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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-Q
(Mark one)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the Quarter Ended OCTOBER 29, 1999
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ...... to ......
Commission file number 1-9769
LANDS' END, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-2512786
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Lands' End Lane, Dodgeville, WI 53595
(Address of principal executive (Zip code)
offices)
Registrant's telephone number, 608-935-9341
including area code
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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of December 8, 1999:
Common stock, $.01 par value 30,149,020 shares outstanding
LANDS' END, INC. & SUBSIDIARIES
INDEX TO FORM 10-Q
Page
PART I. FINANCIAL INFORMATION Number
Item 1. Financial Statements
Consolidated Statements of Operations for the
Three Months Ended October 29, 1999, and
October 30, 1998.................................. 3
Consolidated Statements of Operations for the
Nine Months Ended October 29, 1999, and
October 30, 1998.................................. 4
Consolidated Balance Sheets at October 29, 1999,
January 29, 1999.................................. 5
Consolidated Statements of Cash Flows for the
Nine Months Ended October 29, 1999, and
October 30, 1998.................................. 6
Notes to Consolidated Financial Statements........... 7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................ 12-17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk....................................... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................... 19
Item 4. Submission of Matters to a Vote of
Security Holders.................................. 19
Item 6. Exhibits and Reports on Form 8-K..................... 19
Signature..................................................... 20
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LANDS' END, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three months ended
Oct. 29, Oct. 30,
1999 1998
(Unaudited)
Net sales $325,970 $322,422
Cost of sales 185,157 177,160
Gross profit 140,813 145,262
Selling, general and
administrative expenses 127,189 134,516
Non-recurring charge (credit) (176) 1,500
Income from operations 13,800 9,246
Other income (expense):
Interest expense (558) (3,269)
Interest income 17 7
Other 631 (5,433)
Total other income (expense), net 90 (8,695)
Income before income taxes 13,890 551
Income tax provision 5,139 204
Net income $ 8,751 $ 347
Basic earnings per share $ 0.29 $ 0.01
Diluted earnings per share $ 0.28 $ 0.01
Basic weighted average shares
outstanding 30,125 30,239
Diluted weighted average shares
outstanding 31,071 30,318
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
3
LANDS' END, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Nine months ended
Oct. 29, Oct. 30,
1999 1998
(unaudited)
Net sales $870,195 $830,203
Cost of sales 485,732 444,723
Gross profit 384,463 385,480
Selling, general and
administrative expenses 352,904 365,593
Non-recurring charge (credit) (1,774) 1,500
Income from operations 33,333 18,387
Other income (expense):
Interest expense (1,525) (6,268)
Interest income 55 8
Other (573) (3,407)
Total other expense (2,043) (9,667)
Income before income taxes 31,290 8,720
Income tax provision 11,577 3,226
Net income $ 19,713 $ 5,494
Basic earnings per share $ 0.66 $ 0.18
Diluted earnings per share $ 0.64 $ 0.18
Basic weighted average shares outstanding 30,064 30,560
Diluted weighted average shares outstanding 30,831 30,835
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
4
LANDS' END, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
Oct. 29, Jan. 29,
1999 1999
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 8,089 $ 6,641
Receivables, net 20,737 21,083
Inventory 231,299 219,686
Prepaid advertising 33,104 21,357
Other prepaid expenses 5,924 7,589
Deferred income tax benefit 17,947 17,947
Total current assets 317,100 294,303
Property, plant and equipment, at cost:
Land and buildings 102,646 102,018
Fixtures and equipment 165,246 154,663
Leasehold improvements 4,555 5,475
Total property, plant and equipment 272,447 262,156
Less-accumulated depreciation
and amortization 115,647 101,570
Property, plant and equipment, net 156,800 160,586
Intangibles, net 981 1,030
Total assets $474,881 $455,919
Liabilities and shareholders' investment
Current liabilities:
Lines of credit $ 41,349 $ 38,942
Accounts payable 100,051 87,922
Reserve for returns 6,845 7,193
Accrued liabilities 47,174 54,392
Accrued profit sharing 1,222 2,256
Income taxes payable 4,234 14,578
Total current liabilities 200,875 205,283
Deferred income taxes 8,133 8,133
Shareholders' investment:
Common stock, 40,221 shares issued 402 402
Donated capital 8,400 8,400
Additional paid-in capital 29,708 26,994
Deferred compensation (268) (394)
Accumulated other comprehensive income 738 2,003
Retained earnings 426,109 406,396
Treasury stock, 10,072 and 9,981
shares at cost, respectively (199,216) (201,298)
Total shareholders' investment 265,873 242,503
Total liabilities and shareholders'
investment $474,881 $455,919
The accompanying notes to consolidated financial statements are an integral
part of these consolidated balance sheets.
5
LANDS' END, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
Oct. 29, Oct. 30,
1999 1998
(unaudited)
Cash flows from (used for) operating activities:
Net income $ 19,713 $ 5,494
Adjustments to reconcile net income to net
cash flows from operating activities-
Non-recurring charge (credit) (1,774) 1,500
Depreciation and amortization 15,178 14,661
Deferred compensation expense 126 202
Deferred income taxes - 1,607
Loss on disposal of fixed assets 540 326
Changes in current assets and liabilities:
Receivables, net 346 (6,248)
Inventory (11,613) (137,657)
Prepaid advertising (11,747) (24,605)
Other prepaid expenses 1,665 (1,130)
Accounts payable 12,129 6,320
Reserve for returns (348) 8
Accrued liabilities (4,583) 5,609
Accrued profit sharing (1,034) (3,939)
Income taxes payable (10,344) (21,320)
Other (1,265) 1,241
Net cash flows from (used for) operating activities 6,989 (157,931)
Cash flows used for investing activities:
Cash paid for capital additions (12,745) (39,491)
Net cash flows used for investing activities (12,745) (39,491)
Cash flows from (used for) financing activities:
Proceeds from short-term debt 2,407 224,191
Exercise of stock options 2,715 219
Purchases of treasury stock (4,507) (23,872)
Issuance of treasury stock 6,589 389
Net cash flows from financing activities 7,204 200,927
Net increase in cash and cash equivalents 1,448 3,505
Beginning cash and cash equivalents 6,641 6,338
Ending cash and cash equivalents $ 8,089 $ 9,843
Supplemental cash flow disclosures:
Interest paid $ 1,444 $ 5,478
Income taxes paid 19,288 22,658
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
6
LANDS' END, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Interim financial statements
The condensed consolidated financial statements included herein have been
prepared by Lands' End, Inc. (the company), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission, and in the
opinion of management contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the company believes that the disclosures are adequate
to make the information presented not misleading. The results of operations
for the interim periods disclosed within this report are not necessarily
indicative of future financial results. These consolidated financial
statements are condensed and should be read in conjunction with the financial
statements and the notes thereto included in the company's latest Annual
Report on Form 10-K, which includes financial statements for the year ended
January 29, 1999.
2. Reclassification
Certain financial statement amounts have been reclassified to be consistent
with the current presentation.
