FORM 10-Q
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
Commission file number 1-10714
AUTOZONE, INC.
(Exact name of registrant as specified in its charter)
|
|
|
of incorporation or organization) |
Identification No.) |
123 South Front Street
Memphis, Tennessee 38103
(Address of principal executive offices) (Zip Code)
(901) 495-6500
Registrant's telephone number, including area code
(not applicable)
Former name, former address and former fiscal year, if changed since
last report.
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 periods 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date.
Common Stock, $.01 Par Value -- 101,322,769 shares as of June 1, 2002.
PART I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
2002 |
2001 |
|||
|
||||
Current assets: | ||||
Cash and cash equivalents |
$ 7,242
|
$ 7,286
|
||
Accounts receivable |
22,500
|
19,135
|
||
Merchandise inventories |
1,291,189
|
1,242,896
|
||
Prepaid expenses |
13,758
|
18,426
|
||
Deferred income taxes |
37,288
|
40,768
|
||
Total current assets |
1,371,977
|
1,328,511
|
||
Property and equipment: | ||||
Property and equipment |
2,427,756
|
2,372,311
|
||
Less accumulated depreciation and amortization |
736,163
|
661,868
|
||
1,691,593
|
1,710,443
|
|||
Other assets: | ||||
Cost in excess of net assets acquired |
305,390
|
305,390
|
||
Deferred income taxes |
71,426
|
80,593
|
||
Other assets |
3,861
|
7,575
|
||
380,677
|
393,558
|
|||
$3,444,247
|
$3,432,512
|
|||
LIABILITIES AND STOCKHOLDERS' EQUITY
|
||||
Current liabilities: | ||||
Accounts payable |
$ 932,106
|
$ 945,666
|
||
Accrued expenses |
316,292
|
292,153
|
||
Income taxes payable |
99,618
|
28,835
|
||
Total current liabilities |
1,348,016
|
1,266,654
|
||
Long-term debt |
1,251,134
|
1,225,402
|
||
Other liabilities |
70,182
|
74,243
|
||
Stockholders' equity |
774,915
|
866,213
|
||
$3,444,247
|
$3,432,512
|
|||
AUTOZONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share amounts)
Twelve
|
Weeks
|
Ended
|
Thirty-six
|
Weeks
|
Ended
|
|||
2002 |
2001 |
2002 |
2001 |
|||||
Net sales
|
$1,224,810
|
$1,139,957
|
$3,482,173
|
$3,177,522
|
||||
Cost
of sales, including warehouse
and delivery expenses
|
682,826 |
657,379 |
1,949,153 |
1,852,046 |
||||
Operating,
selling, general and
administrative expenses
|
359,551 |
349,512 |
1,073,934 |
1,004,362 |
||||
Restructuring
and impairment
charges
|
|
5,200
|
|
5,200
|
||||
Operating
profit
|
182,433
|
127,866
|
459,086
|
315,914
|
||||
Interest
expense -- net
|
17,419
|
23,841
|
55,124
|
72,365
|
||||
Income
before income taxes
|
165,014
|
104,025
|
403,962
|
243,549
|
||||
Income
taxes
|
62,700
|
40,500
|
153,800
|
94,500
|
||||
Net income
|
$ 102,314
|
$ 63,525
|
$ 250,162
|
$ 149,049
|
||||
Weighted
average shares
for basic earnings per share
|
103,961 |
112,364 |
106,264 |
114,330 |
||||
Effect
of dilutive stock equivalents
|
2,683
|
673
|
2,751
|
531
|
||||
Adjusted
weighted average shares
for diluted earnings per share
|
106,644
|
113,037
|
109,015
|
114,861
|
||||
Basic
earnings per share
|
$ 0.98
|
$
0.57
|
$
2.35
|
$
1.30
|
||||
Diluted
earnings per share
|
$ 0.96
|
$
0.56
|
$
2.29
|
$
1.30
|
AUTOZONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
|
|
|
||
2002 |
2001 |
|||
Cash flows from
operating activities:
|
||||
Net income |
$ 250,162
|
$ 149,049
|
||
Adjustments to reconcile net income to net
cash provided by operating activities: |
||||
Depreciation and amortization |
82,497
|
91,694
|
||
Net increase in merchandise inventories |
(83,754)
|
(105,964)
|
||
Net increase in current liabilities |
113,516
|
72,075
|
||
Restructuring and impairment charges |
5,200
|
|||
Income tax benefit from exercise of options |
28,159
|
2,018
|
||
Other -- net |
(1,724)
|
(7,890)
|
||
Net cash provided by operating activities |
388,856
|
206,182
|
||
Cash flows from
investing activities:
|
||||
Purchases of property and equipment |
(81,845)
|
(137,305)
|
||
Proceeds from sale of business |
25,723
|
|||
Proceeds
from sale of property and equipment
|
9,716
|
43,353
|
||
Increase in other assets |
(5,175)
|
|||
Notes receivable from officers |
1,911
|
23
|
||
Net cash used in investing activities |
(44,495)
|
(99,104)
|
||
Cash flows from
financing activities:
|
||||
Net proceeds from debt |
