<PAGE> 1
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 quarterly period ended July 26, 1998
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 1-13740
-------
BORDERS GROUP, INC.
-------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-3196915
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification
organization) No.)
500 East Washington Street, Ann Arbor, Michigan 48104
-----------------------------------------------------
(Address of principal executive offices)
(zip code)
(734) 477-1100
--------------
(Registrant's telephone number, 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
----- -----
Title of Class Shares Outstanding As of
--------------
Common Stock August 17, 1998
------------------
76,776,134
------------
<PAGE> 2
BORDERS GROUP, INC.
INDEX
Part I - Financial Information
Page
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
Item 3. Quantitative and Qualitative Disclosures about
Market Risk N/A
Part II - Other information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities N/A
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a vote of
Securityholders 19
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
<PAGE> 3
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS EXCEPT COMMON SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS ENDED
JULY 26, JULY 27,
1998 1997
--------------- ----------------
<S> <C> <C>
Sales $ 546.0 $ 466.3
Cost of merchandise sold, including 406.1 351.1
occupancy costs
--------------- ----------------
Gross margin 139.9 115.2
Selling, general and administrative expenses 130.5 111.1
Pre-opening expense 0.8 1.6
Goodwill amortization 0.7 0.2
--------------- ----------------
Operating income 7.9 2.3
Interest expense 4.0 1.4
--------------- ----------------
Income before income tax 3.9 0.9
Income tax expense 1.5 0.4
--------------- ----------------
Net income $ 2.4 $ 0.5
=============== ================
EARNINGS PER COMMON SHARE DATA --
Diluted earnings per common share $ 0.03 $ 0.01
=============== ================
Diluted weighted average common shares
outstanding (in thousands) 83,449 82,651
=============== ================
Basic earnings per common share $ 0.03 $ 0.01
=============== ================
Basic weighted average common shares
outstanding (in thousands) 76,682 76,286
=============== ================
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
(1)
<PAGE> 4
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS EXCEPT COMMON SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
26 WEEKS ENDED
JULY 26, JULY 27,
1998 1997
----------------- ------------------
<S> <C> <C>
Sales $ 1,091.2 $ 929.9
Cost of merchandise sold, including 811.5 701.9
occupancy costs
--------- -------
Gross margin 279.7 228.0
Selling, general and administrative expenses 260.3 221.5
Pre-opening expense 1.1 1.9
Goodwill amortization 1.4 0.5
--------- -------
Operating income 16.9 4.1
Interest expense 6.7 2.4
--------- -------
Income before income tax 10.2 1.7
Income tax expense 4.0 0.8
--------- -------
Net income $ 6.2 $ 0.9
========= =======
EARNINGS PER COMMON SHARE DATA --
Diluted earnings per common share $ 0.07 $ 0.01
========= =======
Diluted weighted average common shares 83,238 82,260
outstanding (in thousands)
========= =======
Basic earnings per common share $ 0.08 $ 0.01
========= =======
Basic weighted average common shares
outstanding (in thousands) 76,227 76,061
========= =======
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
(2)
<PAGE> 5
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
7/26/98 7/27/97 1/25/98
<S> <C> <C> <C>
ASSETS
Current Assets
Cash $ 44.8 $ 56.8 $ 65.1
Merchandise inventories 888.8 719.4 879.1
Accounts receivable and other current
assets 54.9 50.5 74.2
-------------- --------------- ----------------
Total Current Assets 988.5 826.7 1,018.4
Property and equipment, net of
accumulated depreciation of $306.8,
$259.6 and $281.5, respectively 418.1 307.0 373.7
Other assets and deferred charges 32.7 36.5 33.3
Goodwill, net of accumulated
amortization of $44.5, $42.0, and
$43.1, respectively 107.5 43.9 109.5
-------------- --------------- ----------------
Total Assets $ 1,546.8 $ 1,214.1 $ 1,534.9
============== =============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt and capital lease
obligations due within one year $ 291.5 $ 112.0 $ 127.3
Trade accounts payable 382.8 326.7 480.7
Accrued payroll and other liabilities 170.6 157.8 210.8
Taxes, including income taxes -- 25.7 62.6
-------------- --------------- ----------------
Total Current Liabilities 844.9 622.2 881.4
Long-term debt and capital lease
obligations 5.1 5.5 5.2
Other long-term liabilities 52.9 37.4 50.2
Commitments and contingencies (Note 2) -- -- --
-------------- --------------- ----------------
Total Liabilities 902.9 665.1 936.8
-------------- --------------- ----------------
Stockholders' Equity
Common stock; 200,000,000 shares
authorized; 77,070,613, 76,460,53 and
75,395,988 issued and outstanding at July
26, 1998, July 27, 1997, and January 25,
1998, respectively 700.1 685.2 661.0
Officers receivable and deferred
compensation (5.0) (1.2) (6.3)
Accumulated other comprehensive income (1.7) -- (0.9)
Accumulated deficit (49.5) (135.0) (55.7)
-------------- --------------- ----------------
Total Stockholders' Equity 643.9 549.0 598.1
-------------- --------------- ----------------
$ 1,546.8 $ 1,214.1 $ 1,534.9
============== =============== ================
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
(3)
<PAGE> 6
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE 26 WEEKS ENDED JULY 26, 1998
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
DEFERRED ACCUMULATED RETAINED
COMPENSATION OTHER EARNINGS
COMMON STOCK AND OFFICERS COMPREHENSIVE (ACCUMULATED
SHARES AMOUNT RECEIVABLES INCOME DEFICIT) TOTAL
----------- -------- ----------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT 1/25/98 75,395,998 $ 661.0 $ (6.3) $ (0.9) $ (55.7) $ 598.1
Net income -- -- -- -- 6.2 6.2
Issuance of common 1,734,615 41.0 -- -- -- 41.0
stock
Repurchase and retirement of common stock (60,000) (1.9) -- -- -- (1.9)
Currency translation adjustment -- -- -- (0.8) -- (0.8)
Change in receivable
and deferred compensation -- -- 1.3 -- -- 1.3
----------- -------- ------ ------ ------- --------
BALANCE AT 7/26/98 77,070,613 $ 700.1 $ (5.0) $ (1.7) $ (49.5) $ 643.9
=========== ======== ====== ====== ======= ========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated financial Statements.
