Document/ExhibitDescriptionPagesSize 1: 10-K Annual Report for Fiscal Year Ended February 2, HTML 864K 2008
2: EX-10.2 Amendment to Restated Annual Incentive Bonus Plan HTML 14K
3: EX-21.1 Subsidiaries of Registrant HTML 10K
4: EX-23.1 Consent of Ernst & Young LLP HTML 11K
5: EX-31.1 Statement of George L. Jones, President and Chief HTML 15K
Executive Officer Pursuant to Section
302
6: EX-31.2 Statement of Edward W. Wilhelm, Executive Vice HTML 15K
President and Chief Financial Officer
Pursuant to Section 302
7: EX-32.1 Statement of George L. Jones, President and Chief HTML 9K
Executive Officer Pursuant to Section
906
8: EX-32.2 Statement of Edward W. Wilhelm, Executive Vice HTML 9K
President and Chief Financial Officer
Pursuant to Section 906
(Exact name of registrant as
specified in its charter)
Michigan
(State or other jurisdiction of
incorporation or organization)
38-3294588
(I.R.S. Employer
Identification No.)
100 Phoenix Drive, Ann Arbor, Michigan
(Address of principal executive
offices)
48108
(Zip code)
(734) 477-1100
(Registrant’s telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the act:
Title of Class
Name of Exchange on which registered
Common Stock
New York Stock Exchange
Securities
registered pursuant to Section 12(g) of the act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,”“accelerated
filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
þ
Accelerated
filer o
Non-accelerated
filer o
(Do not check if a smaller reporting company)
Smaller reporting
Company o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $883,615,650
based upon the closing market price of $15.02 per share of
Common Stock on the New York Stock Exchange as of August 3,2007.
Number of shares of Common Stock outstanding as of April 4,2008: 60,495,873
This report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
One can identify these forward-looking statements by the use of
words such as “projects,”“expect,”“estimated,”“look toward,”“going
forward,”“continuing,”“planning,”“returning,”“guidance,”“goal,”“will,”“may,”“intend,”“anticipates,” and other words of similar meaning. One
can also identify them by the fact that they do not relate
strictly to historical or current facts. These statements are
likely to address matters such as the Company’s future
financial performance (including earnings per share growth, EBIT
margins and inventory turns, liquidity, same-store sales growth,
and anticipated capital expenditures and depreciation and
amortization amounts), its exploration of strategic
alternatives, its financing agreement with Pershing Square and
the benefits thereof, strategic plans and expected financing and
benefits relating to such plans (including steps to be taken to
improve the performance of domestic superstores, the downsizing
of the Waldenbooks Specialty Retail segment and the development
of a proprietary Web site).
These statements are subject to risks and uncertainties that
could cause actual results and plans to differ materially from
those included in the Company’s forward-looking statements.
These risks and uncertainties include, but are not limited to,
consumer demand for the Company’s products, particularly
during the holiday season, which is believed to be related to
general economic and geopolitical conditions, competition and
other factors; the availability of adequate capital to fund the
Company’s operations and to carry out its strategic plans;
the performance of the Company’s information technology
systems and the development of improvements to the systems
necessary to implement the Company’s strategic plan, and,
with respect to the exploration of strategic alternatives
including the sale of certain parts of the Company or the sale
of the entire Company, the ability to attract interested third
parties.
Although it is not possible to predict or identify all such
factors, they may include the risks discussed in
“Item 1A. — Risk Factors.”The Company
does not undertake any obligation to update forward-looking
statements.
General
Borders Group, Inc., through its subsidiaries, Borders, Inc.
(“Borders”), Walden Book Company, Inc.
(“Waldenbooks”), Borders Australia Pty Limited and
others (individually and collectively, the “Company”),
is the second largest operator of book, music and movie
superstores and the largest operator of mall-based bookstores in
the world based upon both sales and number of stores. At
February 2, 2008, the Company operated 541 superstores
under the Borders name, including 509 in the United States, 22
in Australia, five in New Zealand, three in Puerto Rico, and two
in Singapore. The Company also operated 490 mall-based and other
bookstores, including stores operated under the Waldenbooks,
Borders Express and Borders Outlet names, as well as
Borders-branded airport stores. In addition, the Company owned
and operated United Kingdom-based Paperchase Products Limited
(“Paperchase”), a designer and retailer of stationery,
cards and gifts. As of February 2, 2008, Paperchase
operated 112 stores, primarily in the United Kingdom, and
Paperchase shops have been added to 319 domestic Borders
superstores.
Business
Strategy
Throughout fiscal 2007, the Company continued to implement its
strategic plan, the principal components of which are as
follows: grow comparable store sales and profitability in the
domestic Borders superstores, right-size the Waldenbooks
Specialty Retail business, explore strategic alternatives in the
International segment, and leverage innovation, technology and
strategic alliances to differentiate the Company’s
business, primarily through its Borders Rewards loyalty program
and through the planned launch of a proprietary
e-commerce
Web site during the spring of fiscal 2008. Please see
“Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” for further discussion of the Company’s
business strategy.
On March 20, 2008, the Company announced that it would
undergo a strategic alternative review process. J.P. Morgan
Securities Inc. and Merrill Lynch & Co. have been
retained as the Company’s financial advisors to assist in
this process. The review will include the investigation of a
wide range of alternatives including the sale of the Company
and/or
certain divisions for the purpose of maximizing shareholder
value.
Segment
Information
The Company is organized based upon the following operating
segments: domestic Borders superstores, Waldenbooks Specialty
Retail stores and International stores (including Borders and
Paperchase stores). Corporate consists of the unallocated
portion of certain corporate governance and corporate incentive
costs. See “Note 13 — Segment
Information” in the notes to consolidated financial
statements for further information relating to these segments.
Domestic
Borders Superstores
Borders is a premier operator of book, music and movie
superstores in the United States, offering customers selection
and service that the Company believes to be superior to other
such superstore operators. In 2007, the Company opened 18 new
Borders superstores, achieved average sales per square foot of
$228 and average sales per superstore of $5.6 million.
Borders superstores offer customers a vast assortment of books,
music and movies, superior customer service, value pricing and
an inviting and comfortable environment designed to encourage
browsing. The largest superstores carry up to 200,000 book,
bargain book, music, movie and periodical titles. On average,
Borders superstores carry 87,000 book titles, with individual
store selections ranging from 39,000 titles to 141,000 titles,
across numerous categories, including many hard-to-find titles.
As of February 2, 2008, the majority of the domestic
Borders superstores were in a book, music and movie format,
which also features an extensive selection of pre-recorded
music, with a broad assortment in categories such as jazz,
classical and world music, and a broad assortment of DVDs,
focusing on new release and catalog movies. A typical Borders
superstore carries approximately 11,500 titles of music and over
7,000 titles of movies.
Borders superstores average 24,700 square feet in size,
including approximately 13,000 square feet devoted to
books, 2,700 square feet devoted to music, 800 square
feet devoted to newsstand and 900 square feet devoted to
movies. Through its remodeling efforts, Borders is realigning
space devoted to specific categories which, in general, results
in an increase in space for categories such as books, movies and
gifts and stationery and a reduction in music space. As part of
those efforts, the Company remodeled 93 Borders superstores
during 2007.
Stores opened in 2007 averaged 22,900 square feet. Each
store is distinctive in appearance and architecture and is
designed to complement its local surroundings, although Borders
utilizes certain standardized specifications to increase the
speed and lower the cost of new store openings.
The typical Borders superstore also dedicates approximately
800 square feet to gifts and stationery. In 2005, the
Company began to install Paperchase shops in all new and most
remodeled domestic superstores as part of a long-term plan to
enhance the variety and distinctiveness of the Company’s
gifts and stationery offering. The Company will continue to
convert gifts and stationery departments to Paperchase shops
through its store remodeling efforts.
In addition, the Company devotes approximately 1,400 square
feet to a cafe within virtually all Borders superstores. In
August 2004, the Company entered into a licensing agreement with
Seattle’s Best Coffee, a wholly-owned subsidiary of
Starbucks Corporation, through which the Company operates
Seattle’s Best Coffee-branded cafes within substantially
all of the Company’s existing Borders superstores in the
continental U.S. and Alaska and new stores as they are
opened. Cafes located within existing Borders superstores began
conversion to Seattle’s Best Coffee cafes in early 2005,
and the conversions were
completed during 2007. There was no change in the size of the
cafes as a result of the conversion to Seattle’s Best
Coffee.
The Company is currently exploring changes to its superstore
format, and has developed a concept store that incorporates
these changes. The first of these new concept stores opened
during the first quarter of 2008, and the Company expects to
open 14 additional concept stores during the year. The concept
store design represents a significant enhancement over existing
Borders stores inside and out and fulfills the Company’s
mission to be a headquarters for knowledge and entertainment.
The concept store includes a deep and intelligent selection,
knowledgeable staff and a comfortable, welcoming atmosphere. The
concept store brings a fresh new look and an exciting
interactive dimension to the store with a Digital Center where
customers can do everything from mix and make their own custom
CDs, download books and music, publish their own books, explore
their family history, and create photo books. The concept store
also puts a strong focus on popular categories, including
travel, cooking, wellness, graphic novels and children’s,
by incorporating digital options and the online world, making
these sections of the store interactive destinations where
customers can not only shop a vast selection of books, but also
take advantage of computer kiosks featuring recommendations,
related video content including interviews with experts and
authors, and much more. In addition, in select destinations
within the store, there are large in-section LCD screens
broadcasting a depth of content featuring some highly
recognizable names in these subject areas, as well as
Borders’ own exclusive programs.
The Company believes this new concept store is a key part of its
long-term strategic plan, and that its concept store
differentiates Borders and gives customers a reason to choose
its stores over other competitors (both brick and mortar and
online). The Company also believes that the concept store, along
with the launch of the new Borders.com, will deliver on its
cross-channel retail strategy including the option for customers
to access the Web site in stores to view wish lists and
conveniently order from millions of titles for delivery to their
homes or their Borders store within two days.
The Company plans to analyze results of these concept stores to
ascertain if acceptable financial returns can be achieved. Based
on this financial analysis, the Company will make decisions to
retrofit the particularly successful elements of the concept
store into existing stores.
The number of Borders domestic superstores located in each state
and the District of Columbia as of February 2, 2008 are
listed below:
Number of
State
Stores
Alaska
1
Arizona
12
Arkansas
1
California
81
Colorado
14
Connecticut
10
Delaware
2
District of Columbia
3
Florida
25
Georgia
15
Hawaii
8
Idaho
2
Illinois
36
Indiana
12
Iowa
4
Kansas
7
Kentucky
5
Louisiana
1
Maine
3
Maryland
12
Massachusetts
15
Michigan
18
Minnesota
7
Mississippi
1
Missouri
10
Montana
3
Nebraska
3
Nevada
6
New Hampshire
4
New Jersey
15
New Mexico
5
New York
29
North Carolina
10
Ohio
20
Oklahoma
4
Oregon
7
Pennsylvania
25
Rhode Island
2
South Dakota
1
Tennessee
7
Texas
23
Utah
3
Vermont
1
Virginia
15
Washington
13
West Virginia
2
Wisconsin
6
Total
509
Waldenbooks
Specialty Retail Stores
Waldenbooks Specialty Retail operates small format stores in
malls, airports and outlet malls, offering customers a
convenient source for new releases, hardcover and paperback
bestsellers, periodicals and a standard selection of other
titles. Waldenbooks Specialty Retail operates stores under the
Waldenbooks, Borders Express and Borders Outlet names, as well
as Borders-branded airport stores. Average sales per square foot
were $277 and average sales per store were $1.1 million for
2007. Waldenbooks Specialty Retail stores average approximately
3,800 square feet in size, and carry an average of 15,500
titles, ranging from 7,700 in an airport store to 24,500 in a
large format store.
The number of Waldenbooks Specialty Retail stores located in
each state and the District of Columbia as of February 2,2008 are listed below:
Number of
State
Stores
Alabama
3
Alaska
2
Arizona
5
Arkansas
3
California
34
Colorado
5
Connecticut
7
Delaware
2
District of Columbia
1
Florida
34
Georgia
11
Hawaii
6
Idaho
2
Illinois
25
Indiana
11
Iowa
6
Kansas
5
Kentucky
10
Louisiana
4
Maine
2
Maryland
13
Massachusetts
16
Michigan
21
Minnesota
3
Mississippi
3
Missouri
7
Montana
3
Nebraska
4
Nevada
4
New Hampshire
5
New Jersey
16
New Mexico
2
New York
20
North Carolina
14
North Dakota
1
Ohio
30
Oklahoma
8
Oregon
6
Pennsylvania
44
Rhode Island
2
South Carolina
8
South Dakota
2
Tennessee
6
Texas
29
Utah
2
Vermont
3
Virginia
15
Washington
9
West Virginia
6
Wisconsin
9
Wyoming
1
Total
490
International
Stores
The Company has a presence on four continents. During fiscal
2007, the Company opened six International superstores.
The Company sold all of its bookstores in the United Kingdom and
Ireland during the third quarter of 2007. See
“Note 14 — Discontinued Operations” in
the notes to consolidated financial statements for further
information relating to the sale of these bookstores.
International superstores as of February 2, 2008 are listed
below:
Number of
Country
Stores
Australia
22
New Zealand
5
Puerto Rico
3
Singapore
2
Total
32
International superstores, which operate under the Borders name,
achieved average sales per square foot of $381 and average sales
per superstore of $8.3 million in 2007. International
superstores range between 13,500 and 38,400 square feet in
size, and are located in both city center as well as suburban
locations. All International superstores offer book, music,
movie and gifts and stationery merchandise and feature cafes.
Cafes located in Australia and New Zealand are licensed to and
operated by Gloria Jean’s Coffees. The gifts and stationery
departments in select Asia Pacific superstores are branded
Paperchase. The Company owns substantially all of Paperchase, as
discussed below.
In July 2004, the Company increased its 15% equity stake in
Paperchase to 96.5%, and purchased an additional 0.5% interest
in November of 2007, bringing its equity interest in Paperchase
to 97% as of February 2, 2008. Paperchase is a brand leader
in design-led and innovative stationery retailing in the United
Kingdom. As of February 2, 2008, the Company operated 112
Paperchase locations, including 33 stand-alone stores, 25
concessions in selected House of Fraser and Selfridges stores,
and seven stores located in railway stations. In addition, the
Company operates concessions in 42 International Borders
superstores, primarily located in the U.K, as well as in five
Books etc. stores, also located in the U.K. The vast majority of
Paperchase’s merchandise is developed specifically by and
for Paperchase and, as such, can only be found in Paperchase
stores.
Internet
The Company, through its subsidiaries, has agreements with
Amazon.com, Inc. (“Amazon”) to operate Web sites
utilizing the Borders.com and Waldenbooks.com URLs (the
“Web Sites”). These agreements are currently being
renewed on a month-to-month basis. Under these agreements,
Amazon is the merchant of record for all sales made through the
Web Sites, and determines all prices and other terms and
conditions applicable to such sales. Amazon is responsible for
the fulfillment of all products sold through the Web Sites and
retains all payments from customers. The Company receives
referral fees for products purchased through the Web Sites. The
agreements contain mutual indemnification provisions, including
provisions that define between the parties the responsibilities
with respect to any liabilities for sales, use and similar
taxes, including penalties and interest, associated with
products sold on the Web Sites. Currently, taxes are not
collected with respect to products sold on the Web Sites except
in certain states. As previously discussed, the Company plans to
launch its proprietary
e-commerce
Web site during the spring of fiscal 2008. At that time the
Amazon agreements will be terminated subject to the survival of
certain provisions.
Distribution
The Company’s centralized distribution system, consisting
of 10 distribution facilities worldwide, enhances its ability to
manage inventory on a
store-by-store
basis. Inventory is shipped from vendors primarily to the
Company’s distribution centers. Approximately 90% of the
books carried by the Company’s stores are processed through
the Company’s distribution facilities. Borders purchases
substantially all of its music and movie merchandise directly
from manufacturers and utilizes the Company’s own
distribution center to ship approximately 95% of its music and
movie inventory to its stores.
In general, unsold books and magazines can be returned to their
vendors at cost. Domestic Borders superstores and Waldenbooks
Specialty Retail stores return books to the Company’s
centralized returns center near Nashville, Tennessee to be
processed for return to the publishers. In general, Borders can
return music and movie merchandise to its vendors at cost plus
an additional fee to cover handling and processing costs.
As of February 2, 2008, the Company’s primary
distribution centers were located in the following localities:
Locality, Country
Number
Square Footage
Bedfordshire, United Kingdom (services Paperchase)
1
67,000
California, United States
1
414,000
Melbourne, Australia
1
35,300
Ohio, United States
1
172,000
Pennsylvania, United States
1
600,000
Puerto Rico
1
10,500
Singapore
1
8,200
Tennessee, United States
3
926,000
Total
10
2,233,000
The Company completed its second year of a multi-year initiative
to enhance the efficiency of its distribution and logistics
network. In 2007, the Company closed its Indiana facility and
consolidated certain operations within the Tennessee campus. In
2008, the Company will reduce its three Tennessee facilities to
two for a total of 633,000 square feet, and will transfer
the operations of the Ohio facility, which services the
Company’s multimedia categories, to its three primary
distribution facilities. These changes will further optimize
inventory and supply chain cost management.
Employees
As of February 2, 2008, the Company had a total of
approximately 14,100 full-time employees and approximately
15,400 part-time employees worldwide. When hiring new
employees, the Company considers a number of factors, including
education, experience, diversity, personality and orientation
toward customer service. All new store employees participate in
a training program that provides up to two weeks of in-store
training in all aspects of customer service and selling,
including title searches for in-stock and in-print merchandise,
sorting, merchandising, operation of point of sale terminals and
store policies and procedures. The Company believes that its
relations with employees are generally excellent. The
Company’s employees are not represented by unions.
Trademarks
and Service Marks
Borders®,
Borders Book
Shop®,
Borders Books &
Music®,
and Borders Books Music
Cafe®
among other marks, are all registered trademarks and service
marks used by Borders. Borders
Rewards®
is a service mark used by Borders and Waldenbooks.
Brentano’s®,
Waldenbooks®,
and
Waldenkids®,
among other marks, are all registered trademarks and service
marks used by Waldenbooks.
Paperchase®
is a registered trademark used by Paperchase Products Limited.
Borders.com®
is a registered trademark and service mark used by Borders
Online, Inc. The Borders, Waldenbooks, Borders.com and
Waldenbooks.com service marks are used as trade names in
connection with their business operations.
Set forth below is certain information regarding the executive
officers of the Company:
Name
Age
Position
George L. Jones
57
President and Chief Executive Officer
Kenneth H. Armstrong
58
Executive Vice President of U.S. Stores
Robert P. Gruen
58
Executive Vice President of Merchandising and Marketing
Edward W. Wilhelm
49
Executive Vice President, Chief Financial Officer
Thomas D. Carney
61
Executive Vice President, General Counsel and Secretary
Daniel T. Smith
43
Executive Vice President, Human Resources
George L. Jones was appointed President, Chief Executive Officer
and a Director for the Company effective July 17, 2006.
Mr. Jones has more than three decades of retail experience
including his most recent post as President and Chief Executive
Officer of the Saks Department Store Group. Prior to Saks,
Mr. Jones was President, Worldwide Licensing and Retail,
for Warner Bros., where in addition to his core
responsibilities, he oversaw Warner Bros. Worldwide Publishing,
Kids WB Music, Warner Bros. Interactive Entertainment, WB Sports
and Warner Bros. Studio Stores. His background also includes key
merchandising and operations positions at Target Corporation,
including Executive Vice President-Store Operations and Senior
Vice President-Merchandising.
Kenneth H. Armstrong was appointed Executive Vice President of
U.S. Stores effective February 2007. Mr. Armstrong has
over 30 years of retail experience including the past three
years as Senior Vice President, Director of Stores for Parisian,
a division of Saks Department Store Group. Prior to Parisian,
Mr. Armstrong served as Senior Vice President, Director of
Stores, for Lord & Taylor. Before joining
Lord & Taylor, he spent 15 years in store
operations management positions at Macy’s.
Robert P. Gruen was appointed Executive Vice President of
Merchandising and Marketing effective February 2007.
Mr. Gruen has more than three decades of retail experience
including positions at Target, Roses Stores, Warner Bros., and
Parisian. Most recently, Mr. Gruen served for one year
as Executive Vice President of Merchandising for HSN (Home
Shopping Network), where he was responsible for strategic
direction of the merchandise group. Immediately prior to his
role at HSN, Mr. Gruen served for two years as Group Vice
President of Meijer, Inc., and prior to that served for two
years as President and Chief Executive Officer of Parisian.
Previous experience includes key merchandising and marketing
positions at Warner Bros. and Target Stores.
Edward W. Wilhelm has served as Executive Vice President and
Chief Financial Officer for the Company since January 2007. From
August 2000 through January 2007, Mr. Wilhelm served as
Senior Vice President and Chief Financial Officer for the
Company. From 1997 through August 2000, Mr. Wilhelm served
as Vice President of Planning, Reporting and Treasury for the
Company. From 1994 through 1997, Mr. Wilhelm served as Vice
President of Finance for the Company. Mr. Wilhelm serves as
a director of The Steak n Shake Company.
Thomas D. Carney has served as Executive Vice President, General
Counsel and Secretary for the Company since April 2008. From
April 2004 through April 2008, Mr. Carney served as Senior
Vice President, General Counsel and Secretary for the Company.
From December 1994 through April 2004, Mr. Carney served as
Vice President, General Counsel and Secretary for the Company.
For more than five years prior to joining the Company,
Mr. Carney was a Partner at the law firm of Dickinson,
Wright, Moon, Van Dusen & Freeman in Detroit.
Daniel T. Smith has served as Executive Vice President for Human
Resources of the Company since April 2008. From January 2003
through April 2008, Mr. Smith served as Senior Vice
President of Human Resources for the Company. From March 2000
through January 2003, Mr. Smith served as Vice President of
Human Resources for the Company. From April 1998 to March 2000,
Mr. Smith served as Vice President of Human Resources of
Waldenbooks. Mr. Smith served as Director of Human
Resources for Waldenbooks
from April 1996 to April 1998. He also served as Director of
Compensation and Benefits of the Company from July 1995 to April
1996.
Additional
Information
The Company’s corporate Web site is located at
www.bordersgroupinc.com. The information found on the
Company’s Web site is not part of this or any other report
filed or furnished to the U.S. Securities and Exchange
Commission. The Company makes available on this Web site under
“Investors,” annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports as soon as reasonably
practicable after having electronically filed or furnished such
materials to the U.S. Securities and Exchange Commission.
Also available on this Web site are the Company’s corporate
governance documents, including its committee charters and its
Business Conduct Policy, Policy and Procedures Regarding Related
Party Transactions, and a Code of Ethics Relating to Financial
Reporting. The Company will disclose on its Web site any
amendments to the Business Conduct Policy or the Code of Ethics
Relating to Financial Reporting and any waiver that would
otherwise be required to be filed on a
Form 8-K.
Printed copies of any of the documents available on the
Company’s Web site will be provided to any shareholder
without charge upon written request to Anne Roman, Investor
Relations, Borders Group, Inc., 100 Phoenix Drive, Ann Arbor,
Michigan
48108-2202.
The Company has filed with the Securities and Exchange
Commission, as an exhibit to its
Form 10-K
annual report for fiscal 2007, the Sarbanes-Oxley Act
Section 302 Certifications regarding the quality of the
Company’s public disclosure. During 2007, Mr. Jones
certified to the New York Stock Exchange that he was not aware
of any violation by the Company of any NYSE Corporate Governance
Listing Standards.