25,732
|
142,792
|
||
Purchase of treasury stock |
(412,442)
|
(261,590)
|
||
Net proceeds from exercise of stock options |
42,257
|
8,128
|
||
Other |
77
|
3,811
|
||
Net cash used
in financing activities
|
(344,376)
|
(106,859)
|
||
Net change in
cash and cash equivalents
|
(15)
|
219
|
||
Cash and cash
equivalents at beginning of period
|
7,257
|
6,969
|
||
Cash and cash
equivalents at end of period
|
$ 7,242
|
$ 7,188
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A-Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain prior year amounts have been reclassified to conform to the fiscal 2002 presentation. Operating results for the thirty-six weeks ended May 4, 2002, are not necessarily indicative of the results that may be expected for the fiscal year ending August 31, 2002. For further information, refer to the financial statements and footnotes included in the Company's annual report on Form 10-K for the year ended August 25, 2001.
Excess Property Writedowns |
Obligations |
Settlements/ Terminations |
& Other |
|||||
Beginning
balance
|
$
|
$29,576
|
$ 6,713
|
$ 2,715
|
||||
Cash
outlays
|
|
306
|
3,792
|
1,876
|
||||
Balance
at November 17, 2001
|
29,270
|
2,921
|
839
|
|||||
Cash
outlays
|
|
116
|
1,333
|
477
|
||||
Balance
at February 9, 2002
|
29,154
|
1,588
|
362
|
|||||
Cash
outlays
|
375
|
212
|
172
|
|||||
Other
adjustments
|
(6,400)
|
6,400
|
|
|
||||
Balance
at May 4, 2002
|
$ (6,400)
|
$22,379
|
$ 1,376
|
$ 190
|
|
|
|
|
|
|
|||
2002 |
2001 |
2002 |
2001 |
|||||
Reported net earnings
|
$102,314
|
$ 63,525
|
$250,162
|
$149,049
|
||||
Add: Goodwill amortization, net of tax
|
|
1,236
|
|
3,707
|
||||
Adjusted net income
|
$102,314
|
$ 64,761
|
$250,162
|
$152,756
|
||||
Basic earnings per share:
|
||||||||
Reported net earnings |
$ 0.98
|
$ 0.57
|
$ 2.35
|
$ 1.30
|
||||
Goodwill amortization, net of tax |
|
$ 0.01
|
|
$ 0.04
|
||||
Adjusted net income |
$ 0.98
|
$ 0.58
|
$ 2.35
|
$ 1.34
|
||||
Diluted earnings per share:
|
||||||||
Reported net earnings |
$ 0.96
|
$ 0.56
|
$ 2.29
|
$ 1.30
|
||||
Goodwill amortization, net of tax |
|
$ 0.01
|
|
$ 0.03
|
||||
Adjusted net income
|
$ 0.96
|
$ 0.57
|
$ 2.29
|
$ 1.33
|
2002 |
2001 |
|||
6%
Notes due November 2003
|
$ 150,000
|
$150,000
|
||
6.5%
Debentures due July 2008
|
190,000
|
190,000
|
||
7.99%
Notes due April 2006
|
150,000
|
150,000
|
||
Bank
term loan due December 2003,
interest rate of 3.00% at May 4, 2002, and
4.95% at August 25, 2001
|
115,000 |
115,000 |
||
Bank
term loan due May 2003,
interest rate of 3.00% at May 4, 2002, and
4.69% at August 25, 2001
|
200,000 |
200,000 |
||
Commercial
paper,
weighted average rate of 2.31% at May 4, 2002,
and 3.93% at August 25, 2001
|
428,467
|
385,447
|
||
Unsecured bank loans |
15,000
|
|||
Other |
17,667
|
19,955
|
||
$1,251,134
|
$1,225,402
|
May 4, 2002 |
|
May 5, 2001 |
May 4, 2002 |
|
May 5, 2001 |
|||
Reported net earnings |
$102,314
|
$63,525
|
$250,162
|
$149,049
|
||||
Foreign currency translation
adjustment |
(816)
|
415
|
(292)
|
187
|
||||
Unrealized gain (loss) on
interest rate swap contracts |
1,403 |
(2,186) |
(1,422) |
(3,973) |
||||
Comprehensive income |
$102,901
|
$61,754
|
$248,448
|
$145,263
|
Note I-Contingencies
AutoZone, Inc., is a defendant in a lawsuit entitled "Coalition for a Level Playing Field, L.L.C., et al., v. AutoZone, Inc., Wal-mart Stores, Inc., Advance Auto Parts, Inc., The Pep Boys -- Manny, Moe and Jack, O'Reilly Automotive, Inc., and Keystone Automotive Operations, Inc.," filed in the U.S. District Court for the Eastern District of New York in February 2000. The case was filed by over 100 plaintiffs, which are principally automotive aftermarket warehouse distributors and jobbers. The plaintiffs claim in the Complaint that the defendants have knowingly received volume discounts, rebates, slotting and other allowances, fees, free inventory, sham advertising and promotional payments, a share in the manufacturers' profits, and excessive payments for services purportedly performed for the manufacturers in violation of the Robinson-Patman Act. The plaintiffs, in an amended Complaint, stated that they seek substantially more than $1 billion in damages (including statutory trebling) and a permanent injunction prohibiting defendants from