Delaware 22-1467904 ----------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) One ADP Boulevard, Roseland, New Jersey 07068 ----------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) |
Indicate by check mark whether the Registrant (1) has filed all annual, quarterly and other reports required to be filed with the commission and (2) has been subject to the filing requirements for at least the past 90 days.
X Yes No
As of December 31, 2001 there were 620,271,986 common shares outstanding.
Three Months Ended Six Months Ended
December 31, December 31,
--------------------- ----------------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues, other than interest
on funds held for clients
and PEO revenues $1,508,922 $1,450,633 $2,942,398 $2,823,471
Interest on funds held for
clients 110,072 129,918 223,260 245,557
PEO revenues (A) 62,034 59,271 123,253 114,923
---------- ---------- ---------- ----------
Total revenues 1,681,028 1,639,822 3,288,911 3,183,951
---------- ---------- ---------- ----------
Operating expenses 691,970 677,102 1,368,322 1,337,060
General, administrative and
selling expenses 393,558 410,627 850,119 846,062
Systems development and
programming costs 117,540 127,503 233,369 246,577
Depreciation and amortization 68,449 78,524 137,912 160,068
Other(income)expense (20,389) 3,166 (50,911) (35,326)
---------- ---------- ---------- ----------
1,251,128 1,296,922 2,538,811 2,554,441
---------- ---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES 429,900 342,900 750,100 629,510
Provision for income taxes 165,300 135,460 288,900 248,670
---------- ---------- ---------- ----------
NET EARNINGS $ 264,600 $ 207,440 $ 461,200 $ 380,840
========== ========== ========== ==========
BASIC EARNINGS PER SHARE $ 0.43 $ 0.33 $ 0.75 $ 0.60
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE $ 0.42 $ 0.32 $ 0.73 $ 0.59
========== ========== ========== ==========
Dividends per share $ 0.1150 $ 0.1025 $ 0.2175 $ 0.1900
========== ========== ========== ==========
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(A) Net of pass-through costs of $649,939 and $651,151, $1,246,401 and $1,243,398, respectively.
See notes to the consolidated financial statements.
December 31, June 30,
Assets 2001 2001
------ ----------- -----------
Cash and cash equivalents $ 1,326,967 $ 1,275,356
Short-term marketable securities 407,802 515,245
Accounts receivable 929,370 976,638
Other current assets 275,026 316,221
----------- -----------
Total current assets 2,939,165 3,083,460
Long-term marketable securities 896,477 806,363
Long-term receivables 213,724 224,964
Land and buildings 468,367 457,110
Data processing equipment 679,873 653,641
Furniture, leaseholds and other 528,916 533,883
----------- -----------
1,677,156 1,644,634
Less accumulated depreciation (1,074,068) (1,029,984)
----------- -----------
Total property, plant and equipment 603,088 614,650
Other assets 230,934 219,133
Goodwill 1,293,620 1,151,874
Other intangibles 448,579 449,536
----------- -----------
Total assets before funds held for clients 6,625,587 6,549,980
Funds held for clients 10,995,695 11,339,110
----------- -----------
Total assets $17,621,282 $17,889,090
=========== ===========
Liabilities and Shareholders' Equity
------------------------------------
Accounts payable $ 150,115 $ 156,324
Accrued expenses & other current
liabilities 984,031 1,032,273
Income taxes 131,387 147,676
----------- -----------
Total current liabilities 1,265,533 1,336,273
Long-term debt 94,895 110,227
Other liabilities 243,855 208,880
Deferred income taxes 238,299 207,928
Deferred revenue 83,921 85,931
----------- -----------
Total liabilities before clients funds
obligations 1,926,503 1,949,239
Client funds obligations 10,827,710 11,238,854
----------- -----------
Total liabilities 12,754,213 13,188,093
Shareholders' equity:
Common stock 63,870 63,870
Capital in excess of par value 420,177 553,927
Retained earnings 5,480,074 5,153,408
Treasury stock (946,448) (837,244)
Accumulated other comprehensive income (150,604) (232,964)
----------- -----------
Total shareholders' equity 4,867,069 4,700,997
----------- -----------
Total liabilities and shareholders' equity $17,621,282 $17,889,090
=========== ===========
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See notes to the consolidated financial statements.