(4)
<PAGE> 7
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
26 WEEKS ENDED
JULY 26, JULY 27,
1998 1997
<S> <C> <C>
CASH PROVIDED BY (USED FOR):
OPERATIONS
Net income $ 6.2 $ 0.9
Adjustments to reconcile net income
to operating cash flows:
Depreciation and goodwill amortization 30.1 24.5
Change in other long-term
assets and liabilities 3.3 (4.3)
Cash provided by (used for) current
assets and current liabilities:
(Increase)/Decrease in inventories (9.7) 19.3
Decrease in accounts payable (97.9) (23.4)
Other, net (82.5) (42.5)
---------------------- -----------------------
Net cash used for operations (150.5) (25.5)
---------------------- -----------------------
INVESTING
Capital expenditures (72.7) (41.0)
---------------------- -----------------------
Net cash used for investing (72.7) (41.0)
---------------------- -----------------------
FINANCING
Net funding from credit facility 164.2 75.0
Issuance of common stock 23.8 6.4
Repurchase of common stock (1.9) (5.9)
Other, net 16.8 5.2
---------------------- -----------------------
Net cash provided by financing 202.9 80.7
---------------------- -----------------------
NET INCREASE/(DECREASE) IN CASH AND (20.3) 14.2
EQUIVALENTS
Cash and equivalents at beginning of 65.1 42.6
year
---------------------- -----------------------
Cash and equivalents at end of period $ 44.8 $ 56.8
====================== =======================
</TABLE>
See and accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
(5)
<PAGE> 8
BORDERS GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Borders Group, Inc. (the Company) have been prepared in accordance with Rule
10-01 of Regulation S-X and do not include all the information and notes
required by generally accepted accounting principles for complete financial
statements. All adjustments, consisting only of normal recurring adjustments,
have been made which, in the opinion of management, are necessary for a fair
presentation of the results of the interim periods. The results of operations
for such interim periods are not necessarily indicative of results of operations
for a full year. The unaudited condensed consolidated financial statements
should be read in conjunction with the Company's consolidated financial
statements and notes thereto for the fiscal year ended January 25, 1998 (the
1997 consolidated financial statements).
The Company's fiscal year ends on the Sunday immediately preceding the
last Wednesday in January. At July 26, 1998, the Company operated 213
superstores under the Borders name, including one in Singapore, 899 mall-based
and other bookstores primarily under the Waldenbooks name and 23 bookstores
under the Books etc. name in the United Kingdom.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
There are various claims, lawsuits, and actions pending against the
Company and its subsidiaries which are incident to their operations. It is the
opinion of management that the ultimate resolution of these matters will not
have a material effect on the Company's liquidity, financial position or results
of operations.
During 1994, the Company entered into an agreement in which leases with
respect to four Borders' locations serve as collateral for certain mortgage
pass-through certificates. These mortgage pass-through certificates include a
provision requiring the Company to repurchase the underlying mortgage notes in
certain events, including the failure by the Company to make payments of rent
under the related leases, the failure by Kmart to maintain required investment
grade ratings or the termination of the guarantee by Kmart of the Company's
obligations under the related leases (which would require mutual consent of
Kmart and Borders). In the event the Company is required to repurchase all of
the underlying mortgage notes, the Company would be obligated to pay
approximately $36.6. Since February 1995, Kmart has failed to maintain
investment grade ratings and therefore these notes are now subject to put by the
holder. To date, the holder has not exercised its rights to put the notes. The
Company does not believe that the note purchase, if required, would have a
material effect on the Company's financial position or earnings.
(6)
<PAGE> 9
BORDERS GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA)
In March 1998, the American Booksellers Association ("ABA") and
twenty-six independent bookstores filed a lawsuit in the United States District
Court for the Northern District of California against the Company and Barnes &
Noble Inc. alleging violations of the Robinson-Patman Act, the California Unfair
Trade Practice Act and the California Unfair Competition Law. The Complaint
seeks injunctive and declaratory relief; treble damages on behalf of each of the
bookstore plaintiffs, and, with respect to the California bookstore plaintiffs,
any other damages permitted by California law; disgorgement of money, property
and gains wrongfully obtained in connection with the purchase of books for
resale, or offered for resale, in California from March 18,1994 until the action
is completed and prejudgement interest on any amounts awarded in the action, as
well as attorney fees and costs. The Company intends to vigorously defend the
action.
In August 1998, The Intimate Bookshop, Inc. and its owner, Wallace
Kuralt, have filed a lawsuit in the United States District Court for the
Southern District of New York against the Company, Barnes & Noble, Inc., Amazon,
Inc., certain publishers and others alleging violation of the Robinson-Patman
Act and other federal law, New York statutes governing trade practices and
common law. The Complaint seeks certification of a class consisting of all
retail booksellers in the United States, whether or not currently in business,
which were in business and were members of the American Booksellers Association
("ABA") at any time during the four year period preceding the filing of the
Complaint. The Complaint alleges that the named plaintiffs have suffered damages
of $11,250,000 or more and requests treble damages on behalf of the named
plaintiffs and each of the purported class members, as well as of injunctive and
declaratory relief (including an injunction requiring the closure of all of
defendants' stores within 10 miles of any location where plaintiff either has or
had a retail bookstore during the four years preceding the filing of the
Complaint, and prohibiting the opening by defendants of any bookstore in such
areas for the next 10 years), disgorgement of alleged discriminatory discounts,
rebates, deductions and payments, punitive damages, interest, costs, attorneys
fees and other relief. Many of the allegations in the Complaint are similar to
those contained in an action instituted by the ABA and 26 bookseller plaintiffs
against the Company and Barnes & Noble in March of 1998. The Company intends
to vigorously defend the action.
The Company has not included any liability in its financial statements
in connection with the lawsuits described above.
NOTE 3 - FINANCING
Credit Facility: The Company has a multicurrency credit agreement which provides
a $425.0, five-year working capital facility. Borrowings under the credit
facility bear interest at a base rate or an increment over LIBOR at the
Company's option. The credit agreement contains operating covenants which limit
the Company's ability to incur indebtedness, make acquisitions, dispose of
assets, issue or repurchase its common stock in excess of $100 million (plus any
proceeds and tax benefits resulting from stock option exercises and tax
benefits resulting from restricted shares purchased by employees from the
Company), pay dividends on its common stock, and require the Company to meet
certain financial measures regarding fixed charge coverage, leverage and
tangible net worth. The Company had borrowings outstanding under the credit
facility of $291.0 at July 26, 1998 and $122.5 at January 25, 1998.
(7)
<PAGE> 10
Lease Financing Facility: The Company has a five-year, $250.0 lease financing
facility ("the Facility") to finance new stores and other property through
operating leases. The Facility will provide financing to lessors through loans
from a third party lender for up to 95% of a project cost. It is expected that
Lessors will make equity contributions approximating 5% of each project.