Item 1A.
Risk
Factors
Risk
Factors
The following risk factors and other information included in
this Annual Report on
Form 10-K
should be carefully considered. The risks and uncertainties
described below are not the only ones the Company faces.
Additional risks and uncertainties not presently known to the
Company or that the Company currently deems immaterial also may
impair the Company’s business operations. If any of the
following risks occur, the Company’s business, financial
condition, operating results and cash flows could be materially
adversely affected.
Competitive
Environment
The Company has experienced declines in operating income over
the last three years and such declines may continue. The Company
believes that the decline is attributable to a number of
factors, including increased competition from Internet retailers
and a greater concentration on the sale of books and music by
mass merchants and other non-bookstore retailers. In addition,
with respect to music, the downloading of titles has
significantly impacted sales of CDs sold by the Company. In
addition, the overall consumer demand for products sold by the
Company, particularly music, has either declined or not
experienced significant growth in recent years.
The retail book business is highly competitive. Competition
within the retail book industry is fragmented, with Borders
facing competition from the Internet and national superstore
operators. In addition, Borders and Waldenbooks compete with
other specialty retail stores that offer books in a particular
area of specialty, independent single store operators, discount
stores, drug stores, warehouse clubs, mail order clubs, mass
merchandisers and other non-bookstore retailers. In the future,
Borders and Waldenbooks may face additional competition from
other categories of Internet and brick and mortar retailers
entering the retail book market.
The music and movie businesses are also highly competitive and
Borders faces competition from large established music chains,
established movie chains, as well as specialty retail stores,
movie rental stores, discount stores, warehouse clubs and mass
merchandisers. In addition, consumers receive television and
mail order offers and have access to mail order clubs. The
largest mail order clubs are affiliated with major manufacturers
of pre-recorded music and may have advantageous marketing
relationships with their affiliates.
The Internet is a significant channel for retailing in all media
categories that the Company carries. In particular, the
retailing of books, music and movies over the Internet is highly
competitive. In addition, the Company faces competition from
companies engaged in the business of selling books, music and
movies via electronic means, including the downloading of books,
music and movie content.
Availability
of Capital Resources
The Company’s success is dependent on the availability of
adequate capital to fund the Company’s operations and to
carry out its strategic plans. Key drivers of the Company’s
cash flows are sales, expense management, capital spending and
the Company’s inventory turn improvement initiative. There
can be no assurance that the Company will have adequate access
to capital markets, which could have a material adverse effect
on the Company’s ability to implement its business strategy
and on its financial condition and results of operations.
On April 9, 2008, the Company completed a financing
agreement with Pershing Square Capital Management, L.P.
(“Pershing Square”) on behalf of certain of its
affiliated investment funds. Under the terms of the agreement,
Pershing Square has loaned $42.5 million to the Company and
will purchase, at the Company’s discretion, certain of the
Company’s international businesses pursuant to a
$135.0 million backstop purchase commitment. The terms of
the Pershing Square financing agreement have been approved by
the lenders under the Company’s current revolving credit
facility, and the revolving credit facility has been amended
accordingly.
Based on current internal projections, the Company believes that
the financing agreement with Pershing Square will allow the
Company to be fully funded during fiscal 2008, where absent
these measures, liquidity issues may otherwise have arisen
during the year. However, there can be no assurance that the
financing agreement with Pershing Square will be sufficient to
sustain the Company’s liquidity needs during fiscal 2008.
Strategic
Alternatives Review Process
On March 20, 2008, the Company announced that it would
undergo a strategic alternative review process. J.P. Morgan
Securities Inc. and Merrill Lynch & Co. have been
retained as the Company’s financial advisors to assist in
this process. The review will include the investigation of a
wide range of alternatives including the sale of the Company
and/or
certain divisions for the purpose of maximizing shareholder
value. The Company can give no assurances that a transaction of
any kind will occur. The Company also cannot ensure that any
transactions that are completed will provide for terms favorable
to the Company or will have a material beneficial effect on the
Company’s business or financial condition or results of
operations.
Planned
Strategy for Domestic Borders Superstores
The Company’s business strategy is dependent principally on
its ability to grow comparable store sales and profitability in
its domestic superstores. The Company is currently exploring
changes to its superstore format, and has developed a concept
store that incorporates these changes. The first of these new
concept stores opened during the first quarter of 2008. The
concept store incorporates many new components, including
enhancement to certain categories within the store, as well as
certain technology enhancements. These technology enhancements
are principally tied to the Company’s efforts to launch its
own
e-commerce
business. The Company also plans to leverage its recently
launched Borders Rewards loyalty program to drive sales. There
can be no assurance that the concept store changes, Borders
Rewards or the
e-commerce
business will be successful in improving sales and profitability.
Planned
Strategy for the Waldenbooks Specialty Retail
Business
Waldenbooks’ results are highly dependent upon conditions
in the mall retailing industry, including overall mall traffic.
Mall traffic has been sluggish over the past several years and
the Company expects it to remain so for the foreseeable future.
In addition, increased competition from superstores, the
Internet and mass merchants has adversely affected
Waldenbooks’ sales and comparable store sales. As a result,
the
Company is aggressively right-sizing the Waldenbooks mall store
base. There can be no assurance that the Company will be able to
do so at the correct rate, or that such efforts will be
successful in improving sales or profitability of the
Waldenbooks Specialty Retail business. The Company’s plans
could result in additional asset impairments and store closure
costs. Also, there can be no assurance that mall traffic will
not decline further or that competition, or other factors, will
not further adversely affect Waldenbooks’ sales.
Planned
Strategy for International Business
The Company’s operations in international markets have
additional risks. It is costly to establish international
facilities and operations, and to promote the Company’s
brands internationally. Sales from the Company’s
International segment may not offset the expense of establishing
and maintaining the related operations and, therefore, these
operations may not be profitable on a sustained basis. In
addition, local companies may have a substantial competitive
advantage because of their greater understanding of, and focus
on, the local customer, as well as their more established local
brand name recognition. The Company is currently exploring
strategic alternatives, including possible sale, franchise
opportunity or restructuring, for portions of the International
businesses, including the Australia, New Zealand and Singapore
superstores, as well as Paperchase. There can be no assurance
that the Company will be able to attract interested third
parties, or in lieu of that, operate its International
businesses profitably.
Planned
Strategy for
E-commerce
Business
The Company’s business strategy includes development of a
proprietary
e-commerce
platform, which will include both in-store and online
e-commerce
components. The Company expects to launch its
e-commerce
Web site during the spring of fiscal 2008. Prior to April 2001
and its agreement with Amazon, the Company operated a
proprietary
e-commerce
business and experienced significant losses. There can be no
assurance that the Company will be able to launch the planned
e-commerce
Web site on time or operate it profitably.
Business
Strategy
The Company’s future results will depend, among other
things, on its success in implementing its business strategy.
There can be no assurance that the Company will be successful in
implementing its business strategy, or that the strategy will be
successful in sustaining acceptable levels of sales growth and
profitability.
Seasonality
The Company’s business is highly seasonal, with sales
generally highest in the fourth quarter. In 2007, 35.1% of the
Company’s sales and 41.6% of the Company’s gross
profit were generated in the fourth quarter. The Company’s
results of operations depend significantly upon the holiday
selling season in the fourth quarter; less than satisfactory net
sales for such period could have a material adverse effect on
the Company’s financial condition or results of operations
for the year and may not be sufficient to cover any losses which
may be incurred in the first three quarters of the year. Other
factors that could affect the holiday selling season include
general economic and geopolitical conditions, overall consumer
spending patterns, weather conditions and, with respect to the
Company’s mall business, overall mall traffic. Because of
the seasonal nature of its business, the Company’s
operations typically use cash during the first three quarters of
the year and generate cash from operations in the fourth quarter.
Consumer
Spending Patterns
Sales of books, music and movies have historically been
dependent upon discretionary consumer spending, which may be
affected by general economic conditions, consumer confidence and
other factors beyond the control of the Company. The Company
believes that 2008 will be a challenging year due to continued
uncertainty in the economic environment. The Company also
believes that the increase in consumer spending via Internet
retailers may significantly affect its ability to generate sales
in its stores. In
addition, sales are dependent in part on the strength of new
release products which are controlled by vendors. A decline in
consumer spending on books, music and movies, or in bestseller
book, music and movie buying could have a material adverse
effect on the Company’s financial condition and results of
operations and its ability to fund its growth strategy.
Foreign
Exchange Risk
The results of operations of the International segment are
exposed to foreign exchange rate fluctuations as the financial
results of the applicable subsidiaries are translated from the
local currency into U.S. dollars upon consolidation. As
exchange rates vary, sales and other operating results, when
translated, may differ materially from expectations. In
addition, the Company is subject to gains and losses on foreign
currency transactions, which could vary based on fluctuations in
exchange rates and the timing of the transactions and their
settlement.
Guarantees
of Disposed Foreign Businesses
The Company has guaranteed four leases relating to its former
subsidiaries in the United Kingdom and Ireland. Based upon
current rents, taxes, common area maintenance charges and
exchange rates, the maximum amount of potential future payments
(undiscounted) is approximately $193.2 million. The leases
provide for periodic rent reviews, which could increase the
Company’s potential liability. The Company has recorded a
reserve of $5.8 million in connection with these contingent
lease liabilities.
Also under the terms of the sale agreement, the Company
indemnified the U.K. and Ireland operations from the tax
liability, if any, imposed upon it as a result of the
forgiveness of the portions of intercompany indebtedness owing
from the Company. The maximum potential liability is
approximately $10.7 million, and the Company has recorded a
liability of approximately $4.4 million based upon the
likelihood that the Company will be required to perform under
the indemnification.
Potential
for Uninsured Losses
The Company is subject to the possibility of uninsured losses
from risks such as terrorism, earthquakes, hurricanes or floods,
for which no, or limited, insurance coverage is maintained.
Litigation
and Other Claims
The Company is subject to risk of losses which may arise from
adverse litigation results or other claims, including the
matters described under “Legal Proceedings” in
Item 3.
Information
Technology Systems Risks
The capacity, reliability and security of the Company’s
information technology hardware and software infrastructure and
its ability to expand and update this infrastructure in response
to changing needs is essential to the Company’s ability to
execute its business strategy. In addition, the Company’s
strategy is dependent on enhancing its existing merchandising
systems, a process currently under way. There can be no
assurances that the Company will be able to effectively
maintain, upgrade or enhance systems, or add new systems, in a
timely and cost effective manner and may not be able to
integrate any newly developed or purchased technologies with
existing systems. These disruptions or impacts, if not
anticipated and appropriately mitigated, could have a material
adverse effect on the Company’s ability to implement its
business strategy and on its financial condition and results of
operations.
The failure of the Company’s information systems to perform
as designed or the Company’s failure to implement and
operate its information systems effectively could disrupt the
Company’s operations or subject the Company to liability,
which could have a material adverse effect on the Company’s
financial condition and results of operations.
In addition, the confidentiality of data of the Company, as well
as that of its employees, customers and other third parties,
must be protected. The Company has systems and processes in
place that are designed
to protect information and prevent fraudulent payment
transactions and other security breaches. There can be no
assurance that these systems and processes will be effective in
preventing or mitigating such fraud, and such breaches could
have a material adverse effect on the Company’s financial
condition and results of operations.
Distribution
and Logistics Network
The Company has undertaken a multi-year initiative to enhance
the efficiency of its distribution and logistics network. This
initiative, if not successfully executed, could have a material
adverse effect on the Company’s financial condition and
results of operations.
Reliance
on Key Personnel
Management believes that the Company’s continued success
will depend to a significant extent upon the efforts and
abilities of Mr. George L. Jones, President and Chief
Executive Officer, as well as certain other key officers of the
Company and each of its subsidiaries. The loss of the services
of Mr. Jones or of other such key officers could have a
material adverse effect on the Company. The Company does not
maintain “key man” life insurance on any of its key
officers.
Other
Risks
The Company is also subject to numerous other risks and
uncertainties which could adversely affect the Company’s
business, financial condition, operating results and cash flows.
These risks include, but are not limited to, higher than
anticipated interest, occupancy, labor, merchandise,
distribution and inventory shrinkage costs, unanticipated work
stoppages, energy disruptions or shortages or higher than
anticipated energy costs, asset impairments relating to
underperforming stores or other unusual items, including any
charges that may result from the Company’s implementation
of its strategic plan, higher than anticipated costs associated
with the closing of underperforming stores, the continued
availability of adequate capital to fund the Company’s
operations, the stability and capacity of the Company’s
information systems, unanticipated costs or problems relating to
the information technology systems required for the operations
of the Company, and changes in accounting rules.
Item 1B.
Unresolved
Staff Comments
None.
Item 2.
Properties
Borders leases all of its stores. Borders store leases generally
have an average initial term of 15 to 20 years with
multiple three- to five-year renewal options. At
February 2, 2008, the average unexpired term under Borders
existing store leases in the United States was 9.8 years
prior to the exercise of any options. The expiration of Borders
leases for stores open at February 2, 2008 are as follows:
Number of
Lease Terms to
Expire During 12 Months Ending on or About January 31
Waldenbooks Specialty Retail leases all of its stores.
Waldenbooks Specialty Retail store leases generally have an
initial term of five to 10 years, and in certain cases
posses renewal terms of one to three years. At present, the
average unexpired term under Waldenbooks Specialty Retail
existing store leases is approximately 1.7 years. The
expiration of Waldenbooks Specialty Retail leases for stores
open at February 2, 2008 are as follows:
Number of
Lease Terms to
Expire During 12 Months Ending on or About January 31
Stores
2009
257
2010
118
2011
58
2012
33
2013
11
2014 and later
13
Total
490
The Company leases all of its International superstores.
International store leases generally have an initial term of 15
to 25 years. At present, the average unexpired term under
existing International store leases is approximately
9.1 years. The expiration of International superstore
leases for stores open at February 2, 2008 are as follows:
Number of
Lease Terms to
Expire During 12 Months Ending on or About January 31
Stores
2009
2
2010
—
2011
—
2012
2
2013
1
2014 and later
27
Total
32
Paperchase generally leases its stores under operating leases
with terms ranging from 6 to 20 years. The average
remaining lease term for Paperchase stores is 8.5 years.
The Company leases a portion of its corporate headquarters in
Ann Arbor, Michigan and owns the remaining building and
improvements. The Company leases all distribution centers.
Item 3.
Legal
Proceedings
Two former employees, individually and on behalf of a purported
class consisting of all current and former employees who work or
worked as Inventory Managers or Sales Managers in Borders stores
in the State of California at any time from September 30,2001 through the trial date, filed an action against the Company
in the Superior Court of California for the County of
San Francisco. The Complaint alleges, among other things,
that the individual plaintiffs and the purported class members
were improperly classified as exempt employees and that the
Company violated the California Labor Code and the California
Business and Professions Code by failing to (i) pay
required overtime, (ii) provide meal periods, rest periods,
and accurate itemized wage statements, (iii) keep accurate
records of employees’ hours of work, and (iv) pay all
compensation owed at the time of termination of employment to
certain members of the purported class. The relief sought
includes damages, restitution, penalties, injunctive relief,
interest, costs, and attorneys’
fees and such other relief as the court deems proper. In
February of 2008, the Superior Court for the State of California
granted final approval of a settlement pursuant to which the
Company agreed to pay up to $3.5 million to settle the
matter. Based upon claims actually made by class members, the
final settlement amount will be approximately $2.7 million.
The Company categorized this charge as “Selling, general
and administrative expenses” on its consolidated statements
of operations.
On October 29, 2002, Gary Gerlinger, individually and on
behalf of all other similarly situated consumers in the United
States who, during the period from August 1, 2001 to the
present, purchased books online from either Amazon.com, Inc.
(“Amazon”) or the Company, instituted an action
against the Company and Amazon in the United States District
Court for the Northern District of California. The Complaint
alleges that the agreement pursuant to which an affiliate of
Amazon operates Borders.com as a co-branded site (the
“Mirror Site”) violates federal anti-trust laws,
California statutory law and the common law of unjust
enrichment. The Complaint seeks injunctive relief, damages,
including treble damages or statutory damages where applicable,
attorneys fees, costs and disbursements, disgorgement of all
sums obtained by allegedly wrongful acts, interest and
declaratory relief. On November 1, 2005, the Court granted
the Company’s Motion to Dismiss all of the remaining claims
of the plaintiff. The anti-trust claims were dismissed with
prejudice, and the unfair competition claims were dismissed
without prejudice. The plaintiff has appealed the decision. The
appeal was argued in the Ninth Circuit Court of Appeals on
November 8, 2007; the Court took it under submission and a
decision is expected within the next few months. The Company has
not included any liability in its consolidated financial
statements in connection with this matter and has expensed as
incurred all legal costs to date.
Certain states and private litigants have sought to impose sales
or other tax collection efforts on out-of-jurisdiction companies
that engage in
e-commerce.
The Company and Amazon have been named as defendants in actions
filed by a private litigant on behalf of the state of Illinois
under the state’s False Claims Act relating to the failure
to collect use taxes on Internet sales in Illinois for periods
both before and after the implementation of the Web Site
Agreement. The Complaints seek judgments, jointly and severally,
against the defendants for, among other things, injunctive
relief, treble the amount of damages suffered by the state of
Illinois as a result of the alleged violations of the
defendants, penalties, costs and expenses, including legal fees.
Similar actions previously filed against the Company in
Tennessee and Nevada have been dismissed.
In addition to the matters described above, the Company is, from
time to time, involved in or affected by other litigation
incidental to the conduct of its businesses. While some of such
matters may involve claims for large sums (including, from time
to time, actions which are asserted to be maintainable as class
action suits) the Company does not believe that any such other
litigation or claims pending at the current time will have a
material adverse effect on its liquidity, financial position, or
results of operations.
Item 4.
Submission
of Matters to a Vote of Security Holders
Market
for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
The following table sets forth, for the fiscal quarters
indicated, the high and low closing market prices for the
Company’s Common Stock and the quarterly dividends declared.
Dividends
High
Low
Declared
Fiscal Quarter 2007
First Quarter
$
22.34
$
19.52
$
0.11
Second Quarter
$
23.41
$
15.02
$
0.11
Third Quarter
$
16.32
$
12.28
$
0.11
Fourth Quarter
$
13.88
$
9.21
$
0.11
Fiscal Quarter 2006
First Quarter
$
25.31
$
23.60
$
0.10
Second Quarter
$
24.02
$
17.31
$
0.10
Third Quarter
$
21.00
$
18.50
$
0.10
Fourth Quarter
$
24.14
$
20.49
$
0.11
The Company’s Common Stock is traded on the New York Stock
Exchange under the symbol BGP.
In December 2007, the Board of Directors declared a quarterly
cash dividend of $0.11 per share, which equaled
$6.5 million in total, on the Company’s common stock,
payable February 10, 2008 to stockholders of record at the
close of business January 2, 2008. The Board of Directors
has suspended the Company’s quarterly dividend program in
order to preserve capital for operations and strategic
initiatives.
The following graph compares the cumulative total shareholder
return on the Company’s Common Stock from January 26,2003 through February 2, 2008 with the cumulative total
return on the Standard & Poor’s 500 Stock Index
(“S&P 500”) and the S&P Midcap 400 Specialty
Retail Index. In accordance with the rules of the Securities and
Exchange Commission, the returns are indexed to a value of $100
at January 26, 2003.
Equity
Securities Authorized for Issuance Under Equity Compensation
Plans
The following table provides information with respect to the
equity compensation plan under which equity securities of the
Company were authorized for issuance on February 2, 2008
(number of shares in thousands):
Number of
Number of
Weighted-
Shares
Awards
Average
Available
Plan Category
Outstanding(2)
Exercise
Price(3)
for Issuance
Plans approved by stockholders:
2004 Long-Term Incentive
Plan(1)
2,660
$
18.22
4,709
(1)
The 2004 Long-Term Incentive Plan (the “2004 Plan”)
was approved by shareholders in May 2004, and replaced all prior
equity compensation plans (the “Prior Plans”). At
February 2, 2008 there were approximately 1.4 million
stock options outstanding under the Prior Plans with a
weighted-average exercise price of $21.93, which, if forfeited
or cancelled, become available for issuance under the 2004 Plan.
(2)
Number of awards outstanding as of February 2, 2008
includes approximately 465,127 restricted share units and
approximately 2,194,634 stock options.
(3)
Reflects the weighted-average exercise price of stock options
outstanding as of February 2, 2008.
In accordance with its normal compensation practices, in April
2008, the Company granted 1.7 million shares of time-vested
shares and share units of its common stock and 0.2 million
options to purchase its common stock with a grant price of $5.85
per share, to certain members of management.
Purchases
of Equity Securities
The table below presents the total number of shares repurchased
during the fourth quarter of fiscal 2007 (number of shares in
thousands):
SELECTED
CONSOLIDATED FINANCIAL AND OPERATING DATA
The information set forth below should be read in conjunction
with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and the
Company’s consolidated financial statements and the notes
thereto.
Fiscal Year Ended
Feb. 2,
Feb. 3,
Jan. 28,
Jan. 23,
Jan. 25,
(dollars in millions except per share data)
2008
2007(1)
2006(1)
2005
2004
Statement of Operations Data
Domestic Borders superstore sales
$
2,847.2
$
2,750.0
$
2,709.5
$
2,588.9
$
2,470.2
Waldenbooks Specialty Retail sales
562.8
663.9
744.8
779.9
820.9
International
sales(2)
364.8
269.9
221.4
163.9
108.7
Total
sales(2)
$
3,774.8
$
3,683.8
$
3,675.7
$
3,532.7
$
3,399.8
Operating income
(loss)(2)
$
6.6
$
8.5
$
170.4
$
201.2
$
186.3
Income (loss) before cumulative effect of accounting
change(2)
$
(18.5
)
$
(13.0
)
$
96.5
$
117.9
$
108.4
Cumulative effect of accounting change (net of
tax)(2)
—
—
—
—
2.1
Income (loss) from continuing
operations(2)
(18.5
)
(13.0
)
96.5
117.9
106.3
Income (loss) from operations of discontinued operations
(13.2
)
(138.3
)
4.5
14.0
8.9
Loss from disposal of discontinued operations
(125.7
)
—
—
—
—
Income (loss) from discontinued operations
(138.9
)
(138.3
)
4.5
14.0
8.9
Net income (loss)
$
(157.4
)
$
(151.3
)
$
101.0
$
131.9
$
115.2
Per Share Data
Diluted (basic) earnings (loss) per common share before
cumulative effect of accounting
change(2)
$
(0.31
)
$
(0.21
)
$
1.36
$
1.51
$
1.37
Diluted loss per common share from cumulative effect of
accounting
change(2)
—
—
—
—
(0.02
)
Diluted (basic) earnings (loss) from continuing operations per
common
share(2)
(0.31
)
(0.21
)
1.36
1.51
1.35
Diluted (basic) earnings (loss) from discontinued operations per
common share
(2.37
)
(2.23
)
0.06
0.18
0.11
Diluted (basic) earnings (loss) per common share
$
(2.68
)
$
(2.44
)
$
1.42
$
1.69
$
1.46
Cash dividends declared per common share
$
0.44
$
0.41
$
0.37
$
0.33
$
0.08
Balance Sheet Data
Working capital — continuing
operations(2)
$
38.2
$
106.6
$
287.5
$
511.1
$
529.2
Working capital
$
38.2
$
127.7
$
326.7
$
569.4
$
556.0
Total assets — continuing
operations(2)
$
2,302.7
$
2,347.9
$
2,236.6
$
2,295.6
$
2,292.5
Total assets
$
2,302.7
$
2,613.4
$
2,572.2
$
2,628.8
$
2,584.6
Short-term borrowings — continuing
operations(2)
$
548.4
$
501.4
$
183.0
$
141.0
$
132.6
Short-term borrowings
$
548.4
$
542.0
$
206.4
$
141.0
$
140.7
Long-term debt, including current portion
$
5.6
$
5.4
$
5.6
$
55.9
$
57.3
Long-term capital lease obligations, including current portion
$
—
$
0.4
$
0.5
$
0.1
$
0.4
Stockholders’ equity
$
476.9
$
642.0
$
927.8
$
1,088.9
$
1,100.6
(1)
The Company’s 2006 and 2005
fiscal years consisted of 53 weeks.