Six Months Ended
December 31,
2001 2000
---------- ----------
Cash Flows From Operating Activities:
-------------------------------------
Net earnings $ 461,200 $ 380,840
Expenses not requiring outlay of cash 188,909 183,417
Changes in operating net assets 62,188 (19,150)
---------- ----------
Net cash flows provided by operating activities 712,297 545,107
---------- ----------
Cash Flows From Investing Activities:
-------------------------------------
Purchase of marketable securities (2,058,862) (5,578,302)
Proceeds from sale of marketable securities 2,477,841 1,581,357
Net change in client fund obligations (411,144) 3,744,974
Capital expenditures (65,515) (90,915)
Additions to intangibles (47,601) (43,543)
Acquisitions of businesses, net of cash acquired (122,274) (45,314)
Other 6,381 (10,261)
---------- ----------
Net cash flows used in investing activities (221,174) (442,004)
---------- ----------
Cash Flows From Financing Activities:
-------------------------------------
Net proceeds from short-term borrowings 49,803 26,253
Payments of debt (3,299) (43,317)
Proceeds from issuance of common stock 107,661 100,541
Repurchases of common stock (459,143) -
Dividends paid (134,534) (120,003)
---------- ----------
Net cash flows used in financing activities (439,512) (36,526)
---------- ----------
Net change in cash and cash equivalents 51,611 66,577
Cash and cash equivalents, beginning of period 1,275,356 1,227,637
---------- ----------
Cash and cash equivalents, end of period $1,326,967 $1,294,214
========== ==========
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See notes to the consolidated financial statements.
The information furnished herein reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. Adjustments are of a normal recurring nature. The results of operations for the six months ended December 31, 2001 may not be indicative of the results to be expected for the year ending June 30, 2002. These statements should be read in conjunction with the annual financial statements and related notes of Automatic Data Processing, Inc. (ADP or the Company) for the year ended June 30, 2001. Certain reclassifications have been made to prior period financial statements to conform to the current presentation.
Note A - The calculation of basic and diluted earnings per share (EPS) is
as follows:
(In thousands, except EPS)
Periods ended December 31, 2001
----------------------------------------------------
Three Month Period Six Month Period
------------------------ -------------------------
Income Shares EPS Income Shares EPS
Basic $264,600 617,335 $0.43 $461,200 618,957 $0.75
Effect of zero coupon
subordinated notes 403 2,410 879 2,556
Effect of stock
options - 10,492 - 9,988
-------- ------- -------- -------
Diluted $265,003 630,237 $0.42 $462,079 631,501 $0.73
======== ======= ===== ======== ======= =====
Periods ended December 31, 2000
-----------------------------------------------------
Three Month Period Six Month Period
------------------------- -------------------------
Income Shares EPS Income Shares EPS
Basic $207,440 632,082 $0.33 $380,840 631,035 $0.60
Effect of zero coupon
subordinated notes 635 3,820 1,314 3,947
Effect of stock
options - 15,905 - 15,425
------- ------- -------- -------
Diluted $208,075 651,807 $0.32 $382,154 650,407 $0.59
======== ======= ===== ======== ======= =====
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Note B - On July 1, 2001, the Company adopted Financial Accounting Standards Board Statement of Financial Accounting Standard No. 141, "Business Combinations" (SFAS 141) and Statement of Financial Accounting Standard No. 142 "Goodwill and Other Intangible Assets" (SFAS 142).
SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. The adoption of SFAS 141 did not have a material effect on the Company's results of operations or financial position.
SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. SFAS 142 also requires intangible assets with finite useful lives be amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
The Company completed its assessment of impairment as of July 1, 2001, which indicated no impairment of goodwill.
Prior to fiscal year 2002, the Company amortized goodwill over periods from 10 to 40 years. Pro forma net income and earnings per share for the three months and six months ended December 31, 2000, adjusted to eliminate historical amortization of goodwill and related tax effects, are as follows:
(In thousands, except EPS)
Three months ended Six months ended
December 31, December 31,
2000 2000
---- ----
Previously reported net earnings $207,440 $380,840
Goodwill amortization 13,450 25,925
Tax provision (1,664) (3,283)
-------- --------
Pro forma net earnings $219,226 $403,482
======== ========
Previously reported basic EPS $ 0.33 $ 0.60
Previously reported diluted EPS $ 0.32 $ 0.59
Pro forma basic EPS $ 0.35 $ 0.64
Pro forma diluted EPS $ 0.34 $ 0.62
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Note C - Other (income) expense consists of the following:
Three months ended Six months ended
December 31, December 31,
2001 2000 2001 2000
---- ---- ---- ----
Interest income on corporate
funds $(24,280) $(43,817) $(57,825) $(86,211)
Realized (gains)losses on
investments (2,460) 43,634 (6,454) 44,238
Interest expense 6,351 3,349 13,368 6,647
-------- -------- -------- --------
Total other (income)expense $(20,389) $ 3,166 $(50,911) $(35,326)
======== ========= ======== ========
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Note D - Comprehensive income for the three months and six months ended December 31, 2001 and 2000 is as follows:
Three months ended Six months ended
December 31, December 31,
2001 2000 2001 2000
---- ---- ---- ----
Net earnings $264,600 $207,440 $461,200 $380,840
Other comprehensive income:
Foreign currency translation
adjustment 9,016 23,574 47,418 (44,399)
Unrealized gains(losses) on
securities (41,442) 39,405 34,942 54,944
-------- -------- -------- --------
Comprehensive income $232,174 $270,419 $543,560 $391,385
======== ======== ======== ========
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Note E - Interim financial data by segment:
ADP evaluates performance of its business units based on recurring operating results before interest on corporate funds, interest expense, realized gains and losses on investments, foreign currency gains and losses, and income taxes. Certain revenues and expenses are charged to business units at a standard rate for management and motivational reasons. Other costs are recorded based on management responsibility. As a result, various income and expense items, including certain non-recurring gains and losses, are recorded at the corporate level and certain shared costs are not allocated. Goodwill amortization is charged to business units to act as a surrogate for the cost of capital for acquisitions, which is subsequently eliminated in consolidation. Interest on invested funds held for clients are recorded in Employer Services' revenues at a standard rate of 6%, with the adjustment to actual revenues included in Other. Prior year's business unit revenues and pre-tax earnings have been restated to reflect the current year's budgeted foreign exchange rates.