3. Derivative Instruments and Hedging Activities
The company's sales of merchandise to its subsidiaries in the
United Kingdom, Japan, and Germany are denominated in the
subsidiary's local currency. Accordingly, the future U.S.-
Dollar-equivalent cash flows may vary due to changes in related
foreign currency exchange rates. To reduce that risk, the
company enters into foreign currency forward contracts and
purchases foreign currency put options. The company's sales to
its foreign subsidiaries are on credit with settlement within
approximately one month. Accordingly, the settlement dates of
the forward contracts and put options fall approximately one
month after the date of forecasted sales.
To a lesser extent, the company has export sales to customers in
Canada. The company incurs third-party expenses related to the
Canadian export business, some of which are denominated in
Canadian dollars. Accordingly, the future U.S.-Dollar-equivalent
cash flows may vary due to changes in the foreign currency rate.
To reduce that risk, the company enters into foreign currency
forward contracts. The company's purchases are on credit with
settlement within approximately one month. Accordingly, the
settlement dates of the forward contracts fall approximately one
month after the date of forecasted purchases. The company has no
other freestanding or embedded derivative instruments.
As of July 31, 1999, the company adopted the Financial Accounting
Standards Board's (FASB's) Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (Statement 133). Statement 133 unifies
accounting and financial reporting standards for forward
contracts, put options, other derivative instruments and related
hedging activities. Statement 133 requires, in part, that the
company report all derivative instruments in the statement of
financial position as assets or liabilities at their fair value.
The treatment of subsequent changes in fair value depends on
whether special hedge accounting is available.
Before the effective date of Statement 133, special hedge
accounting was not available for the company's forward contracts.
Those contracts were reported in the statement of financial
position as assets or liabilities at their fair value and changes
in fair value were reported currently in earnings. Special hedge
accounting for the company's put options involved reporting the
put options initially at the amount of the premium paid, with
amortization of the premium over the option period. Subsequent
gains or losses on the put options through the date of the sale
to the foreign subsidiary were deferred until the date the
consolidated entity (through the foreign subsidiary) sold the
merchandise to a third-party. At the date merchandise is sold to
a foreign subsidiary, the hedging relationship is terminated and
subsequent gains and losses on the put option (including
unamortized premium) were reported currently in earnings.
As part of its adoption of Statement 133 on July 31, 1999, the
company designated all of its hedging relationships anew. Both
forward contracts and put options can qualify for special cash
flow hedge accounting under Statement 133 if applicable hedging
criteria are met. Under Statement 133's cash flow hedging model,
gains and losses on the derivative instrument that occur through
the date the company sells merchandise to a subsidiary or
purchases from a foreign third-party are deferred in a component
of equity (accumulated other comprehensive income) to the extent
the hedging relationship is effective. The maximum hedging
period (the period between the company's designation and
culmination of a hedging relationship) of the company's cash flow
hedges is 24 months.
As required by Statement 133, the company assesses hedge
effectiveness at least quarterly. The effectiveness of put
options is assessed based on changes in intrinsic value of the
options due to changes in spot foreign exchange rates. Because
they are excluded from the company's assessment of hedge
effectiveness, the company reports currently in earnings changes
in the fair value of put options due to changes in time value of
the options. For the quarter ended October 29, 1999, a net loss
of $0.3 million was recognized in other expense due to hedge
ineffectiveness and fair value changes excluded from the
company's effectiveness assessments.
To the extent the company must discontinue cash flow hedge
accounting because it is probable that original forecasted sales
will not occur, Statement 133 requires that the company
immediately reclassify the net gain or loss from accumulated
other comprehensive income into earnings. During the quarter
ended October 29, 1999, net losses of $0.2 million were so
reclassified.
At the date merchandise is sold to a foreign subsidiary or
purchased from a foreign third-party, the hedging relationship is
terminated and subsequent gains and losses on the hedging
derivative instrument are reported currently in earnings. At the
date of the ultimate sale of the merchandise by the foreign
subsidiary to a third-party or purchase from a foreign third
party, the gain or loss previously deferred in equity is
reclassified into earnings. The company estimates that net
hedging losses of $1.6 million will be reclassified from
accumulated other comprehensive income into earnings within the
12 months between October 30, 1999 and October 27, 2000.
Upon the company's adoption of Statement 133 on July 31, 1999,
the company adjusted the carrying amount of the two put option
contracts as assets at their fair value of $34 thousand. Because
the put options had previously qualified in a cash flow-type
hedging relationship prior to adoption of Statement 133, an
immaterial cumulative-effect-type transition adjustment and an
immaterial transition adjustment related to the ineffective
portion of the put options were reported in accumulated other
comprehensive income and other expense, respectively. No
transition adjustment was needed for the forward contracts, which
were already being reported at their fair value with changes in
fair value reported currently in earnings.
7
LANDS' END, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Earnings per share
The following table discloses the computation of the diluted earnings per
share and the basic earnings per share.
Three months ended Nine months ended
Oct. 29, Oct. 30, Oct. 29, Oct. 30,
(In thousands, except per 1999 1998 1999 1998
share data)
Net income $ 8,751 $ 347 $19,713 $ 5,494
Average shares of common
stock outstanding 30,125 30,239 30,064 30,560
Incremental shares from assumed
exercise of stock options 946 79 767 275
Diluted weighted average shares
of common stock outstanding 31,071 30,318 30,831 30,835
Basic earnings per share $ 0.29 $ 0.01 $ 0.66 $ 0.18
Diluted earnings per share $ 0.28 $ 0.01 $ 0.64 $ 0.18
5. Comprehensive income
In accordance with Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income", the following table presents the company's
comprehensive income (000's):
Three months ended Nine months ended
Oct. 29, Oct. 30, Oct. 29, Oct. 30,
1999 1998 1999 1998
Net income $ 8,751 $ 347 $19,713 $ 5,494
Other comprehensive income:
Foreign currency translation
adjustments 992 2,060 790 1,241
Unrealized loss on forward
contracts and options (2,055) n/a (2,055) n/a
Comprehensive income $ 7,688 $ 2,407 $18,448 $ 6,735
8
LANDS' END, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Non-recurring charge and related reversal
During fiscal year 1999, in connection with changes in executive management,
the company announced a Plan designed to reduce administrative and
operational costs stemming from duplicative responsibilities and certain
non-profitable operations. This Plan included the reduction of staff
positions, the closing of three outlet stores, the liquidation of the
Willis & Geiger operations and the termination of a licensing agreement with
MontBell Co. Ltd. A non-recurring charge of $12.6 million was recorded in
fiscal 1999 related to these matters.
Below is a summary of related costs for the periods ended October 29, 1999.
Balance Costs Charges Balance
(In thousands) 1/29/99 Incurred Reversed 10/29/99
Severance costs $ 6,700 $(4,861) $ 0 $ 1,839
Asset impairments 3,199 (1,973) (1,111) 115
Facility exit costs
and other 2,590 (1,779) (663) 148
Total $12,489 $(8,613) $(1,774) $ 2,102
During the nine months ended October 29, 1999, the company executed the Plan
and incurred costs totaling $8.6 million. In addition, there was a reversal
of $1.8 million of the reserves recorded in fiscal 1999. Those included $0.7
million for better than expected lease termination settlements related to
two store closings, and $1.1 million for better than anticipated sell-through
of Willis & Geiger inventory liquidations. Based on these two factors, there
was an addition to net income of $1.1 million, or $0.04 per share in the
first nine months of fiscal 2000. The majority of the balance of $2.1
million, predominantly severance, will be paid in fiscal 2000, with a
carryover of a portion to fiscal 2001.