Independent of its obligations as lessee, the Company will guarantee payment
when due of all amounts required to be paid to the third party lender. The
principal amount guaranteed will be limited to approximately 89% of the original
cost of a project so long as the Company is not in default under the lease
relating to such project. There was $180.5 outstanding under the lease facility
at July 26, 1998 and $157.9 at January 25, 1998.
(8)
<PAGE> 11
BORDERS GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA)
NOTE 4 - CHANGES IN ACCOUNTING PRINCIPLES
Effective January 26, 1998, the Company adopted Statement of Financial
Accounting Standards (FAS) No. 130, "Reporting Comprehensive Income." This
statement requires that all items recognized under accounting standards as
components of comprehensive income be reported in an annual financial statement
that is displayed with the same prominence as other annual financial statements.
This statement also requires that an entity classify items of other
comprehensive income by their nature in an annual financial statement.
Comprehensive income includes all changes in equity during a period except those
resulting from investments by or distributions to shareholders. For the Company,
comprehensive income for all periods presented consisted solely of net earnings
and foreign currency translation adjustments pursuant to FAS No. 52, "Foreign
Currency Translation", as follows:
<TABLE>
<CAPTION>
Three Months Ended
July 26, July 27,
1998 1997
----------------- -----------------
<S> <C> <C>
Net earnings $ 2.4 $ 0.5
----------------- -----------------
Other comprehensive income:
Foreign currency translation adjustments (2.5) -
Related tax effect 0.9 -
----------------- -----------------
(1.6) -
----------------- -----------------
Total comprehensive income $ 0.8 $ 0.5
================= =================
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
July 26, July 27,
1998 1997
----------------- -----------------
<S> <C> <C>
Net earnings $ 6.2 $ 0.9
----------------- -----------------
Other comprehensive income:
Foreign currency translation adjustments (1.3) -
Related tax effect 0.5 -
----------------- -----------------
(0.8) -
----------------- -----------------
Total comprehensive income $ 5.4 $ 0.9
================= =================
</TABLE>
Effective January 26, 1998, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position (SOP) 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use." This SOP
provides guidance on when costs incurred for internal-use computer software are
and are not capitalized. Costs incurred as part of the preliminary project stage
or post-implementation/operation stage of computer software development must be
expensed as incurred. Costs incurred as part of the application development
stage of computer software development must be capitalized. This SOP does not
permit restatement of amounts recorded prior to the adoption of the SOP;
however, adoption of this SOP did not have a
(9)
<PAGE> 12
material impact on the Company's financial position, results of operations, or
liquidity in the second quarter of 1998.
(10)
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company, through its subsidiaries, is the second largest operator
of book superstores and the largest operator of mall-based bookstores in the
world based upon both sales and number of stores. At July 26, 1998, the Company
operated 213 superstores under the Borders name, including one in Singapore, 899
mall-based and other bookstores primarily under the Waldenbooks name and 23
bookstores under the Books etc. name in the United Kingdom.
The Company's second quarters of 1998 and 1997 consisted of the 13
weeks ended July 26, 1998 and July 27, 1997, respectively.
RESULTS OF OPERATIONS
The following table presents the Company's statement of operations
data, as a percentage of sales, for the periods indicated:
<TABLE>
<CAPTION>
13 WEEKS ENDED 26 WEEKS ENDED
JULY 26, JULY 27, JULY 26, JULY 27,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of merchandise sold, including 74.4 75.3 74.4 75.5
occupancy costs ------ ------ ------ ------
Gross margin 25.6 24.7 25.6 24.5
Selling, general and administrative
expenses 23.9 23.8 23.9 23.8
Pre-opening expense 0.1 0.3 0.1 0.2
Goodwill amortization 0.1 -- 0.1 0.1
------ ------ ------ ------
Operating income 1.4 0.5 1.5 0.4
Interest expense 0.7 0.3 0.6 0.3
------ ------ ------ ------
Income before income taxes 0.7 0.2 0.9 0.2
Income tax expense 0.3 0.1 0.3 0.1
------ ------ ------ ------
Net income 0.4 % 0.1 % 0.6 % 0.1 %
====== ====== ====== ======
</TABLE>
(11)
<PAGE> 14
STORE ACTIVITY
The Company's store activity is summarized below:
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED YEAR ENDED
JULY 26, JULY 27, JULY 26, JULY 27, JANUARY 25, 1998
1998 1997 1998 1997
------------- ------------- ------------ ----------- -----------------
<S> <C> <C> <C> <C> <C>
BORDERS SUPERSTORES
Beginning number of stores 206 163 203 157 157
Openings 7 8 10 14 46
---------- ---------- ---------- ---------- ----------
Ending number of stores 213 171 213 171 203
========== ========== ========== ========== ==========
WALDEN MALL BOOKSTORES
Beginning number of stores 903 930 923 961 961
Openings 1 4 5 5 8
Closings (5) (5) (29) (37) (46)
---------- ---------- ---------- ---------- ----------
Ending number of stores 899 929 899 929 923
========== ========== ========== ========== ==========
</TABLE>
13 WEEKS ENDED JULY 26, 1998 AND JULY 27, 1997
Sales in the second quarter of 1998 were $546.0 million, a $79.7
million, or 17.1%, increase over second quarter 1997 sales of $466.3 million.
This increase reflects a $69.7 million, or 25.8%, increase in Borders' sales
resulting from new store openings and a comparable store sales increase of 5.4%.
This increase was offset in part by a decline in Walden sales of $7.6 million
due to store closings and a comparable store sales decrease of 2.5%.
Cost of merchandise sold, including occupancy costs, was $406.1 million
in the second quarter of 1998, as compared with $351.1 million in the second
quarter of 1997. Gross margin as a percentage of sales was 25.6% in 1998 versus
24.7% in 1997. The 0.9% increase in gross margin primarily reflects buying
improvements resulting in a higher initial product margin, and tighter control
of inventory shrinkage.
Selling, general and administrative ("SG&A") expenses in the second
quarter of 1998 were up $19.4 million, or 17.5%, over SG&A expenses in the
second quarter of 1997 ($130.5 million versus $111.1 million). As a percentage
of sales, SG&A expenses were 23.9% in 1998 versus 23.8% in the second quarter of
1997. The 0.1% increase in SG&A expenses is due to increased spending on
strategic initiatives which offset operating leverage in the Company's core
business.