(2)
Excludes the results of
discontinued operations (Borders Ireland Limited, Books etc.,
and U.K. Superstores).
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
General
Borders Group, Inc., through its subsidiaries, Borders, Inc.
(“Borders”), Walden Book Company, Inc.
(“Waldenbooks”), Borders Australia Pty Limited and
others (individually and collectively, the “Company”),
is the second largest operator of book, music and movie
superstores and the largest operator of mall-based bookstores in
the world based upon both sales and number of stores. At
February 2, 2008, the Company operated 541 superstores
under the Borders name, including 509 in the United States, 22
in Australia, five in New Zealand, three in Puerto Rico, and two
in Singapore. The Company also operated 490 mall-based and other
bookstores, including stores operated under the Waldenbooks,
Borders Express and Borders Outlet names, as well as
Borders-branded airport stores. In addition, the Company owned
and operated United Kingdom-based Paperchase Products Limited
(“Paperchase”), a designer and retailer of stationery,
cards and gifts. As of February 2, 2008, Paperchase
operated 112 stores, primarily in the United Kingdom, and
Paperchase shops have been added to 319 domestic Borders
superstores.
Business
Strategy
Strategic
alternatives review
process. On
March 20, 2008, the Company announced that it would undergo
a strategic alternative review process. J.P. Morgan
Securities Inc. and Merrill Lynch & Co. have been
retained as the Company’s financial advisors to assist in
this process. The review will include the investigation of a
wide range of alternatives including the sale of the Company
and/or
certain divisions for the purpose of maximizing shareholder
value.
Throughout fiscal 2007, the Company continued to implement its
strategic plan, the principal components of which are as follows:
Grow comparable
store sales and profitability in the domestic Borders
superstores. The
Company continues to focus on improving key retailing practices
at its domestic superstores, including increasing effectiveness
of merchandise presentation, improving assortment planning,
replenishment and supply chain effectiveness, and ensuring
consistency of execution across the chain. A key component in
this strategy is the development of a concept store, the first
of which opened during the first quarter of 2008. The concept
store includes the implementation of “destination
businesses” within certain of the Company’s most
popular categories, which will help to distinguish the
Company’s domestic superstores from competitors. The
concept store also includes a Seattle’s Best Coffee cafe
and a Paperchase shop, which continue to be drivers of both
sales and increased profitability for their categories. The
Company plans to open additional concept stores in 2008, and
will implement select features of the concept store in its
existing superstores based on financial analysis of costs and
benefits. To address declining sales in the music category, as
well as increasing space available for improved merchandising
presentation and expansion of higher margin categories, the
Company has begun reducing inventories and reallocating floor
space in its stores. Also, the Company made changes in 2007 to
its loyalty program, Borders Rewards, which has grown to over
25 million members. The changes were intended to increase
profitability, to drive revenue through partnerships with other
organizations, and to drive sales by employing customer data to
tailor promotions that meet specific customer needs and
interests.
Right-size the
Waldenbooks Specialty Retail
business. The
Waldenbooks Specialty Retail segment has generally experienced
negative comparable store sales percentages for the past several
years, primarily due to the overall decrease in mall traffic,
sluggish bestsellers and increased competition from all
channels. The Company is working to aggressively right-size the
Waldenbooks mall store base, which could result in additional
asset impairments and store closure costs in the next few years,
but will position the Company to improve sales, profitability
and free cash flow in the long term. The Company will retain
stable locations that meet acceptable profit and return on
investment objectives and in those stores, change product
assortment and formats to drive sales and profitability.
Explore strategic
alternatives in the International
segment. As
previously announced, the Company has suspended growth and
investment in its International businesses, while focusing on
improving the
profitability of the investments the Company has already made. A
key component in this strategy was the sale of the
Company’s U.K. and Ireland bookstores during the third
quarter of 2007, as discussed below. The Company is continuing
to explore strategic alternatives for portions of its remaining
International businesses, including the Australia, New Zealand
and Singapore superstores, as well as Paperchase. The Company
believes the Borders brand has global potential, however, and
believes that future International growth will most profitably
utilize a franchise business model, which the Company has
applied successfully in Malaysia and the United Arab Emirates.
Leverage
innovation, technology and strategic alliances to differentiate
our business. In
order to achieve the goals of the strategic plan detailed above,
the Company plans to enhance its current systems environment.
This includes a focus on the systems supporting the domestic
Borders superstore business, including merchandise buying,
replenishment and supply chain, as well as in-store technology
enhancements. In addition, this effort includes development of a
proprietary
e-commerce
platform, which will include both in-store and online
e-commerce
components. The proprietary
e-commerce
Web site will also allow the Company to engage in key
partnerships that are expected to build incremental revenues and
margins and connect
e-commerce
sales to the Company’s Borders Rewards loyalty program. The
Company expects to launch its
e-commerce
Web site during the spring of fiscal 2008.
The Company plans to continue to execute this strategy
throughout fiscal 2008, factoring in its belief that 2008 will
be a challenging year for retailers due to continued uncertainty
in the economic environment, and will focus on maximizing cash
flow and profitability. The Company plans to reduce capital
spending by investing in projects with short paybacks and high
returns, will review all cost structures with the goal of
reducing expenses to improve profitability, and will continue to
reduce working capital needs of the business and drive inventory
productivity, thus improving cash flow and lowering supply chain
costs.
Other
Information
The Company, through its subsidiaries, has agreements with
Amazon.com, Inc. (“Amazon”) to operate Web sites
utilizing the Borders.com and Waldenbooks.com, (the “Web
Sites”). These agreements are currently being renewed on a
month-to-month basis. Under these agreements, Amazon is the
merchant of record for all sales made through the Web Sites, and
determines all prices and other terms and conditions applicable
to such sales. Amazon is responsible for the fulfillment of all
products sold through the Web Sites and retains all payments
from customers. The Company receives referral fees for products
purchased through the Web Sites. The agreements contain mutual
indemnification provisions, including provisions that define
between the parties the responsibilities with respect to any
liabilities for sales, use and similar taxes, including
penalties and interest, associated with products sold on the Web
Sites. Currently, taxes are not collected with respect to
products sold on the Web Sites except in certain states. As
previously discussed, the Company plans to launch its
proprietary
e-commerce
site during the spring of fiscal 2008. At that time the Amazon
agreements will be terminated subject to the survival of certain
provisions.
The Company has signed an agreement with Berjaya Corporation
Berhad (“Berjaya”), a publicly-listed diversified
corporation headquartered in Malaysia, establishing a franchise
arrangement under which Berjaya will operate Borders stores in
Malaysia. The Company has also signed an agreement with Al Maya
Group (“Al Maya”), a diversified corporation
headquartered in the United Arab Emirates, establishing a
franchise agreement under which Al Maya or its affiliates will
operate Borders stores in the United Arab Emirates and other
Gulf Cooperation Council (“GCC”) countries.
Effective with respect to fiscal 2005, the Company’s fiscal
year ends on the Saturday closest to the last day of January.
Fiscal 2007 consisted of 52 weeks, and ended on
February 2, 2008. Fiscal 2006 consisted of 53 weeks
and ended February 3, 2007. Fiscal 2005 consisted of
53 weeks and ended January 28, 2006. References herein
to years are to the Company’s fiscal years.
Discontinued
Operations
On September 21, 2007, the Company sold its U.K. and
Ireland bookstore operations to Bookshop Acquisitions Ltd., a
corporation formed by Risk Capital Partners, a private equity
firm in the United Kingdom. The
consideration for the sale was: (i) cash of
$20.4 million; (ii) the potential for up to an
additional $20.4 million of contingent deferred
consideration, which will be payable in whole or in part only if
specified sales levels are achieved by the U.K. and Ireland
bookstore operations in future years; (iii) a 19.9% equity
interest in Bookshop Acquisitions Ltd., which is expected to be
diluted to approximately seventeen percent (17%); and
(iv) 7% loan notes of approximately $3.4 million which
mature in 2017 or sooner upon the occurrence of certain events.
The sale agreement included all 41 Borders superstores located
in the U.K. and the Borders superstore in Ireland, as well as
all 28 Books etc. stores. All assets and liabilities, with the
exception of outstanding lease guarantees relating to four
stores, remained with the entities sold, which are now owned by
Risk Capital Partners. The maximum potential liability under
these lease guarantees is approximately $193.2 million. The
leases provide for periodic rent reviews, which could increase
the Company’s potential liability. One of the applicable
lease guaranty agreements provides that the guaranty will
automatically terminate if Borders U.K. Limited achieves a
specified level of net assets. This potential limitation has not
been considered in calculating the maximum exposures set forth
above. In addition, in the event of a default under the primary
leases and the landlord does not require the Company to take a
new (replacement) lease, the landlord would have an obligation
to attempt to re-lease the premises, which could further reduce
the Company’s potential liability. The Company has recorded
a contingent liability of approximately $5.8 million based
upon the likelihood that the Company will be required to perform
under the guarantees.
Also under the terms of the sale agreement, the Company
indemnified the U.K. and Ireland operations from the tax
liability, if any, imposed upon it as a result of the
forgiveness of the portions of intercompany indebtedness owing
from the Company. The maximum potential liability is
approximately $10.7 million, and the Company has recorded a
liability of approximately $4.4 million based upon the
likelihood that the Company will be required to perform under
the indemnification.
The Company did not record any amount related to the contingent
deferred consideration of $20.4 million. The Company will
record this amount once the realization of such amount is
resolved beyond a reasonable doubt. The Company has attributed
only a nominal value to its equity interest in Bookshop
Acquisitions Ltd. and to its 7% loan notes.
The disposal resulted in a loss of $125.7 million for year
ended February 2, 2008. The operation of the disposed
businesses resulted in losses of $13.2 million and
$138.3 million for the years ended February 2, 2008
and February 3, 2007, respectively, and income of
$4.5 million for the year ended January 28, 2006.
The following table presents the Company’s consolidated
statements of operations data, as a percentage of sales, for the
three most recent fiscal years. All amounts reflect the results
of the Company’s continuing operations unless otherwise
noted.
Consolidated sales increased $91.0 million, or 2.5%, to
$3,774.8 million in 2007 from $3,683.8 million in
2006. This resulted primarily from increased sales in the
Borders segment, due to increased comparable store sales and the
opening of new superstores. Also contributing to the increase in
sales was the International segment, due to increased comparable
store sales, the opening of new superstores and favorable
foreign currency exchange rates. Partially offsetting these
increases was a decrease in sales of the Waldenbooks Specialty
Retail segment, due primarily to store closures, partially
offset by increased comparable store sales. Excluding the impact
of the extra week in fiscal 2006, sales would have increased
4.2%.
Comparable store sales measures include stores open more than
one year, with new stores included in the calculation upon their
13th month of operation. Comparable store sales measures
for Waldenbooks Specialty Retail include the Company’s
mall-based seasonal businesses, and comparable store sales
measures for International Borders superstores include sales
from licensed departments operating within the superstores.
International comparable store sales are calculated in local
currency. The calculation of 2007 comparable store sales
increases or decreases assume that 2007 and 2006 consisted of
52 weeks.
Comparable store sales for domestic Borders superstores
increased 1.5% in 2007. The comparable store sales increase for
2007 was due primarily to positive comparable store sales in the
book category of 3.2%, including strong sales of the final Harry
Potter title, as well as increased comparable store sales in
Seattle’s Best Coffee cafes and Paperchase gifts and
stationery shops of 13.3% and 10.0%, respectively. Also, on a
comparable store basis, transactions increased by 1.0% for the
year. Comparable store sales in the music category continued to
decline with negative comparable store sales of 14.2% for the
year. The impact of price changes on comparable store sales was
not significant.
Waldenbooks Specialty Retail’s comparable store sales
increased 2.2% in 2007. The comparable store sales increase was
driven by increased transaction size of 2.4% while transaction
count declined by 0.2%. The impact of price changes on
comparable store sales was not significant.
Comparable store sales for International Borders superstores
increased 7.9% in 2007, driven by positive comparable store
sales in Australia, Singapore and Puerto Rico, partially offset
by a decline in comparable stores sales in New Zealand. The
impact of price changes on comparable store sales was not
significant.
Other
Revenue
Other revenue for the Borders and International segments
primarily consists of income recognized from unredeemed gift
cards, as well as revenue from franchisees. Other revenue for
the Borders segment also includes wholesale revenue earned
through sales of merchandise to other retailers, as well as
referral fees received from Amazon as part of the Web Site
agreement. Other revenue in the International segment also
includes revenue earned through a transitional services
agreement with the new owners of Borders U.K. Other revenue in
the Waldenbooks Specialty Retail segment primarily consists of
income recognized from unredeemed gift cards.
Other revenue increased $6.3 million, or 15.8%, to
$46.1 million in 2007 from $39.8 million in 2006. The
increase is due to increases in the domestic Borders Superstores
and International segments, partially offset by a decrease in
the Waldenbooks Specialty Retail segment. The increase in
domestic Borders Superstores was primarily due to increased
income recognized from unredeemed gift cards in 2007. The
International increase was the result of increased revenue from
franchisees and transitional services revenue in 2007.
Gross
Margin
Consolidated gross margin decreased $8.0 million, or 0.8%,
to $982.6 million in 2007 from $990.6 million in 2006.
As a percentage of sales, it decreased by 0.9%, to 26.0% in 2007
from 26.9% in 2006. This was due to a decrease in the domestic
Borders Superstores segment, partially offset by an increase in
the Waldenbooks Specialty Retail segment’s gross margin as
a percentage of sales. Gross margin as a percentage of sales
remained flat in the International segment. The decrease in the
domestic Borders Superstores segment was primarily due to
increased promotional discounts as a percentage of sales related
to Borders Rewards and the Harry Potter book. In addition,
shrinkage in the DVD category and cafe waste increased as a
percentage of sales, and occupancy costs increased as a
percentage of sales. Partially offsetting these increases were
decreased distribution costs as a percentage of sales, driven by
the increase in comparable store sales, and 2006 accruals for
Borders Rewards member benefits as a percentage of sales. These
benefits were substantially modified in 2007 and reduced the
required accrual in the current year. The increase in the
Waldenbooks Specialty Retail segment was primarily due to
decreased occupancy costs as a percentage of sales, resulting
from the increase in comparable store sales. Partially
offsetting the decrease in occupancy were increased promotional
discounts and other costs as a percentage of sales, mainly
related to sales of the seventh and final book in the Harry
Potter series and Borders Rewards, and increased distribution
costs, primarily due to increased product returns and the
associated handling costs. The International segment’s
gross margin as a percentage of sales was flat, primarily the
result of decreased occupancy costs as a percentage of sales,
driven by the increase in comparable store sales, offset by
increased product markdowns as a percentage of sales and
increased distribution costs as a percentage of sales.
The Company classifies the following items as “Cost of
merchandise sold (includes occupancy)” on its consolidated
statements of operations: product costs and related discounts,
markdowns, freight, shrinkage, capitalized inventory costs,
distribution center costs (including payroll, rent, supplies,
depreciation, and other operating expenses), and store occupancy
costs (including rent, common area maintenance, depreciation,
repairs and maintenance, taxes, insurance, and others). The
Company’s gross margin may not be comparable to that of
other retailers, which may exclude the costs related to their
distribution network and store occupancy from cost of sales and
include those costs in other financial statement lines.
Consolidated selling, general and administrative expenses
(“SG&A”) increased $44.0 million, or 4.8%,
to $956.1 million in 2007 from $912.1 million in 2006.
As a percentage of sales, it increased by 0.6%, to 25.3% in 2007
from 24.7% in 2006. This increase primarily resulted from
increased SG&A expenses as a percentage of sales for the
domestic Borders Superstores segment and the International
segment, partially offset by decreased SG&A expense in the
Waldenbooks Specialty Retail segment. The domestic Borders
Superstores segment increase was primarily driven by increased
corporate payroll and corporate operating expenses as a
percentage of sales, mainly the result of the settlement of the
California overtime litigation in 2007, a gain on the sale of
investments in 2006, income received in 2006 from the Visa
Check/MasterMoney Antitrust Litigation settlement, and 2007
investment in strategic initiatives. In addition, store payroll
and operating expenses increased as a percentage of sales. These
increases were partially offset by decreased advertising costs
as a percentage of sales. The increase in the International
segment was primarily the result of increased corporate payroll
and operating expenses as a percentage of sales, due to
professional fees incurred pursuant to the strategic
alternatives process relating to the Company’s Asia Pacific
operations, as well as increased advertising costs as a
percentage of sales. Partially offsetting these items were
decreased store payroll and operating expenses as a percentage
of sales, driven by the increase in comparable store sales. The
Waldenbooks Specialty Retail decrease was primarily due to
decreased store payroll and operating expenses as a percentage
of sales, driven by the increase in comparable store sales.
Partially offsetting these decreases were increased corporate
payroll and corporate operating expenses as a percentage of
sales and increased advertising expense as a percentage of
sales. Also impacting the comparison of 2007 to 2006 was income
received in 2006 from the Visa Check/MasterMoney Antitrust
Litigation settlement.
The Company classifies the following items as “Selling,
general and administrative expenses” on its consolidated
statements of operations: store and administrative payroll,
rent, depreciation, utilities, supplies and equipment costs,
credit card and bank processing fees, bad debt, legal and
consulting fees, certain advertising income and expenses and
others.
Asset
Impairments and Other Writedowns
In 2007, the Company recorded a $6.7 million writedown
related to the impairment of assets (primarily leasehold
improvements, furniture, and fixtures) of certain
underperforming stores. Of this, $5.5 million related to
domestic Borders superstores, $0.7 million related to
Waldenbooks Specialty Retail stores and $0.5 million
related to one Borders store in Puerto Rico. In addition, the
Company recorded a charge of $6.4 million in 2007 related
to the closure costs of certain stores. Of this,
$5.6 million related to domestic Borders superstores,
$0.7 million related to Waldenbooks Specialty Retail stores
and $0.1 related to one Borders store in Australia.
In 2006, the Company recorded a $19.1 million writedown
related to the impairment of assets (primarily leasehold
improvements, furniture, and fixtures) of certain
underperforming stores. Of this, $9.0 million related to
domestic Borders superstores and $10.1 million related to
Waldenbooks Specialty Retail stores. In addition, the Company
recorded a charge of $7.2 million in 2006 related to the
closure costs of certain stores. Of this, $4.1 million
related to domestic Borders superstores and $3.1 million
related to Waldenbooks Specialty Retail stores. The Company also
recorded a charge of $34.3 million related to Waldenbooks
Specialty Retail’s merchandising system.
Interest
Expense
Consolidated interest expense increased $13.2 million, or
44.4%, to $42.9 million in 2007 from $29.7 million in
2006. This was primarily a result of increased borrowings to
fund capital expenditures, seasonal inventory growth and
dividend payments.
The effective tax rate differed for the years presented from the
federal statutory rate primarily due to the realization of the
benefits of prior year net operating loss carryforwards,
partially offset by the impact of non-deductible losses. The
effective tax rate was 49.0% in 2007 and 38.7% in 2006.
Loss
from Continuing Operations
Due to the factors mentioned above, loss from continuing
operations as a percentage of sales increased to 0.5% in 2007
from 0.4% in 2006, and loss from continuing operations dollars
increased to $18.5 million in 2007 from $13.0 million
in 2006.
Consolidated
Results — Comparison of 2006 to 2005
Sales
Consolidated sales remained relatively flat, increasing
$8.1 million, to $3,683.8 million in 2006 from
$3,675.7 million in 2005. This resulted primarily from
increased sales in the Borders segment, due to the opening of
new superstores, partially offset by negative comparable store
sales. Also contributing to the increase in sales was the
International segment, due to the opening of new superstores,
favorable foreign currency exchange rates and positive
comparable store sales. A decrease in sales of the Waldenbooks
Specialty Retail segment partially offset the increase in
consolidated sales, due primarily to store closures and negative
comparable store sales.
Comparable store sales measures include stores open more than
one year, with new stores included in the calculation upon their
13th month of operation. Comparable store sales measures
for Waldenbooks Specialty Retail include the Company’s
mall-based seasonal businesses, and comparable store sales
measures for International Borders superstores include sales
from licensed departments operating within the superstores.
International comparable store sales are calculated in local
currency. The calculation of 2006 comparable store sales
increases or decreases assume that 2006 and 2005 consisted of
53 weeks.
Comparable store sales for domestic Borders superstores
decreased 2.2% in 2006. This was due primarily to negative
comparable store sales in the music category of 15.1%, as well
as a decline in comparable store sales of books. The decrease in
books was driven by a challenging comparison to 2005 when the
sixth book in the Harry Potter series was released, as well as
weakness in other bestsellers. The cafe and gift and stationery
categories positively impacted comparable store sales in
remodeled stores, resulting primarily from the conversions of
cafes to the Seattle’s Best Coffee brand and gift and
stationery departments to the Paperchase brand. The impact of
price changes on comparable store sales was not significant.
Waldenbooks Specialty Retail’s comparable store sales
decreased 7.5% in 2006. This was primarily due to the sluggish
mall environment, the 2005 release of the Harry Potter title,
and weakness in other bestsellers, which impacted Waldenbooks
Specialty Retail to a greater degree than Borders superstores.
The impact of price changes on comparable store sales was not
significant.
Comparable store sales for International Borders superstores
increased 0.1% in 2006 driven by positive comparable store sales
in Australia and New Zealand, partially offset by a decline in
comparable stores sales in Singapore and Puerto Rico. The impact
of price changes on comparable store sales was not significant.
Other
Revenue
Other revenue for the Borders and International segments
primarily consists of income recognized from unredeemed gift
cards, as well as revenue from franchisees. Other revenue for
the Borders segment also includes wholesale revenue earned
through sales of merchandise to other retailers, as well as
referral fees received from Amazon as part of the Web Site
agreement. Other revenue in the Waldenbooks Specialty Retail
segment primarily consists of income recognized from unredeemed
gift cards.
Other revenue decreased $1.6 million, or 3.9%, to
$39.8 million in 2006 from $41.4 million in 2005. This
was primarily due to higher wholesale revenue earned through
sales of merchandise in 2005 to Berjaya, related to the opening
and initial stock of inventory of its first franchise store in
April of 2005.
Gross
Margin
Consolidated gross margin decreased $76.1 million, or 7.1%,
to $990.6 million in 2006 from $1,066.7 million in
2005. As a percentage of sales, it decreased by 2.1%, to 26.9%
in 2006 from 29.0% in 2005. This was due to a decrease in the
domestic Borders Superstores and Waldenbooks Specialty Retail
segments’ gross margin as a percentage of sales, partially
offset by an increase in the International segment. The decrease
in the domestic Borders superstores segment was primarily the
result of increased promotional discounts as a percentage of
sales, mainly due to the Company’s loyalty program, Borders
Rewards, as well as increased supply chain and occupancy costs
as a percentage of sales resulting from the decline in
comparable store sales. The decrease in the Waldenbooks
Specialty Retail segment was also due to increased promotional
discounts as a percentage of sales resulting from Borders
Rewards. Increased occupancy and supply chain costs as a
percentage of sales, resulting from the decline in comparable
store sales, also contributed to the decrease in gross margin
rate for the Waldenbooks Specialty Retail segment. The increase
in the International segment was primarily the result of a
decrease in occupancy costs as a percentage of sales, mainly due
to the increase in comparable store sales, and decreased shrink
and other costs as a percentage of sales.