7. Segment disclosure
The company organizes and manages its three business segments (core,
specialty and international) based on type of catalog, which focuses on
specific customer needs and markets served. Certain catalogs are combined
for purposes of assessing financial performance. The company evaluates the
performance of its business segments based on operating profit.
The core segment consists of adult apparel in the regular monthly and
prospecting catalogs, Beyond Buttondowns catalog, and First Person Singular
catalog. The specialty segment includes Kids, Corporate Sales, and Coming
Home catalogs. The international segment is composed of foreign-based
operations in Japan, the United Kingdom, and Germany.
Segment sales represent sales to external parties. Sales from the Internet,
export sales shipped from the United States, and liquidation sales are
included in the respective business segments. Segment operating profit is
revenue less direct and allocable operating expenses, which includes interest
expense and interest income. Segment identifiable assets are those that are
directly used in or identified with segment operations. "Other" includes
corporate expenses, intercompany eliminations, and other income and deduction
items that are not allocated to segments.
9
LANDS' END, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pertinent financial data by operating segment for the periods ended
October 29, 1999, and October 30, 1998 are as follows (in thousands):
Quarter ended October 29, 1999
Inter- Consoli-
Core Specialty national Other dated
Net sales $177,471 $116,923 $ 31,576 $ - $325,970
Operating profit (loss) (1,674) 14,556 456 552 13,890
Identifiable assets 257,510 140,577 76,794 - 474,881
Depreciation and
amortization 2,526 1,757 620 - 4,903
Capital expenditures 4,211 2,498 550 - 7,259
Interest expense 254 164 140 - 558
Interest income $ 7 $ 4 $ 6 $ - $ 17
Quarter ended October 30, 1998
Inter- Consoli-
Core Specialty national Other dated
Net sales $185,410 $103,341 $ 33,671 $ - $322,422
Operating profit (loss) (3,468) 9,018 634 (5,633) 551
Identifiable assets 368,910 168,640 91,313 - 628,863
Depreciation and
amortization 2,851 1,661 567 - 5,079
Capital expenditures 6,025 3,562 726 - 10,313
Interest expense 1,924 968 377 - 3,269
Interest income $ 1 - 6 - 7
Nine months ended October 29, 1999
Inter- Consoli-
Core Specialty national Other dated
Net sales $502,695 $274,427 $ 93,073 $ - $870,195
Operating profit
(loss) (1) 5,205 28,423 (1,691) (647) 31,290
Identifiable assets 257,510 140,577 76,794 - 474,881
Depreciation and
amortization 8,662 4,728 1,788 - 15,178
Capital expenditures 7,440 4,062 1,243 - 12,745
Interest expense 673 367 485 - 1,525
Interest income $ 20 $ 11 $ 24 $ - $ 55
10
LANDS' END, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended October 30, 1998
Inter- Consoli-
Core Specialty national Other dated
Net sales $507,010 $231,771 $ 91,422 $ - $830,203
Operating profit
(loss) (2) 2,641 12,939 (813) (6,047) 8,720
Identifiable assets 368,910 168,640 91,313 - 628,863
Depreciation and
amortization 9,055 4,139 1,467 - 14,661
Capital expenditures 20,014 9,149 10,328 - 39,491
Interest expense 3,459 1,581 1,228 - 6,268
Interest income $ 1 $ 1 $ 6 $ - $ 8
(1) Includes non-recurring credits of $0.5 million and $1.3 million
allocated to the core and specialty, respectively.
(2) Includes non-recurring charge of $1.0 million and $0.5 million allocated
to the core and specialty segments, respectively.
11
Item 2. MANAGEMENT'S DISCUSSION
AND ANALYSIS
Results of Operations
Three Months Ended October 29, 1999, compared with
Three Months Ended October 30, 1998
The company's net sales for the third quarter ended October 29, 1999, totaled
$326.0 million, up 1 percent from sales of $322.4 million in the same quarter
last year. Sales growth during the quarter just ended came from increased
liquidations, from Corporate Sales and from the Kids catalog, partially
offset by a 4 percent decline in the core business segment. Sales from the
specialty business segment rose about 13 percent, while sales from the
international business segment were down about 6 percent from the same period
last year. During the third quarter, there was an increase in catalog
productivity, or sales per page, due to the planned 20 percent reduction in
the number of pages circulated. Third quarter sales on the company's
Internet site www.landsend.com were about two and one-half times those in the
same quarter last year. In the most recent fiscal year, Internet sales were
$61 million, about 4.5 percent of total net sales.
Sales during the first five weeks of the fourth quarter (10/30/99 through
12/3/99) were down about 18 percent from sales in the similar period last
year. The company's strategy this year has focused on improving profits,
rather than being driven by growth. As part of that strategy, page
circulation for the last six months of fiscal 2000 was reduced by about 20
percent. The sales shortfall was greater than anticipated based on the planned
circulation reductions, especially toward the end of the five-week period ended
December 3, 1999. In addition to decreased page circulation, other
factors affecting sales were significantly fewer liquidation and promotional
sales in the current year's fourth quarter, overall softness in most cold
weather clothing categories and the shifting of a clearance catalog from the
fourth quarter last year to the third quarter this year.
Gross profit in the quarter just ended was $140.8 million, or 43.2 percent of
net sales, compared with $145.3 million, or 45.1 percent of net sales, in the
similar quarter last year. The decrease in gross profit margin was primarily
due to a higher level of liquidated merchandise and steeper markdowns,
partially offset by lower merchandise costs through improved sourcing.
Liquidations of excess inventory were about 16 percent of net sales in the
quarter just ended, compared with about 12 percent in the similar period a
year ago.
For the third quarter this year, selling, general and administrative expenses
decreased 5.4 percent to $127.2 million, compared with $134.5 million for
last year's third quarter. As a percentage of net sales, SG&A was 39.0
percent, compared with 41.7 percent in the similar period last year. The
decrease in the SG&A ratio was primarily the result of the reduction in the
number of pages mailed and greater overall catalog productivity. This was
partially offset by increased media advertising and higher bonus and profit
sharing expense due to a higher profit level in the quarter just ended.
12
During the quarter just ended, interest expense was $0.6 million, compared
with $3.3 million in the same quarter last year. Lower inventory, coupled
with lower capital expenditures and purchases of treasury stock, resulted in
a decrease in the company's borrowing on short-term lines of credit, which
stood at $41 million as of October 29, 1999, compared with $257 million a
year ago.
Third quarter ending inventory was $231 million, down 39 percent from $379
million a year ago. We shipped about 91 percent of items at the time of
order placement during the quarter just ended.
Net income for the quarter just ended was $8.8 million, compared with the
$0.3 million earned in the same quarter last year. Diluted earnings per
share for the quarter just ended were $0.28, compared with $0.01 in the prior
year. Net income for the quarter just ended includes a foreign currency
exchange after-tax gain of $0.4 million. The prior year's similar quarter
included an after-tax loss of $3.4 million, resulting from unrealized losses
due to strengthening of the yen against the U.S. dollar. Foreign currency
exchange gains or losses will occur in response to currency market movements
and the company's hedging strategy.