Results of the Company's three largest business units, Employer Services, Brokerage Services and Dealer Services, are shown below.
Three months ended December 31,
(In millions) Employer Brokerage Dealer
Services Services Services
----------- ----------- -----------
2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ----
Revenues $1,026 $972 $364 $367 $174 $169
Pre-tax earnings $ 274 $225 $ 64 $ 61 $ 30 $ 27
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Six months ended December 31,
Employer Brokerage Dealer
Services Services Services
---------- ----------- -----------
2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ----
Revenues $1,998 $1,873 $724 $726 $349 $334
Pre-tax earnings $ 489 $ 401 $130 $124 $ 57 $ 48
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Note F - The Company's short-term financing is sometimes obtained on a secured basis through the use of repurchase agreements, which are collateralized principally by U.S. government securities. These agreements generally have terms ranging from overnight to up to 10 days. There were $49 million in outstanding repurchase agreements at December 31, 2001 and no outstanding balance as of December 31, 2000. For the quarter and six months ended December 31, 2001, the Company had an average outstanding balance of approximately $707 million and $611 million, respectively, at an average interest rate of 2.7%.
Note G - In October 2001, the Company entered into a new $4.0 billion unsecured revolving credit agreement with certain financial institutions, replacing an existing $2.5 billion credit agreement. The interest rate applicable to the borrowings is tied to LIBOR or prime rate depending on the notification provided to the syndicated financial institutions prior to borrowing. The Company is also required to pay a facility fee on the credit agreement. The agreement, which expires in October 2002, has no borrowings to date.
RESULTS OF OPERATIONS
Revenues and earnings again reached record levels during the quarter ended December 31, 2001. Revenues and revenue growth by ADP's major business units for the three months and six months ended December 31, 2001 and 2000 are as follows:
($'s in millions) Revenues
------------------------------------------
Three Months Ended Six Months Ended
December 31, December 31
------------------ ----------------
2001 2000 2001 2000
------ ------ ------ ------
Employer Services $1,026 $ 972 $1,998 $1,873
Brokerage Services 364 367 724 726
Dealer Services 174 169 349 334
Other 117 132 218 251
------ ------ ------ ------
Total revenues $1,681 $1,640 $3,289 $3,184
====== ====== ====== ======
Revenue Growth
------------------------------------------
Three Months Ended Six Months Ended
December 31, December 31,
------------------ -----------------
2001 2000 2001 2000
------ ------ ------ ------
Employer Services 6% 14% 7% 14%
Brokerage Services (1) 18 - 28
Dealer Services 3 (9) 4 (9)
Other (11) 15 (13) 18
Total revenues 3% 12% 3% 14%
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Consolidated revenues for the quarter of approximately $1.7 billion increased 3% from last year. Revenue growth in Employer Services was 6%, as new business sales were flat with last year. Growth was offset by lower pays per control (the number of employees our client's pay) and lower retention, as a result of the weak economy. Brokerage Services revenues declined 1%. Excluding the recent acquisition of IBM's output services print business, Brokerage Services revenues declined 7%. The mix of back office client transactions in the quarter resulted in lower revenue per trade and the continued reduction in discretionary spending in the financial services industry, particularly in research and implementation services, also contributed to the decline. Postage revenues, which are primarily offset by postage expenses, declined as a result of our ongoing effort to transition the proxy mailing and voting process towards electronic delivery and the "householding," or the consolidation of customer accounts. Dealer Services revenue growth was 3% in the quarter.
The primary components of Other revenues are Claims Services, foreign exchange differences and miscellaneous processing services. In addition, Other revenues have been adjusted for the difference between actual interest income earned on invested funds held for clients and interest credited to Employer Services at a standard rate of 6%. Claims Services revenues increased 3% partially offsetting net declines in the other components. The prior year's business unit revenues and pre-tax earnings have been restated to reflect the current year's budgeted foreign exchange rates.