The Company classifies the following items as “Cost of
merchandise sold (includes occupancy)” on its consolidated
statements of operations: product costs and related discounts,
markdowns, freight, shrinkage, capitalized inventory costs,
distribution center costs (including payroll, rent, supplies,
depreciation, and other operating expenses), and store occupancy
costs (including rent, common area maintenance, depreciation,
repairs and maintenance, taxes, insurance, and others). The
Company’s gross margin may not be comparable to that of
other retailers, which may exclude the costs related to their
distribution network and store occupancy from cost of sales and
include those costs in other financial statement lines.
Selling,
General and Administrative Expenses
Consolidated selling, general and administrative expenses
(“SG&A”) increased $26.4 million, or 3.0%,
to $912.1 million in 2006 from $885.7 million in 2005.
As a percentage of sales, it increased by 0.6%, to 24.7% in 2006
from 24.1% in 2005. This increase primarily resulted from
increased SG&A expenses as a percentage of sales for the
domestic Borders Superstores and Waldenbooks Specialty Retail
segments, partially offset by a decrease in the International
segment. SG&A expenses as a percentage of sales for the
domestic Borders Superstores segment increased primarily due to
increased store payroll and operating expenses as a percentage
of sales, resulting from the launch of Borders Rewards and the
decline in comparable store sales. The impact of these factors
was partially offset by income received from the Visa
Check/MasterMoney Antitrust Litigation settlement and a gain on
the sale of investments. The Visa Check/MasterMoney Antitrust
Litigation was a class action lawsuit brought against Visa and
MasterCard related to their debit card policies. The Waldenbooks
Specialty Retail increase was primarily due to increased store
payroll and operating expenses as a percentage of sales, driven
by the decline in comparable store sales, partially offset by
decreased corporate and operating expenses as a percentage of
sales and income received from the Visa Check/MasterMoney
Antitrust Litigation settlement. International SG&A
expenses as percentage of sales decreased primarily as a result
of decreased store payroll and store operating expenses as a
percentage of sales and decreased advertising expenses as a
percentage of sales. Partially offsetting these decreases were
increased corporate payroll and corporate operating expenses as
a percentage of sales, due to increased spending to support
international new store growth.
The Company classifies the following items as “Selling,
general and administrative expenses” on its consolidated
statements of operations: store and administrative payroll,
rent, depreciation, utilities, supplies and equipment costs,
credit card and bank processing fees, bad debt, legal and
consulting fees, certain advertising income and expenses and
others.
In 2006, the Company recorded a $19.1 million writedown
related to the impairment of assets (primarily leasehold
improvements, furniture, and fixtures) of certain
underperforming stores. Of this, $9.0 million related to
domestic Borders superstores and $10.1 million related to
Waldenbooks Specialty Retail stores. In addition, the Company
recorded a charge of $7.2 million in 2006 related to the
closure costs of certain stores. Of this, $4.1 million
related to domestic Borders superstores and $3.1 million
related to Waldenbooks Specialty Retail stores. The Company also
recorded a charge of $34.3 million related to Waldenbooks
Specialty Retail’s merchandising system.
In 2005, the Company recorded a $2.6 million writedown
related to the impairment of certain long-lived assets
(primarily leasehold improvements, furniture, and fixtures), at
certain underperforming Borders and Waldenbooks Specialty Retail
stores. In addition, the Company recorded a charge of
$2.3 million in 2005 related to the closure costs of
certain stores. Of this, $1.0 million related to domestic
Borders superstores and $1.3 million related to Waldenbooks
Specialty Retail stores.
Interest
Expense
Consolidated interest expense increased $16.1 million, or
118.4%, to $29.7 million in 2006 from $13.6 million in
2005. This was primarily a result of increased borrowings to
fund capital expenditures, inventory growth and common stock
repurchases in 2006.
Taxes
The effective tax rate differed for the years presented from the
federal statutory rate primarily due to a change in the mix of
earnings between high and low tax jurisdictions. The effective
tax rate was 38.7% in 2006 and 38.5% in 2005.
Income
(Loss) from Continuing Operations
Due to the factors mentioned above, loss from continuing
operations as a percentage of sales was 0.4% in 2006, as
compared to income from continuing operations of 2.6% in 2005,
and 2006 loss from continuing operations dollars was
$13.0 million, as compared to income from continuing
operations of $96.5 million in 2005.
Domestic
Borders Superstores
(dollar amounts in
millions)
2007
2006
2005
Sales
$
2,847.2
$
2,750.0
$
2,709.5
Other revenue
$
35.3
$
31.6
$
32.8
Operating income
$
30.6
$
92.4
$
174.1
Operating income as % of sales
1.1
%
3.4
%
6.4
%
Store openings
18
31
15
Store closings
8
5
4
Store count
509
499
473
Domestic
Borders Superstores — Comparison of 2007 to
2006
Sales
Domestic Borders superstore sales increased $97.2 million,
or 3.5%, to $2,847.2 million in 2007 from
$2,750.0 million in 2006. This increase was comprised of
non-comparable sales of $56.2 million, associated with 2007
and 2006 store openings, and comparable store sales increases of
$41.0 million. Excluding the impact of the extra week in
fiscal 2006, sales would have increased by 5.3%.
Other revenue for Borders increased $3.7 million, or 11.7%,
to $35.3 million in 2007 from $31.6 million in 2006.
This increase was primarily due to increased income recognized
from unredeemed gift cards in 2007.
Gross
Margin
Gross margin as a percentage of sales decreased approximately
1.6%, to 26.0% in 2007 from 27.6% in 2006. This was primarily
due to increased promotional discounts of 1.0% as a percentage
of sales related to Borders Rewards and the Harry Potter book.
In addition, shrinkage in the DVD category and cafe waste
increased 0.7% as a percentage of sales, and occupancy costs
increased 0.2% as a percentage of sales, due to increased
depreciation and property tax expense. Partially offsetting
these increases were decreased distribution costs of 0.1% as a
percentage of sales, driven by the increase in comparable store
sales, and 2006 accruals for Borders Rewards member benefits of
0.2% as a percentage of sales. These benefits were substantially
modified in 2007 and reduced the required accrual in the current
year.
Gross margin dollars decreased $17.7 million, or 2.3%, to
$740.2 million in 2007 from $757.9 million in 2006,
which was primarily due to the decrease in gross margin as a
percentage of sales noted above, partially offset by new store
openings and the increase in comparable store sales.
Selling,
General and Administrative Expenses
SG&A as a percentage of sales increased 1.0%, to 24.4% in
2007 from 23.4% in 2006. This was primarily due to increased
corporate payroll and corporate operating expenses of 0.8% as a
percentage of sales, mainly the result of the settlement of the
California overtime litigation in 2007, a gain on the sale of
investments in 2006, income received in 2006 from the Visa
Check/MasterMoney Antitrust Litigation settlement, and 2007
investment in strategic initiatives. In addition, store payroll
and operating expenses increased 0.4% as a percentage of sales.
These increases were partially offset by decreased advertising
costs as a percentage of sales of 0.2%.
SG&A dollars increased $49.0 million, or 7.6%, to
$693.5 million in 2007 from $644.5 million in 2006,
primarily due to new store openings and the increased store
payroll and operating expenses required, a gain on the sale of
investments in 2006 of $5.0 million, income received in
2006 from the Visa Check/MasterMoney Antitrust Litigation
settlement of $2.6 million, and the settlement of the
California overtime litigation in 2007 of $2.7 million.
Asset
Impairments and Other Writedowns
The Company has processes in place to monitor store performance
and other factors for indicators of asset impairment. When an
indicator of impairment is present, the Company evaluates the
recoverability of the affected assets. As a result of this
evaluation in 2007, the Company recorded a $5.5 million
writedown related to the impairment of assets at underperforming
Borders stores. In addition, the Company recorded a charge of
$5.6 million related to the closure costs of certain
Borders stores.
In 2006, the Company recorded a $9.0 million writedown
related to the impairment of assets at certain underperforming
Borders stores. In addition, the Company recorded a charge of
$4.1 million related to the closure costs of certain
Borders stores.
Operating
Income
Due to the factors mentioned above, operating income as a
percentage of sales decreased to 1.1% in 2007 compared to 3.4%
in 2006, and operating income dollars decreased
$61.8 million, or 66.9%, to $30.6 million in 2007 from
$92.4 million in 2006.
Domestic
Borders Superstores — Comparison of 2006 to
2005
Sales
Domestic Borders superstore sales increased $40.5 million,
or 1.5%, to $2,750.0 million in 2006 from
$2,709.5 million in 2005. This increase was comprised of
non-comparable sales of $99.5 million, associated with 2006
and 2005 store openings, partially offset by decreased
comparable store sales of $59.0 million.
Other
Revenue
Borders’ other revenue decreased $1.2 million, or
3.7%, to $31.6 million in 2006 from $32.8 million in
2005. This was primarily due to higher wholesale revenue earned
through sales of merchandise in 2005 to Berjaya, related to the
opening and initial stock of inventory of its first franchise
store in April of 2005.
Gross
Margin
Gross margin as a percentage of sales decreased approximately
2.2%, to 27.6% in 2006 from 29.8% in 2005. This was primarily
due to increased promotional discounts of 1.1% as a percentage
of sales, mainly related to the Company’s loyalty program,
Borders Rewards. Additionally, occupancy costs increased 0.7% as
a percentage of sales, due to the de-leveraging that resulted
from negative comparable store sales. Also contributing to the
decline in gross margin were increased supply chain costs of
0.4% as a percentage of sales, primarily related to the cost of
opening of the Company’s new distribution center in
Pennsylvania.
Gross margin dollars decreased $50.9 million, or 6.3%, to
$757.9 million in 2006 from $808.8 million in 2005,
which was primarily due to the decrease in gross margin as a
percentage of sales noted above, partially offset by increased
sales.
Selling,
General and Administrative Expenses
SG&A as a percentage of sales increased 0.3%, to 23.4% in
2006 from 23.1% in 2005. This was primarily due to increased
store payroll and operating expenses of 0.7% as a percentage of
sales, as well as increased advertising expense of 0.1% as a
percentage of sales, related to the launch of Borders Rewards,
and the decline in comparable store sales. Partially offsetting
these increases were decreased corporate payroll and operating
expenses of 0.5% as a percentage of sales, resulting from
disciplined cost controls at the corporate level, income
received from the Visa Check/MasterMoney Antitrust Litigation
settlement, and a gain on the sale of investments.
SG&A dollars increased $17.2 million, or 2.7%, to
$644.5 million in 2006 from $627.3 million in 2005,
primarily due to new store openings and the increased store
payroll and operating expenses required, as well as the store
payroll and other costs necessary to launch Borders Rewards.
Partially offsetting these increases was income received from
the Visa Check/MasterMoney Antitrust Litigation settlement of
$2.6 million, and income received from the sale of
investments of $5.0 million.
Asset
Impairments and Other Writedowns
The Company has processes in place to monitor store performance
and other factors for indicators of asset impairment. When an
indicator of impairment is present, the Company evaluates the
recoverability of the affected assets. As a result of this
evaluation in 2006, the Company recorded a $9.0 million
writedown related to the impairment of assets at underperforming
Borders stores. In addition, the Company recorded a charge of
$4.1 million related to the closure costs of certain
Borders stores.
In 2005, the Company recorded a $2.1 million writedown
related to the impairment of assets at certain underperforming
Borders stores and $1.0 million of expense related to the
closure of certain domestic Borders superstores.
Due to the factors mentioned above, operating income as a
percentage of sales decreased to 3.4% in 2006 compared to 6.4%
in 2005, and operating income dollars decreased
$81.7 million, or 46.9%, to $92.4 million in 2006 from
$174.1 million in 2005.
Waldenbooks
Specialty Retail
(dollar amounts in
millions)
2007
2006
2005
Sales
$
562.8
$
663.9
$
744.8
Other revenue
$
3.8
$
4.3
$
4.8
Operating income (loss)
$
(21.4
)
$
(78.0
)
$
2.5
Operating income (loss) as % of sales
(3.8
)%
(11.7
)%
0.3
%
Store openings
1
10
23
Store closings
75
124
50
Store count
490
564
678
Waldenbooks
Specialty Retail — Comparison of 2007 to
2006
Sales
Waldenbooks Specialty Retail sales decreased
$101.1 million, or 15.2%, to $562.8 million in 2007
from $663.9 million in 2006. This was comprised of
decreased non-comparable sales of $112.8 million associated
with 2007 and 2006 store closings, partially offset by
comparable store sales increases of $11.7 million.
Excluding the impact of the extra week in fiscal 2006, sales
would have decreased by 14.1%.
Other
Revenue
Waldenbooks Specialty Retail other revenue decreased
$0.5 million, or 11.6%, to $3.8 million in 2007 from
$4.3 million in 2006.
Gross
Margin
Gross margin as a percentage of sales increased 0.7%, to 23.4%
in 2007 from 22.7% in 2006. This was primarily due to decreased
occupancy costs as a percentage of sales of 1.5%, resulting from
the increase in comparable store sales. Partially offsetting the
decrease in occupancy were increased promotional discounts and
other costs of 0.4% as a percentage of sales, mainly related to
sales of the seventh and final book in the Harry Potter series
and Borders Rewards, and increased distribution costs of 0.4% as
a percentage of sales, primarily due to increased product
returns and the associated handling costs.
Gross margin dollars decreased $18.9 million, or 12.5%, to
$131.9 million in 2007 from $150.8 million in 2006,
primarily due to store closures, partially offset by the
increase in gross margin percentage noted above and the increase
in comparable store sales.
Selling,
General and Administrative Expenses
SG&A as a percentage of sales decreased 0.3%, to 27.0% in
2007 from 27.3% in 2006. This was primarily due to decreased
store payroll and operating expenses of 1.8% as a percentage of
sales, driven by the increase in comparable store sales.
Partially offsetting these decreases were increased corporate
payroll and corporate operating expenses of 1.4% as a percentage
of sales and increased advertising expense of 0.1% as a
percentage of sales. Also impacting the comparison of 2007 to
2006 was income received in 2006 from the Visa Check/MasterMoney
Antitrust Litigation settlement.
SG&A dollars decreased $29.3 million, or 16.2%, to
$151.7 million in 2007 from $181.0 million in 2006,
primarily due to store closures and income received in 2006 from
the Visa Check/MasterMoney Antitrust Litigation settlement of
$0.9 million.
Asset
Impairments and Other Writedowns
Waldenbooks Specialty Retail has experienced declining sales and
profits over the past several years. In 2007, the segment
generated an operating loss for the second year in a row, and
the Company tested all assets of the segment for impairment. As
a result, Waldenbooks Specialty Retail incurred asset impairment
charges of $0.7 million related to underperforming stores.
In addition, the Company recorded a charge of $0.7 million
related to the closure costs of certain Waldenbooks Specialty
Retail stores in 2007.
In 2006, for the first time, the segment generated an operating
loss, and the Company tested all assets of the segment for
impairment. As a result, Waldenbooks Specialty Retail incurred
asset impairment charges of $10.1 million related to
underperforming stores, and recorded an impairment charge of
$34.3 million related to its merchandising system. In
addition, the Company recorded a charge of $3.1 million
related to the closure costs of certain Waldenbooks Specialty
Retail stores in 2006.
Operating
Loss
Due to the factors mentioned above, operating loss as a
percentage of sales decreased to 3.8% in 2007 compared to 11.7%
in 2006, and operating loss dollars decreased
$56.6 million, or 72.6%, to $21.4 million in 2007 from
$78.0 million in 2006.
Waldenbooks
Specialty Retail — Comparison of 2006 to
2005
Sales
Waldenbooks Specialty Retail sales decreased $80.9 million,
or 10.9%, to $663.9 million in 2006 from
$744.8 million in 2005. This was comprised of decreased
comparable store sales of $51.4 million and decreased
non-comparable sales of $29.5 million associated with 2006
and 2005 store closings.
Other
Revenue
Waldenbooks Specialty Retail other revenue decreased
$0.5 million, or 10.4%, to $4.3 million in 2006 from
$4.8 million in 2005.
Gross
Margin
Gross margin as a percentage of sales decreased 3.4%, to 22.7%
in 2006 from 26.1% in 2005. This was primarily due to increased
promotional discounts and other costs of 1.7% as a percentage of
sales, mainly related to the Company’s loyalty program,
Borders Rewards, as well as increased occupancy costs as a
percentage of sales of 1.4%, primarily due to the de-leveraging
that resulted from negative comparable store sales. Also
contributing to the decline in gross margin as a percentage of
sales were increased supply chain costs of 0.3% as a percentage
of sales, due to the decline in comparable store sales.
Gross margin dollars decreased $43.8 million, or 22.5%, to
$150.8 million in 2006 from $194.6 million in 2005,
primarily due to store closures, decreased comparable store
sales and the decrease in gross margin percentage noted above.
Selling,
General and Administrative Expenses
SG&A as a percentage of sales increased 1.8%, to 27.3% in
2006 from 25.5% in 2005. This was primarily due to increased
store payroll and operating expenses of 2.8% as a percentage of
sales, resulting from the decrease in comparable store sales.
Partially offsetting the increase were decreased corporate
payroll and operating expenses of 1.0% as a percentage of sales,
resulting from disciplined cost controls at the corporate level
and income received from the Visa Check/MasterMoney Antitrust
Litigation settlement.
SG&A dollars decreased $8.8 million, or 4.6%, to
$181.0 million in 2006 from $189.8 million in 2005,
primarily due to store closures and income received from the
Visa Check/MasterMoney Antitrust Litigation settlement of
$0.9 million.
Asset
Impairments and Other Writedowns
Waldenbooks Specialty Retail has experienced declining sales and
profits over the past several years. In 2006, for the first
time, the segment generated an operating loss, and the Company
tested all assets of the segment for impairment. As a result,
Waldenbooks Specialty Retail incurred asset impairment charges
of $10.1 million related to underperforming stores, and
recorded an impairment charge of $34.3 million related to
its merchandising system. In addition, the Company recorded a
charge of $3.1 million related to the closure costs of
certain Waldenbooks Specialty Retail stores in 2006.
In 2005, Waldenbooks Specialty Retail incurred asset impairment
charges of $0.5 million related to underperforming
Waldenbooks Specialty Retail stores, and recorded a charge of
$1.3 million related to the closure costs of certain
Waldenbooks Specialty Retail stores.
Operating
Income (Loss)
Due to the factors mentioned above, operating loss as a
percentage of sales was 11.7% in 2006, as compared to operating
income of 0.3% in 2005, and 2006 operating loss was
$78.0 million in 2006, as compared to operating income of
$2.5 million in 2005.
International
(dollar amounts in
millions)
2007
2006
2005
Sales
$
364.8
$
269.9
$
221.4
Other revenue
$
7.0
$
3.9
$
3.8
Operating income
$
10.5
$
9.4
$
3.4
Operating income as % of sales
2.9
%
3.5
%
1.5
%
Superstores:
Store openings
6
6
4
Store count
32
26
20
Paperchase stand-alone stores:
Stores acquired
—
—
—
Store openings
9
6
4
Store count
33
24
18
International —
Comparison of 2007 to 2006
Sales
International sales increased $94.9 million, or 35.2%, to
$364.8 million in 2007 from $269.9 million in 2006. Of
this increase in sales, $30.2 million was due to the
translation of foreign currencies to U.S. dollars. The
remaining $64.7 million was the result of new superstore
openings and the increase in comparable store sales. Excluding
the impact of the extra week in fiscal 2006, sales would have
increased by 37.2%.
Other
Revenue
Other revenue increased $3.1 million, or 79.5%, to
$7.0 million in 2007 from $3.9 million in 2006. This
was primarily due to increased revenue from franchisees and
transitional services revenue in 2007.
Gross margin as a percentage of sales remained flat at 30.3% in
2007 as compared to 2006, primarily the result of decreased
occupancy costs of 0.3% as a percentage of sales, driven by the
increase in comparable store sales. Offsetting this decrease
were increased product markdowns of 0.2% as a percentage of
sales and increased distribution costs of 0.1% as a percentage
of sales.
Gross margin dollars increased $28.6 million, or 34.9%, to
$110.5 million in 2007 from $81.9 million in 2006. The
increase is due to new superstore openings and the increase in
comparable store sales. Also contributing to the increase in
gross margin dollars was the translation of foreign currencies
to U.S. dollars of $8.2 million.
Selling,
General and Administrative Expenses
SG&A as a percentage of sales increased approximately 0.4%,
to 26.8% in 2007 from 26.4% in 2006. This was primarily the
result of increased corporate payroll and operating expenses of
0.7% as a percentage of sales, due to professional fees incurred
pursuant to the strategic alternatives process relating to the
Company’s Asia Pacific operations, as well as increased
advertising costs of 0.3% as a percentage of sales. Partially
offsetting these items were decreased store payroll and
operating expenses of 0.6% as a percentage of sales, driven by
the increase in comparable store sales.
SG&A dollars increased $26.5 million, or 37.2%, to
$97.8 million in 2007 from $71.3 million in 2006. Of
this increase, $6.8 million is the result of translation of
foreign currencies to U.S. dollars. The remainder of the
increase is due to new store openings and the increased store
payroll and operating expenses required, as well as professional
fees incurred pursuant to the strategic alternatives process
relating to the Company’s Asia Pacific operations.
Asset
Impairments and Other Writedowns
The Company has processes in place to monitor store performance
and other factors for indicators of asset impairment. When an
indicator of impairment is present, the Company evaluates the
recoverability of the affected assets. As a result of this
evaluation in 2007, the Company recorded a $0.5 million
writedown related to the impairment of assets at one
underperforming Borders store in Puerto Rico. In addition, the
Company recorded a charge of $0.1 million related to the
assets of a Borders store in Australia which were damaged by a
flood.
In 2006, there were no asset impairments in the International
segment.
Operating
Income
Due to the factors mentioned above, operating income as a
percentage of sales decreased to 2.9% in 2007 compared to 3.5%
in 2006, and operating income dollars increased
$1.1 million, or 11.7%, to $10.5 million in 2007 from
$9.4 million in 2006.
International —
Comparison of 2006 to 2005
Sales
International sales increased $48.5 million, or 21.9%, to
$269.9 million in 2006 from $221.4 million in 2005. Of
this increase in sales, $4.7 million was due to the
translation of foreign currencies to U.S. dollars. The
remaining $43.8 million was the result of new superstore
openings and increased comparable store sales.
Other
Revenue
Other revenue remained essentially flat, increasing
$0.1 million, or 2.6%, to $3.9 million in 2006 from
$3.8 million in 2005.
Gross margin as a percentage of sales increased 1.7%, to 30.3%
in 2006 from 28.6% in 2005, primarily the result of a decrease
in occupancy costs of 0.8% as a percentage of sales, mainly due
to the increase in comparable store sales. Also positively
affecting gross margin were decreased shrink and other costs of
0.9% as a percentage of sales.
Gross margin dollars increased $18.6 million, or 29.4%, to
$81.9 million in 2006 from $63.3 million in 2005. The
increase is due to the improvement in the gross margin rate, new
superstore openings and the increase in comparable store sales.