(12)
<PAGE> 15
Pre-opening expense in the second quarter of 1998 was $0.8 million
versus $1.6 million from the same period in 1997. Pre-opening expense consists
principally of grand-opening advertising expense and store payroll related to
the opening, and is expensed in the first full fiscal month of a store's
operations. Pre-opening expense per store varies primarily as a result of
differing levels of grand opening advertising, depending on the presence of the
Company and its competitors in the market and differing levels of labor costs
associated with merchandising the store. The Company opened 7 Borders
superstores and 1 Walden store in the second quarter of 1998 as compared to 8
Borders superstores and 4 Walden stores in the second quarter of 1997.
Goodwill amortization was $0.7 million in the second quarter of 1998
versus $0.2 million from the same period in 1997. The increase of $0.5 is a
result of the higher goodwill balance due to the acquisition of Books etc. in
October 1997.
Interest expense was $4.0 million in the second quarter of 1998 as
compared to $1.4 million in 1997. The increase of $2.6 million is primarily
related to interest on borrowings for the repurchase of common stock and the
acquisition of Books etc.
Income tax expense in the second quarter of 1998 was $1.5 million as
compared to $0.4 million in 1997.
26 WEEKS ENDED JULY 26, 1998 AND JULY 27, 1997
Sales in the 26 weeks ended July 26, 1998 were $1,091.2 million, a
$161.3 million, or 17.3%, increase over 26 weeks ended July 27, 1997 sales of
$929.9 million. This increase reflects a $141.2 million, or 26.5%, increase in
Borders' sales resulting from new store openings and a comparable store sales
increase of 5.2%. This increase was offset in part by a decline in Walden sales
of $13.2 million due to store closings and a comparable store sales decrease of
1.7%.
Cost of merchandise sold, including occupancy costs, was $811.5 million
in the 26 weeks ended July 26, 1998, as compared with $701.9 million in the same
1997 period. Gross margin as a percentage of sales was 25.6% in 1998 versus
24.5% in 1997. The 1.1% increase in gross margin primarily reflects buying
improvements resulting in a higher initial product margin, and tighter control
of inventory shrinkage.
Selling, general and administrative ("SG&A") expenses in the 26 weeks
ended July 26, 1998 were up $38.8 million, or 17.5%, over SG&A expenses in the
same period in 1997 ($260.3 million versus $221.5 million). As a percentage of
sales, SG&A expenses were 23.9% in 1998 versus 23.8% in 1997. The 0.1% increase
in SG&A expenses is due to increased spending on strategic initiatives which
offset operating leverage in the Company's core business.
(13)
<PAGE> 16
Pre-opening expense in the 26 weeks ended July 26, 1998 was $1.1
million versus $1.9 million in the same period in 1997. The Company opened 10
Borders superstores and 5 Walden stores in 1998 as compared to 14 Borders
superstores and 5 Walden store in 1997.
Goodwill amortization was $1.4 million in the 26 weeks ended July 26,
1998 versus $0.5 million in the same period in 1997. The increase of $0.9 is a
result of the higher goodwill balance due to the acquisition of Books etc. in
October 1997.
Interest expense was $6.7 million in the 26 weeks ended July 26, 1998
as compared to $2.4 million in 1997. The increase of $4.3 million is primarily
related to interest on borrowings for the repurchase of common stock and the
acquisition of Books etc.
Income tax expense in the 26 weeks ended July 26, 1998 was $4.0 million
as compared to $0.8 million in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund working
capital needs, the opening of new stores and the refurbishment and expansion of
existing stores.
Net cash used for operations for the 26 weeks ended July 26, 1998 was
$150.5 million as compared to $25.5 million in the corresponding period in the
prior year. The current year operating cash inflows primarily reflect net
income and non-cash depreciation and amortization expense of $30.1 million.
Operating cash outflows for the period were primarily the result of the timing
of inventory purchases and a decrease in taxes payable during the period.
Net cash used for investing for the first 26 weeks of 1998 was $72.7
million as compared to $41.0 million in the first 26 weeks of 1997, and
primarily represents capital expenditures for new stores, existing store
refurbishments, the addition of the new Nashville fulfillment center, and the
new west coast distribution center.
Net cash provided by financing in the first 26 weeks of 1998 was $202.9
million versus $80.7 million in the first 26 weeks of 1997. Net cash provided by
financing resulted primarily from net borrowings under the credit facility.
On a consolidated basis, the Company expects its working capital
requirements to increase as a result of its expansion program for its Borders
books and music superstores and international expansion programs.
The Company believes funds generated from operations, borrowings under
the credit facility and financing through the lease facility will be sufficient
to fund its anticipated capital requirements for at least two to three years.
The Company has a multicurrency credit agreement which provides a
$425.0 million, five-year working capital facility. Borrowings under the credit
facility bear interest at a base rate or an increment over LIBOR at the
Company's option. The credit agreement contains operating covenants which limit
the Company's ability to incur indebtedness, make acquisitions, dispose of
assets, issue or repurchase its common stock in excess of $100 million (plus any
proceeds and tax benefits resulting from stock option exercises and tax benefits
resulting from restricted shares purchased by employees from the Company), pay
dividends on its common stock, and require the Company to meet certain financial
measures regarding fixed charge coverage, leverage and tangible net worth. The
Company had borrowings outstanding under the credit facility of $291.0 at July
26, 1998 and $122.5 at January 25, 1998.
(14)
<PAGE> 17
The Company has a five year, $250.0 million lease financing facility
("the Lease Facility") to finance new stores and other property through
operating leases. The Lease Facility will provide financing to lessors through
loans from a third party lender for up to 95% of a project cost. It is expected
that lessors will make equity contributions approximating 5% of each project.
Independent of its obligations as lessee, the Company guarantees payment when
due of all amounts required to be paid to the third party lender. The principal
amount guaranteed will be limited to approximately 89% of the original cost of a
project, so long as the Company is not in default under the lease relating to
such project. There were 46 properties financed through the lease facility, with
a financed value of $180.5 million, at July 26, 1998. Management believes that
the rental payments for properties financed through the lease facility may be
lower than those which the Company could obtain elsewhere due to, among other
factors, (i) the lower borrowing rates available to the Company's landlords
under the facility, and (ii) the fact the rental payments for properties
financed through the facility do not include amortization of the principal
amounts of the landlords' indebtedness related to the properties. Rental
payments relating to such properties will be adjusted when permanent financing
is obtained to reflect the interest rates available at the time of the
refinancing and the amortization of principal.