Systems development and programming costs decreased in the quarter due to cost containment initiatives primarily related to the maintenance of existing applications, while funding of investments in new products continued.
In July 2001, the Company adopted SFAS No. 142, "Goodwill and Other Intangibles Assets," which requires that goodwill no longer be amortized, but instead be tested for impairment at least annually. The decrease in amortization expense is due to the adoption of SFAS 142. The Company completed its assessment of impairment as of July 2001, which indicated no impairment of goodwill.
Pre-tax earnings for the quarter increased 21% to $429.9 million from $356.4 million in the prior year quarter adjusted for the pro forma impact of SFAS 142. In the quarter ended December 31, 2000, the Company recorded a $45 million write-off ($27 million after-tax) of its $90 million investment in Bridge Information Systems, Inc. (Bridge). Pre-tax earnings for the quarter increased 7% to $429.9 million from $401.4 million in the prior year quarter as adjusted for the pro forma impact of SFAS 142 and the impact of the prior year non-recurring write-off of the Bridge investment.
Consolidated pre-tax margins increased over the previous year as cost containment initiatives benefited each of our businesses and continued automation and operating efficiencies have enabled the Company to offset accelerated investments in new products.
The effective income tax rate was 38.5% of pre-tax earnings in the current
quarter compared to 39.5% in the prior year quarter. The decrease in the effective
income tax rate was primarily due to the adoption of SFAS 142 and the elimination
of goodwill amortization expense in the current year quarter. Adjusting the
prior year for the pro forma impact of SFAS 142, the effective income tax rate
was 38.5%.
Net earnings for the quarter increased 21% to $264.6 million from $219.2 million in the prior year quarter adjusted for the pro forma impact of SFAS 142. Net earnings for the quarter increased 7% to $264.6 million from $246.2 million in the prior year quarter adjusted for the pro forma impact of SFAS 142 and prior to the write-off of the Bridge investment.
Diluted earnings per share on fewer shares outstanding, primarily resulting from the Company share repurchases, increased 24% to $0.42 from $0.34 in the prior year quarter adjusted for the pro forma impact of SFAS 142. Diluted earnings per share increased 11% adjusted for the pro forma impact of SFAS 142 and prior to the Bridge write-off. We expect consolidated revenue growth in the mid single-digits and we project double-digit earnings per share growth over fiscal 2001 pro forma full year results.
FINANCIAL CONDITION
The Company's financial condition and balance sheet remain exceptionally strong. At December 31, 2001, the Company had cash and marketable securities of $2.6 billion. Shareholders' equity was $4.9 billion and the ratio of long-term debt to equity was 2%.
Capital expenditures for fiscal 2002 are expected to approximate $175 million, compared to $185 million in fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows generated from operations were $712.3 million for the six months ended December 31, 2001, adding to our strong cash position.
Cash flows used in investing activities totaled $221.2 million primarily as a result of additions to our investment portfolio and capital expenditures.
Cash flows used in financing activities totaled $439.5 million. In the first six months of fiscal 2002, the Company purchased approximately 9.4 million shares of common stock at an average price per share of approximately $49. As of December 31, 2001, the Company has remaining Board of Directors authorization to purchase up to 43.9 million additional shares.
Approximately thirty percent of the Company's overall investment portfolio is invested in overnight interest-bearing instruments, which are therefore impacted immediately by changes in interest rates. The other seventy percent of the Company's investment portfolio is invested in fixed-income securities, with maturities up to ten years, which are also subject to interest rate risk, including reinvestment risk. The Company has historically had the ability to hold these investments until maturity, and therefore this has not had an adverse impact on income or cash flows.
The earnings impact of future interest rate changes is based on many factors, which influence the return on the Company's portfolio. These factors include, among others, the overall portfolio mix between short-term and long-term investments. This mix varies during the year and is impacted by daily interest rate changes. A hypothetical change in interest rates of 25 basis points applied to the average projected investment balances for fiscal 2002 would result in an $11 million pre-tax earnings impact over a twelve month period.
The Company's short-term financing is sometimes obtained on a secured basis through the use of repurchase agreements, which are collateralized principally by U.S. government securities. These agreements generally have terms ranging from overnight to up to 10 days. There were $49 million in outstanding repurchase agreements at December 31, 2001 and no outstanding balance as of December 31, 2000. For the quarter and six months ended December 31, the Company had average outstanding balances of approximately $707 million and $611 million, respectively, at an average interest rate of 2.7%.
In October 2001, the Company entered into a new $4.0 billion unsecured revolving credit agreement with certain financial institutions, replacing an existing $2.5 billion credit agreement. The interest rate applicable to the borrowings is tied to LIBOR or prime rate depending on the notification provided to the syndicated financial institutions prior to borrowing. The Company is also required to pay a facility fee on the credit agreement. The agreement, which expires in October 2002, has no borrowings to date.