committing further violations of the Robinson-Patman Act and from opening any further stores to compete with plaintiffs as long as defendants continue to violate the Act. AutoZone, Inc., answered the complaint on February 15, 2002, denying the plaintiff's allegations. The parties will enter into a period of discovery related to the merits of the case. The Company will vigorously defend against this case, and believes the suit to be without merit and that the Company will ultimately prevail. The Company currently believes that this matter will not likely result in liabilities material to the Company's financial condition or results of operations.
The Company currently, and from time to time, is involved in various other legal proceedings incidental to the conduct of its business. Although the amount of liability that may result from these proceedings cannot be ascertained, the Company does not currently believe that, in the aggregate, these other matters will result in liabilities material to the Company's financial condition or results of operations.
Note J-Sale of TruckPro Business
In December 2001, the Company's heavy-duty truck parts business was sold to a group of investors in exchange for cash and a six-year note. The Company has deferred a preliminary gain of $4.5 million related to the sale due to uncertainties associated with the realization of the gain. The transaction is still subject to a final working capital adjustment based on the closing balance sheet that will occur during the fourth quarter. The Company has agreed to assist the purchaser of the business by providing certain corporate services that had been provided by the Company prior to the sale for a period of six months at the Company's incremental cost of providing the services. In addition, we have subleased some of the TruckPro store properties to the purchaser of the TruckPro business for an initial term of not less than twenty years.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies
Product Warranties
We provide our customers limited warranties on certain products that may range from 30 days to lifetime warranties. We provide for a reserve for warranty obligations at the time of a product's sale based on that product's historical return rate. Our product vendors pay a portion of our warranty expense. However, at times, the vendors may not cover all of the warranty expense. If we materially underestimate our warranty expense on products that are not fully warranted to us by our vendors, we may experience a material adverse impact on our reported financial position and results of operations. If we overestimate our warranty expense, we will recognize any excess in income at the time the excess is determined.
LIFO Inventory Method
Our inventories are stated at the lower of cost or market using the last-in, first out (LIFO) method. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must necessarily be based on management's estimates of expected year-end inventory levels and costs.
Litigation and Other Contingent Liabilities
We have received claims related to and been notified that we are a defendant in a number of legal proceedings resulting from our business, such as employment matters, product liability, general liability related to our store premises and alleged violation of the Robinson-Patman Act (as specifically described in Note I to the Financial Statements). We accrue reserves using our best estimate of our probable and reasonably estimable contingent liabilities, such as lawsuits and our retained liability for insured claims. We do not believe that any of these contingent liabilities, individually or in the aggregate, will have a material adverse effect upon our consolidated financial position or results of operations. However, if our estimates related to these contingent liabilities are incorrect, the future results of operations for any particular fiscal quarter or year could be materially adversely affected. Some of our litigation is being conducted before juries in states where past jury awards have been significant, and we are unable to predict the results of any jury verdict. If we overestimate our contingent liabilities, we will recognize any excess in income at the time the excess is determined.