During 1994, the Company entered into agreements in which leases with
respect to four Borders' locations serve as collateral for certain mortgage
pass-through certificates. The mortgage pass-through certificates include a
provision requiring the Company to repurchase the underlying mortgage notes in
certain events, including the failure by the Company to make payments of rent
under the related leases, the failure by Kmart to maintain required investment
grade ratings or the termination of the guarantee by Kmart of the Company's
obligations under the related leases (which would require mutual consent of
Kmart and Borders). In the event the Company is required to repurchase all of
the underlying mortgage notes, the Company would be obligated to pay
approximately $36.6 million. Since February 1995, Kmart has failed to maintain
investment grade ratings, and, therefore, these notes are now subject to put by
the holder. To date, the holder has not exercised its right to put the notes.
The Company does not believe that the note purchase, if required, would have a
material effect on the Company's financial position or earnings.
The Company currently has a program in place to repurchase its common
stock up to a limit of $100 million plus the aggregate exercise price of options
that are exercised from time to time and the aggregate tax benefits to the
Company from the exercise of options and the vesting of restricted shares
purchased by employees from the Company. As of July 26, 1998, the aggregate
limit on repurchases under the program was approximately $146.4 million. It is
the Company's intention to repurchase its common stock through a combination of
market purchases, share withholding to pay taxes associated with the exercise of
options and the vesting of restricted shares, and the acceptance of previously
owned shares to pay such taxes or the exercise price of options. As of July 26,
1998, the Company had repurchased $88.7 million of common stock under this
program. Subsequent to the second quarter of 1998, $14.5 million of common
stock was repurchased under the program.
(15)
<PAGE> 18
OTHER MATTERS
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define a specific year. Absent corrective
actions, a computer program that has date sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in system failures or miscalculations causing disruptions to various activities
and operations.
The Company initiated assessments in prior years to identify the work
efforts required to assure that systems supporting the business successfully
operate beyond the turn of the century. The scope of this work effort
encompasses information technology systems and systems utilizing
embedded technology, such as microcontrollers.
Plans for achieving Year 2000 compliance were finalized during 1998, and
implementation work is underway. The initial phases of this work, an inventory
and assessment of potential problem areas, have been essentially completed.
Modification and testing phases continue, with most required system
modifications to mission critical systems planned for completion by the end of
fiscal 1998. The company will utilize both internal and external resources to
reprogram, replace and test the modifications made for the Year 2000 compliance.
Attention has also been focused on compliance attainment efforts of vendors and
others, including key system interfaces with customers and suppliers. Most key
suppliers and business partners have been contacted for clarification of their
year 2000 plans. Notwithstanding the substantive work efforts described above,
the Company could potentially experience disruptions to some aspects of its
various activities and operations, including those resulting from non-compliant
systems utilized by unrelated third party governmental and business entities.
The Company is beginning the process of developing business contingency plans
in order to attempt to mitigate the extent of potential disruption to business
operations.
Costs of addressing the Year 2000 issues have not been material to date
and, based on preliminary information gathered to date from the Company and its
vendors, are not currently expected to have a material adverse impact on the
Company's financial position, results of operations or cash flows in future
periods. However, if the Company or its vendors are unable to resolve such
processing issues in a timely manner, it could result in a material financial
risk, including loss of revenue, substantial unanticipated costs and service
interruptions.
In March 1998, the American Booksellers Association ("ABA") and twenty-six
independent bookstores filed a lawsuit in the United States District Court for
the Northern District of California against the Company and Barnes & Noble Inc.
alleging violations of the Robinson-Patman Act, the California Unfair Trade
Practice Act and the California Unfair Competition Law. The Complaint seeks
injunctive and declaratory relief; treble damages on behalf of each of the
bookstore plaintiffs, and, with respect to the California bookstore plaintiffs,
any other damages permitted by California law; disgorgement of money, property
and gains wrongfully obtained in connection with the purchase of books for
resale, or offered for resale, in California from March 18,1994 until the action
is completed and prejudgement interest on any amounts awarded in the action, as
well as attorney fees and costs. The Company intends to vigorously defend the
action.
In August 1998, The Intimate Bookshop, Inc. and its owner, Wallace Kuralt,
have filed a lawsuit in the United States District Court for the Southern
District of New York against the Company, Barnes & Noble, Inc., Amazon, Inc.,
certain publishers and others alleging violation of the Robinson-Patman Act and
other federal law, New York statutes governing trade practices and common law.
The Complaint seeks certification of a class consisting of all retail
booksellers in the United States, whether or not currently in business, which
were in business and were members of the American Booksellers Association
("ABA") at any time during the four year period preceding the filing of the
Complaint. The Complaint alleges that the named plaintiffs have suffered damages
of $11,250,000 or more and requests treble damages on behalf of the named
plaintiffs and each of the purported class members, as well as of injunctive and
declaratory relief (including an injunction requiring the closure of all of
defendants' stores within 10 miles of any location where plaintiff either has or
had a retail bookstore during the four years preceding the filing of the
Complaint, and prohibiting the opening by defendants of any bookstore in such
areas for the next 10 years), disgorgement of alleged discriminatory discounts,
rebates, deductions and payments, punitive damages, interest, costs, attorneys
fees and other relief. Many of the allegations in the Complaint are similar to
those contained in an action instituted by the ABA and 26 bookseller plaintiffs
against the Company and Barnes & Noble in March of 1998. The Company intends
to vigorously defend the action.
(16)
<PAGE> 19
SAFE HARBOR STATEMENT
This document includes forward looking statements, as defined in the Private
Securities Litigation Reform Act of 1995 including information with respect to
the Company's Year 2000 compliance. Such statements are based upon
management's estimates, assumptions and projections and are subject to risks and
uncertainties that could cause actual results to differ materially from those
set forth in the forward looking statements. Factors that could cause actual
results to differ materially from those in the forward looking statements
include, among other things, consumer demand for the Company's products, which
is believed to be related to overall consumer spending patterns and, with
respect to the mall business, overall mall traffic; an unexpected increase in
competition; higher than anticipated interest, occupancy, labor, distribution
and inventory shrinkage costs; unanticipated adverse litigation results;
unanticipated work stoppages; higher than anticipated costs associated with the
closing of underperforming stores; unanticipated increases in the cost of the
merchandise sold by the Company; the performance of the Company's new strategic
initiatives, including the Internet and international expansion; the stability
and capacity of the Company's information systems; unanticipated costs or
problems relating to the Company's Year 2000 compliance; changes in foreign
currency exchange rates; and the continued ability of the Company to locate and
develop suitable sites for its superstore expansion program.
(17)
<PAGE> 20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is from time to time involved in or affected by litigation
incidental to the conduct of its respective businesses. The Company believes
that no currently pending litigation to which it is a party will have a material
adverse effect on its liquidity, financial position or results of operations.