The company adopted SFAS 133 at the beginning of the third quarter of fiscal
2000. Pursuant to this standard, the ineffective portion of cash flow hedges
and the fair value changes excluded from the company's effectiveness
assessments are reflected in earnings as the changes occur. These changes
resulted in a $0.3 million non-cash charge for the third quarter of fiscal
2000. For the company's cash flow hedges, changes in fair value are recognized
in other comprehensive income to the extent determined to be effective until
the hedged item is recognized in earnings. For the third quarter of fiscal
2000, $2.1 million of losses were recognized in other comprehensive income.
Results of operations will continue to be affected by changes in fair value
for these contracts, the amount and timing of which cannot be predicted.
Nine Months Ended October 29, 1999, compared with
Nine Months Ended October 30, 1998
The company's net sales in the first nine months of fiscal 2000 increased 4.8
percent to $870.2 million from $830.2 million in the same period last year.
The increase in net sales was due primarily to increased liquidations, the
company's specialty business segment consisting of Corporate Sales, Kids and
Coming Home, and the international business segment. Sales from the core
segment were down. In particular, sales from the core monthly catalogs were
lower, due to a reduction in the number of pages circulated, but productivity,
or sales per page, increased.
Gross profit of $384.5 million for the first nine months of fiscal 2000
decreased 0.3 percent from $385.5 million in the same nine-month period last
year. As a percentage of net sales, gross profit decreased from 46.4 percent
in fiscal 1999 to 44.2 percent in fiscal 2000. The decrease in gross profit
was due to higher sales of liquidated merchandise, at steeper markdowns and
lower initial markups. Year-to-date liquidation sales were about 14 percent,
compared with 10 percent during the same period last year.
Selling, general and administrative expenses decreased 3.5 percent to $352.9
million in the first nine months of fiscal 2000 from $365.6 million in the
same period last year. As a percentage of net sales, selling, general and
administrative expenses decreased to 40.6 percent in fiscal 2000 from 44.0
percent in fiscal 1999. The decrease in the SG&A ratio in the first nine
months of fiscal 2000 was primarily the result of greater catalog
productivity, or sales per page, lower paper prices, and lower salaries and
benefit costs. These were partially offset by increased bonus and profit
sharing expense related to the higher profitability level.
13
Net income in the first nine months of fiscal 2000 was up 259 percent to
$19.7 million, or $0.64 per share, compared with $5.5 million, or $0.18 per
share in the first nine months of the prior year. This year's first nine
months included an addition to net income (after-tax) of $1.1 million, or
$0.04 per share, from the reversal of a portion of the non-recurring charge
taken last year. This was due to better-than-anticipated sell-through of
Willis & Geiger liquidations and favorable lease terminations related to two
store closing. Last year's nine months-to-date period included an after-tax
non-recurring charge of $0.9 million, or $0.03 per share.
Seasonality of business
The company's business is highly seasonal. Historically, a disproportionate
amount of the company's net sales and a majority of its profits have been
realized during the fourth quarter. If the company's sales were materially
different from seasonal norms during the fourth quarter, the company's annual
operating results could be materially affected. In addition, as the company
continues to refine its marketing efforts by experimenting with the timing of
its catalog mailings, quarterly results may fluctuate. Accordingly, results
for the individual quarters are not necessarily indicative of the results to
be expected for the entire year.
Liquidity and capital resources
To date, the bulk of the company's working capital needs have been met
through funds generated from operations and from short-term bank loans. The
company's principal need for working capital has been to meet peak inventory
requirements associated with its seasonal sales pattern. In addition, the
company's resources have been used to make asset additions and to purchase
treasury stock.
At October 29, 1999, the company had unsecured domestic credit facilities
totaling $145 million, of which about $25 million had been used. On
November 17, 1999, the company entered into a new domestic credit facility
with unsecured credit totaling $200 million. The company also maintains
foreign credit lines for use in foreign operations totaling the equivalent of
approximately $55 million as of October 29, 1999, of which $16 million was
used.
Since fiscal 1990, the company's board of directors has authorized the
company from time to time to purchase a total of 12.7 million shares of
treasury stock. As of December 8, 1999, 11.6 million shares have been
purchased, and there is a balance of 1.1 million shares available to the
company. The company purchased 0.1 million shares of treasury stock during
the nine months ended October 29, 1999.
Capital expenditures for fiscal 2000 are currently planned to be about
$24 million, of which about $12.7 million had been expended through
October 29, 1999. Major projects to date as of October 29, 1999, pertained
mainly to new computer hardware and software and distribution center
equipment. The company believes that its cash flow from operations and
borrowings under its current credit facilities will provide adequate
resources to meet its capital requirements, treasury stock purchases and
operational needs for the foreseeable future.
14
Other matters
Year 2000
The "Year 2000" issue refers to the possibility that some date-sensitive
computer software will not correctly interpret "00" references, possibly
resulting in processing errors or system failures. We do not manufacture or
sell any products that could encounter Year 2000 problems. However, the Year
2000 issue could affect computers that we use for entering orders from
customers, for monitoring business information such as customer lists and
inventory positions, and for other business processes, as well as
microprocessors embedded in equipment used in our warehouses and other
facilities. In addition, the Year 2000 issue could affect third parties on
which we depend, such as our product vendors and suppliers of telephone
communications, credit card processing, Internet support, product shipment,
package delivery, catalog production and distribution, and other important
services. Our facilities also depend on basic infrastructure items such as
electricity and water utilities. Computer errors or failures in any of these
areas have the potential to disrupt our business operations.
We began to address the Year 2000 issue in 1996 and established a Year 2000
project office in 1997. The project office works with our information
systems department and outside consultants to identify and assess the Year
2000 readiness of our internal computer systems and microprocessors and,
where appropriate, to remediate and test them. The project office is also
involved with assessing the readiness of our suppliers to deal with the Year
2000 issue. The principal activities of our Year 2000 project office are
as follows:
Internal Systems: Most of the software that is critical to our business runs
on mainframe computers in a MVS operating environment, as well as on a few
mid-range computers. Certain less important functions are performed on a
mainframe computer in a VM operating environment. We have completed
substantially all of the identification, assessment, remediation and unit
testing efforts.
A substantial amount of the mainframe remediation and unit testing work has
been performed by a consulting firm. Another firm was used to help configure
and perform integration testing. End-to-end system integration testing of key
applications was completed in the third quarter of 1999. However, due to the
less critical nature of certain operations performed in the VM environment,
further remediation in that area, as well as related unit and integration
testing, is expected to continue throughout 1999 on a selectively prioritized
basis, and some of these functions may not be remediated.
We completed the inventory and assessment of hardware and software associated
with personal computers in 1998. We have also completed the remediation of
substantially all PC components.
We have identified and assessed the microprocessors used in our warehouses
and other facilities in the United States, Japan and the United Kingdom.
We have not identified significant problems in this area and have
substantially completed all remediation in this area.
15
Suppliers: Our Year 2000 project office is working closely with other
departments, including merchandising, inventory and quality assurance,
to track the Year 2000 readiness of our principal product vendors through
written questionnaires, telephone calls and on-site visits. Among other
things, we are evaluating the readiness of vendors' manufacturing processes
and business operations and their ability to perform electronic data
interchange with us. In addition, we are evaluating the vulnerability of
vendors to possible interruption of the supply of key components of their
products, such as fabric, buttons and zippers.