Vendor Allowances
We receive various payments and allowances from our vendors based on volume of purchases and in payment for services that AutoZone provides to the vendors. Monies received from vendors include rebates, allowances and cooperative advertising funds. Typically these funds are determined periodically and are, at times, dependent on projected purchase volumes and advertising plans. Certain vendor allowances are used exclusively for advertising and other direct expenses and are recognized as a reduction to selling, general and administrative expenses when earned. Rebates and other miscellaneous incentives are earned based on purchases and/or the sale of the product. These monies are treated as a reduction of inventories and are recognized as a reduction to cost of sales as the inventories are sold. The amounts to be received are subject to changes in market conditions or marketing strategies for the vendors, and changes in profitability or sell-through of the related merchandise for AutoZone.
Restructuring and Impairment Charges
In the third and fourth quarters of fiscal 2001, we incurred pre-tax restructuring and impairment charges of $156.8 million as more fully described in Note B to the financial statements. A substantial portion of the charges related to the closure of 51 domestic auto parts stores and the writedown of various real estate projects in process and excess properties. The accrual for net lease obligations related to leased properties included estimates and assumptions regarding the following: the probability that properties could be subleased and the amounts and timing of such subleases which were estimated on a property-by-property basis, the long-term borrowing rate used to discount the lease obligations to present value and estimates of future upkeep costs. The fair value of owned properties was determined using the following estimates and assumptions: the amount of assets in stores to be closed that can be redeployed to other stores was estimated to be 40% of the carrying value of fixtures and selling prices for properties were based on estimates received from brokers and recent sales prices of similar properties assuming sales in an orderly fashion over a twelve-month period. The fair value of the TruckPro business was determined based on the purchase price specified in preliminary offers received from third parties. The inventory rationalization charge included the following estimates and assumptions: all inventory initiatives should be completed by the end of the first quarter of fiscal 2002 (but in no case would exceed one year), no consideration would be received for the discontinued inventory and some sell-through of the inventory on-hand at year end 2001 may occur before the inventory initiatives are complete. When actual results differ from the estimates, we record the impact in income from operations in the period the related disposal transactions occur. In addition, the estimates are reviewed on a quarterly basis and any adjustments are made as deemed necessary based on the most recent information.
Twelve Weeks Ended May 4, 2002, Compared to
The following table shows AutoZone's obligations and commitments to make
future payments under contractual obligations (in thousands):
Contractual Obligations |
|
|
|
1 year |
|
|
|
|
|
years |
Long-Term Debt |
$1,251,134
|
$428,467
|
$619,742
|
$ 12,925
|
$190,000
|
|||||
Synthetic Leases |
22,280
|
22,280
|
||||||||
Other Operating Leases |
674,377
|
109,794
|
257,779
|
121,429
|
185,375
|
|||||
Construction Obligations |
|
15,085
|
|
15,085
|
|
|
|
|
|
|
Total Contractual Cash Obligations |
$1,962,876
|
$553,346
|
$877,521
|
$156,634
|
$375,375
|
Other Commercial Commitments
|
|
Amounts Committed |
|
Less than 1 year |
|
1-3 years
|
|
4-5 years
|
|
Over 5 years |
Standby Letters of Credit |
$ 26,434
|
$ 26,434
|
|
|
|
|||||
Surety Bonds |
24,495
|
24,495
|
||||||||
Share Repurchase Obligations |
108,789
|
|
108,789
|
|
|
|
|
|
|
|
Total Commercial Commitments |
$159,718
|
|
$159,718
|
|
|
|
|
|
|
Item 3. Quantitative and Qualitative Disclosures About Market Risk
AutoZone is exposed to market risk from changes in foreign exchange and interest rates. To minimize interest rate risks, we periodically use various financial instruments. All hedging transactions are authorized and executed pursuant to policies and procedures established by our Board of Directors. We do not buy or sell financial instruments for trading purposes.