OTHER MATTERS
Certain member countries of the European Union have transitioned to the Euro as a new common legal currency. The costs of this transition have not had a material effect on our consolidated financial statements.
This report contains "forward-looking statements" based on management's expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ from those expressed. Factors that could cause differences include, but are not limited to: ADP's success in obtaining, retaining and selling additional services to clients; the pricing of products and services; changes in laws regulating payroll taxes and employee benefits; overall economic trends, including interest rate and foreign currency trends; stock market activity; auto sales and related industry changes; employment levels; changes in technology; availability of skilled technical associates and the impact of new acquisitions. ADP disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
Except as noted below, all other items are either inapplicable or would result in negative responses and, therefore, have been omitted.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of the Shareholders was held on November 13, 2001. The following members were elected to the Company's Board of Directors to hold office for the ensuing year. The votes cast for each director were are follows:
Nominee In Favor Opposed Abstained Not voted ------- -------- ------- --------- --------- Gregory D. Brenneman 495,187,748 2,974,223 7,094,535 118,813,956 Gary C. Butler 497,826,017 335,954 4,456,266 121,452,225 Joseph A. Califano, Jr. 497,450,259 711,712 4,832,024 121,076,467 Leon G. Cooperman 497,899,837 262,134 4,382,446 121,526,045 George H. Heilmeier 497,815,221 346,750 4,467,062 121,441,429 Ann Dibble Jordan 497,724,571 437,400 4,557,712 121,350,779 Harvey M. Krueger 486,174,669 11,987,302 16,107,614 109,800,877 Frederic V. Malek 497,778,114 383,857 4,504,169 121,404,322 Henry Taub 497,541,111 620,860 4,741,172 121,167,319 Laurence A. Tisch 497,159,034 1,002,937 5,123,249 120,785,242 Arthur F. Weinbach 497,860,823 301,148 4,421,460 121,487,031 Josh S. Weston 497,608,451 553,520 4,673,832 121,234,659 |
The results of the voting on the additional items indicated below was as follows:
(a) To approve an amendment to the Company's 2000 Key Employee's Stock Option Plan, which has been approved by the Board of Directors increasing by 22,000,000 shares the number of shares of Common Stock of the Company that may be acquired upon the exercise of options that may be granted to employees under such plan. The votes of the shareholders on this ratification were as follows:
In Favor Opposed Abstained Not voted -------- ------- --------- --------- 451,786,122 46,529,433 3,813,794 152,934 |
(b) To approve the Company's 2001 Executive Incentive Compensation Plan. The votes of the shareholders on this ratification were as follows:
In Favor Opposed Abstained Not voted -------- ------- --------- --------- 452,711,974 45,575,566 3,953,863 40,880 |
(c) To ratify the appointment of Deloitte & Touche LLP to serve as the Company's independent certified public accountants for the fiscal year begun on July 1, 2001. The votes of the shareholders on this ratification were as follows:
In Favor Opposed Abstained Not voted -------- ------- --------- --------- 490,934,847 8,663,820 2,683,626 121,788,179 |
ITEM 6. EXHIBITS AND REPORTS ON FORM 10-Q
(a) Exhibit number Exhibit
-------------- -------
10.8 2000 Key Employees' Stock Option Plan (as
amended effective as of August 31, 2001)
(Management Compensatory Plan).
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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.
Date: January 31, 2002 /s/ Karen E. Dykstra
------------------------
Karen E. Dykstra
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Exhibit 10.10
Automatic Data Processing, Inc., a Delaware corporation (the "Company"), hereby formulates and adopts the following 2000 Key Employees' Stock Option Plan (the "Plan") for employees of the Company and its Subsidiaries (as defined in Paragraph 5):
1. PURPOSE. The purpose of the Plan is to secure for the Company the benefits of the additional incentive inherent in the ownership of common stock, par value $.10, of the Company ("Common Stock") by selected employees of the Company and its Subsidiaries who, in the judgment of the Committee (as defined in Paragraph 2), are important to the success and the growth of the business of the Company and its Subsidiaries and to help the Company and its Subsidiaries secure and retain the services of such employees.
2. ADMINISTRATION. Except to the extent required in order to qualify for exemptive relief under Rule 16b-3 or its successor provision under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or to satisfy the requirements for performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), in which case the Board of Directors of the Company (the "Board of Directors"), or a committee appointed by the Board of Directors which satisfies the requirements of such provisions shall administer the Plan (and all applicable provisions of the Plan, including any reference herein to the "Committee", shall be construed accordingly), the Plan shall be administered by a Stock Option Committee (the "Committee") to be appointed by the Board of Directors, which Committee may include employees who are and who are not members of the Board of Directors. The Committee shall select one of its members as Chairman and shall make such rules and regulations as it shall deem appropriate concerning the holding of its meetings and transaction of its business. Any member of the Committee may be removed at any time either with or without cause by resolution adopted by the Board of Directors, and any vacancy on the Committee may at any time be filled by resolution adopted by the Board of Directors.