Our evaluation of product vendors is focused on 44 suppliers that
collectively account for more than 85 percent of our unit volume of product
purchases. Out of that group, we currently believe that approximately 98
percent are either Year 2000-ready or making substantial progress and should
continue to be monitored, while approximately 2 percent may experience
problems that will need to be addressed further in contingency planning.
In addition, we have successfully verified and tested electronic data
interchange with all product vendors.
We have identified 112 suppliers of services and infrastructure items
that are most important to our business operations. Each of these service
providers has been assigned a business leader who is responsible for ensuring
the Year 2000 assessment information is current as well as establishing
contingency plans as needed. We currently believe that approximately 91
percent are either compliant or making substantial progress, while 9 percent
may experience Year 2000-related problems and merit increased monitoring and
contingency planning. With respect to our most critical telecommunications,
catalog production and delivery providers, we have had extensive contacts with
them and received substantial information concerning their Year 2000
readiness, and have identified no significant problems that are likely to be
encountered.
We currently have less comfort regarding foreign suppliers and infrastructure
issues, especially in Asia, than we do in the domestic environment. Foreign
service suppliers are very important to our business because approximately 55
percent of our products are manufactured abroad. In many cases we are
currently unable to assess the extent of Year 2000 problems that may be
encountered. We continue to monitor these suppliers based on our business
exposure in each country.
Contingency Planning: Initial contingency plans were completed in
March 1999. These plans address business critical processes and functions
and third-party issues that may place our operations at risk. We expect to
review and modify these contingency plans throughout 1999.
Based on the activities of our Year 2000 project office, we currently expect
that our most important computer systems will be able to function adequately
into the next century. While some disruptions are likely to occur with
internal systems and at least a few product vendors, we believe the most
probable scenario is that there will not be a systemic failure of important
services or infrastructure that will materially disrupt our operations as a
whole. Moreover, in view of the strong seasonality of our business, any
disruptions that do occur are likely to take place in the off-peak selling
period following the 1999 holiday season. However, our expectations in this
regard are forward-looking in nature and are necessarily subject to the many
uncertainties that relate to the Year 2000 issue, especially as it affects
our suppliers and other third parties over whom we have little or no control.
16
If our remediation, supplier evaluation and contingency planning efforts are
not successful, there could be a material adverse effect on our business,
results of operations or financial condition. We currently believe that the
greatest area of risk in this regard relates to foreign supply and
infrastructure issues such as the ability to ship products produced in other
countries. In addition, our sales volume could be adversely affected if
widespread Year 2000 problems in our domestic or foreign markets were to
result in a general slowdown of economic activity and consumer demand.
Cost: The total cost of our Year 2000 efforts is expected to be about $21-22
million, which is being expensed as incurred except for about $1 million of
hardware replacement costs that have been or will be capitalized. About $3.4
million of the total amount was incurred through the end of fiscal 1998 and
approximately an additional $8.9 million in fiscal 1999. The costs incurred
during the first three quarters of fiscal year 2000 amounted to roughly $7.3
million. We currently expect a total amount of about $8.5 million of
expenditures will be incurred in fiscal 2000, and about $1 million in fiscal
2001. The timing and amount of these future expenditures are forward-looking
and subject to uncertainties relating to our ongoing assessment of the Year
2000 issue and appropriate remediation efforts, contingency plans and
responses to any problems that may arise. Our Year 2000 expenses have been
paid out of our annual budgets for information services. Accordingly, other
technology development projects have been delayed to the extent that
resources have been devoted to the Year 2000 project.
Outlook
As previously announced, the company indicated that page circulation is being
reduced by about 20 percent in the last half of fiscal 2000 to eliminate
unprofitable mailings and in part to manage the transition from print to
e-commerce. In the first half of next year, we plan to continue this strategy
and expect it will have a similar but smaller impact on sales. We plan to
reduce page circulation in the primary monthly catalogs by 5 to 10 percent
through the first half of next year. In fiscal 2001, we plan to increase
capital spending to the $40-$50 million range, primarily investing in our
information technology infrastructure.
Statement regarding forward-looking information
Statements in this release that are not historical are forward looking,
including, without limitation, statements about goals for Internet sales,
anticipated cost savings, and possible circulation reductions and their
anticipated effects on sales or profits. As such, these statements are
inherently subject to a number of risks and uncertainties. Future results
may be materially different from those expressed or implied by these
statements due to a number of factors. Currently, the company believes that
the principal factors that create uncertainty about its future results are the
following: general economic or business conditions, both domestic and foreign;
continued growth rates for e-commerce shopping; the company's ability to
attract customers to the Internet; technology developments and their
availability and cost; customer response to product offerings and initiatives;
cost associated with printing and mailing catalogs; dependence on consumer
seasonal buying patterns; and fluctuations in foreign currency exchange rates.
The company's future results could, of course, be affected by other factors
as well.
17
Item 3: Quantitative and Qualitative Disclosure About Market Risk
The company uses derivative instruments to hedge, and therefore attempts to
reduce its exposure to the effects of currency fluctuations on cash flows.
The company is subject to foreign currency risk related to its transactions
with operations in the United Kingdom, Japan, Germany and with foreign third
party vendors. The company's risk management policy is to hedge the majority
of merchandise purchases by foreign operations and from foreign third party
vendors, which includes forecasted transactions, through the use of foreign
exchange forward contracts and options to minimize this risk. The company's
policy is not to speculate in derivative instruments for profit on the
exchange rate price fluctuation, trade in currencies for which there are no
underlying exposures, or enter into trades for any currency to intentionally
increase the underlying exposure. Derivative instruments used as hedges must
be effective at reducing the risk associated with the exposure being hedged
and must be designated as a hedge at the inception of the contract. As of
October 29, 1999 the company had net outstanding foreign currency forward
contracts totaling about $48 million, and options totaling $6 million.
The company is subject to the risk of fluctuating interest rates in the
normal course of business, primarily as a result of its short-term borrowing
and investment activities at variable interest rates. As of October 29, 1999
the company had no outstanding derivative instruments related to its debt or
investments.
18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings presently pending, except
for routine litigation incidental to the business, to which Lands'
End, Inc., is a party or of which any of its property is the
subject.
Items 2 and 3 are not applicable and have been omitted.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders for
the quarter ended October 29, 1999.
Item 5. is not applicable and has been omitted
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Table Exhibit
Number Description Number
10 Statement of Corporate Policy
Regarding Transactions in Securities 1
10 Amended and Restated Non-employee
Director Stock Option Plan 2
(b) There were no reports filed on Form 8-K during the three-month
period ended October 29, 1999.
19
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, its duly authorized officer and chief financial officer.
LANDS' END, INC.
Date: December 8, 1999 By /s/ STEPHEN A. ORUM
Stephen A. Orum
Executive Vice President,
and Chief Financial Officer
20
EXHIBIT 10.1
As Amended 12/03/99
LANDS' END, INC.
STATEMENT OF CORPORATE POLICY
REGARDING TRANSACTIONS
IN SECURITIES
This Statement of Corporate Policy applies to all officers,
directors, employees and agents of Lands' End, Inc. (the "Company")
and to the immediate Family Members (as defined below) of the officers
and directors of the Company.
1. It is the policy of the Company that it and its officers,
directors, employees and agents comply with all applicable
provisions of federal and state securities laws and
regulations.