We adopted Statements of Financial Accounting Standards Nos. 133, 137 and 138 (collectively "SFAS 133") pertaining to the accounting for derivatives and hedging activities at the beginning of fiscal 2001. SFAS 133 requires us to recognize all derivative instruments in the balance sheet at fair value. The adoption of SFAS 133 impacts the accounting for our interest rate hedging program. AutoZone reduces its exposure to increases in interest rates by entering into interest rate swap contracts. All of our interest rate swaps are designated as cash flow hedges. At May 4, 2002, and August 25, 2001, we held interest rate swap contracts related to $190 million of variable-rate debt. Of the $190 million, $50 million matures in fiscal 2003 and $140 million matures in fiscal 2004.
Upon the adoption of SFAS 133, we recorded the fair value of the interest rate swaps in our consolidated balance sheet. Thereafter, we have adjusted the carrying value of the interest rate swaps to reflect their current fair value. The related gains or losses on the swaps are deferred in stockholders' equity (as a component of comprehensive income). These deferred gains and losses are recognized in income in the period in which the related interest rate payments being hedged have been recognized in expense. However, to the extent that the change in value of an interest rate swap contract does not perfectly offset the change in the interest rate payments being hedged, that ineffective portion is immediately recognized in income. The fair values of the interest rate swaps were a liability of $7.0 million at May 4, 2002, and a liability of $5.6 million at August 25, 2001.
The fair value of AutoZone's debt was estimated at $1.24 billion at May 4, 2002, and $1.21 billion at August 25, 2001, based on the market value of the debt at those dates. Such fair value is less than the carrying value of debt at May 4, 2002, by $7.8 million and at August 25, 2001, by $17.3 million. We had $756.4 million of variable-rate debt outstanding at May 4, 2002, and $730.4 million at August 25, 2001. At these borrowing levels, a one percentage point increase in interest rates would have an unfavorable annual impact on our pre-tax earnings and cash flows of $6.8 million and $6.6 million, respectively. The primary interest rate exposure on variable-rate debt is based on LIBOR.
PART II.
OTHER INFORMATION
RISK FACTORS
We may not be able to increase sales by the same historic growth rates.
We have significantly increased our domestic store count in the past five fiscal years, growing from 1,423 stores at August 31, 1996, to 3,019 stores at August 25, 2001, an average store count increase per year of 16%. We do not plan to continue our store count growth rate at the historic pace. In addition, a portion of our total sales increases each year results from increases in sales at existing stores. We cannot provide any assurance that we can continue to increase same store sales as our stores mature in their markets.
We have an ever-increasing need for qualified employees.
In fiscal year 2001, our consolidated employee count increased from approximately 43,200 at the beginning of the year to about 44,600, a 3% increase in the year. We do not know if we can continue to hire and retain qualified employees at current wage rates. In the event of increasing wage rates, if we do not increase our wages competitively, our customer service could suffer by reason of a declining quality of our workforce or, alternatively, our earnings would decrease if we increase our wage rates.
If demand for our products slows, then our business may be materially affected.
Demand for products sold by our stores depends on many factors. In the short term, it may depend upon:
In the event of war, acts of terrorism, or either are threatened, it may
have a negative impact on our ability to obtain merchandise available for
sale in our stores. Some of our merchandise is imported from other countries.
If imported goods become difficult or impossible to bring into the United
States, and if we cannot obtain such merchandise from other sources at
similar costs, our sales and profit margins may be negatively affected.
In addition, a significant amount of the merchandise sold in our Mexico
stores is exported from the United States. If we cannot export this merchandise
in a timely manner, sales in our Mexico stores may be adversely affected.
In the event that commercial transportation is curtailed or substantially
delayed, our business may be adversely impacted, as we may have difficulty
shipping merchandise to our distribution centers and stores.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are
filed as part of this report:
3.1
|
Restated
Articles of Incorporation of AutoZone, Inc. Incorporated by reference to
Exhibit 3.1 to the Form 10-Q for the quarter ended February 13, 1999.
|
|
3.2
|
Second
Amended and Restated By-laws of AutoZone, Inc. Incorporated by reference
to Exhibit 3 to the Form 8-K dated March 21, 2000.
|
|
10.1 |
AutoZone,
Inc. Fourth Amended and Restated 1998 Director Stock Option Plan.
|
(b) (1) We filed a Current Report on Form 8-K dated February 26, 2002, attaching a press release thatreported earnings for the quarter ended February 9, 2002.
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.
AUTOZONE, INC.