Also contributing to the increase in gross margin dollars was
the translation of foreign currencies to U.S. dollars of
$2.5 million.
Selling,
General and Administrative Expenses
SG&A as a percentage of sales decreased 0.2%, to 26.4% in
2006 from 26.6% in 2005. This was primarily the result of
decreased store payroll and store operating expenses of 0.4% as
a percentage of sales and decreased advertising expenses of 0.1%
as a percentage of sales. Partially offsetting these decreases
were increased corporate payroll and corporate operating
expenses of 0.3% as a percentage of sales, due to increased
spending to support international new store growth.
SG&A dollars increased $12.3 million, or 20.8%, to
$71.3 million in 2006 from $59.0 million in 2005. The
increase is primarily due to new store openings and the
increased store payroll and operating expenses required. Also
contributing to the increase in SG&A are the translation of
foreign currencies to U.S. dollars of $0.9 million.
Asset
Impairments and Other Writedowns
There were no asset impairments in the International segment in
2006 or 2005.
Operating
Income (Loss)
Due to the factors mentioned above, operating income as a
percentage of sales increase to 3.5% in 2007 from 1.5% in 2006,
and operating income dollars increased to $9.4 million in
2006 from $3.4 million in 2005.
Corporate
(dollar amounts in
millions)
2007
2006
2005
Operating loss
$
(13.1
)
$
(15.3
)
$
(9.6
)
The Corporate segment includes various corporate governance and
corporate incentive costs.
Corporate —
Comparison of 2007 to 2006
Operating loss decreased $2.2 million, or 14.4%, to
$13.1 million in 2007 from $15.3 million in 2006. This
was primarily due to decreased compensation expense in 2007 as
compared to 2006 related to the 2006 departure of executive
officers, including the retirement of the Company’s former
Chief Executive Officer.
Corporate —
Comparison of 2006 to 2005
Operating loss increased $5.7 million, or 59.4%, to
$15.3 million in 2006 from $9.6 million in 2005. This
was primarily due to increased compensation expense related to
the departure of several executive officers during 2006,
including the Company’s former Chief Executive Officer, and
a gain on the sale of investments in 2005.
The Company’s principal capital requirements are to fund
investment in its strategic plan, including the refurbishment of
existing stores, continued investment in new corporate
information technology systems such as its
e-commerce
Web site, and maintenance spending on stores, distribution
centers and corporate information technology. The Company will
also require funds to open its 15 new concept stores during
2008, the first of which opened in the first quarter.
Net cash provided by operating activities of continuing
operations was $101.5 million, $38.7 million, and
$161.2 million in 2007, 2006, and 2005, respectively. The
current year operating cash inflows primarily reflect non-cash
charges for depreciation, asset impairments and other
writedowns, a loss on disposal of assets related to the remodel
program and an increase in minority interest, as well as an
increase in other long-term liabilities, accrued payroll and
other liabilities, and a decrease in inventories, accounts
receivable and other long-term assets. Operating cash outflows
for the period resulted from operating results, an increase in
prepaid expenses, and decreases in taxes payable and accounts
payable. Also affecting operating cash was an adjustment to net
income resulting from a non-cash increase in deferred income
taxes.
Excluding discontinued operations, net cash used for investing
in 2007 was $123.1 million, which primarily funded capital
expenditures for new stores, the refurbishment of existing
stores, new corporate information technology systems including
spending on the Company’s
e-commerce
Web site, and maintenance of existing stores, distribution
centers and management information systems. The Company also
invested $0.8 million in its Paperchase subsidiary. These
expenditures were partially offset by proceeds from the
Company’s sale of its U.K. and Ireland book store
operations of $20.4 million. Excluding discontinued
operations, net cash used for investing in 2006 was
$153.8 million, which primarily funded capital expenditures
for new stores, the refurbishment of existing stores, new
corporate information technology systems, a new distribution
center and maintenance of existing stores, distribution centers
and management information systems. These expenditures were
partially offset by proceeds from the Company’s sale of
investments of $21.6 million. Excluding discontinued
operations, net cash used for investing in 2005 was
$57.0 million, which primarily funded capital expenditures
for new stores, the refurbishment of existing stores, new
corporate information technology systems and maintenance of
existing stores, distribution centers and management information
systems. These expenditures were offset by proceeds from the
Company’s sale of investments of $105.2 million, which
primarily consisted of auction rate securities.
Capital expenditures from continuing operations in 2007 were
$142.7 million, and reflect the opening of 24 new
superstores and one new Waldenbooks Specialty Retail store, as
well as the remodeling of 93 domestic superstores.
Additional 2007 capital spending reflected investment in the
Company’s
e-commerce
Web site and maintenance spending for new stores, distribution
centers and management information systems. Capital expenditures
in 2006 were $175.4 million, and reflect the opening of 37
new superstores and 10 new Waldenbooks Specialty Retail stores,
including six new airport stores and three new outlet stores, as
well as the remodeling of 88 domestic superstores. Additional
2006 capital spending reflected continued investment in new
buying and merchandising systems, spending on a new distribution
center and maintenance spending for new stores, distribution
centers and management information systems. Capital expenditures
in 2005 were $162.2 million, which reflected the opening of
19 new superstores and 23 new Waldenbooks Specialty Retail
stores, including 5 new airport stores and 16 new outlet stores,
as well as the remodeling of 100 domestic superstores and the
conversion of 98 Waldenbooks stores to Borders Express.
Additional 2005 capital spending reflected continued investment
in new buying and merchandising systems, partial spending on the
new distribution center and maintenance spending for new stores,
distribution centers and management information systems.
Excluding discontinued operations, net cash provided by
financing was $32.5 million in 2007, resulting primarily
from funding from the credit facility of $43.4 million and
the issuance of long-term debt of $0.4 million, as well as
proceeds from the exercise of employee stock options and the
associated excess tax benefit of $9.1 million. Partially
offsetting these items were the repurchase of common stock of
$0.6 million, the payment of cash dividends on shares of
the Company’s common stock of $19.4 million and the
repayment of long-term capital lease obligations of
$0.4 million. Excluding discontinued operations, net cash
provided by financing was $159.7 million in 2006, resulting
primarily from funding from the credit facility of
$303.4 million, as well as proceeds from the exercise of
employee stock options and the associated excess tax benefit of
$30.3 million. Partially offsetting these items were the
repurchase of common stock of $148.7 million, the payment
of cash dividends on shares of the Company’s common stock
of $25.2 million and the repayment of long-term capital
lease obligations of $0.1 million. Excluding discontinued
operations, net cash used for financing was $265.2 million
in 2005, resulting primarily from the Company’s repurchase
of common stock of $265.9 million and the payment of cash
dividends on shares of the Company’s common stock of
$25.5 million, partially offset by proceeds of
$27.6 million from the exercise of employee stock options
and funding from the credit facility of $1.2 million.
The Company expects capital expenditures to be below
$100.0 million in 2008, compared to the $142.7 million of
capital expenditures in 2007. The Company is continuing to
critically review all capital expenditures to focus on necessary
maintenance spending and projects with very high return on
capital. Capital expenditures in 2008 will result primarily from
investment in management information systems, the Company’s
new
e-commerce
Web site, as well as a reduced number of new superstore openings
and store refurbishments. In addition, capital expenditures will
result from maintenance spending for existing stores,
distribution centers and management information systems. The
Company currently plans to open approximately 15 domestic
Borders superstores in 2008. Average cash requirements for the
opening of a prototype Borders Books and Music superstore are
$2.8 million, representing capital expenditures of
$1.6 million, inventory requirements (net of related
accounts payable) of $1.0 million, and $0.2 million of
pre-opening costs. Average cash requirements to open a new
airport or outlet mall store range from $0.3 million to
$0.8 million, depending on the size and format of the
store. Average cash requirements for a major remodel of a
Borders superstore are between $0.1 million and
$0.5 million. The Company plans to lease new store
locations predominantly under operating leases.
The Board of Directors has suspended the company’s
quarterly dividend program in order to preserve capital for
operations and strategic initiatives.
The Company has a Multicurrency Revolving Credit Agreement, as
amended (the “Credit Agreement”), which expires in
July 2011. The Credit Agreement provides for borrowings of up to
$1,125.0 million secured by eligible inventory and accounts
receivable and related assets. Borrowings under the Credit
Agreement are limited to a specified percentage of eligible
inventories and accounts receivable and bear interest at a
variable base rate plus the applicable increment or LIBOR plus
the applicable increment at the Company’s option. The
Credit Agreement (i) includes a fixed charge coverage ratio
requirement of 1.1 to 1 that is applicable only if outstanding
borrowings under the facility exceed 90% of permitted borrowings
thereunder, (ii) contains covenants that limit, among other
things, the Company’s ability to incur indebtedness, grant
liens, make investments, consolidate or merge or dispose of
assets, (iii) prohibits dividend payments and share
repurchases that would result in borrowings under the facility
exceeding 90% of permitted borrowings thereunder, and
(iv) contains default provisions that are typical for this
type of financing, including a cross default provision relating
to other indebtedness of more than $25.0 million. The
Company had borrowings outstanding under the Credit Agreement
(or a prior agreement) of $547.3 million,
$499.0 million and $130.1 million at February 2,2008, February 3, 2007 and January 28, 2006,
respectively, excluding any borrowings outstanding related to
the Company’s recently disposed U.K. and Ireland bookstore
operations. The U.K. and Ireland bookstore operations had
borrowings outstanding of $40.6 million and
$23.4 million at February 3, 2007 and January 28,2006, respectively.
As of February 2, 2008the Company was in compliance with
its debt covenants. The Company currently does not meet the
Credit Agreement’s fixed charge coverage ratio requirement;
however, borrowings under the Credit Agreement have not exceeded
90% of permitted borrowings. In April of 2008, the Company
amended its Credit Agreement. Pursuant to this amendment lenders
(i) approved a loan to the Company by Pershing Square
Capital Management, L.P., as described below,
(ii) permitted increased borrowing availability until
December 15, 2008, from 90% of permitted borrowings to
92.5%, (iii) until December 15, 2008, made the fixed
charge coverage ratio and the cash dominion event apply only if
outstanding borrowings under the facility exceed 92.5% of
permitted borrowings, rather than 90%, and (iv) increased
the interest rate, commitment fees and letter of credit fees
thereunder.
On April 9, 2008, the Company completed a financing
agreement with Pershing Square Capital Management, L.P.
(“Pershing Square”) on behalf of certain of its
affiliated investment funds. Under the terms of the agreement,
Pershing Square has loaned $42.5 million to the Company and
will purchase, at the Company’s discretion, certain of the
Company’s international businesses pursuant to a
$135.0 million backstop purchase commitment. The terms of
the Pershing Square financing agreement have been approved by
the lenders under the Company’s current revolving credit
facility, and the revolving credit facility has been amended
accordingly.
The financing agreement with Pershing Square consists of three
main components:
1. A $42.5 million senior secured term loan maturing
January 15, 2009 with an interest rate of 9.8% per annum.
The term loan is secured by an indirect pledge of approximately
65% of the stock of Paperchase Products Ltd.
(“Paperchase”) pursuant to a Deed of Charge Over
Shares. In the event that Paperchase is sold, all proceeds from
the sale are required to be used to prepay the term loan. The
representations, covenants and events of default therein are
otherwise substantially identical to the Company’s existing
Multicurrency Revolving Credit Agreement (as amended, the
“Credit Agreement”), other than some relating to
Paperchase. Such exceptions are not expected to interfere with
the operations of Paperchase or the Company in the ordinary
course of business.
2. A backstop purchase offer that will give the Company the
right but not the obligation, until January 15, 2009, to
require Pershing Square to purchase its Paperchase, Australia,
New Zealand and Singapore subsidiaries, as well as its
approximately 17% interest in Bookshop Acquisitions, Inc.
(Borders U.K.) after the Company has pursued a sale process to
maximize the value of those assets. Pershing Square’s
purchase obligation is at a price of $135.0 million (less
any debt attributable to those assets) and on customary terms to
be negotiated. Proceeds of any such purchase by Pershing Square
are to be first applied to repay amounts outstanding under the
$42.5 million term loan. Although the Company believes that
these businesses are worth substantially more than the backstop
purchase offer price, the relative certainty of this arrangement
provides the Company with valuable flexibility to pursue
strategic alternatives. The Company has retained the right, in
its sole discretion, to forego the sale of these assets or to
require Pershing Square to consummate the transaction. Pershing
Square has no right of first refusal or other preemptive right
with respect to the sale of these businesses by the Company to
other parties.
3. The issuance to Pershing Square of 9.55 million
warrants to purchase the Company’s common stock at $7.00
per share. The Company is also required to issue an additional
5.15 million warrants to Pershing Square if any of the
following three conditions occurs: the Company requires Pershing
Square to purchase its international subsidiaries as described
in (2) above, a definitive agreement relating to certain
business combinations involving the Company is not signed by
October 1, 2008, or the Company terminates the strategic
alternatives process. The warrants will be cash-settled until
the issuance of the underlying shares is approved by the
Company’s shareholders, and in certain other circumstances.
The warrants feature full anti-dilution protection, including
preservation of the right to convert into the same percentage of
the fully-diluted shares of the Company’s common stock that
would be outstanding on a pro forma basis giving effect to the
issuance of the shares underlying the warrants at all times, and
“full-ratchet” adjustment to the exercise price for
future issuances (in each case, subject to certain exceptions),
and adjustments to compensate for all dividends and
distributions.
For accounting purposes, the Company allocated the proceeds from
the financing agreement with Pershing Square between the senior
secured term loan, the warrants, and the backstop purchase offer
based upon their relative fair market values. This will result
in the recognition of a discount on the secured term loan of
approximately $7.2 million, which will be amortized to
earnings over the term of the loan using the effective interest
method. The warrants will be recorded as liabilities at their
fair market value of $40.8 million, with subsequent changes
in their fair market value to be recognized in earnings. An
intangible asset in the amount of approximately
$35.6 million related to the backstop purchase offer will
also be recorded, and will be expensed if it becomes probable
that the backstop purchase offer will not be executed. If the
backstop purchase offer is executed, the intangible asset will
be added to the carrying value of the related businesses, and
expensed upon sale.
The Company plans to execute its strategic initiatives
principally with funds generated from operations, financing
through the Credit Agreement, the Pershing Square financing
previously discussed, or, if applicable, as it relates to the
backstop purchase offer, alternative dispositions of the foreign
subsidiaries, and other sources of new financing as deemed
necessary and available. Based on current internal sales
projections, the Company believes that the financing agreement
with Pershing Square will allow the Company to be fully funded
during fiscal 2008, where absent these measures, liquidity
issues may otherwise have arisen during the year.
Off-Balance
Sheet Arrangements
The Company is the primary beneficiary of two variable interest
entities (“VIEs”) due to the Company’s guarantee
of the debt of these entities. As a result, the Company
consolidates these VIEs and has recorded property and equipment,
net of accumulated depreciation, of $4.9 million, long-term
debt (including current portion) of $5.2 million and
minority interest of $0.3 million at February 2, 2008.
As discussed previously, the Company guarantees the leases of
four stores that it previously owned in the U.K. and Ireland.
The maximum potential liability under these lease guarantees is
approximately $193.2 million. The leases provide for
periodic rent reviews, which could increase the Company’s
potential liability. One of the applicable lease guaranty
agreements provides that the guaranty will automatically
terminate if Borders U.K. Limited achieves a specified level of
net assets. This potential limitation has not been considered in
calculating the maximum exposures set forth above. In addition,
in the event of a default under the primary leases and the
landlord does not require the Company to take a new
(replacement) lease, the landlord would have an obligation to
attempt to re-lease the premises, which could further reduce the
Company’s potential liability. The Company has recorded a
contingent liability of approximately $5.8 million based
upon the likelihood that the Company will be required to perform
under the guarantees.
The Company also has indemnified the U.K. and Ireland operations
from the tax liability, if any, imposed upon it as a result of
the forgiveness of the portions of intercompany indebtedness
owing from the Company. The maximum potential liability is
approximately $10.7 million, and the Company has recorded a
liability of approximately $4.4 million based upon the
likelihood that the Company will be required to perform under
the indemnification.
Significant
Contractual Obligations
The following table summarizes the Company’s significant
contractual obligations at February 2, 2008, excluding
interest expense:
Fiscal Year
2013 and
(dollars in millions)
2008
2009-2010
2011-2012
Thereafter
Total
Credit Agreement borrowings
$
547.3
$
—
$
—
$
—
$
547.3
Operating lease obligations
340.3
622.3
563.5
1,590.7
3,116.8
Debt of consolidated VIEs
0.2
0.4
0.5
4.1
5.2
Other borrowings
1.1
0.4
—
—
1.5
Total
$
888.9
$
623.1
$
564.0
$
1,594.8
$
3,670.8
The table above excludes any amounts related to the payment of
uncertain tax positions as the Company cannot make a reasonably
reliable estimate of the periods of cash settlements with the
respective taxing authorities. Excluding interest and penalties,
these uncertain tax positions total $18.9 million at
February 2, 2008.
The Company’s business is highly seasonal, with sales
significantly higher during the fourth quarter, which includes
the holiday selling season.
Fiscal 2007
(dollars in millions)
Q1
Q2
Q3
Q4
Sales
$
792.3
$
852.7
$
805.2
$
1,324.6
Operating income (loss)
(40.1
)
(22.2
)
(56.2
)
125.1
% of full year:
Sales
21.0
%
22.6
%
21.3
%
35.1
%
Fiscal 2006
(dollars in millions)
Q1
Q2
Q3
Q4
Sales
$
784.6
$
780.0
$
764.6
$
1,354.6
Operating income (loss)
(18.1
)
(9.2
)
(48.0
)
83.8
% of full year:
Sales
21.3
%
21.2
%
20.7
%
36.8
%
Critical
Accounting Policies and Estimates
In the ordinary course of business, the Company has made a
number of estimates and assumptions relating to the reporting of
results of operations and financial condition in the preparation
of its financial statements in conformity with accounting
principles generally accepted in the United States. Actual
results could differ from those estimates under different
assumptions and conditions. The Company believes that the
following discussion addresses the Company’s most critical
accounting policies and estimates.
Asset
Impairments
The carrying value of long-lived store assets is evaluated
whenever changes in circumstances indicate the carrying amount
of such assets may not be recoverable. In performing such
reviews for recoverability, the Company compares the expected
cash flows to the carrying value of long-lived assets for the
applicable stores. If the expected future cash flows are less
than the carrying amount of such assets, the Company recognizes
an impairment loss for the difference between the carrying
amount and the estimated fair value. Expected future cash flows,
which are estimated over the assets’ remaining useful
lives, contain estimates of sales and the impact those future
sales will have upon cash flows. Future sales are estimated
based, in part, upon a projection of each store’s sales
trend based on the actual sales of the past several years.
Additionally, each store’s future cash contribution is
based upon the most recent year’s actual cash contribution,
but is adjusted based upon projected trends in sales and store
operating costs. Fair value is estimated using expected
discounted future cash flows, with the discount rate
approximating the Company’s borrowing rate. Significant
deterioration in the performance of the Company’s stores
compared to projections could result in significant additional
asset impairments.
The carrying value of non-store long-lived assets is also
evaluated whenever changes in circumstances indicate the
carrying amount of such assets may not be recoverable. Expected
future cash flows, which are estimated over each asset’s
remaining useful life, contain estimates of future cash flows
based on projected trends in sales and operating costs. Fair
value is estimated using expected discounted future cash flows,
with the discount rate approximating the Company’s
borrowing rate.
Goodwill
Impairment
Pursuant to the provisions of Statement of Financial Accounting
Standards No. 142, “Goodwill and Other Intangible
Assets” (“FAS 142”), the Company’s
goodwill is tested for impairment annually (or more
frequently if impairment indicators arise). Pursuant to
FAS 142, a reporting unit is defined as an operating
segment or one level below an operating segment (a component),
for which discrete financial information is available and
reviewed by management. The Company’s reporting units were
identified as the operating segments of Domestic Borders
superstores and Waldenbooks Specialty Retail, and the regional
components of the International operating segment. The carrying
amounts of the net assets of the applicable reporting units
(including goodwill) are compared to the estimated fair values
of those reporting units. Fair value is principally estimated
using a discounted cash flow model which depends on, among other
factors, estimates of future sales and expense trends, liquidity
and capitalization. The discount rate used approximates the
weighted average cost of capital of a hypothetical third party
buyer. Changes in any of the assumptions underlying these
estimates may result in the future impairment of goodwill.
If an impairment is detected due to the carrying value of the
reporting unit being greater than the fair value, FAS 142
requires that an analysis be completed to determine the amount
of the goodwill impairment. To determine the amount of the
goodwill impairment, the fair value of the reporting unit is
allocated to each of the reporting unit’s assets and
liabilities. The amount of fair value remaining (if any) after
this allocation is then compared to the recorded value of
goodwill. If the remaining fair value exceeds the recorded value
of goodwill, no impairment exists. If, however, the remaining
fair value is less than the recorded value of goodwill, goodwill
must be reduced to the amount of remaining fair value, with the
reduction being recorded as an expense on the statement of
operations.
Inventory
The carrying value of the Company’s inventory is affected
by reserves for shrinkage, markdowns and non-returnable
inventory. Projections of shrinkage are based upon the results
of regular, periodic physical counts of the Company’s
inventory. The Company’s shrinkage reserve is adjusted as
warranted based upon the trends yielded by the physical counts.
Reserves for non-returnable inventory are based upon the
Company’s history of liquidating non-returnable inventory.
The markdown percentages utilized in developing the reserve are
evaluated against actual, ongoing markdowns of non-returnable
inventory to ensure that they remain consistent. Significant
differences between future experience and that which was
projected (for either the shrinkage or non-returnable inventory
reserves) could affect the recorded amounts of inventory and
cost of sales.
The Company includes certain distribution and other expenses in
its inventory costs, particularly freight, distribution payroll,
and certain occupancy expenses. In addition, certain selling,
general and administrative expenses are included in inventory
costs. These amounts totaled approximately $104.8 million
and $107.6 million as of February 2, 2008 and
February 3, 2007, respectively. The extent to which these
costs are included in inventory is based on certain estimates of
space and labor allocation.
Leases
All leases are reviewed for capital or operating classification
at their inception under the guidance of Statement of Financial
Accounting Standards No. 13, “Accounting for
Leases” (“FAS 13”), as amended. The Company
uses its incremental borrowing rate in the assessment of lease
classification.
Gift
Cards
The Company sells gift cards to its customers and records a
liability for the face value of all certificates issued and
unredeemed within the last 12 months. For certificates
older than 12 months, the Company records a liability for a
portion of the certificates’ face value based upon
historical redemption trends, and records the related income as
a component of “Other revenue”. To the extent that
future redemption patterns differ from those historically
experienced, significant variations in the recorded reserves may
result.
Advertising
and Vendor Incentive Programs
The Company receives payments and credits from vendors pursuant
to co-operative advertising programs, shared markdown programs,
purchase volume incentive programs and magazine slotting
programs. These
programs continue to be beneficial for both the Company and
vendors, and the Company expects continued participation in
these types of programs. Changes in vendor participation levels,
as well as changes in the volume of merchandise purchased, among
other factors, could adversely impact the Company’s results
of operations and liquidity.