2. No person covered by this Policy Statement shall purchase or
sell any security issued by the Company (a "Company
security") while such person is in possession of material
information about the Company that has not been disclosed to
the public, except for (a) the exercise of any stock option
previously granted to such person by the Company (but not the
sale of the underlying common stock) or any other transaction
with the Company that either would not constitute a purchase
or sale under Section 16 of the Securities Exchange Act of
1934 ("Section 16") or would constitute an exempt transaction
under Section 16 and (b) any transaction with the Company
that has been approved by the Board of Directors.
3. No person covered by this Policy Statement may use any
material information relating to the Company (or relating to
any other company if such information has been obtained in
the course of such person's employment by the Company) that
has not been disclosed to the public as the basis for
purchasing or selling any security issued by any other
entity.
4. No officer or director of the Company may purchase or sell
any security issued by the Company except (a) during a Window
Period (as defined below) or (b) with the prior approval of
at least one of the Chairman, any Vice-Chairman or the
President (as provided below), (c) pursuant to any
transaction permitted by the exceptions to paragraph 2 above,
or (d) pursuant to a public securities offering that has been
registered by the Company under the Securities Act of 1933.
(i) Unless otherwise determined in a specific instance by
the Board of Directors, the term "Window Period" shall
mean the period of thirty (30) business days which
commences on (and includes) the third (3d) business day
after and ends on (and includes) the thirty-second (32d)
business day after any of the following dates: (A) the
date of release for publication of the Company's summary
statements of sales and earnings for each fiscal year,
and for each of the first and second fiscal quarters,
and (B) the date of release of the Company's summary
sales and earnings for the first 47 weeks of its fiscal
year (or comparable eleven-month period).
(ii) The Chairman, any Vice-Chairman or the President shall
not approve any purchase or sale pursuant to paragraph
4(b) unless (A) failure to approve the transaction would
impose a material hardship on the officer or director
proposing the transaction and (B) the transaction has
been reviewed without objection by the General Counsel
or (if the office of General Counsel is vacant, such
other counsel for the company as may be designated by
any of the foregoing officers). For purposes of this
policy, a material hardship may include, without
limitation, (A) needs arising primarily from personal
financial planning considerations of the officer or
director or (B) the practical inability of the officer
or director to purchase or sell the desired amount of a
security during a Window Period because of the amount
involved. The Chairman, any Vice-Chairman or President
may also consider the intended timing and duration of
any proposed transaction or series of transactions and
its temporal proximity to a Window Period.
5. No officer or director of the Company (whether or not such
person is subject to Section 16) shall purchase and sell, or
sell and purchase (in each case, within the meaning of
Section 16), any equity security of the Company within any
period of less than six months, except for transactions that
are exempt under Section 16.
6. No officer or director of the Company (whether or not such
person is subject to Section 16) shall sell any equity
security of the Company if such person either (a) does not
own the security sold or (b) does not deliver the security
against such sale within twenty days thereafter or does not
within five days after such sale deposit the security in the
mails or other usual channels of transportation.
7. No officer or director of the Company shall make any gift of
a security issued by the Company, other than to an Immediate
Family Member of such officer or director, while such officer
or director is in possession of material information about
the Company that has not been disclosed to the public.
Subject to the foregoing sentence, gifts of Company
securities may be made at any time and without further
restriction to any charitable organization if such gift would
give rise to a charitable deduction under the federal income
tax code. No officer or director of the Company shall make
any gift of Company securities to any person who is neither
(a) an Immediate Family Member of such officer or director
nor (b) a charitable organization described in the preceding
sentence, unless the recipient of such gift has executed and
delivered to the General Counsel an agreement in writing not
to sell or otherwise dispose of such Company securities (or
the common stock underlying any transferred option) for a
period of at least six months after the gift is made.
Notwithstanding the foregoing, no gift of an employee or
director stock option granted by the Company be made except
as permitted by the terms of such option, including the terms
of the stock option plan of the Company pursuant to which it
was granted, as in effect from time to time.
2
8. Each officer and director of the Company shall comply with
all applicable filing requirements of paragraph (a) of
Section 16 and of Rule 144 promulgated under the Securities
Act of 1933. The Director of Investor Relations (or such
other officer or employee who may be designated by the
Chairman, any Vice-Chairman or President from time to time)
shall implement a system to assist officers and directors in
the timely filing of all required reports under the
foregoing provisions.
9. This policy shall apply to purchases, sales and gifts of
Company securities by or for the account of an Immediate
Family Member of an officer or director of the Company to
the same extent as to such transactions by or for the
account of such officer or director. As used in this
policy, "Immediate Family Member" means (a) any member of
the immediate family of an officer or director of the
Company, other than adult family members who do not live
with or depend financially on such officer or director and
who exercise independent control over their personal
investment decisions, (b) any trust or similar arrangement
for the benefit of an officer or director or a person who
is otherwise an Immediate Family Member, (c) any personal
charitable foundation or similar arrangement established by
an officer or director or a person who is otherwise an
Immediate Family Member, and (d) with respect to any
employee or director stock option granted by the Company,
any other person to whom a gift of such option may be made
pursuant to the terms of such option, including the terms
of the stock option plan of the Company pursuant to which
it was granted, as in effect from time to time.
10. Each officer and director of the Company shall, and any
other person covered by this Policy Statement may be
required to, execute and deliver an annual statement to the
Director of Investor Relations (or other officer or employee
described above) certifying that such person has complied
with this Policy Statement at all times after the date
hereof (or such lesser time as such person has been covered
hereby).
11. The Director of Investor Relations (or other officer or
employee described above) may adopt such reasonable
procedures as he or she shall deem necessary or desirable in
order to implement this Policy Statement.
3
EXHIBIT 10.2
As Amended 12/03/99
LANDS' END, INC.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
I. Identification of the Plan
1.1 Title. The Plan described herein shall be known as the
"Non-Employee Director Stock Option Plan" of Lands' End, Inc. (the
"Company") and is referred to herein as the "Plan." The Plan is
hereby established as of the date of the annual meeting of the
Company's stockholders ("Annual Meeting") held on May 14, 1997 (the
"Effective Date").
1.2 Purpose. The Board of Directors of the Company believes it
is in the best interest of the Company to encourage stock ownership by
members of the Board of Directors of the Company who are not also
employed by the Company ("Non-Employee Directors") in order to further
align the interests of the Non-Employee Directors with those of the
shareholders. The Plan will provide additional means for the Company
to attract and retain qualified individuals as members of the Board of
Directors of the Company and to promote such alignment of interests by
granting Non-Employee Directors from time to time nonqualified stock
options ("Options") to purchase shares of common stock of the Company
("Company Shares"). By virtue of the benefits available under the
Plan, Non-Employee Directors will have an opportunity to participate
in any future appreciation in the value of Company Shares, which will
furnish such Non-Employee Directors with an additional incentive to
work for and contribute to the growth and success of the Company.
1.3 Adoption and Restatement of the Plan. The Lands' End, Inc.
Non-Employee Director Stock Option Plan was adopted by the Company's
Board of Directors on February 18, 1997 and approved by the Company's
shareholders on May 14, 1997. The Lands' End, Inc. Non-Employee
Director Stock Option Plan was amended and restated by the Company's
Board of Directors on August 24, 1999 and December 3, 1999.