In March 1998, the American Booksellers Association ("ABA") and twenty-six
independent bookstores filed a lawsuit in the United States District Court for
the Northern District of California against the Company and Barnes & Noble Inc.
alleging violations of the Robinson-Patman Act, the California Unfair Trade
Practice Act and the California Unfair Competition Law. The Complaint seeks
injunctive and declaratory relief; treble damages on behalf of each of the
bookstore plaintiffs, and, with respect to the California bookstore plaintiffs,
any other damages permitted by California law; disgorgement of money, property
and gains wrongfully obtained in connection with the purchase of books for
resale, or offered for resale, in California from March 18, 1994 until the
action is completed and pre-judgment interest on any amounts awarded in the
action, as well as attorney fees and costs. The Company intends to vigorously
defend the action.
In August 1998, The Intimate Bookshop, Inc. and its owner, Wallace Kuralt,
have filed a lawsuit in the United States District Court for the Southern
District of New York against the Company, Barnes & Noble, Inc., Amazon, Inc.,
certain publishers and others alleging violation of the Robinson-Patman Act and
other federal law, New York statutes governing trade practices and common law.
The Complaint seeks certification of a class consisting of all retail
booksellers in the United States, whether or not currently in business, which
were in business and were members of the American Booksellers Association
("ABA") at any time during the four year period preceding the filing of the
Complaint. The Complaint alleges that the named plaintiffs have suffered damages
of $11,250,000 or more and requests treble damages on behalf of the named
plaintiffs and each of the purported class members, as well as of injunctive and
declaratory relief (including an injunction requiring the closure of all of
defendants' stores within 10 miles of any location where plaintiff either has or
had a retail bookstore during the four years preceding the filing of the
Complaint, and prohibiting the opening by defendants of any bookstore in such
areas for the next 10 years), disgorgement of alleged discriminatory discounts,
rebates, deductions and payments, punitive damages, interest, costs, attorneys
fees and other relief. Many of the allegations in the Complaint are similar to
those contained in an action instituted by the ABA and 26 bookseller plaintiffs
against the Company and Barnes & Noble in March of 1998. The Company intends
to vigorously defend the action.
(18)
<PAGE> 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
The following actions were taken at the Annual Meeting of Stockholders of the
Company held on May 14, 1998, with the votes on such matters being as indicated
below:
1. The following individuals were elected to serve as directors for one
year terms expiring in 1999:
Name For Authority
---- --- Withheld
---------
Robert F. DiRomualdo 63,794,504 shares 95,825
Peter R. Formanek 63,791,100 shares 99,229
Amy B. Lane 63,792,357 shares 97,972
Victor L. Lund 63,779,436 shares 110,893
George R. Mrkonic 63,791,183 shares 99,146
Larry Pollock 63,781,191 shares 109,138
Leonard A. Schlesinger 63,791,710 shares 98,619
(19)
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
(a) Exhibits:
10.25 Borders Group, Inc. Stock Option Plan for
International Employees
27.0 Financial Data Schedule
(b) Reports on Form 8-K:
Subsequent to the 13 week period ended July 26, 1998,
one report was filed on form 8-K under Item 5 - Other
Events. This report related to The Intimate Bookshop,
Inc. lawsuit filed in the United States District Court
for the Southern District of New York. This report was
dated August 7, 1998 and filed on August 10, 1998.
(20)
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
BORDERS GROUP, INC.
-------------------
(REGISTRANT)
Date: September 9, 1998 By: /s/ Kenneth E. Scheve
----------------------------------
Kenneth E. Scheve
Senior Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
(21)
<PAGE> 24
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
10.25 Borders Group, Inc. Stock Option Plan for
International Employees
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.25
BORDERS GROUP, INC. STOCK OPTION PLAN
FOR INTERNATIONAL EMPLOYEES
1. PURPOSE. The Borders Group, Inc. Stock Option Plan for
International Employees (the "Plan") is intended (i) to attract and retain
officers and other key employees who will be involved in the international
operations of Borders Group, Inc. (the "Company") and its "Subsidiaries"
(corporations of which a majority of the shares of voting stock are owned
directly or indirectly by the Company and other business entities which have a
majority of their shares of voting stock owned directly or indirectly by the
Company); (ii) to increase the proprietary interest in the Company of such
persons by providing further opportunity for ownership of shares of the
Company's common stock, (the "Shares"); and (iii) to increase the incentives to
such persons to contribute to the success of the Company's business.
2. ADMINISTRATION. The Plan shall be administered by the
Compensation Committee (the "Committee" or "Administrator") of the Board of
Directors of the Company (the "Board").
The Administrator shall keep minutes of its meetings. A majority of
the members of the Administrator shall constitute a quorum thereof and the acts
of a majority of the members present at any meeting of the Administrator at
which a quorum is present, or acts unanimously approved in writing by all of the
members of the Administrator, shall be the acts of the Administrator.
The Administrator may make such rules and regulations and establish
such procedures for the administration of the Plan as it deems appropriate in
its sole discretion. The interpretation and application of the Plan or of any
term or condition of an option granted under the Plan or of any rule, regulation
or procedure, and any other matter relating to or necessary to the
administration of the Plan, shall be determined by the Administrator, and any
such determination shall be final and binding upon all persons.
3. SHARES. The number of Shares which shall be reserved for
issuance under the Plan shall not exceed 850,000, subject to adjustment in
accordance with the provisions of Section 6 hereof. Shares to be optioned or
issued under the Plan may be either authorized and unissued shares or issued
shares which shall have been reacquired by the Company. In the event that any
outstanding option or portion thereof expires or is canceled, surrendered or
terminated for any reason, the Shares allocable to the unexercised portion of
such option may again be subjected to an option or be issued under the Plan.
<PAGE> 2
4. GRANT OF OPTIONS.
(a) GENERAL POWERS OF ADMINISTRATOR. The Administrator may grant
options to purchase Shares to employees of the Company or any of its
Subsidiaries who, at the time of grant, are involved primarily in the
international operations of the Company or its Subsidiaries whether directly or
in a support role, provided, however, that no options shall be granted under
this Plan to any officer or director of the Company. Subject to the foregoing.
the Administrator shall have the discretion, in accordance with the provisions
of the Plan, to determine to whom an option is granted, the number of Shares
optioned, and the terms and conditions of the option, and, in the case of
replacement options, to determine the terms and conditions of such options. In
making such determinations, the Administrator shall consider the position and
responsibilities of the employee, the nature and value to the Company of his or
her services and accomplishments, his or her present and potential contribution
to the success of the Company, and such other factors as the Administrator may
deem relevant. The Administrator may delegate to the Chairman of the Board, the
Vice Chairman and/or President of the Company the authority to grant options to
any eligible employee of the Company or any of its Subsidiaries. If such
authority is delegated, the Administrator's delegation of authority shall
include the authority to determine (i) to whom the option is to be granted, (ii)
the number of shares optioned, (iii) the terms and conditions of the option, and
(iv) in the case of replacement options, the terms and conditions of such
options.
