, alter, suspend, discontinue or terminate any outstanding Award,
prospectively or retroactively, if such action would adversely affect the rights
of the holder of such Award, without the consent of the Participant or holder or
beneficiary thereof.
(c) Correction of Defects, Omissions and Inconsistencies. The Committee may
correct any defect, supply any omission or reconcile any inconsistency in the
Plan or any Award in the manner and to the extent it shall deem desirable to
carry the Plan into effect.
Section 8. Income Tax Withholding; Tax Bonuses.
(a) Withholding. In order to comply with all applicable federal or state income
tax laws or regulations, the Company may take such action as it deems
appropriate to ensure that all applicable federal or state payroll, withholding,
income or other taxes, which are the sole and absolute responsibility of a
Participant, are withheld or collected from such Participant. In order to assist
a Participant in paying all or a portion of the federal and state taxes to be
withheld or collected upon exercise or receipt of (or the lapse of restrictions
relating to) an Award, the Committee, in its discretion and subject to such
additional terms and conditions as it may adopt, may permit the Participant to
satisfy such tax obligation by (i) electing to have the Company withhold a
portion of the Shares otherwise to be delivered upon exercise or receipt of (or
the lapse of restrictions relating to) such Award with a Fair Market Value equal
to the amount of such taxes or (ii) delivering to the Company Shares other than
Shares issuable upon exercise or receipt of (or the lapse of restrictions
relating to) such Award with a Fair Market Value equal to the amount of such
taxes. The election, if any, must be made on or before the date that the amount
of tax to be withheld is determined.
(b) Tax Bonuses. The Committee, in its discretion, shall have the authority, at
the time of grant of any Award under this Plan or at any time thereafter, to
approve cash bonuses to designated Participants to be paid upon their exercise
or receipt of (or the lapse of restrictions relating to) Awards in order to
provide funds to pay all or a portion of federal and state taxes due as a result
of such exercise or receipt (or the lapse of such restrictions). The Committee
shall have full authority in its discretion to determine the amount of any such
tax bonus.
Section 9. General Provisions.
(a) No Rights to Awards. No Eligible Person, Participant or other Person shall
have any claim to be granted any Award under the Plan, and there is no
obligation for uniformity of treatment of Eligible Persons, Participants or
holders or beneficiaries of Awards under the Plan. The terms and conditions of
Awards need not be the same with respect to any Participant or with respect to
different Participants.
(b) Award Agreements. No Participant will have rights under an Award granted to
such Participant unless and until an Award Agreement shall have been duly
executed on behalf of the Company and, if requested by the Company, signed by
the Participant.
(c) No Limit on Other Compensation Arrangements. Nothing contained in the Plan
shall prevent the Company or any Affiliate from adopting or continuing in effect
other or additional compensation arrangements, and such arrangements may be
either generally applicable or applicable only in specific cases.
(d) No Right to Employment. The grant of an Award shall not be construed as
giving a Participant the right to be retained in the employ of the Company or
any Affiliate, nor will it affect in any way the right of the Company or an
Affiliate to terminate such employment at any time, with or without cause. In
addition, the Company or an Affiliate may at any time dismiss a Participant from
employment free from any liability or any claim under the Plan or any Award,
unless otherwise expressly provided in the Plan or in any Award Agreement.
(e) Governing Law. The validity, construction and effect of the Plan or
any Award, and any rules and regulations relating to the Plan or any
Award, shall be determined in accordance with the laws of the State of
Minnesota.
(f) Severability. If any provision of the Plan or any Award is or becomes or is
deemed to be invalid, illegal or unenforceable in any jurisdiction or would
disqualify the Plan or any Award under any law deemed applicable by the
Committee, such provision shall be construed or deemed amended to conform to
applicable laws, or if it cannot be so construed or deemed amended without, in
the determination of the Committee, materially altering the purpose or intent of
the Plan or the Award, such provision shall be stricken as to such jurisdiction
or Award, and the remainder of the Plan or any such Award shall remain in full
force and effect.
(g) No Trust or Fund Created. Neither the Plan nor any Award shall create or be
construed to create a trust or separate fund of any kind or a fiduciary
relationship between the Company or any Affiliate and a Participant or any other
Person. To the extent that any Person acquires a right to receive payments from
the Company or any Affiliate pursuant to an Award, such right shall be no
greater than the right of any unsecured general creditor of the Company or any
Affiliate.
(h) No Fractional Shares. No fractional Shares shall be issued or delivered
pursuant to the Plan or any Award, and the Committee shall determine whether
cash shall be paid in lieu of any fractional Shares or whether such fractional
Shares or any rights thereto shall be canceled, terminated or otherwise
eliminated.
(i) Headings. Headings are given to the Sections and subsections of the Plan
solely as a convenience to facilitate reference. Such headings shall not be
deemed in any way material or relevant to the construction or interpretation of
the Plan or any provision thereof.
Section 10. Effective Date of the Plan.
The Plan shall be effective as of the date on which the approval of the
shareholders of the Company is obtained (the "Effective Date").
Section 11. Term of the Plan.
No Award shall be granted under the Plan after the tenth anniversary of the
Effective Date or any earlier date of discontinuation or termination established
pursuant to Section 7(a) of the Plan. However, unless otherwise expressly
provided in the Plan or in an applicable Award Agreement, any Award theretofore
granted may extend beyond such date.