1.4 Company Shares Reserved for the Plan. There is reserved
for issuance upon the exercise of Options to be granted under the Plan
an aggregate of 400,000 Company Shares, which may be authorized and
unissued shares or treasury shares and which number is subject to
adjustment for events occurring after the Effective Date as provided
in Section 5.4.
II Administration of the Plan.
2.1 Committee's Membership and Powers. The Plan will be
administered by a committee of the Board of Directors of the Company
(the "Committee") consisting of two or more members of the Board of
Directors of the Company ("Directors") as the Board of Directors of
the Company (the "Board") may designate from time to time. All
questions of interpretation of the Plan or of any Option shall be
determined by the Committee, and such determination shall be final and
binding upon all persons having an interest in the Plan or such
Option. Notwithstanding any other provision herein to the contrary,
the Committee shall have no authority, discretion, or power to select
the Non-Employee Directors who will receive Options, to set the
exercise price of the Options, to determine the number of Company
Shares to be subject to an Option or the time at which an Option shall
be granted, to establish the duration of an Option, or to alter any
other terms or conditions specified in the Plan, except in the sense
of administering the Plan subject to the provisions of the Plan.
2.2 Indemnification. Service on the Committee shall constitute
service as a Director so that members of the Committee shall be
entitled to indemnification and reimbursement as Directors to the full
extent provided for at any time by law, the Company's Certificate of
Incorporation, the Company's By-Laws and in any insurance policy or
other agreement intended for the benefit of the Directors.
III. Plan Participants. An Option shall be granted only to a person
who, at the time of the grant, is a Non-Employee Director. A Non-
Employee Director who receives a grant of an Option is referred to
herein as a "participant."
IV. Terms and Conditions of Options. Options shall be nonstatutory
stock options; that is, options which are not treated as incentive
stock options within the meaning of Section 422(b) of the Internal
Revenue Code of 1986, as amended (the "Code"). Options shall be
evidence by option agreements specifying the number of Company Shares
covered thereby, in such form as the Board shall from time to time
establish (the "Option Agreements"). Option Agreements may
incorporate all or any of the terms of the Plan by reference and shall
comply with and be subject to the following terms and conditions.
4.1 Automatic Grant of Options. Subject to execution by a Non-
Employee Director of the appropriate Option Agreement, Options shall
be granted automatically and without further action of the Board, as
follows:
(a) Initial Option. Each person who is a Non-Employee
Director immediately after the Annual Meeting on the
Effective Date shall be granted, on the Effective
Date, an Option to purchase twenty thousand (20,000)
Company Shares (an "Initial Option"). Any Non-
Employee Director who receives the Initial Option will
be eligible to receive the Annual Option commencing
with the Annual Meeting in 2000. The Initial Option
shall vest and become exercisable as follows:
(i) Time Vesting. Subject to the terms and
conditions of the Initial Option and subject to
Section 4.1(a)(ii) below, the Initial Option
shall vest and become exercisable as to (A) 50%
of the Company Shares covered thereby on the
Effective Date; (B) another 25% of the Company
Shares covered thereby immediately after the
Annual Meeting in 1998, provided that such
person is a Director on such date; and (C)
another 25% of the Company Shares covered
thereby immediately after the Annual Meeting in
1999, provided that such person is a Director on
such date.
2
(ii) Acceleration for Death or Disability. If the
participant ceases to be a Non-Employee Director
as a result of his or her death or "disability",
the Initial Option shall immediately vest and
become exercisable as to all of the Company
Shares covered thereby as of the date of such
termination. For this purpose a participant
shall be considered "disabled" if the Committee
determines in good faith that he or she is
unable to engage in any substantial gainful
activity by reason of any medically determinable
physical or mental impairment which can be
expected to result in death or which has lasted
or can be expected to last for continuous period
of not less than 12 months.
(b) Annual Option. Commencing immediately after the
Annual Meeting in 1998, each Non-Employee Director
shall be granted, immediately after such Annual
Meeting and each Annual Meeting thereafter where such
person remains a Non-Employee Director, an Option to
purchase five thousand (5,000) Company Shares (an
"Annual Option"); provided, however, that any Non-
Employee Director who receives the Initial Option will
be eligible to receive the Annual Option commencing
with the Annual Meeting in 2000. Each Annual Option
shall vest and become exercisable immediately upon the
grant of such Annual Option.
(c) New Directors.
(i) Any person who became a Non-Employee Director
for the first time after the Effective Date but
before December 3, 1999 (whether to fill a
vacancy or a newly-created director position)
shall be granted, effective on December 3, 1999,
an Option to purchase five thousand (5,000)
Company Shares, which Option shall vest and
become exercisable immediately upon the grant of
such Interim Option.
(ii) Any person who shall become a Non-Employee
Director for the first time after December 3,
1999 (whether to fill a vacancy or a newly-
created director position) shall be granted, on
the date he or she first becomes a Non-Employee
Director, an Option to purchase ten thousand
(10,000) Company Shares, which Option shall vest
and become exercisable immediately upon the
grant of such Interim Option.
(iii) Any person who shall become a Non-Employee
Director for the first time after the Effective
Date and not on the date of an Annual Meeting
(whether to fill a vacancy or a newly-created
director position and whether before or after
December 3, 1999) shall be granted, on the date
3
he or she first becomes a Non-Employee Director,
an Option (an "Interim Option") to purchase a
number of Company Shares equal to five thousand
(5,000) times a fraction, the numerator of which
is the number of complete months from the date
the Non-Employee Director is elected until the
then anticipated date of the next Annual Meeting
and the denominator of which is twelve (12).
Each Interim Option shall vest and become
exercisable immediately upon the grant of such
Interim Option.
(d) Right to Decline Option. Notwithstanding the
foregoing, any person may elect not to receive an
Option by so notifying the Company, orally or in
writing, no later than the day prior to the date such
Option would otherwise be granted. A person so
declining an Option shall receive no payment or other
consideration in lieu of such declined Option. A
person who has declined an Option may revoke such
election by delivering written notice of such
revocation to the Board no later than the day prior to
the date such Option would be granted.
4.2 Terms of Options. Each Option shall expire and not be
exercisable after the first to occur of (i) December 31 of the year in
which the tenth anniversary of the Grant Date of such Option occurs
and (ii) three years after the Non-Employee Director ceases to be a
Director of the Company for any reason.
4.3 Option Price. The Option price per Company Share shall be
100 percent of the fair market value of a Company Share on the date
the Option is granted (the "Grant Date"). For this purpose "fair
market value" of a Company Share as of any date shall be equal to the
last per share sales price reported for a Company Share for such date
in The Wall Street Journal or, if no sales of Company Shares are
reported for such date in The Wall Street Journal, for the next
succeeding date for which sales of Company Shares are so reported in
The Wall Street Journal. If sales of Company Shares are not reported
for any date in The Wall Street Journal, then the "fair market value"
of a Company Share as of any date shall be determined in such manner
as shall be prescribed in good faith by the Committee.
4.4 Method of Exercising Options. An Option may be exercised
only by a written notice to the Company accompanied by payment of the
full Option price which may be made in any one or any combination of
the following: cash, certified or official bank check, or delivery of
Company Share certificates endorsed in blank or accompanied by
executed stock powers evidencing Company Shares whose value shall be
deemed to be the "fair market value" (as determined in accordance with
Section 4.3 hereof) on the date of exercise of such Company Shares.