Pursuant to co-operative advertising programs offered by
vendors, the Companycontracts with vendors to promote
merchandise for specified time periods. Pursuant to the
provisions of Emerging Issues Task Force Issue
No. 02-16,
“Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor”
(“EITF 02-16”),
vendor consideration which represents a reimbursement of
specific, incremental, identifiable costs is included in the
“Selling, general and administrative” line on the
consolidated statements of operations, along with the related
costs, in the period the promotion takes place. Consideration
which exceeds such costs is classified as a reduction of the
“Cost of merchandise sold” line on the consolidated
statements of operations. Additionally, the Company has recorded
$2.6 million and $1.2 million of vendor consideration
as a reduction to its inventory balance at February 2, 2008
and February 3, 2007, respectively.
The Company also receives credits from vendors pursuant to
shared markdown programs, purchase volume programs, and magazine
slotting programs. Credits received pursuant to these programs
are classified in the “Cost of merchandise sold” line
on the consolidated statements of operations, and are recognized
upon certain product volume thresholds being met or product
placements occurring.
Income
Taxes
The Company must make certain estimates and judgments in
determining income tax expense for financial statement purposes.
These estimates and judgments occur in the calculation of
certain tax assets and liabilities, which arise from differences
in the timing of recognition of revenue and expense for tax and
financial statement purposes. In addition, the calculation of
the Company’s tax liabilities involves dealing with
uncertainties in the application of complex tax regulations. The
Company recognizes liabilities for anticipated tax issues in the
United States and other tax jurisdictions based on an estimate
of whether, and to the extent which, additional taxes will be
due. The Company recognizes the tax effects of a position only
if it is “more-likely-than-not” to be sustained based
solely on its technical merits as of the reporting date. The
more-likely-than-not threshold represents a positive assertion
by management that a company is entitled to the economic
benefits of a tax position. If a tax position is not considered
more-likely-than-not to be sustained based solely on its
technical merits, no benefits of the position are to be
recognized. Moreover, the more-likely-than-not threshold must
continue to be met in each reporting period to support continued
recognition of a benefit.
The Company also records a valuation allowance against deferred
tax assets arising from certain net operating losses when it is
more likely than not that some portion of all of such net
operating losses will not be realized. The Company’s
effective tax rate in a given financial statement period may be
materially impacted by changes in the mix and level of earnings,
changes in the expected outcome of audit controversies or
changes in the deferred tax valuation allowance.
New
Accounting Guidance
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, “Fair Value
Measurements” (“FAS 157”). FAS 157
provides guidance for using fair value to measure assets and
liabilities and only applies when other standards require or
permit the fair value measurement of assets and liabilities.
FAS 157 does not expand the use of fair value measurement.
FAS 157 is effective for fiscal years beginning after
November 15, 2007. The Company does not expect the adoption
of FAS 157 to have a material impact on its consolidated
financial position or results of operations.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities”
(“FAS 159”). FAS 159 allows companies to
elect to measure certain assets and liabilities at fair value
and is effective for fiscal years beginning after
November 15, 2007. The Company does not expect the adoption
of FAS 159 to have a material impact on its consolidated
financial position or results of operations.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141 (revised 2007), “Business
Combinations” (“FAS 141(R)”).
FAS 141(R) will significantly change the accounting for
business combinations in a number of areas, including the
treatment of contingent consideration, contingencies,
acquisition costs, in-process research and development and
restructuring costs. FAS 141(R) includes an amendment to
Statement of Financial Accounting Standards No. 109,
“Accounting for Income Taxes.” This statement is
effective for fiscal years beginning after December 15,2008. The Company does not expect the adoption of
FAS 141(R) to have a material impact on its consolidated
financial position or results of operations.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 160, “Noncontrolling
Interests in Consolidated Financial Statements, an amendment of
ARB No. 51” (“FAS 160”). FAS 160
will revise the treatment of noncontrolling interests in
consolidated balance sheets and consolidated statements of
income. Noncontrolling interests will become a part of
stockholder’s equity in the consolidated balance sheets and
consolidated income statements will report income attributable
to the Company and to noncontrolling interests separately.
FAS 160 is effective for fiscal years beginning after
December 15, 2008 and early adoption is prohibited. The
Company does not expect the adoption of FAS 160 to have a
material impact on its consolidated financial position or
results of operations.
Related
Party Transactions
The Company has not engaged in any related party transactions,
with the exception of the financing agreement with Pershing
Square Capital Management, L.P., discussed on page 38,
which would have had a material effect on the Company’s
financial position, cash flows, or results of operations.
Item 7A.
Quantitative
and Qualitative Disclosures About Market Risk
The Company is exposed to market risk during the normal course
of business from changes in interest rates and foreign currency
exchange rates. The exposure to these risks is managed though a
combination of normal operating and financing activities, which
may include the use of derivative financial instruments in the
form of interest rate swaps and forward foreign currency
exchange contracts.
Interest
Rate Risk
The Company is subject to risk resulting from interest rate
fluctuations, as interest on certain of the Company’s
borrowings is based on variable rates. The Company’s
objective in managing its exposure to interest rate fluctuations
is to limit the impact of interest rate changes on earnings and
cash flows and to lower its overall borrowing costs.
Historically, the Company had utilized interest rate swaps to
achieve this objective, effectively converting a portion of its
variable rate exposure to fixed interest rates. Currently, the
Company has no such agreements in effect.
LIBOR is the rate upon which the Company’s variable rate
debt is principally based. If LIBOR were to increase 1% for the
full year of 2008 as compared to 2007, the Company’s
after-tax losses would increase approximately $3.4 million
based on the Company’s outstanding debt as of
February 2, 2008.
Foreign
Currency Exchange Risk
The Company is subject to foreign currency exchange exposure for
operations with assets and liabilities that are denominated in
currencies other than U.S. dollars. On a normal basis, the
Company does not attempt to hedge the foreign currency
translation fluctuations in the net investments in its foreign
subsidiaries. The Company does, from time to time, enter into
short-term forward exchange contracts to sell or purchase
foreign currencies at specified rates based on estimated foreign
currency cash flows. It is the policy of the Company not to
purchase financial
and/or
derivative instruments for speculative purposes. At
February 2, 2008, the Company had no foreign currency
forward contracts outstanding.
Liabilities, Minority Interest and Stockholders’
Equity
Current liabilities:
Short-term borrowings and current portion of long-term debt
$
548.6
$
502.0
Trade accounts payable
550.3
562.0
Accrued payroll and other liabilities
344.6
336.9
Taxes, including income taxes
18.3
61.0
Deferred income taxes
6.0
16.1
Current liabilities of discontinued operations
—
117.9
Total current liabilities
1,467.8
1,595.9
Long-term debt
5.4
5.2
Other long-term liabilities
350.4
313.2
Noncurrent liabilities of discontinued operations
—
55.1
Contingencies (Note 6)
—
—
Total liabilities
1,823.6
1,969.4
Minority interest
2.2
2.0
Total liabilities and minority interest
1,825.8
1,971.4
Stockholders’ equity:
Common stock, 300,000,000 shares authorized; 58,794,224 and
58,476,306 shares issued and outstanding at
February 2, 2008 and February 3, 2007, respectively
184.0
175.5
Accumulated other comprehensive income
42.4
28.5
Retained earnings
250.5
438.0
Total stockholders’ equity
476.9
642.0
Total liabilities, minority interest and stockholders’
equity
$
2,302.7
$
2,613.4
See accompanying notes to consolidated financial statements.
Nature of
Business: Borders
Group, Inc., through its subsidiaries, Borders, Inc.
(“Borders”), Walden Book Company, Inc.
(“Waldenbooks”), Borders Australia Pty Limited and
others (individually and collectively, the “Company”),
is the second largest operator of book, music and movie
superstores and the largest operator of mall-based bookstores in
the world based upon both sales and number of stores. At
February 2, 2008, the Company operated 541 superstores
under the Borders name, including 509 in the United States, 22
in Australia, five in New Zealand, three in Puerto Rico, and two
in Singapore. The Company also operated 490 mall-based and other
bookstores, including stores operated under the Waldenbooks,
Borders Express and Borders Outlet names, as well as
Borders-branded airport stores. In addition, the Company owned
and operated United Kingdom-based Paperchase Products Limited
(“Paperchase”), a designer and retailer of stationery,
cards and gifts. As of February 2, 2008, Paperchase
operated 112 stores, primarily in the United Kingdom, and
Paperchase shops have been added to 319 domestic Borders
superstores.
Principles of
Consolidation: The
consolidated financial statements include the accounts of the
Company and all majority-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.
The results of Borders Ireland Limited, Books etc., and U.K.
Superstores are presented as discontinued operations for all
periods presented.
Use of
Estimates: The
preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Fiscal
Year: Effective
with respect to fiscal 2005, the Company’s fiscal year ends
on the Saturday closest to the last day of January. Fiscal 2007
consisted of 52 weeks, and ended on February 2, 2008.
Fiscal 2006 consisted of 53 weeks and ended
February 3, 2007. Fiscal 2005 consisted of 53 weeks
and ended January 28, 2006. References herein to years are
to the Company’s fiscal years.
Foreign Currency
and Translation of Foreign
Subsidiaries: The
functional currencies of the Company’s foreign operations
are the respective local currencies. All assets and liabilities
of the Company’s foreign operations are translated into
U.S. dollars at fiscal period-end exchange rates. Income
and expense items are translated at average exchange rates
prevailing during the year. The resulting translation
adjustments are recorded as a component of stockholders’
equity and comprehensive income. Excluding discontinued
operations, foreign currency transaction gains/(losses) were
$1.4, $(0.1), and $1.4 in 2007, 2006, and 2005, respectively.
Cash and
Equivalents: Cash
and equivalents include short-term investments with original
maturities of 90 days or less.
Inventories: Merchandise
inventories are valued on a
first-in,
first-out (“FIFO”) basis at the lower of cost or
market using the retail inventory method. The Company includes
certain distribution and other expenses in its inventory costs,
totaling $104.8 and $107.6 as of February 2, 2008, and
February 3, 2007, respectively.
Property and
Equipment: Property
and equipment are recorded at cost, including capitalized
interest, and depreciated over their estimated useful lives on a
straight-line basis for financial statement purposes and on
accelerated methods for income tax purposes. Store properties
are leased and improvements are amortized over the shorter of
their estimated useful lives or the initial term of the related
lease, generally over three to 20 years. Other annual rates
used in computing depreciation for financial statement purposes
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
approximate 3% for buildings and 10% to 33% for other fixtures
and equipment. Amortization of assets under capital leases is
included in depreciation expense.
The carrying value of long-lived store assets is evaluated
whenever changes in circumstances indicate the carrying amount
of such assets may not be recoverable. In performing such
reviews for recoverability, the Company compares the expected
cash flows to the carrying value of long-lived assets for the
applicable stores. If the expected future cash flows are less
than the carrying amount of such assets, the Company recognizes
an impairment loss for the difference between the carrying
amount and the estimated fair value. Expected future cash flows,
which are estimated over the assets’ remaining useful
lives, contain estimates of sales and the impact those future
sales will have upon cash flows. Future sales are estimated
based, in part, upon a projection of each store’s sales
trend based on the actual sales of the past several years.
Additionally, each store’s future cash contribution is
based upon the most recent year’s actual cash contribution,
but is adjusted based upon projected trends in sales and store
operating costs. Fair value is estimated using expected
discounted future cash flows, with the discount rate
approximating the Company’s borrowing rate. Significant
deterioration in the performance of the Company’s stores
compared to projections could result in significant additional
asset impairments.
The carrying value of non-store long-lived assets is also
evaluated whenever changes in circumstances indicate the
carrying amount of such assets may not be recoverable. Expected
future cash flows, which are estimated over each asset’s
remaining useful life, contain estimates of future cash flows
based on projected trends in sales and operating costs. Fair
value is estimated using expected discounted future cash flows,
with the discount rate approximating the Company’s
borrowing rate.
Goodwill: Pursuant
to the provisions of Statement of Financial Accounting Standards
No. 142, “Goodwill and Other Intangible Assets”
(“FAS 142”), the Company’s goodwill is
tested for impairment annually (or more frequently if impairment
indicators arise). Pursuant to FAS 142, a reporting unit is
defined as an operating segment or one level below an operating
segment (a component), for which discrete financial information
is available and reviewed by management. The Company’s
reporting units were identified as the operating segments of
Domestic Borders superstores and Waldenbooks Specialty Retail,
and the regional components of the International operating
segment. The carrying amounts of the net assets of the
applicable reporting units (including goodwill) are compared to
the estimated fair values of those reporting units. Fair value
is principally estimated using a discounted cash flow model
which depends on, among other factors, estimates of future sales
and expense trends, liquidity and capitalization. The discount
rate used approximates the weighted average cost of capital of a
hypothetical third party buyer. Changes in any of the
assumptions underlying these estimates may result in the future
impairment of goodwill.
If an impairment is detected due to the carrying value of the
reporting unit being greater than the fair value, FAS 142
requires that an analysis be completed to determine the amount
of the goodwill impairment. To determine the amount of the
goodwill impairment, the fair value of the reporting unit is
allocated to each of the reporting unit’s assets and
liabilities. The amount of fair value remaining (if any) after
this allocation is then compared to the recorded value of
goodwill. If the remaining fair value exceeds the recorded value
of goodwill, no impairment exists. If, however, the remaining
fair value is less than the recorded value of goodwill, goodwill
must be reduced to the amount of remaining fair value, with the
reduction being recorded as an expense on the statement of
operations.
Leases: All
leases are reviewed for capital or operating classification at
their inception under the guidance of Statement of Financial
Accounting Standards No. 13, “Accounting for
Leases” (“FAS 13”), as amended. The Company
uses its incremental borrowing rate in the assessment of lease
classification, and defines initial lease term to include the
construction build-out period, but to exclude lease extension
period(s). The Company conducts operations primarily under
operating leases. For leases that contain rent
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
escalations, the Company records the total rent payable during
the lease term, as defined above, on a straight-line basis over
the term of the lease and records the difference between the
rents paid and the straight-line rent as a deferred rent
liability, under “Other long-term liabilities” on the
Company’s consolidated balance sheets, totaling $143.3 and
$140.4 as of February 2, 2008 and February 3, 2007,
respectively.
Landlord
Allowances: The
Company classifies landlord allowances as deferred rent
liabilities, under “Other long-term liabilities” on
the Company’s consolidated balance sheets, totaling $123.0
and $119.2 as of February 2, 2008 and February 3,2007, respectively, in accordance with the provisions of FASB
Technical
Bulletin No. 88-1,
“Issues Relating to Accounting for Leases” (“FTB
88-1”),
and as an operating activity on the Company’s consolidated
statements of cash flows. Also in accordance with the provisions
of FTB 88-1,
the Company amortizes landlord allowances over the life of the
initial lease term, and classifies this amortization as a
reduction of occupancy expense, included as a component of
“Cost of merchandise sold (includes occupancy)” in the
Company’s consolidated statements of operations.
Financial
Instruments: The
recorded values of the Company’s financial instruments,
which include accounts receivable, accounts payable and
indebtedness, approximate their fair values.
Pursuant to the provisions of Statement of Financial Accounting
Standards No. 133, “Accounting For Derivative
Instruments and Hedging Activities”
(“FAS 133”), as amended, the Company recognizes
the fair value of its derivatives on the consolidated balance
sheets.
Accumulated Other
Comprehensive Income
(Loss): Accumulated
other comprehensive income (loss) for the Company includes
exchange rate fluctuations. Disclosure of comprehensive income
(loss) is incorporated into the consolidated statements of
stockholders’ equity for all years presented. Accumulated
other comprehensive income (loss) includes $42.4 and $28.5 for
exchange rate fluctuations as of February 2, 2008 and
February 3, 2007, respectively.
Revenue: Revenue
is recognized, net of estimated returns, at the point of sale
for all of the Company’s segments. Revenue excludes sales
taxes and any value-added taxes.
The Company, through its subsidiaries, has agreements with
Amazon.com, Inc. (“Amazon”) to operate Web sites
utilizing the Borders.com and Waldenbooks.com URLs (the
“Web Sites”). Under these agreements, which expire in
early 2008, Amazon is the merchant of record for all sales made
through the Web Sites, and determines all prices and other terms
and conditions applicable to such sales. Amazon is responsible
for the fulfillment of all products sold through the Web Sites
and retains all payments from customers. The Company receives
referral fees for products purchased through the Web Sites. The
agreements contain mutual indemnification provisions, including
provisions that define between the parties the responsibilities
with respect to any liabilities for sales, use and similar
taxes, including penalties and interest, associated with
products sold on the Web Sites. Currently, taxes are not
collected with respect to products sold on the Web Sites except
in certain states.
Pre-Opening
Costs:The Company
expenses pre-opening costs as incurred in accordance with
SOP 98-5,
“Reporting on the Costs of
Start-Up
Activities.”
Closing
Costs: Pursuant to
the provisions of Statement of Financial Accounting Standards
No. 146, “Accounting for Costs Associated with Exit or
Disposal Activities” (“FAS 146”), the
Company expenses when incurred all amounts related to the
discontinuance of operations of stores identified for closure.
Borders
Rewards: The
Company launched the Borders Rewards loyalty program during the
first quarter of 2006. Membership in Borders Rewards is free,
with no enrollment costs or annual fees. Five percent of all
qualifying purchases made by members throughout 2006 were
credited to personal Holiday Savings accounts, which were used
on holiday purchases made from November 15, 2006 through
January 31, 2007. Beginning April 12, 2007, the
Company replaced the program’s previous member benefits
with Borders
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
Bucks. Members can earn Borders Bucks in increments of $5 for
each cumulative $150 they spend on qualifying purchases in a
calendar year at Borders and Waldenbooks stores nationwide.
Borders Bucks expire 30 days after receipt by the member if
not redeemed. The Company accrues the full cost of all rewards
as they are earned by members. This cost is categorized as
“Cost of merchandise sold” on the consolidated
statements of operations for the applicable periods.
Gift
Cards:The Company
sells gift cards to its customers and records a liability for
the face value of all certificates issued and unredeemed within
the last 12 months. For certificates older than
12 months, the Company records a liability for a portion of
the certificates’ face value based upon historical
redemption trends, and records the related income as a component
of “Other revenue” in the Company’s consolidated
statements of operations. The Company has included the liability
for gift cards as a component of “Accrued payroll and other
liabilities” on its consolidated balance sheets, totaling
$145.2 and $147.5 as of February 2, 2008 and
February 3, 2007, respectively.
Advertising
Costs:The Company
expenses advertising costs as incurred, and recorded
approximately $35.8, $36.8 and $35.4 of gross advertising
expenses in 2007, 2006 and 2005, respectively.
The Company receives payments and credits from vendors pursuant
to co-operative advertising programs, shared markdown programs,
purchase volume incentive programs and magazine slotting
programs.
Pursuant to co-operative advertising programs offered by
vendors, the Companycontracts with vendors to promote
merchandise for specified time periods. Pursuant to the
provisions of Emerging Issues Task Force Issue
No. 02-16,
“Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor”
(“EITF 02-16”),
which the Company adopted effective January 1, 2003, vendor
consideration which represents a reimbursement of specific,
incremental, identifiable costs is included in the
“Selling, general and administrative” line on the
consolidated statements of operations, along with the related
costs, in the period the promotion takes place. As a percentage
of gross advertising expenses, such consideration totaled
approximately (58.7%), (55.8%) and (58.3%) in 2007, 2006, and
2005, respectively. Consideration that exceeds such costs is
classified as a reduction of the “Cost of merchandise
sold” line on the consolidated statements of operations.
Additionally, the Company recorded $2.6 and $1.2 of vendor
consideration as a reduction to its inventory balance at 2007
and 2006, respectively.
The Company also receives credits from vendors pursuant to
shared markdown programs, purchase volume programs, and magazine
slotting programs. Credits received pursuant to these programs
are classified in the “Cost of merchandise sold” line
on the consolidated statements of operations, and are recognized
upon certain product volume thresholds being met or product
placements occurring.
Advertising costs not part of the programs listed above are
included in the “Selling, general and administrative”
line of the consolidated statements of operations.
Income
Taxes: Income
taxes are accounted for in accordance with Statement of
Financial Accounting Standards No. 109, “Accounting
for Income Taxes” (“FAS 109”). FAS 109
requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary differences
between the book carrying amounts and the tax basis of assets
and liabilities. FAS 109 also requires that deferred tax
assets be reduced by a valuation allowance if it is more likely
than not that some portion of or all of the deferred tax asset
will not be realized.
The Company also applies the requirements of FASB Interpretation
No. 48, “Accounting for Uncertainty in Income
Taxes — an Interpretation of FASB Statement
No. 109” (“FIN 48”). FIN 48
requires that the tax effects of a position be recognized only
if it is “more-likely-than-not” to be sustained based
solely on its technical merits as of the reporting date. The
more-likely-than-not threshold represents a positive assertion
by management that a company is entitled to the economic
benefits of a tax position. If a tax position is not considered
more-likely-than-not to be sustained based solely on its
technical merits, no benefits of the
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
position are to be recognized. Moreover, the
more-likely-than-not threshold must continue to be met in each
reporting period to support continued recognition of a benefit.
The Company and its subsidiaries file separate foreign, state
and local income tax returns and, accordingly, provide for such
income taxes on a separate company basis.
Equity-Based
Compensation: Beginning
in 2006, the Company accounted for equity-based compensation in
accordance with the provisions of Statement of Financial
Accounting Standards No. 123 (revised 2004),
“Share-Based Payment” (“FAS 123(R)”).
The Company adopted FAS 123(R) using the modified
prospective method. Under the modified prospective method,
compensation cost is recognized for all share-based payments
granted after the adoption of FAS 123(R) and for all awards
granted to employees prior to the adoption date of
FAS 123(R) that remain unvested on the adoption date.
Accordingly, no restatements were made to prior periods. The
Company records compensation cost for equity-based compensation
in the “Selling, general and administrative” line of
the consolidated statements of operations.
Prior to 2006, the Company accounted for equity-based
compensation under the guidance of Accounting Principles Board
Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB No. 25”). As permitted, the
Company had adopted the disclosure-only option of Statement of
Financial Accounting Standards No. 123, “Accounting
for Stock Based Compensation” (“FAS 123”),
as amended by Statement of Financial Accounting Standards
No. 148, “Accounting for Stock-Based
Compensation — Transition and Disclosure.” The
following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value
recognition provisions of FAS 123 to stock-based employee
compensation during 2005:
2005
Net income, as reported
$
101.0
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects
0.9
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards, net of tax
1.8
Pro forma net income
$
100.1
Earnings per share:
Diluted — as reported
$
1.42
Diluted — pro forma
$
1.41
Basic — as reported
$
1.45
Basic — pro forma
$
1.43
See “Note 10 — Stock-Based Compensation
Plans” for further discussion of the Company’s
equity-based compensation plans.
New Accounting
Guidance: In
September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, “Fair Value
Measurements” (“FAS 157”). FAS 157
provides guidance for using fair value to measure assets and
liabilities and only applies when other standards require or
permit the fair value measurement of assets and liabilities.
FAS 157 does not expand the use of fair value measurement.
FAS 157 is effective for fiscal years beginning after
November 15, 2007. The Company does not expect the adoption
of FAS 157 to have a material impact on its consolidated
financial position or results of operations.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities”
(“FAS 159”). FAS 159 allows companies to
elect to measure certain assets and liabilities at fair value
and is effective for fiscal years beginning after
November 15, 2007. The Company does not expect the adoption
of FAS 159 to have a material impact on its consolidated
financial position or results of operations.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141 (revised 2007), “Business
Combinations” (“FAS 141(R)”).