Subject to the express provisions of the Plan, the Committee shall have plenary authority to interpret the Plan, to prescribe, amend and rescind the rules and regulations relating to it and to make all other determinations deemed necessary and advisable for the administration of the Plan. The determinations of the Committee shall be conclusive.
3. STOCK SUBJECT TO OPTIONS. Subject to the adjustment provisions of Paragraph 13 below, a maximum of 36,750,000 shares of Common Stock may be made subject to Options (as defined below) granted under the Plan. In addition, subject to the adjustment provisions of Paragraph 13 below, no person may be granted Options under the Plan during any of the Company's fiscal years with respect to more than 500,000 shares of Common Stock.
If, and to the extent that, Options granted under the Plan shall terminate, expire or be canceled for any reason without having been exercised, new Options may be granted in respect of the shares covered by such terminated, expired or canceled Options. The granting and terms of such new Options shall comply in all respects with the provisions of the Plan.
Shares sold upon the exercise of any Option granted under the Plan may be shares of authorized and unissued Common Stock, shares of issued Common Stock held in the Company's treasury, or both.
There shall be reserved at all times for sale under the Plan a number of shares of Common Stock, of either authorized and unissued shares of Common Stock, shares of Common Stock held in the Company's treasury, or both, equal to the maximum number of shares that may be purchased pursuant to Options granted or that may be granted under the Plan.
4. GRANT OF OPTIONS. The Committee shall have the authority and responsibility, within the limitations of the Plan, to determine the employees to whom Options are to be granted, whether the Options granted shall be "incentive stock options" ("Incentive Options"), within the meaning of Section 422(b) of the Code, or Options which are not Incentive Options ("Nonqualified Options" and together with Incentive Options, "Options," individually, an "Option"), the number of shares that may be purchased under each Option and the Option price.
In determining the officers or key employees to whom Options shall be granted and the number of shares to be covered by each such Option, the Committee shall take into consideration the employee's present and potential contribution to the success of the Company and its Subsidiaries (as defined below) and such other factors as the Committee may deem proper and relevant.
5. EMPLOYEES ELIGIBLE. Incentive Options may be granted to any key employee of the Company or any of its Subsidiaries. Nonqualified Options may be granted to any key employee of the Company or any of its Subsidiaries or Affiliates. Options may be granted to employees who hold or have held Options under this Plan or any similar or other awards under any other plan of the Company or any of its Subsidiaries or Affiliates. Employees who are also officers or directors of the Company or any of its Subsidiaries or Affiliates shall not by reason of such offices be ineligible as recipients of Options.
For purposes of the Plan, a "Subsidiary" of the Company shall mean any "subsidiary corporation" as such term is defined in Section 424(f) of the Code. An entity shall be deemed a Subsidiary of the Company only for such periods as the requisite ownership relationship is maintained.
For purposes of the Plan, an "Affiliate" of the Company shall mean any corporation, partnership, or other entity controlled by the Company.
Any Person who would own, directly or indirectly, immediately after the granting of an Option to such Person, more than 10% of the total combined voting power of all classes of stock of the Company or any of its Subsidiaries shall only be eligible to receive an Incentive Option under the Plan if it satisfies the requirements of Section 422(c)(5) of the Code.
An employee receiving an Option pursuant to the Plan is hereinafter referred to as an "Optionee".
6. PRICE. The exercise price of each share of Common Stock purchasable under any Option granted pursuant to the Plan shall not be less than the Fair Market Value (as defined below) thereof at the time the Option is granted. In no event shall the Committee cause or permit, without the prior approval of the Company's stockholders, any Options granted pursuant to the Plan to be repriced, replaced, or re-granted through cancellation, or to otherwise lower the exercise price of a previously granted Option.
For purposes of the Plan, "Fair Market Value" of a share of Common Stock means the average of the high and low sales prices of a share of Common Stock on the New York Stock Exchange Composite Tape on the date in question. If shares of Common Stock are not traded on the New York Stock Exchange on such date, "Fair Market Value" of a share of Common Stock shall be determined by the Committee in its sole discretion.
7. DURATION OF OPTIONS. Options granted hereunder shall become exercisable, in whole or in part, all as the Committee in its discretion may provide upon the granting thereof.