(b) TYPES OF OPTIONS. Each option granted under the Plan shall be a
non-qualified stock option (a "Non-Qualified" option).
(c) GENERAL PROVISIONS. Options granted under the Plan shall be
subject to and governed by the provisions of the Plan and by such other terms
and conditions, not inconsistent with the Plan, as shall be determined by the
Administrator in its sole discretion. Except as otherwise provided herein, the
date on which an option shall be granted shall be the date on which the
optionee, the number of Shares optioned and the terms and conditions of the
option are determined by the Administrator; provided, however, that if an option
or any term or condition of an option is rejected or not accepted by an optionee
or if an option is not granted in accordance with the provisions of the Plan,
such option shall be deemed to have not been granted and shall be of no effect.
Each option shall be evidenced by a written agreement (the "Share Option
Agreement") in such form as the Administrator may from time to time approve.
2
<PAGE> 3
(d) TANDEM OPTIONS. Tandem options granted under Article 16(e) of
the Borders Group, Inc. Management Stock Purchase Plan shall have the exercise
price set forth therein; shall be forfeited to the extent that an equivalent
number of shares are not purchased; shall become exercisable on the later of (i)
the date on which timely payment for the Restricted Share has been made (and to
the extent that the optionee shall fail to make such timely payment, a
proportionate number of shares underlying the Tandem Option shall be forfeited)
and (ii) the third anniversary of the date on which the exercise price is
determined; shall expire on the fifth anniversary of the date on which the
exercise price is determined; shall become exercisable only to the extent that
Restricted Shares are purchased; and shall contain such other terms as the
Administrator or its delegate shall determine.
5. TERMS AND CONDITIONS OF OPTIONS.
(a) OPTION PRICE. Except as otherwise provided in the Management
Stock Purchase Plan of the Company, in the case of each option granted under the
Plan, the price of each share that may be acquired upon the exercise of an
option (the "Option Price Per Share") shall not be less than the Fair Market
Value per Share on the date of grant of such option. "Fair Market Value" per
Share shall mean the closing price on the NYSE Composite Transactions Tape (or
its equivalent if the Shares are not traded on the New York Stock Exchange) of
such Share for the trading day immediately prior to the relevant valuation date.
(b) PERIOD OF OPTION AND WHEN EXERCISABLE.
(i) Except as otherwise provided in Section 4 hereof, an
option granted under the Plan may not be exercised after the earlier of (A) the
date specified by the Administrator, which shall be a maximum of ten years and
two days from date of grant, or (B) the applicable time limit specified in
paragraph (iii) of this Section 5 (b). Any option not exercised within the
aforementioned time periods shall automatically terminate at the expiration of
such period.
(ii) Except as specified in Section 4 hereof or in this
Section 5(b)(ii), an option granted with a maximum exercise period of more than
three years may not be exercised prior to three years from the date of grant (or
such other period as determined by the Administrator in its sole discretion),
except that this limitation shall be removed (A) if termination of employment of
the optionee results from death or Disability, or (B) if termination of
employment of the optionee occurs at or after age 65 and the optionee has ten or
more years of full-time service with Kmart, the Company and/or any of its
Subsidiaries, or (C)
3
<PAGE> 4
in the event of a Change in Control of the Company, or (D) if and to the
extent the Administrator may so determine in its sole discretion. "Disability"
shall mean an optionee's total and permanent inability to perform his or her
duties with the Company or any of its affiliates by reason of any medically
determinable physical or mental impairment, as determined by a physician
acceptable to the Company. An option granted with a maximum exercise period of
three years or less shall not be subject to the limitation contained in this
paragraph (ii) unless otherwise specified by the Administrator. A Change in
Control shall be deemed to have occurred if:
(A) the "beneficial ownership" (as defined in Rule
l3d-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) of securities representing more than 20% of the
combined voting power of the Company is acquired by any "person" as
defined in sections 13(d) and 14(d) of the Exchange Act (other; the
Company; any Subsidiary; any trustee or other fiduciary holding
securities under an employee benefit plan of the Company; or any
corporation owned, directly or indirectly, by the shareholders of the
Company in substantially the same proportions as their ownership of
shares of the Company, or
(B) the shareholders of the Company approve a
definitive agreement to merge or consolidate the Company with or into
another corporation, or to sell or otherwise dispose of all or
substantially all of its assets, or adopt a plan of liquidation, or
(C) during any period of three consecutive years,
individuals who at the beginning of such period were members of the
Board cease for any reason to constitute at least a majority thereof
(unless the election, or the nomination for election by the Company's
shareholders, of each new director was approved by a vote of at least a
majority of the directors then still in office who were directors at
the beginning of such period).
(iii) An option may be exercised by an optionee only while
such optionee is in the employ of the Company or a Subsidiary or within three
months thereafter, and only if any limitation upon the right to exercise such
option under paragraph (ii) of this Section 5 (b) has been removed or has
expired prior to termination of employment and exercise is not otherwise
precluded hereunder; provided, however, if at the date of termination of
employment the optionee has ten or more years of full-time service with the
Kmart, Company and/or any of its Subsidiaries or if termination of employment
results from death or Disability, such three-month period shall be extended to
three years. Employment with a Subsidiary shall be deemed terminated on the date
a former Subsidiary ceases to be a Subsidiary of the Company.
(iv) In the event of the Disability of an optionee, an option
which is otherwise exercisable may be exercised by the optionee's legal
representative or guardian. In the event of the death of an optionee, either
before or after termination of employment with the Company or any of its
subsidiaries, an option which is otherwise exercisable may be exercised by the
person or persons whom the
4
<PAGE> 5
optionee shall have designated in writing on forms prescribed by and filed with
the Administrator("Beneficiary or Beneficiaries"), or, if no such designation
has been made, by the person or persons to whom the optionee's rights shall have
passed by will or by the laws of descent and distribution ("Successor(s)"). The
Administrator may require an indemnity and/or such evidence or other assurances
as it may deem necessary in connection with an exercise by a legal
representative, guardian, Beneficiary or Successor.