FAS 141(R) will significantly change the accounting for
business combinations in a number of areas, including the
treatment of contingent consideration, contingencies,
acquisition costs, in-process research and development and
restructuring costs. FAS 141(R) includes an amendment to
Statement of Financial Accounting Standards No. 109,
“Accounting for Income Taxes.” This statement is
effective for fiscal years beginning after December 15,2008. The Company does not expect the adoption of
FAS 141(R) to have a material impact on its consolidated
financial position or results of operations.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 160, “Noncontrolling
Interests in Consolidated Financial Statements, an amendment of
ARB No. 51” (“FAS 160”). FAS 160
will revise the treatment of noncontrolling interests in
consolidated balance sheets and consolidated statements of
income. Noncontrolling interests will become a part of
stockholder’s equity in the consolidated balance sheets and
consolidated income statements will report income attributable
to the Company and to noncontrolling interests separately.
FAS 160 is effective for fiscal years beginning after
December 15, 2008 and early adoption is prohibited. The
Company does not expect the adoption of FAS 160 to have a
material impact on its consolidated financial position or
results of operations.
Reclassifications: Certain
prior year amounts have been reclassified to conform to current
year presentation.
NOTE 2 —
WEIGHTED-AVERAGE
SHARES OUTSTANDING
Weighted-average shares outstanding are calculated as follows
(thousands):
2007
2006
2005
Weighted-average common shares outstanding — basic
58,742
61,940
69,785
Dilutive effect of employee stock options
—
—
1,303
Weighted-average common shares outstanding — diluted
58,742
61,940
71,088
Unexercised employee stock options to purchase 0.3 million
and 1.5 million shares as of February 2, 2008 and
February 3, 2007 respectively were not included in the
fiscal 2007 and fiscal 2006 weighted-average shares outstanding
calculation because to do so would have been antidilutive, due
to the Company’s loss from continuing operations.
Unexercised employee stock options and unvested restricted share
units to purchase 3.6 million, 2.8 million, and
4.1 million common shares as of February 2, 2008,
February 3, 2007, and January 28, 2006, respectively,
were not included in the weighted-average shares outstanding
calculation because to do so would have been antidilutive, due
to the exercise price of these shares exceeding the
Company’s share price at the end of the respective fiscal
years.
NOTE 3 —
ASSET
IMPAIRMENTS AND OTHER WRITEDOWNS
Asset
Impairments: In
accordance with the provisions of FAS 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets,” the
Company evaluates the carrying values of long-lived assets
whenever changes in circumstances indicate the carrying amounts
of such assets may not be recoverable. When an indicator of
impairment is present, the Company evaluates the recoverability
of the affected assets.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
In 2007, assets of underperforming domestic Borders superstores
were tested for impairment and as a result, the Company recorded
a charge of $5.5. The Waldenbooks Specialty Retail segment has
experienced declining sales and profits over the past several
years. For the second year in a row, the segment generated an
operating loss in 2007, and the Company tested all assets of the
segment for impairment. This resulted in a fourth quarter 2007
charge of $0.7 related to underperforming Waldenbooks Specialty
Retail stores. In the International segment, the Company
recorded an asset impairment charge of $0.5 related to one
Borders store in Puerto Rico.
In 2006, assets of underperforming domestic Borders superstores
were tested for impairment and as a result, the Company recorded
a charge of $9.0. The Waldenbooks Specialty Retail segment has
experienced declining sales and profits over the past several
years. For the first time in 2006, the segment generated an
operating loss, and the Company tested all assets of the segment
for impairment. This resulted in a fourth quarter 2006 charge of
$10.1 related to underperforming Waldenbooks Specialty Retail
stores and a $34.3 charge related to Waldenbooks Specialty
Retail’s merchandising system.
In 2005, the Company recorded a charge of $2.6 related to the
impairment of certain long-lived assets (primarily leasehold
improvements, furniture, and fixtures), consisting of $2.1
related to underperforming domestic Borders superstores and $0.5
related to underperforming Waldenbooks Specialty Retail stores.
The charges taken for these impairments are categorized as
“Asset impairments and other writedowns” on the
consolidated statements of operations.
Store
Closings: In
accordance with the provisions of FAS 146, “Accounting
for Costs Associated with Exit or Disposal Activities,” the
Company expenses when incurred all amounts related to the
discontinuance of operations of stores identified for closure.
These expenses typically pertain to inventory markdowns, asset
impairments, and store payroll and other costs. When the Company
closes any of its stores, the inventory of the closed stores is
either returned to vendors or marked down and sold. Stores’
leasehold improvements, furniture, fixtures and equipment are
generally discarded or sold for nominal amounts.
Borders superstores closed during 2007 averaged approximately
25 employees per store and Waldenbooks Specialty Retail
stores closed during 2007 averaged between five to seven
employees per store, who have been or will be displaced by the
closures, with the majority being transferred to other domestic
Borders superstore or Waldenbooks Specialty Retail locations.
Those employees not transferred are eligible for involuntary
termination benefits, but the total amount of these benefits for
the stores affected by the store closures is not significant.
During 2007, the Company recorded a $6.4 charge for the closing
costs of its stores, consisting of the following:
$5.6 related to the closure of 8 domestic Borders
superstores, $0.7 related to the closure of 75 Waldenbooks
Specialty Retail stores and $0.1 related to related to one
Borders store in Australia which was damaged by a flood but not
closed. The charge for all segments consisted primarily of asset
impairments.
During 2006, the Company recorded a $7.2 charge for the closing
costs of its stores, consisting of the following: $4.1 relating
to the closure of five domestic Borders superstores, and $3.1
relating to the closure of 124 Waldenbooks Specialty Retail
stores. The charge for Borders consisted primarily of asset
impairments, and the charge for Waldenbooks Specialty Retail
included $0.8 of asset impairments and $2.3 of store payroll and
other costs.
During 2005, the Company recorded a $2.3 charge for the closing
costs of its stores, consisting of the following: $1.0 relating
to the closure of two Borders stores, and $1.3 relating to the
closure of 50 Waldenbooks Specialty Retail stores (net of a $0.1
adjustment of the prior year reserve resulting from actual costs
differing from estimates). The charge for Borders consisted
primarily of asset impairments,
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
and the charge for Waldenbooks Specialty Retail included $0.4 of
asset impairments and $0.9 of store payroll and other costs.
Asset impairment and store payroll costs related to store
closings are categorized as “Asset impairments and other
writedowns” on the consolidated statements of operations.
The following table summarizes the sales and operating loss for
the domestic Borders superstores closed in each of the following
fiscal years:
2007
2006
2005
Sales
$
28.0
$
6.9
$
7.2
Operating loss
(3.8
)
(2.0
)
(2.2
)
The following table summarizes the sales and operating loss for
the Waldenbooks Specialty Retail stores closed in each of the
following fiscal years:
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
Deferred tax assets and liabilities resulted from the following:
2007
2006
Deferred tax assets
Accruals and other current liabilities
$
8.9
$
7.9
Deferred revenue
13.3
8.6
Other long-term liabilities
3.4
2.6
Deferred compensation
4.3
2.0
Deferred rent
57.7
59.3
State deferred tax assets
8.2
9.5
Foreign deferred tax assets
18.1
13.5
Asset impairments and other writedowns
19.1
21.8
Valuation allowance
(6.5
)
(14.6
)
Total deferred tax assets
126.5
110.6
Deferred tax liabilities
Inventory
18.4
18.6
Property and equipment
56.2
51.6
Foreign deferred tax liabilities
5.4
2.8
Total deferred tax liabilities
80.0
73.0
Net deferred tax assets (liabilities)
$
46.5
$
37.6
The Company has tax net operating loss carryforwards from
continuing operations in foreign jurisdictions totaling
$10.1 as of February 2, 2008, $18.1 as of
February 3, 2007, and $18.7 as of January 28,2006. These losses have an indefinite carryforward period. The
Company has established a valuation allowance to reflect the
uncertainty of realizing a portion of the benefits of these net
operating losses and deferred assets in foreign jurisdictions.
Consolidated domestic income (loss) from continuing operations
before taxes was $(46.1) in 2007, $(23.2) in 2006, and
$172.4 in 2005. The corresponding amounts for foreign
operations were $9.8 in 2007, $2.0 in 2006 and
$(15.6) in 2005.
With the exception of the Company’s Singapore subsidiary,
undistributed earnings of foreign subsidiaries are considered to
be permanently reinvested outside the United States. Deferred
U.S. income taxes are not provided on undistributed
earnings considered permanently reinvested. Cumulative foreign
earnings considered permanently reinvested totaled $52.5 as
of February 2, 2008 and $53.6 as of February 3,2007.
The Company adopted FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes — an
Interpretation of FASB Statement No. 109”
(FIN 48), as amended, as of the beginning of the current
fiscal year. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized under FAS 109. Upon
adoption, the Company recognized an additional
$4.2 liability for uncertain tax positions, which was
accounted for as a reduction to beginning retained earnings. The
adoption of FIN 48 also resulted in the reclassification of
$7.2 from current taxes payable to non-current accrued
liabilities, based upon management’s estimate of when these
liabilities will be settled.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
As of the beginning of the year, total uncertain tax positions,
adjusted for the impact of the adoption of FIN 48, totaled
$8.4. As of February 2, 2008 this balance increased to
$18.9. The increase in the liability for income taxes associated
with uncertain tax positions of $10.5 relates to
uncertainty with respect to ultimately realizing the full
benefit of certain foreign and domestic tax positions. This
increase was partially offset by the impact of audit settlements
and statute of limitation expirations. These balances represent
the total amount of uncertain tax positions that, if recognized,
would favorably affect the effective tax rate.
The balance of unrecognized tax benefits we have provided are as
follows:
The current year increase in unrecognized tax benefits is
largely related to the impact of discontinued operations.
Although these unrecognized benefits originated as a result of
discontinued operations, the Company retains the associated
liability. An estimate of the range of reasonably possible
change in our unrecognized tax benefits within 12 months of
our fiscal year ended February 2, 2008 cannot be made at
this time.
The Company recognizes interest and penalties related to
unrecognized tax benefits in its income tax provision. For the
year ended February 2, 2008, we recorded a net tax benefit
of $0.8 for tax related interest and penalties in the
consolidated statement of operations. As of February 2,2008, we recorded a liability of $5.9 for the payment of
tax related interest and penalties in the Company’s
consolidated balance sheets.
A number of the Company’s tax returns remain subject to
examination by taxing authorities. These include federal tax
returns for 2004 through 2006, tax returns in certain states for
1996 through 2006, and tax returns in certain foreign
jurisdictions for 1999 through 2006.
NOTE 6 —
CONTINGENCIES
Litigation: Two
former employees, individually and on behalf of a purported
class consisting of all current and former employees who work or
worked as Inventory Managers or Sales Managers in Borders stores
in the State of California at any time from September 30,2001 through the trial date, have filed an action against the
Company in the Superior Court of California for the County of
San Francisco. The Complaint alleges, among other things,
that the individual plaintiffs and the purported class members
were improperly classified as exempt employees and that the
Company violated the California Labor Code and the California
Business and Professions Code by failing to (i) pay
required overtime, (ii) provide meal periods, rest periods,
and accurate itemized wage statements, (iii) keep accurate
records of employees’ hours of work, and (iv) pay all
compensation owed at the time of termination of employment to
certain members of the purported class. The relief sought
includes damages, restitution, penalties, injunctive relief,
interest, costs, and attorneys’ fees and such other relief
as the court deems proper. In February of 2008, the Superior
Court for the State of California granted final approval of a
settlement pursuant to which the Company agreed to pay up to
$3.5 to settle the matter. Based upon claims actually made
by class
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
members, the final settlement amount will be approximately $2.7.
The Company categorized this charge as “Selling, general
and administrative expenses” on its consolidated statements
of operations.
On October 29, 2002, Gary Gerlinger, individually and on
behalf of all other similarly situated consumers in the United
States who, during the period from August 1, 2001 to the
present, purchased books online from either Amazon.com, Inc.
(“Amazon”) or the Company, instituted an action
against the Company and Amazon in the United States District
Court for the Northern District of California. The Complaint
alleges that the agreement pursuant to which an affiliate of
Amazon operates Borders.com as a co-branded site (the
“Mirror Site”) violates federal anti-trust laws,
California statutory law and the common law of unjust
enrichment. The Complaint seeks injunctive relief, damages,
including treble damages or statutory damages where applicable,
attorneys fees, costs and disbursements, disgorgement of all
sums obtained by allegedly wrongful acts, interest and
declaratory relief. On November 1, 2005, the Court granted
the Company’s Motion to Dismiss all of the remaining claims
of the plaintiff. The anti-trust claims were dismissed with
prejudice, and the unfair competition claims were dismissed
without prejudice. The plaintiff has appealed the decision. The
appeal was argued in the Ninth Circuit Court of Appeals on
November 8, 2007; the Court took it under submission and a
decision is expected within the next few months. The Company has
not included any liability in its consolidated financial
statements in connection with this matter and has expensed as
incurred all legal costs to date.
Certain states and private litigants have sought to impose sales
or other tax collection efforts on out-of-jurisdiction companies
that engage in
e-commerce.
The Company and Amazon have been named as defendants in actions
filed by a private litigant on behalf of the state of Illinois
under the state’s False Claims Act relating to the failure
to collect use taxes on Internet sales in Illinois for periods
both before and after the implementation of the Web Site
Agreement. The Complaints seek judgments, jointly and severally,
against the defendants for, among other things, injunctive
relief, treble the amount of damages suffered by the state of
Illinois as a result of the alleged violations of the
defendants, penalties, costs and expenses, including legal fees.
Similar actions previously filed against the Company in
Tennessee and Nevada have been dismissed.
Although an adverse resolution of any of the matters described
above could have a material adverse effect on the results of the
operations of the Company for the applicable period or periods,
the Company does not believe that these matters will have a
material effect on its liquidity or financial position.
In addition to the matters described above, the Company is, from
time to time, involved in or affected by other litigation
incidental to the conduct of its businesses.
NOTE 7 —
DEBT
Credit
Facility: The
Company has a Multicurrency Revolving Credit Agreement, as
amended (the “Credit Agreement”), which expires in
July 2011. The Credit Agreement provides for borrowings of up to
$1,125.0 million secured by eligible inventory and accounts
receivable and related assets. Borrowings under the Credit
Agreement are limited to a specified percentage of eligible
inventories and accounts receivable and bear interest at a
variable base rate plus the applicable increment or LIBOR plus
the applicable increment at the Company’s option. The
Credit Agreement (i) includes a fixed charge coverage ratio
requirement of 1.1 to 1 that is applicable only if outstanding
borrowings under the facility exceed 90% of permitted borrowings
thereunder, (ii) contains covenants that limit, among other
things, the Company’s ability to incur indebtedness, grant
liens, make investments, consolidate or merge or dispose of
assets, (iii) prohibits dividend payments and share
repurchases that would result in borrowings under the facility
exceeding 90% of permitted borrowings thereunder, and
(iv) contains default provisions that are typical for this
type of financing, including a cross default provision relating
to other indebtedness of more than $25.0 million. The
Company had borrowings outstanding under the Credit Agreement
(or a prior agreement) of $547.3, $499.0 and $130.1 at
February 2, 2008, February 3, 2007 and
January 28, 2006,
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
respectively, excluding any borrowings outstanding related to
the Company’s recently disposed U.K. and Ireland bookstore
operations. The U.K. and Ireland bookstore operations had
borrowings outstanding of $40.6 and $23.4 at February 3,2007 and January 28, 2006, respectively. The weighted
average interest rate in 2007 and 2006 was approximately 7.1%
and 6.5%, respectively.
Debt of
Consolidated
VIEs:The Company
includes the debt of two variable interest entities
(“VIEs”), consolidated pursuant to Financial
Accounting Standards Board Interpretation No. 46R,
“Consolidation of Variable Interest Entities”
(“FIN 46R”), in its consolidated balance sheets.
Scheduled principal payments of this debt as of February 2,2008 total $0.2 in 2008, $0.2 in 2009, $0.2 in 2010, $0.2 in
2011, $0.3 in 2012, $4.1 in all later years, and in the
aggregate, total $5.2. See “Note 8 —
Leases” for further discussion of the Company’s
consolidation of these VIEs.
As of February 2, 2008, the Company was in compliance with
its debt covenants. The Company currently does not meet the
Credit Agreement’s fixed charge coverage ratio requirement;
however, borrowings under the Credit Agreement have not exceeded
90% of permitted borrowings. In April of 2008, the Company
amended its Credit Agreement. Pursuant to this amendment lenders
(i) approved a loan to the Company by Pershing Square
Capital Management, L.P., as described below,
(ii) permitted increased borrowing availability until
December 15, 2008, from 90% of permitted borrowings to
92.5%, (iii) until December 15, 2008, made the fixed
charge coverage ratio and the cash dominion event apply only if
outstanding borrowings under the facility exceed 92.5% of
permitted borrowings, rather than 90%, and (iv) increased
the interest rate, commitment fees and letter of credit fees
thereunder.
On April 9, 2008, the Company completed a financing
agreement with Pershing Square Capital Management, L.P.
(“Pershing Square”) on behalf of certain of its
affiliated investment funds. Under the terms of the agreement,
Pershing Square has loaned $42.5 to the Company and will
purchase, at the Company’s discretion, certain of the
Company’s international businesses pursuant to a $135.0
backstop purchase commitment. The terms of the Pershing Square
financing agreement have been approved by the lenders under the
Company’s current revolving credit facility, and the
revolving credit facility has been amended accordingly. See
“Note 16 — Subsequent Event” for
further information relating to the financing agreement with
Pershing Square.
NOTE 8 —
LEASES
Operating
Leases: The
Company conducts operations primarily in leased facilities.
Store leases are generally for initial terms of three to
20 years. Borders’ leases generally contain multiple
three- to five-year renewal options which allow Borders the
option to extend the life of the leases up to 25 years
beyond the initial noncancellable term. Waldenbooks Specialty
Retail’s leases generally do not contain renewal options.
Certain leases provide for additional rental payments based on a
percentage of sales in excess of a specified base. Also, certain
leases provide for the payment by the Company of executory costs
(taxes, maintenance, and insurance).
Lease
Commitments: Future
minimum lease payments under operating leases at
February 2, 2008 total $340.3 in 2008, $321.0 in 2009,
$301.3 in 2010, $286.1 in 2011, $277.4 in 2012, and $1,590.7 in
all later years, and in the aggregate, total $3,116.8.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
Rental
Expenses: A
summary of operating lease minimum and percentage rental
expense, excluding discontinued operations, follows:
2007
2006
2005
Minimum rentals
$
362.7
$
356.3
$
331.6
Percentage rentals
30.4
23.7
19.0
Total
$
393.1
$
380.0
$
350.6
Capitalized
Leases: The
Company, at times, accounts for certain items under capital
leases. The Company has no capitalized leases as of
February 2, 2008.
Consolidated
VIEs:The Company
is the primary beneficiary of two variable interest entities
(“VIEs”) due to the Company’s guarantee of the
debt of these entities. As a result, the Company consolidates
these VIEs and has recorded property and equipment, net of
accumulated depreciation, of $4.9, long-term debt (including
current portion) of $5.2 and minority interest of $0.3 at
February 2, 2008, and has recorded property and equipment,
net of accumulated depreciation, of $5.1, long-term debt
(including current portion) of $5.4 and minority interest of
$0.3 at February 3, 2007.
NOTE 9 —
EMPLOYEE
BENEFIT PLANS
Employee Savings
Plan: Employees of
the Company who meet certain requirements as to age and service
are eligible to participate in the Company’s 401(K) Savings
Plan. The Company’s expense related to this plan was $4.0,
$4.2, and $4.2 for 2007, 2006 and 2005, respectively.
NOTE 10 —
STOCK-BASED
COMPENSATION PLANS
2004 Long-Term
Incentive
Plan:The Company
maintains the 2004 Long-Term Incentive Plan (the “2004
Plan”), pursuant to which the Company may grant stock-based
awards to employees and non-employee directors of the Company,
including restricted shares and share units of its common stock
and options to purchase its common stock. The 2004 Plan was
approved by shareholders in May 2004, and replaced all prior
stock-based benefit plans on a go-forward basis. Three million
shares were authorized for the grant of stock-based awards under
the 2004 Plan (plus any shares forfeited or cancelled under the
2004 Plan or any prior plan). At February 2, 2008,
4.7 million shares remained available for grant.
Under the 2004 Plan, the exercise price of options granted will
not be less than the fair value of the Company’s common
stock at the date of grant. The plan provides for vesting
periods as determined by the Compensation Committee of the
Company’s Board of Directors. The Company recognizes
compensation expense for options granted on a straight-line
basis over the vesting period.
The Company’s senior management personnel are required to
use 20%, and may use up to 100%, of their annual incentive
bonuses to purchase shares of the Company’s common stock,
at a 20% to 40% discount from the fair value. In addition, the
Company’s senior management personnel may elect to make a
one-time purchase of such shares. These shares of common stock
purchased under the 2004 Plan will generally be restricted from
sale or transfer for at least two and up to four years from date
of purchase. Gains, if any, vest over the same period of time.
The Company recognizes compensation expense for the discount on
shares of common stock purchased under the 2004 Plan (or prior
plan). Such discounts are recognized as expense on a
straight-line basis over the period during which the shares are
restricted from sale or transfer. The amount of expense deferred
related to these shares at February 2, 2008 totaled $0.2.
The Company grants performance-based share units of its common
stock (“RSUs”) to its senior management personnel.
RSUs vest in amounts based on the achievement of performance
goals. The
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
Compensation Committee of the Company’s Board of Directors
establishes the RSU’s performance criteria and vesting
period. The Company also grants time-vested restricted stock and
restricted share units to its senior management personnel.
The Company previously recognized compensation expense for the
RSUs granted under the 2004 Plan using variable accounting, in
accordance with the provisions of Accounting Principles Board
Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB No. 25”). Under variable
accounting, estimates of compensation costs were recorded and
updated each period until the measurement date, based on changes
in the Company’s share price and the estimated vesting
period of the RSUs. Beginning in 2006, the Company recognized
compensation expense for the RSUs in accordance with the
provisions of Statement of Financial Accounting Standards
No. 123 (revised 2004), “Share-Based Payment”
(“FAS 123(R)”). In accordance with
FAS 123(R), the Company records compensation cost based on
the fair market value of the RSUs on the date of grant.
Employee Stock
Purchase Plan: The
Company maintained an employee stock purchase plan (the
“Employee Plan”), which allowed the Company’s
associates not eligible under the 2004 Plan to purchase shares
of the Company’s common stock at a 15% discount from their
fair market value. The Employee Plan expired as of
December 31, 2005.
A summary of the information relative to the Company’s
stock option plans follows (number of shares in thousands):
The weighted-average fair values of options at their grant date
where the exercise price equals the market price on the grant
date were $3.66, $3.84, and $4.49 in 2007, 2006 and 2005,
respectively.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
The Black-Scholes option valuation model was used to calculate
the fair market value of the options at the grant date. The
following assumptions were used in the calculation:
2007
2006
2005
Risk-free interest rate
3.9-5.1
%
4.7-5.1
%
3.8-4.1
%
Expected life
3-5 years
3-5 years
3-5 years
Expected volatility
25.3-29.7
%
25.1-25.5
%
25.6-27.6
%
Expected dividends
1.8-4.1
%
1.6-2.3
%
1.3-1.6
%
Under FAS 123(R), the Company recognized $2.8, or $0.05 per
share, net of $1.7 tax benefit, of stock-based compensation
expense related to stock options, and $2.8, or $0.05 per share,
net of $1.7 tax benefit, of stock-based compensation expense
related to restricted stock and restricted stock unit grants and
employee stock purchases for the year ended February 2,2008. As of February 2, 2008, unrecognized compensation
cost was $4.2 with a weighted-average future vesting period of
2.5 years related to stock options and $3.9 with a
weighted-average future vesting period of 2.3 years related
to restricted stock and restricted stock unit grants and
employee stock purchases. The total fair value of shares vested
was $0.4, $0.0 and $0.0 for the years ended February 2,2008, February 3, 2007 and January 28, 2006,
respectively. Stock-based compensation expense is included in
“Selling, general and administrative expenses” on the
consolidated statements of operations. Upon adoption of
FAS 123(R), the balance of $0.4 of deferred compensation
was charged to additional paid in capital.