Notwithstanding any provision of the Plan to the contrary, except as otherwise provided in the applicable award agreement, the unexercised portion of any Option granted under the Plan shall automatically and without notice terminate and become null and void at the time of the earliest to occur of the following:
(a) The expiration of 10 years (or, in the case of an Incentive Option, five years, in the case of an Optionee described in Section 422(c)(5) of the Code) from the date on which such Option was granted;
(b) The expiration of 15 days (or such longer period as the Committee may provide in the event of the Optionee's Permanent and Total Disability (as defined in Section 22(a)(3) of the Code) from the date of termination of the Optionee's employment with the Company or any of its Subsidiaries; provided, however, that if the Optionee shall die during such 15-day period (or such longer period as the Committee may provide in the event of the Optionee's Permanent and Total Disability) the provisions of subparagraph (c) below shall apply;
(c) The expiration of six months after the appointment and qualification of the executor or administrator of the Optionee's estate or 12 months after the date of the Optionee's death, whichever occurs earlier, if such death occurs either during employment by the Company or any of its Subsidiaries or during the 15-day period (or such longer period as the Committee may provide in the event of the Optionee's Permanent and Total Disability) following the date of termination of such employment; and
(d) In whole or in part, at such earlier time or upon occurrence of such earlier event as the Committee in its discretion may provide upon the granting of such Option.
The Committee may determine whether any given leave of absence constitutes a termination of employment. The Options granted under the Plan shall not be affected by any change of employment so long as the Optionee continues to be an employee of the Company or any of its Subsidiaries.
8. EXERCISE OF OPTIONS. Options shall be exercisable by the Optionee (or the Optionee's executor or administrator), as to all or part of the shares covered thereby, by the giving of written notice of the exercise thereof to the Company at its principal business office, directed to the attention of its Secretary. The Company shall cause certificates for the shares so purchased to be delivered to the Optionee (or the Optionee's executor or administrator) at the Company's principal business office, against payment in full of the purchase price, which payment may be made by cash, check or money order and, subject to the Committee's consent, by shares of the Company's Common Stock which are not subject to any pledge or security interest and have been held for at least 6 months or previously acquired on the open market or by delivery to the Committee of a copy of irrevocable instructions to a stockbroker to deliver promptly to the Company any amount of loan proceeds or proceeds of the sale of the shares subject to the Option sufficient to pay the exercise price on the date specified in the notice of exercise.
9. NONTRANSFERABILITY OF OPTIONS. No Option or any right evidenced thereby shall be transferable in any manner other than by will or the laws of descent and distribution, and, during the lifetime of an Optionee, only the Optionee (or the Optionee's court-appointed legal representative) may exercise an Option.
10. RIGHTS OF OPTIONEE. Neither the Optionee nor the Optionee's executor or administrator shall have any of the rights of a stockholder of the Company with respect to the shares subject to an Option until certificates for such shares shall actually have been issued upon the due exercise of such Option. No adjustment shall be made for any cash dividend or other right for which the record date is prior to the date of such due exercise and full payment for such shares has been made therefor.
11. RIGHT TO TERMINATE EMPLOYMENT. Nothing in the Plan or in any Option shall confer upon any Optionee the right to continue in the employment of the Company or any of its Subsidiaries or affect the right of the Company or any of its Subsidiaries to terminate the Optionee's employment at any time, subject, however, to the provisions of any agreement of employment between the Company or any of its Subsidiaries and the Optionee.
12. NONALIENATION OF BENEFITS. No right or benefit under the Plan shall be subject to anticipation, alienation, sale, assignment, hypothecation, pledge, exchange, transfer, encumbrance or charge, and any attempt to anticipate, alienate, sell, assign, hypothecate, pledge, exchange, transfer, encumber or charge the same shall be void. To the extent permitted by applicable law, no right or benefit hereunder shall in any manner be liable for or subject to the debts, contracts, liabilities or torts of the person entitled to such benefits.
13. ADJUSTMENT UPON CHANGES IN CAPITALIZATION, ETC. In the event of any stock split, stock dividend, stock change, reclassification, recapitalization or combination of shares which changes the character or amount of Common Stock prior to exercise of any portion of an Option theretofore granted under the Plan, such Option, to the extent that it shall not have been exercised, shall entitle the Optionee (or the Optionee's executor or administrator) upon its exercise to receive in substitution such number and kind of shares as the Optionee would be entitled to receive if the Optionee had actually owned the stock subject to such Option at the time of the occurrence of such change and the Options shall be subject to such adjustments, as determined by the Committee, as to the number, price or kind of stock as determined to be equitable; provided, however, that if the change is of such a nature that the Optionee, upon exercise of the Option, would receive property other than shares of stock, then the Committee shall make an appropriate adjustment in the Option to provide that the Optionee (or the Optionee's executor or administrator) shall acquire upon exercise only shares of stock of such number and kind as the Committee, in its sole judgment, shall deem equitable; and, provided further, that any such adjustment shall be made so as to conform to the requirements of Section 424(a) or 162(m) of the Code and the regulations promulgated thereunder. The Committee shall also make appropriate adjustment in the number of shares subject to Options under the Plan and the maximum number of shares to be granted to any person in any fiscal year as determined to be equitable.
In the event that any transaction (other than a change specified in the preceding paragraph) described in Section 424(a) of the Code affects the Common Stock subject to any unexercised Option, the Board of the surviving or acquiring corporation shall make such similar adjustment as is permissible and appropriate.