(v) Notwithstanding anything contained herein to the
contrary, all rights with respect to all options of an optionee are subject to
the conditions that the optionee not engage or have engaged (a) in activity
constituting Cause, or (b) in activity directly or indirectly in competition
with any business of the Company or a Subsidiary, or in other conduct inimical
to the best interests of the Company or a Subsidiary, following the optionee's
termination of employment. If it is determined by the Administrator or the
Administrator's designee (which determination of such designee shall be subject
to ratification by the Administrator), either before or after termination of
employment of an optionee, that there has been a failure of any such condition,
all options and all rights with respect to all options granted to such optionee
shall immediately terminate and be null and void. "Cause shall mean an
optionee's fraud, embezzlement, defalcation, gross negligence in the performance
or nonperformance of the optionee's duties (other than as a result of
Disability) or material failure or refusal to perform the optionee's duties at
any time while in the employ of the Company or a Subsidiary.
(c) EXERCISE AND PAYMENT.
(i) Subject to the provisions of Sections 4 and 5(b), an
option may be exercised by notice (in the form prescribed by the Administrator)
to the Company specifying the number of Shares to be purchased. Payment for the
number of Shares purchased upon the exercise of an option shall be made in full
at the price provided for in the applicable Share Option Agreement and such
purchase price shall be paid by the delivery to the Company of cash (including
check or similar draft) in United States dollars or previously owned whole
Shares that have been owned by the optionee for more than six (6) months or a
combination thereof. Shares used in payment of the purchase price shall be
valued at their Fair Market Value as of the date notice of exercise is received
by the Company. Any Shares delivered to the Company shall be in such form as is
acceptable to the Company.
(ii) The Company may defer making delivery of Shares under the
Plan until satisfactory arrangements have been made for the payment of any tax
attributable to exercise of an option. The Administrator may, in its sole
discretion, permit an optionee to elect, in such form and at such time as the
Administrator may prescribe, to pay all or a portion of all taxes arising in
connection with the exercise of an option by electing to (A) have the Company
withhold whole Shares, or (B) deliver other whole Shares previously owned by the
optionee having a Fair Market Value not greater than the amount to be withheld;
provided, however, that the amount to be withheld shall not exceed the
optionee's estimated total tax obligations associated with the transaction.
5
<PAGE> 6
(d) NONTRANSFERABILITY. No option or any rights with respect
thereto shall be subject to any debts or liabilities of an optionee, nor be
assignable or transferable except by will or the laws of descent and
distribution, nor be exercisable during the optionee's lifetime other than by
him or her, nor shall Shares be issued to or in the name of anyone other than
the optionee; provided, however, that (i) an option may after the death or
Disability of an optionee be exercised pursuant to paragraph (iv) of Section
5(b); (ii)any Shares issued to an optionee hereunder may at the request of the
optionee be issued in the name of the optionee and one other person, as joint
tenants with right of survivorship and not as tenants in common, or in the name
of a trust for the benefit of the optionee or for the benefit of the optionee
and others; and (iii) if so provided in the Share Option Agreement executed by
the optionee and approved by the Administrator, the option and rights covered by
such Agreement may be transferred without consideration to an immediate family
member(s) or to a trust for the benefit of such family member(s), in which event
the transferee(s) must agree in writing to accept the terms and conditions of
such option and such option shall not be covered under Rule 16(b)-3 of the
Exchange Act.
(e) EMPLOYMENT. No provision of the Plan, nor any term or
condition of any option, nor any action taken by the Administrator, the Company
or any Subsidiary pursuant to the Plan, shall give or be construed as giving an
optionee any right to be retained in the employ of the Company or of any
Subsidiary, or affect or limit in any way the right of the Company or any
Subsidiary to terminate the employment of any optionee.
(f) TERMINATION OF OPTION BY OPTIONEE. An optionee may at any
time elect, in a written notice filed with the Administrator, to terminate a
Non-Qualified option with respect to any number of shares as to which such
option shall not have been exercised.
6. ADJUSTMENTS. If there is any change in the number or class
of Shares through the declaration of Share dividends, or recapitalization
resulting in Share splits, or combinations or exchanges of such Shares or
similar corporate transactions, or if the Administrator otherwise determines
that, as a result of a corporate transaction involving a change in the Company's
capitalization, it is appropriate to effect the adjustments described in this
Section 6, the aggregate number or class of Shares on which options may be
granted or which may be issued under the Plan, the number or class of Shares
covered by each outstanding option, and the exercise price per Share of each
option, shall all be proportionately adjusted by the Administrator; provided,
however, that any fractional Shares resulting from such adjustment shall be
eliminated. Subject to any required action by shareholders, if a new option is
substituted for the option granted hereunder, or an assumption of the option
6
<PAGE> 7
granted hereunder is made, by reason of a corporate merger, consolidation,
acquisition of property or stock, separation, reorganization or liquidation, the
option granted hereunder shall pertain to and apply to the securities to which a
holder of the number of Shares subject to the option would have been entitled.
7. TERM OF PLAN. No option shall be granted under the Plan
after December 31, 2003. Options granted prior thereto, however, may extend
beyond such date and the provisions of the Plan shall continue to apply thereto.
8. APPLICATION OF FUNDS. The proceeds received by the Company
from the sale of Shares pursuant to options granted under the Plan will be used
for general corporate purposes.
9. NO OBLIGATION TO EXERCISE OPTION. The granting or
acceptance of an option shall impose no obligation upon the optionee to exercise
such an option.
10. RIGHTS AS A STOCKHOLDER. An optionee shall have no rights
as a stockholder with respect to Shares covered by his or her option until the
date of issuance to him or her of a certificate evidencing such Shares after the
exercise of such option and payment in full of the purchase price. No adjustment
will be made for dividends or other rights for which the record date is prior to
the date such certificate is issued.
11. AMENDMENTS. The Board may from time to time alter, amend,
suspend or discontinue the Plan. Any such amendment may be effective in respect
of all past and future options granted hereunder in the sole discretion of the
Board.
The Plan, each option under the Plan and the grant and exercise
thereof, and the obligation of the Company to sell and issue shares under the
Plan shall be subject to all applicable laws, rules, regulations and
governmental and stockholder approvals, and the Administrator may make such
amendment or modification thereto as it shall deem necessary to comply with any
such laws, rules and regulations or to obtain any such approvals.
12. SEVERABILITY. If any provision of the Plan, or any term or
condition of any option granted or Share Option Agreement or form executed or to
be executed thereunder, or any application thereof to any person or circumstance
is invalid, such provision, term, condition or application shall to that extent
be void (or, in the discretion of the Administrator, such provision, term or
condition may be amended so as to avoid such invalidity or failure), and shall
not affect other provisions, terms or conditions or applications thereof, and to
this extent such provision, term or condition is severable.
7
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