4
V. General Provisions
5.1 Option Agreement. No person shall have any rights under
any Option granted under this Plan unless and until the Company and
the person to whom such Options shall have been granted shall have
executed and delivered an agreement expressly conferring the grant of
the Option to such person and containing provisions setting forth the
terms of the Option.
5.2 Shareholder Rights. A participant shall not have any
dividend, voting or other shareholder rights by reason of a grant of
an Option prior to the issuance of any Company Shares pursuant to the
proper exercise of all or any portion of such Option.
5.3 Transferability of Options.
(a) Permitted Transfers. Other than by will or the laws
of descent and distribution, each Option granted under
this Plan shall be transferable only to a member of a
participant's Family Group (the "Permitted
Transferees") and only if not transferred for value.
A Permitted Transferee may make subsequent transfers
to any person who would also be a Permitted Transferee
of the participant. If a participant or Permitted
Transferee transfers an Option pursuant to this
Section 5.3, he or she must give the Company prompt
written notice of such transfer and the transfer shall
only be effective upon the Company's receipt of such
notice. An Option shall be exercisable during the
participant's lifetime only by such participant, his
or her guardian in the event of disability or, upon
transfer, the Permitted Transferee. "Family Group"
means any child, stepchild, grandchild, parent,
stepparent, grandparent, spouse, former spouse,
sibling, niece, nephew, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law, or
sister-in-law, including adoptive relationships, any
person sharing the participant's household (other than
a tenant or employee), a trust in which these persons
have more than fifty percent of the beneficial
interest, a foundation in which these persons (or the
participant) control the management of the assets and
any other entity in which these persons (or the
participant) own more than fifty percent of the voting
interests. The following transactions are not
prohibited transfers for value: (i) a transfer under a
domestic relations order in settlement of marital
property rights; and (ii) a transfer to an entity in
which more than fifty percent of the voting interests
are owned by family members (or the participant) in
exchange for an interest in that entity.
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(b) Death. In the event of the death of a participant,
exercise of any Option that has not been previously
transferred shall be made only by the executor or
administrator of the estate of the deceased
participant or the person or persons to whom the
deceased participant's rights under the benefit shall
pass by will or the laws of descent and distribution
and only to the extent that the deceased participant
was entitled thereto at the date of his or her death.
5.4 Adjustments. In the event that the Committee shall
determine that any dividend or other distribution (whether in the form
of cash, Company Shares, other securities or other property),
recapitalization, stock split, reverse stock split, reorganization,
merger, consolidation, combination, split-up, spin-off, repurchase or
exchange of Company Shares or other securities of the Company,
issuance of warrants or other rights to purchase Company Shares or
other securities of the Company, or other similar corporate
transaction or event affects the Company 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 (a) the number and type of Company Shares (or other
securities or property) which thereafter may be made the subject of
Options, (b) the number and type of Company Shares (or other
securities or property) subject to outstanding Options, and (c) the
grant, purchase, or exercise price with respect to any Options, or, if
deemed appropriate, make provision for a cash payment to the holder of
an outstanding Option.
5.5 Withholding of Taxes. The Company shall be entitled, if
the Committee (or any financial officer designated by it) considers it
necessary or desirable, to withhold (or secure payment from the
participant in lieu of withholding) the amount of any withholding or
other payment required of the Company under the tax withholding
provisions of the Code, any state's income tax act or any other
applicable law with respect to any Company Shares issuable under such
participant's exercised Options, and the Company may defer issuance
unless indemnified to its satisfaction with respect to payment of such
withholding or other tax. Subject to such rules as the Committee may
adopt, participants may satisfy this obligation, in whole or in part,
by an election to have the number of Company Shares received upon
exercise of any Option reduced by a number of Company Shares having a
"fair market value" (as determined in accordance with Section 4.3
hereof) equal to the amount of the required withholding to be so
satisfied or to surrender to the Company previously held Company
Shares having an equivalent fair market value.
5.6 No Directorship Rights Conferred. Nothing in the Plan or
in any Option granted under the Plan shall confer any right on a Non-
Employee Director to continue as a Director or shall interfere in any
way with any right or power to remove him or her from the Board in
accordance with applicable law and the Company's Articles of
Incorporation and Bylaws.
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5.7 Disposition of Company Shares. Unless otherwise
specifically authorized by the Committee, participants may not dispose
of, sell or otherwise transfer any Company Shares acquired upon
exercise of Options granted under the Plan for a period of six months
following the Grant Date.
5.8 Continued Availability of Company Shares Under Unexercised
Options. If an Option granted under the Plan terminates or expires
without being wholly exercised or if Company Shares as to which an
Option has been exercised shall for any reason not be issued, a new
Option may be granted under the Plan covering the number of Company
Shares to which such termination, expiration, failure to issue or
reacquisition related.
5.9 Intent to Comply with Rule 16b-3. It is the intent of the
Company that the Plan comply in all respects with Rule 16b-3 under the
Securities Exchange Act of 1934, as amended, that any ambiguities or
inconsistencies in construction of the Plan be interpreted to give
effect to such intention and that if any provision of the Plan is
found not to be in compliance with Rule 16b-3, such provision shall be
deemed null and void to the extent required to permit the Plan to
comply with Rule 16b-3.
5.10 No Strict Construction. No rule of strict construction
shall be applied against the Company, the Committee or any other
person in the interpretation of any of the terms of the Plan, any
Option agreement or any Option granted under the Plan or any rule or
procedure established by the Committee.
5.11 Choice of Law. Each Option granted under the Plan shall be
considered to be a contract under the laws of the State of Delaware
and, for all purposes, the Plan and each Option granted under the Plan
shall be construed in accordance with and governed by the laws of the
State of Delaware.
5.12 Successors. This Plan is binding on and will inure to the
benefit of any successor to the Company, whether by way of merger,
consolidation, purchase or otherwise.
5.13 Severability. If any provision of the Plan or an Option
Agreement shall be held illegal or invalid for any reason, such
illegality or invalidity shall not affect the remaining provisions of
the Plan or such agreement, and the Plan and such agreement shall each
be construed and enforced as if the invalid provisions had never been
set forth therein.
VI. Amendment and Termination.
6.1 Amendment. The Board of Directors may amend the Plan from
time to time, in its sole discretion, but no amendment shall:
(a) without a participant's consent impair his or her
rights to any Option theretofore granted; or
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(b) without the authorization and approval of the
Company's shareholders (i) increase the maximum number
of Company Shares which may be issued in the aggregate
under the Plan, except as provided in Section 5.4 (ii)
extend the termination date of the Plan or of any
Option granted under the Plan or (iii) enlarge the
class of persons eligible to receive Options under the
Plan.
6.2 Termination. The Board of Directors may terminate the Plan
at any time with respect to Company Shares for which Options have not
theretofore been granted. Unless earlier terminated, the Plan will
terminate at the close of business on the day following the Annual
Meeting in 2006. Following the termination of the Plan, no further
Options may be granted under the Plan; however, all Options which
prior to the Plan termination have not expired, terminated or been
exercised or surrendered may be exercised thereafter in accordance
with their terms and the terms hereof, and the Committee shall
continue to have its full powers under the Plan.
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