By: /s/ MICHAEL G. ARCHBOLD
By: /s/ TRICIA K. GREENBERGER
EXHIBIT INDEX
The following exhibits are filed as part of this
report:
3.1
|
Restated
Articles of Incorporation of AutoZone, Inc. Incorporated by reference to
Exhibit 3.1 to the Form 10-Q for the quarter ended February 13, 1999.
|
|
3.2
|
Second
Amended and Restated By-laws of AutoZone, Inc. Incorporated by reference
to Exhibit 3 to the Form 8-K dated March 21, 2000.
|
|
10.1 |
AutoZone,
Inc. Fourth Amended and Restated 1998 Director Stock Option Plan.
|
This Fourth Amended
and Restated 1998 Director Stock Option Plan shall be effective as of the19th
day of March, 2002, the date of its adoption by the Board of Directors
of AutoZone, Inc.
1. PURPOSE OF THE PLAN.
Under this 1998 Director Stock Option Plan (the "Plan") of AutoZone, Inc. (the "Company"), non-qualified options to purchase shares of the Company's capital stock shall be granted to Non-Employee Directors of the Company. The Plan is designed to enable the Company to attract and retain Non-Employee Directors of the highest caliber and experience, and to increase their ownership of the Company's capital stock.
2. STOCK SUBJECT TO PLAN.
The maximum number of shares of stock for which options ("Options") granted hereunder may be exercised shall be 140,000 shares of the Company's Common Stock, par value $.01 per share (the "Common Stock"), subject to the adjustments provided in Section 7. All shares of stock subject to Options shall be treasury shares of Common Stock. Shares of stock subject to the unexercised portions of any Options which expire or terminate or are canceled may again be subject to Options granted hereunder.
3. PARTICIPATING DIRECTORS.
Each member of the Board of Directors of the Company (the "Board") who is not, at the time that eligible directors are granted Options pursuant to Section 5 hereof, an employee or officer of the Company or any of its subsidiaries (a "Non-Employee Director"), shall be eligible to participate in the Plan.
4. ADMINISTRATION.
(a) The Plan shall be administered by the Compensation Committee of the Board (the "Committee") which shall consist of two or more directors who are Non-Employee Directors, appointed by and holding office at the pleasure of the Board. Appointment of Committee members shall be effective upon acceptance of appointment. Committee members may resign at any time by delivering written notice to the Board. Vacancies on the Committee shall be filled by the Board.(b) It shall be the duty of the Committee to conduct the general administration of the Plan in accordance with its provisions. The Committee shall have the power to interpret the Plan and the Options and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret, amend or revoke any such rules. The Board shall have no right to exercise any of the rights or duties of the Committee under the Plan.
(c) The Committee shall act by a majority of its members in office. The Committee may act either by vote at a meeting or by a memorandum or other written instrument signed by a majority of the Committee.
(d) All expenses and liabilities incurred by members of the Committee in connection with the administration of the Plan shall be borne by the Company. The Committee may employ attorneys, consultants, accountants, appraisers, brokers or other persons, and the Committee, the Company and its officers and directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding on each Non-Employee Director who has been granted an Option hereunder (sometimes referred to hereinafter as an "Optionee"), the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or the Options, and all members of the Committee shall be fully protected by the Company with respect to any such action, determination or interpretation.
During the existence of the Plan, Options shall be granted as follows:(a) On January 1 of each year, each Non-Employee Director as of such date shall be granted an Option to purchase 1,500 shares of Common Stock (subject to the adjustments provided in Section 7); provided, however, that (i) with respect to the calendar year beginning January 1, 1998, each Non-Employee Director who is an Non-Employee Director on the effective date of the Plan shall be granted an Option to purchase 1,000 shares of Common Stock (subject to the adjustments provided in Section 7) as of the effective date of the Plan, and (ii) each new Non-Employee Director who is elected a director after January 1, 2000, shall be granted an initial Option to purchase 3,000 shares of Common Stock as of the date of his or her election as a director and a pro-rata portion of that year's annual grant set forth in (i);
(b) Beginning on January 1, 2001, and on each January 1 thereafter, each Non-Employee Director who, as of December 31 of the prior year, beneficially owns shares of Common Stock having an aggregate Fair Market Value (as determined below) greater than or equal to five (5) times such Non-Employee Director's annual director fee (not including meeting fees) payable by the Company for such year, shall be granted an Option to purchase 1,500 shares of Common Stock (subject to the adjustments provided in Section 7). For purposes of this Plan, the "Fair Market Value" of a share of Common Stock shall mean, as to any particular day, the average of the highest and lowest prices quoted for a share of Common Stock trading on the New York Stock Exchange on that day, or if no such prices were quoted for the shares of Common Stock on the New York Stock Exchange for that day for any reason, the average of the highest and lowest prices quoted on the last Business Day (as defined below) on which prices were quoted. The highest and lowest prices for the shares of Common Stock shall be those published in the edition of The Wall Street Journal or any successor publication for the next Business Day. For purposes of this Plan, the term "Business Day" shall mean a day on which the Company's executive offices in Memphis, Tennessee, are open for business and on which trading is conducted on the New York Stock Exchange.