If any such change or transaction shall occur, the number and kind of shares for which Options may thereafter be granted under the Plan shall be adjusted to give effect thereto.
14. PURCHASE FOR INVESTMENT. Whether or not the Options and shares covered by the Plan have been registered under the Securities Act of 1933, as amended, each person exercising an Option under the Plan may be required by the Company to give a representation in writing that such person is acquiring such shares for investment and not with a view to, or for sale in connection with, the distribution of any part thereof.
The Company will endorse any necessary legend referring to the foregoing restriction upon the certificate or certificates representing any shares issued or transferred to the Optionee upon the exercise of any Option granted under the Plan.
15. FORM OF AGREEMENTS WITH OPTIONEES. Each Option granted pursuant to the Plan shall be in writing and shall have such form, terms and provisions, not inconsistent with the provisions of the Plan, as the Committee shall provide for such Option. Each Optionee shall be notified promptly of such grant, and a written agreement shall be promptly executed and delivered by the Company and the Optionee.
16. TERMINATION AND AMENDMENT OF PLAN AND OPTIONS. Unless the Plan shall theretofore have been terminated as hereinafter provided, Options may be granted under the Plan at any time, and from time to time, prior to the tenth anniversary of the Effective Date (as defined below), on which date the Plan will expire, except as to Options then outstanding under the Plan. Such Options shall remain in effect until they have been exercised, have expired or have been canceled.
The Plan may be terminated or modified at any time by the Board of Directors; provided, however, that any such modification shall comply with all applicable laws, applicable stock exchange listing requirements, and applicable requirements for exemption (to the extent necessary) under Rule 16b-3 under the Exchange Act.
No termination, modification or amendment of the Plan, without the consent of the Optionee, may adversely affect the rights of such person with respect to such Option. With the consent of the Optionee and subject to the terms and conditions of the Plan, the Committee may amend outstanding award agreements with any Optionee.
17. EFFECTIVE DATE OF PLAN. The Plan shall become effective upon its adoption by the Board of Directors (the "Effective Date"), subject, however, to its approval by the Company's stockholders within 12 months after the date of such adoption.
18. GOVERNMENT AND OTHER REGULATIONS. The obligation of the Company with respect to Options granted under the Plan shall be subject to all applicable laws, rules and regulations and such approvals by any governmental agency as may be required, including, without limitation, the effectiveness of any registration statement required under the Securities Act of 1933, as amended, and the rules and regulations of any securities exchange on which the Common Stock may be listed.
19. WITHHOLDING. The Company's obligation to deliver shares of Common Stock in respect of any Option granted under the Plan shall be subject to all applicable federal, state, local and foreign tax withholding requirements. Federal, state, local and foreign withholding taxes due upon the exercise of any Option (or upon any disqualifying disposition of shares of Common Stock subject to an Incentive Option), in the Committee's sole discretion, may be paid in shares of Common Stock (including the withholding of shares subject to an Option) upon such terms and conditions as the Committee may determine.
20. SEPARABILITY. If any of the terms or provisions of the Plan conflict with the requirements of Rule 16b-3 under the Exchange Act and/or Section 422 of the Code, then such terms or provisions shall be deemed inoperative to the extent they so conflict with the requirements of Rule 16b-3 under the Exchange Act and/or section 422 of the Code. With respect to Incentive Options, if the Plan does not contain any provision required to be included herein under Section 422 of the Code, such provision shall be deemed to be incorporated herein with the same force and effect as if such provision had been set out at length herein; provided, further, that to the extent any Option which is intended to qualify as an Incentive Option cannot so qualify such Option, to the extent, shall be deemed to be a Nonqualified Option for all purposes of the Plan.
21. NON-EXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the Board of Directors nor the submission of the Plan to the stockholders of the Company for approval shall be construed as creating any limitation on the power of the Board of Directors to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options and the awarding of stock and cash otherwise than under the Plan, and such arrangements may be either generally applicable or applicable only in specific cases.
22. EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION. By acceptance of an Option, each Optionee shall be deemed to have agreed that such grant is special incentive compensation that will not be taken into account, in any manner, as salary, compensation or bonus in determining the amount of any payment under any pension, retirement or other employee benefit plan of the Company or any of its Subsidiaries. In addition, each beneficiary of a deceased Optionee shall be deemed to have agreed that such Option will not affect the amount of any life insurance coverage, if any, provided by the Company on the life of the Optionee which is payable to such beneficiary under any life insurance plan covering employees of the Company or any of its Subsidiaries.
23. DEFERRAL. The Committee may, in its sole discretion, establish procedures whereby one or more Optionees may elect to defer the receipt of shares upon the exercise of Options for a specified period of time or until the occurrence of a specified event.
24. GOVERNING LAW. The Plan shall be governed by, and construed in accordance with, the laws of the State of New Jersey.