(c) Each Non-Employee Director as of March 21, 2000, shall be granted an Option to purchase 500 shares of Common Stock (subject to the adjustments provided in Section 7) as of such date.
6. OPTION PROVISIONS.
Each Option shall be evidenced by an agreement between the Company and the Non-Employee Director and shall contain the following terms and provisions, and such other terms and provisions as the Committee may authorize:
(a) The exercise price of each Option shall be equal to the aggregate Fair Market Value of the shares of Common Stock subject to the Option on the date of grant;(b) Payment for shares of Common Stock purchased upon any exercise of the Option shall be made in full at the time of such exercise (i) in cash, (ii) by delivery of shares of Common Stock already owned by the Optionee, duly endorsed for transfer to the Company, (iii) by delivery of a notice that the Optionee has placed a market sell order with a broker approved by the Company with respect to shares of Common Stock then issuable upon exercise of the Option, and that the broker has been directed to pay a sufficient portion of the net proceeds of the sale to the Company in satisfaction of the option exercise price, or (iv) by a combination of any of the foregoing methods of payment. For purposes of exercising the Option, the value of any shares of Common Stock delivered in payment shall be the Fair Market Value of such shares of Common Stock on the last Business Day prior to deliver;
(c) Subject to subsection (d) below and Section 7 hereof, the Option shall become fully vested and exercisable on the third anniversary of the date of grant;
(d) The Option shall terminate and may not be exercised to any extent by anyone after the first to occur of the following events:
(i) the expiration of ten years from the date of grant;(ii) the expiration of five years from the date upon which the Non-Employee Director ceases to be a director of the Company if the Non-Employee Director has reached the age of 70 on or before such date ("Normal Retirement Age");
(iii) the expiration of 90 days from the date of the Non-Employee Director's death;
(iv) the date that the Non-Employee Director ceases to be a director of the Company (for a reason other than the death of the Non-Employee Director) if the Non-Employee Director has not reached Normal Retirement Age;
(v) subject to Section 7(b) hereof, the effective date of a Corporate Transaction (as defined below), unless the Committee waives this provision in connection with such transaction.
In the event that a Non-Employee Director ceases to be a director of the Company prior to the time that the Option has become vested and exercisable pursuant to subsection (c) above, the Option shall continue to vest and become exercisable pursuant to subsection (c) above until such time as the Option terminates pursuant to this subsection (d).(e)Notwithstanding any other provision herein, the Option may not be exercised prior to the admission of the shares of stock issuable upon exercise of the Option to listing on notice of issuance on any stock exchange on which shares of the same class are then listed; nor unless and until, in the opinion of counsel for the Company, such securities may be issued and delivered without causing the Company to be in violation of or incur any liability under any Federal, state or other securities law, any requirement of any securities exchange listing agreement to which the Company may be a party, or any other requirement of law or of any regulatory body having jurisdiction over the Company; and
(f) The Option shall not be transferable by the Optionee other than by will or the laws of descent and distribution, may not be pledged or hypothecated, and shall be exercisable during the Optionee's lifetime only by the Optionee or by his or her guardian or legal representative.
(a) Subject to subsection (d) below, in the event that the Committee determines that any dividend or other distribution (whether in the form of cash, Common Stock, other securities, or other property), recapitalization, reclassification, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, liquidation, dissolution, or sale, transfer, exchange or other disposition of all or substantially all of the assets of the Company (including, but not limited to, a Corporate Transaction, as defined below), or exchange of Common Stock or other securities of the Company, issuance of warrants or other rights to purchase Common Stock or other securities of the Company, or other similar corporate transaction or event, in the Committee's sole discretion, affects the Common Stock such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits intended to be made available under the Plan or with respect to any Option, then the Committee shall, in such manner as it may deem equitable, adjust any or all of:(i) the number and kind of shares of Common Stock (or other securities or property) with respect to which Options may be granted under the Plan (including, but not limited to, adjustments of the limitations in Section 2 on the maximum number and kind of shares which may be issued under the Plan);(ii) the number and kind of shares of Common Stock (or other securities or property) subject to outstanding Options; and
(iii) the grant or exercise price with respect to any Option.
(b) Subject to subsection (d) below, in the event of any Corporate Transaction (as defined below), the Plan shall terminate, and all outstanding Options shall terminate, unless provisions shall be made in writing in connection with such Corporate Transaction for the continuance of the Plan and/or for the assumption of Options theretofore granted, or the substitution for such Options of options covering the stock of a successor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices, in which event the Plan and Options theretofore granted shall continue in the manner and under the terms so provided. If the Plan and unexercised Options would otherwise terminate pursuant to the foregoing sentence, then, for such period of time prior to the consummation of such Corporate Transaction as the Company shall designate, all outstanding Options shall be exercisable as to all shares covered thereby, notwithstanding anything to the contrary in Section 6(c) hereof or the provisions of such Option;(c) For purposes of the Plan, the term "Corporate Transaction" shall mean any of the following stockholder-approved transactions to which the Company is a party:
(i) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the State in which the Company is incorporated, form a holding company or effect a similar reorganization as to form whereupon this Plan and all Options are assumed by the successor entity;(ii) the sale, transfer, exchange or other disposition of all or substantially all of the assets of the Company, in complete liquidation or dissolution of the Company in a transaction not covered by the exceptions to clause (i) above; or
(iii) any reverse merger in which the Company is the surviving entity but in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities are transferred or issued to a person or persons different from those who held such securities immediately prior to such merger.
(d) No adjustment or action described in this Section 7 shall be authorized or occur to the extent such adjustment or action would result in short-swing profits liability under Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or violate the exemptive conditions of Rule 16b-3 of the Exchange Act unless the Committee determines that the Option is not to comply with such exemptive conditions.
The Company shall be entitled to require payment in cash or deduction from other compensation payable to each Optionee of any sums required by federal, state or local tax laws to be withheld with respect to the issuance, vesting or exercise of any Option. The Committee may in its discretion and in satisfaction of the foregoing requirement allow such Optionee to elect to have the Company withhold shares of Common Stock otherwise issuable under such Option (or allow the return of shares of Common Stock) having an aggregate Fair Market Value equal to the sums required to be withheld.
9. LOANS.
The Committee may, in its absolute discretion, extend one or more loans to Optionees in connection with the exercise of an Option. The terms and conditions of any such loan shall be set by the Committee.
10. DURATION, TERMINATION AND AMENDMENT OF PLAN.
The Plan shall become effective upon its adoption by the Board. Unless sooner terminated, the Plan shall expire ten (10) years from the date the Plan is adopted by the Board, so that no Option may be granted hereunder after that date although any option outstanding on that date may thereafter be exercised in accordance with its terms. The Board may alter, amend, suspend or terminate this Plan, provided that no such action shall deprive an Optionee, without his or her consent, of any Option previously granted pursuant to the Plan or of any of the Optionee's rights under such Option.
11. COMPLIANCE WITH LAWS.
This Plan, the granting and vesting of Options under this Plan and the issuance and delivery of shares of Common Stock and the payment of money under this Plan or under Options granted hereunder are subject to compliance with all applicable federal and state laws, rules and regulations (including but not limited to state and federal securities laws and federal margin requirements) and to such approvals by any listing, regulatory or governmental authority as may, in the opinion of counsel for the Company, be necessary or advisable in connection therewith. Any securities delivered under this Plan shall be subject to such restriction, and the person acquiring such securities shall, if requested by the Company, provide such assurances and representations to the Company as the Company may deem necessary or desirable to assure compliance with all applicable legal requirements. To the extent permitted by applicable law, the Plan and Options granted or awarded hereunder shall be deemed amended to the extent necessary to conform to such laws, rules or regulations.
12. TITLES.
Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Plan.
13. GOVERNING LAW.
This Plan and any agreements hereunder shall be administered, interpreted
and enforced under the internal laws of the State of Nevada without regard
to the conflicts of laws rules thereof.