The following table summarizes the information regarding stock
options outstanding at February 2, 2008 (number of shares
in thousands):
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
A summary of the information relative to the Company’s
granting of stock-based awards other than options follows
(number of shares in thousands):
Number of
Weighted-Average
Weighted-Average
Shares
Purchase Price
at Grant Date FMV
Stock purchased:
2004 Plan (or prior plan)
2005
32
17.80
26.05
2006
75
14.17
17.75
2007
30
16.82
21.37
Employee plan
2005
26
20.28
23.86
2006
—
—
—
2007
—
—
—
Stock and stock units issued:
Time-vested shares issued:
2004 Plan
2005
50
—
23.96
2006
114
—
24.16
2007
250
—
18.06
Performance-based stock units issued:
2004 Plan
2005
395
—
26.24
2006
405
—
23.59
2007
46
—
20.42
NOTE 11 —
ACQUISITION OF PAPERCHASE PRODUCTS, LTD.
In July 2004, the Company invested cash of $24.1, including debt
repayment of $4.1, in connection with an increase in its 15%
equity stake in Paperchase Products, Ltd.
(“Paperchase”), a leading stationery retailer in the
United Kingdom, to 96.5%, which was allocated primarily to fixed
assets, inventory and $22.4 of goodwill. The Company also
recorded minority interest of $1.0. The entire amount of initial
goodwill was subsequently impaired in 2006.
In 2007, the Company purchased an additional 0.5% interest in
Paperchase from the minority owners for cash consideration of
$0.8, which was allocated primarily to inventory.
NOTE 12 —
FINANCIAL
INSTRUMENTS
The Company is subject to risk resulting from interest rate
fluctuations, as interest on certain of the Company’s
borrowings is based on variable rates. The Company’s
objective in managing its exposure to interest rate fluctuations
is to limit the impact of interest rate changes on earnings and
cash flows and to lower its overall borrowing costs. During
2005, the Company utilized two interest rate swaps to achieve
this objective, effectively converting a portion of its variable
rate exposure to fixed interest rates. In accordance with the
provisions of FAS 133, the Company designated these
interest rate swap agreements as cash flow
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
hedges. These two interest rate swaps settled during the second
quarter of 2005, and a cumulative loss was realized, totaling
less than $0.1.
A portion of the Company’s borrowings is based on a fixed
interest rate. In August 2003, the Company entered into an
interest rate swap to convert the fixed rate, upon which the
$50.0 of Notes were based, to a variable rate based on LIBOR. In
accordance with the provisions of FAS 133, the Company
designated this swap agreement as a fair market value hedge.
Changes in the fair value of a derivative that is designated as,
and meets all the required criteria for, a fair market value
hedge are recorded in the Company’s consolidated statements
of operations, as are changes in the fair value of the hedged
debt. This fair market value hedge settled during the second
quarter of 2006.
The Company is organized based upon the following operating
segments: domestic Borders superstores, Waldenbooks Specialty
Retail stores and International stores (including Borders and
Paperchase stores). Corporate consists of the unallocated
portion of certain corporate governance and corporate incentive
costs. The accounting policies of the segments are the same as
those described in the “Summary of Significant Accounting
Policies.” Transactions between segments, consisting
principally of inventory transfers, are recorded primarily at
cost. The Company evaluates the performance of its segments and
allocates resources to them based on operating income and
anticipated future contribution.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
2007
2006
2005
Total assets
Domestic Borders superstores
$
1,719.5
$
1,714.6
$
1,615.2
Waldenbooks Specialty Retail
264.9
322.3
345.8
International
241.8
182.6
140.9
Corporate
76.5
128.4
134.7
Total assets of continuing operations
$
2,302.7
$
2,347.9
$
2,236.6
Discontinued operations
—
265.5
335.6
Total assets
$
2,302.7
$
2,613.4
$
2,572.2
Capital expenditures
Domestic Borders superstores
$
103.6
$
128.9
$
98.1
Waldenbooks Specialty Retail
7.5
12.0
19.8
International
20.7
18.9
11.8
Corporate
10.9
15.6
32.5
Total capital expenditures
$
142.7
$
175.4
$
162.2
Total assets for the Corporate segment include certain corporate
headquarters asset balances, which have not been allocated to
the other segments; however, depreciation expense associated
with such assets has been allocated to the other segments as
follows:
2007
2006
2005
Domestic Borders superstores
$
10.4
$
12.9
$
10.6
Waldenbooks Specialty Retail
0.1
6.1
4.9
International
0.2
0.3
0.2
Total
$
10.7
$
19.3
$
15.7
Long-lived assets by geographic area are as follows:
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
Sales by merchandise category are as follows:
2007
2006
2005
Sales
Books
$
2,496.1
$
2,416.7
$
2,429.0
Music
276.5
318.5
366.2
Video
268.4
248.6
232.9
Gifts & stationery
300.0
259.5
211.5
Other
433.8
440.5
436.1
Total Sales
$
3,774.8
$
3,683.8
$
3,675.7
NOTE 14 —
DISCONTINUED
OPERATIONS
On September 21, 2007, the Company sold its U.K. and
Ireland bookstore operations to Bookshop Acquisitions Ltd., a
corporation formed by Risk Capital Partners, a private equity
firm in the United Kingdom. The consideration for the sale
was: (i) cash of $20.4; (ii) the potential for up to
an additional $20.4 of contingent deferred consideration, which
will be payable in whole or in part only if specified sales
levels are achieved by the U.K. and Ireland bookstore operations
in future years; (iii) a 19.9% equity interest in Bookshop
Acquisitions Ltd., which is expected to be diluted to
approximately seventeen percent (17%); and (iv) 7% loan
notes of approximately $3.4 which mature in 2017 or sooner upon
the occurrence of certain events.
The sale agreement included all 41 Borders superstores located
in the U.K. and the Borders superstore in Ireland, as well as
all 28 Books etc. stores. All assets and liabilities, with the
exception of outstanding lease guarantees relating to four
stores, remained with the entities sold, which are now owned by
Risk Capital Partners. The maximum potential liability under
these lease guarantees is approximately $193.2. The leases
provide for periodic rent reviews, which could increase the
Company’s potential liability. One of the applicable lease
guaranty agreements provides that the guaranty will
automatically terminate if Borders U.K. Limited achieves a
specified level of net assets. This potential limitation has not
been considered in calculating the maximum exposures set forth
above. In addition, in the event of a default under the primary
leases and the landlord does not require the Company to take a
new (replacement) lease, the landlord would have an obligation
to attempt to re-lease the premises, which could further reduce
the Company’s potential liability. The Company has recorded
a contingent liability of approximately $5.8 based upon the
likelihood that the Company will be required to perform under
the guarantees.
Also under the terms of the sale agreement, the Company
indemnified the U.K. and Ireland operations from the tax
liability, if any, imposed upon it as a result of the
forgiveness of the portions of intercompany indebtedness owing
from the Company. The maximum potential liability is
approximately $10.7, and the Company has recorded a liability of
approximately $4.4 based upon the likelihood that the Company
will be required to perform under the indemnification.
The Company did not record any amount related to the contingent
deferred consideration of $20.4. The Company will record this
amount once the realization of such amount is resolved beyond a
reasonable doubt. The Company has attributed only a nominal
value to its equity interest in Bookshop Acquisitions Ltd. and
to its 7% loan notes.
The disposal resulted in a loss of $125.7 for year ended
February 2, 2008. The operation of the disposed businesses
resulted in a loss of $13.2 for year ended February 2,2008, a loss of $138.3 for the year ended February 3,2007 and income of $4.5 for the year ended January 28,2006.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
NOTE 16 —
SUBSEQUENT
EVENTS
On March 20, 2008, the Company announced that it would
undergo a strategic alternative review process. J.P. Morgan
Securities Inc. and Merrill Lynch & Co. have been
retained as the Company’s financial advisors to assist in
this process. The review will include the investigation of a
wide range of alternatives including the sale of the Company
and/or
certain divisions for the purpose of maximizing shareholder
value.
On April 9, 2008, the Company completed a financing
agreement with Pershing Square Capital Management, L.P.
(“Pershing Square”) on behalf of certain of its
affiliated investment funds. Under the terms of the agreement,
Pershing Square has loaned $42.5 to the Company and will
purchase, at the Company’s discretion, certain of the
Company’s international businesses pursuant to a $135.0
backstop purchase commitment. The terms of the Pershing Square
financing agreement have been approved by the lenders under the
Company’s current revolving credit facility, and the
revolving credit facility has been amended accordingly. Based on
current internal projections, the Company believes that the
financing agreement with Pershing Square will allow the Company
to be fully funded during fiscal 2008, where absent these
measures, liquidity issues may otherwise have arisen during the
year.
The financing agreement with Pershing Square consists of three
main components:
1. A $42.5 million senior secured term loan maturing
January 15, 2009 with an interest rate of 9.8% per annum.
The term loan is secured by an indirect pledge of approximately
65% of the stock of Paperchase Products Ltd.
(“Paperchase”) pursuant to a Deed of Charge Over
Shares. In the event that Paperchase is sold, all proceeds from
the sale are required to be used to prepay the term loan. The
representations, covenants and events of default therein are
otherwise substantially identical to the Company’s existing
Multicurrency Revolving Credit Agreement (as amended, the
“Credit Agreement”), other than some relating to
Paperchase. Such exceptions are not expected to interfere with
the operations of Paperchase or the Company in the ordinary
course of business.
2. A backstop purchase offer that will give the Company the
right but not the obligation, until January 15, 2009, to
require Pershing Square to purchase its Paperchase, Australia,
New Zealand and Singapore subsidiaries, as well as its
approximately 17% interest in Bookshop Acquisitions, Inc.
(Borders U.K.) after the Company has pursued a sale process to
maximize the value of those assets. Pershing Square’s
purchase obligation is at a price of $135.0 (less any debt
attributable to those assets) and on customary terms to be
negotiated. Proceeds of any such purchase by Pershing Square are
to be first applied to repay amounts outstanding under the $42.5
term loan. Although the Company believes that these businesses
are worth substantially more than the backstop purchase offer
price, the relative certainty of this arrangement provides the
Company with valuable flexibility to pursue strategic
alternatives. The Company has retained the right, in its sole
discretion, to forego the sale of these assets or to require
Pershing Square to consummate the transaction. Pershing Square
has no right of first refusal or other preemptive right with
respect to the sale of these businesses by the Company to other
parties.
3. The issuance to Pershing Square of 9.55 million
warrants to purchase the Company’s common stock at
$7.00 per share. The Company is also required to issue an
additional 5.15 million warrants to Pershing Square if any
of the following three conditions occurs: the Company requires
Pershing Square to purchase its international subsidiaries as
described in (2) above, a definitive agreement relating to
certain business combinations involving the Company is not
signed by October 1, 2008, or the Company terminates the
strategic alternatives process. The warrants will be
cash-settled until the issuance of the underlying shares is
approved by the Company’s shareholders, and in certain
other circumstances. The warrants feature full anti-dilution
protection, including preservation of the right to convert into
the same percentage of the fully-diluted shares of the
Company’s common stock that would be outstanding on a pro
forma basis giving effect to the issuance of the shares
underlying the warrants at all times, and
“full-ratchet” adjustment to the exercise price for
future issuances (in each
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
case, subject to certain exceptions), and adjustments to
compensate for all dividends and distributions.
For accounting purposes, the Company allocated the proceeds from
the financing agreement with Pershing Square between the senior
secured term loan, the warrants, and the backstop purchase offer
based upon their relative fair market values. This will result
in the recognition of a discount on the secured term loan of
approximately $7.2, which will be amortized to earnings over the
term of the loan using the effective interest method. The
warrants will be recorded as liabilities at their fair market
value of $40.8, with subsequent changes in their fair market
value to be recognized in earnings. An intangible asset in the
amount of approximately $35.6 related to the backstop purchase
offer will also be recorded, and will be expensed if it becomes
probable that the backstop purchase offer will not be executed.
If the backstop purchase offer is executed, the intangible asset
will be added to the carrying value of the related businesses,
and expensed upon sale.
In April of 2008, the Company also amended its Credit Agreement.
Pursuant to this amendment lenders (i) approved a loan to
the Company by Pershing Square Capital Management, L.P., as
described above, (ii) permitted increased borrowing
availability until December 15, 2008, from 90% of permitted
borrowings to 92.5%, (iii) until December 15, 2008,
made the fixed charge coverage ratio and the cash dominion event
apply only if outstanding borrowings under the facility exceed
92.5% of permitted borrowings, rather than 90%, and
(iv) increased the interest rate, commitment fees and
letter of credit fees thereunder.
We have audited the accompanying consolidated balance sheets of
Borders Group, Inc. and subsidiaries as of February 2, 2008
and February 3, 2007, and the related consolidated
statements of operations, stockholders’ equity, and cash
flows for each of the three years in the period ended
February 2, 2008. These financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Borders Group, Inc. and subsidiaries as of
February 2, 2008 and February 3, 2007, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended February 2,2008, in conformity with U.S. generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial
statements, in 2006 the Company adopted required provisions of
Financial Accounting Standards Board Statement No. 123(R),
Share Based Payments and in 2007 the Company adopted required
provisions of Financial Accounting Standards Board
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Borders Group, Inc.’s internal control over financial
reporting as of February 2, 2008, based on criteria
established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated April 10, 2008
expressed an unqualified opinion thereon.
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Item 9A. Controls
and Procedures
Controls and
Procedures: The
Company’s Chief Executive Officer and Chief Financial
Officer have evaluated the effectiveness of the Company’s
disclosure controls and procedures, as such term is defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), as of February 2, 2008 (the
“Evaluation Date”). Based on such evaluation, such
officers have concluded that the Company’s controls and
procedures were effective to ensure that information required to
be disclosed in this annual report is recorded, processed,
summarized and reported within the time periods specified in the
SEC’s rules and forms, and that such information is
accumulated and communicated to management, including the
Company’s Chief Executive Officer (principal executive
officer) and Chief Financial Officer (principal financial
officer), to allow timely decisions regarding required
disclosure.
Changes in
Internal
Control: There
have been no changes in our internal control over financial
reporting that occurred in the last fiscal quarter that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Management’s
Annual Report on Internal Control over Financial
Reporting: Management
is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in
Rule 13a-15(f)
under the Securities Exchange Act of 1934, as amended).
Management assessed the effectiveness of the Company’s
internal control over financial reporting as of February 2,2008. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”) in Internal
Control — Integrated Framework. Based on this
assessment, management has concluded that, as of
February 2, 2008, the Company’s internal control over
financial reporting was effective to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. The
Company’s independent registered public accounting firm,
Ernst & Young LLP, has issued an audit report on the
Company’s effectiveness of internal control over financial
reporting as of February 2, 2008, which is included herein.
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders of
Borders Group, Inc.
We have audited Borders Group, Inc’s internal control over
financial reporting as of February 2, 2008 based on
criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). Borders Group,
Inc.’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Annual
Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Borders Group, Inc. maintained, in all material
respects, effective internal control over financial reporting as
of February 2, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Borders Group, Inc. as of
February 2, 2008 and February 3, 2007, and the related
consolidated statements of operations, stockholders’ equity
and cash flows for each of the three years in the period ended
February 2, 2008 and our report dated April 10, 2008
expressed an unqualified opinion thereon.
Directors,
Executive Officers and Corporate Governance
Information regarding the executive officers of the Company
required by this Item 10 is set forth in Item 1 of
Part I herein under the caption “Executive Officers of
the Company.”
Information pertaining to directors of the Company required by
Item 10 is included under the caption “Election of
Directors” in the Company’s Proxy Statement related to
its 2008 Annual Meeting of Stockholders, and is incorporated
herein by reference. Information relating to compliance with
Section 16(a) of the Securities Exchange Act of 1934, as
amended, is set forth in the Proxy Statement and incorporated
herein by reference.
The information required by this section is incorporated herein
by reference to the information under the caption
“Section 16(a) Beneficial Ownership Reporting
Compliance” in the Proxy Statement related to its 2008
Annual Meeting of Stockholders.
Code
of Ethics and Other Corporate Governance
Information
Information regarding the Company’s Business Conduct Policy
and its Code of Ethics Relating to Financial Reporting, as well
the names of the individuals determined by the Board of
Directors to be “audit committee financial experts,”
is included in the “Election of Directors — Board
of Directors Meetings and Committees” and “Election of
Directors — Corporate Governance” sections of the
Company’s Proxy Statement related to its 2008 Annual
Meeting of Stockholders, and is incorporated herein by reference.
Item 11.
Executive
Compensation
The information required by this Item 11 is incorporated
herein by reference to the information under the captions
“Executive Compensation” and “Compensation of
Directors” in the Proxy Statement related to its 2008
Annual Meeting of Stockholders.
Item 12.
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this Item 12 is incorporated
herein by reference to the information under the heading
“Beneficial Ownership of Common Stock” in the Proxy
Statement related to its 2008 Annual Meeting of Stockholders.
Item 13.
Certain
Relationships and Related Transactions and Director
Independence
The information required by this Item 13 is incorporated by
reference to the information under the heading “Information
Regarding the Board of Directors and Corporate Governance”
in the Proxy Statement related to its 2008 Annual Meeting of
Stockholders.
Item 14:
Principal
Accounting Fees and Services
The information required by this Item 14 is incorporated
herein by reference to the information under the heading
“Fees Paid to Independent Registered Public Accounting
Firm” in the Proxy Statement related to its 2008 Annual
Meeting of Stockholders.
Report of Independent Registered Public Accounting Firm
73
2. Financial Statement Schedules
All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable and therefore have been omitted.
3. The following exhibits are filed herewith unless
otherwise indicated:
Exhibit
Number
Description
2
.1(1)
Agreement and plan of Merger dated as of April 8, 1997
between Michigan Borders Group, Inc. and Borders Group, Inc.
First Amendment to the Restated By laws of Borders Group, Inc.
3
.5(20)
Second Amendment to the Restated By laws of Borders Group, Inc.
3
.6(23)
Third Amendment to the Restated By laws of Borders Group, Inc.
3
.7(24)
Fourth Amendment to the Restated By laws of Borders Group, Inc.
4
.1(27)
Warrant and Registration Rights Agreement, dated as of April 9,2008, among Borders Group, Inc. and Computershare Inc. and
Computershare Trust Company, N.A., as Warrant Agent.
4
.2(27)
Side Letter, dated as of April 9, 2008, between Pershing
Square Capital Management, L.P. and Borders Group, Inc.
10
.1(11)
Restated Borders Group, Inc. Annual Incentive Bonus Plan
10
.2
First Amendment to the Restated Borders Group, Inc. Annual
Incentive Bonus Plan dated as of March 31, 2008
10
.3(7)
Borders Group, Inc. 2004 Long-Term Incentive Plan
10
.4(8)
First Amendment to the Borders Group, Inc. 2004 Long Term
Incentive Plan dated as of May 20, 2004
Second Amendment to the Borders Group, Inc. 2004 Long Term
Incentive Plan dated as of March 30, 2007
10
.6(1)
Borders Group, Inc. Stock Option Plan
10
.7(5)
Amendment to the Borders Group, Inc. Stock Option Plan
10
.8(2)
Borders Group, Inc. Stock Option Plan for International Employees
10
.9(3)
1998 Borders Group, Inc. Stock Option Plan
10
.10(4)
Amendment No. 1 to 1998 Borders Group, Inc. Stock Option
Plan
10
.11(9)
Non-Qualified Deferred Compensation Plan
10
.12(10)
Restricted Share Unit Grant Agreement
10
.13(12)
Restricted Share Grant Agreement
10
.14(14)
2006 Restricted Share Unit Grant Agreement
10
.15(14)
Summary of terms of fiscal 2006 compensation for non-employee
directors and executive officers
10
.16(18)
Summary of terms of fiscal 2006 compensation for
Mr. Lawrence I. Pollock related to his role as
non-executive chairman of the board of directors
10
.17(13)
Employment and Consultancy Agreement between Mr. Josefowicz
and the Company
10
.18(15)
Revised Form of Severance Agreement for Executive Officers
(other than Mr. Josefowicz)
10
.19(16)
Summary of Employment Agreement between Mr. Jones and the
Company
10
.20(16)
Employment Agreement between Mr. Jones and the Company
10
.21(25)
Employment terms between Mr. Armstrong and the Company
10
.22(25)
Employment terms between Mr. Gruen and the Company
10
.23(3)
Participation Agreement dated as of December 1, 1998 by and
among Borders Group, Inc., Borders, Inc. and Parties thereto
10
.24(5)
Participation Agreement dated as of January 22, 2001 by and
among Borders Group, Inc., Borders, Inc. and Parties thereto
10
.25(6)
Participation Agreement dated as of November 15, 2002 by
and among Borders Group, Inc., Borders, Inc. and Parties thereto
10
.26(8)
Security Agreement dated as of July 30, 2004 among Borders
Group, Inc., its subsidiaries and Parties thereto
10
.27(17)
Second Amended and Restated Multicurrency Revolving Credit
Agreement dated as of July 31, 2006 among Borders Group,
Inc., its subsidiaries and Parties thereto
10
.28(19)
Amendment No. 1 to the Second Amended and Restated
Multicurrency Revolving Credit Agreement dated as of
April 2, 2007, among the Company, its subsidiaries named
therein and the lenders named therein
10
.29(21)
Amendment No. 2 to the Second Amended and Restated
Multicurrency Revolving Credit Agreement dated as of
July 31, 2006 among Borders Group, Inc. its subsidiaries
and Parties thereto
10
.30(27)
Amendment No. 3 to the Second Amended and Restated
Multicurrency Revolving Credit Agreement among Borders Group,
Inc. its subsidiaries and Parties thereto
10
.31(22)
Deed of Tax Covenant between BGI (UK) limited and Bookshop
Acquisitions Limited
Brand License Agreement between Borders Properties, Inc. and
Borders (UK) Limited and Borders Books Ireland Limited
10
.33(22)
Transitional Services Agreement between Borders International
Services, Inc. and Borders (UK) Limited and Borders Books
Ireland Limited
10
.34(22)
Subscription and Shareholders Agreement between Bookshop
Acquisitions Limited and, Luk Johnson and BGI (UK) Limited
10
.35(26)
Commitment Letter from Pershing Square Capital Management, L.P.
to Borders Group, Inc., dated as of March 19, 2008
10
.36(27)
Purchase Offer Letter, dated as of April 9, 2008, between
Pershing Square Capital Management, L.P. and Borders Group, Inc.
10
.37(27)
Deed of Charge Over Shares between BGP (UK) Limited (as Chargor)
and Pershing Square Capital Management, L.P. (as Collateral
Agent).
10
.38(27)
Senior Secured Credit Agreement among Borders Group, Inc. (the
Borrower), Pershing Square Capital Management, L.P. (as
Administrative Agent and as Collateral Agent) and the lenders
named therein, dated as of April 9, 2008.
Statement of George L. Jones, President and Chief Executive
Officer of Borders Group, Inc. pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31
.2
Statement of Edward W. Wilhelm, Executive Vice President and
Chief Financial Officer of Borders Group, Inc. pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32
.1
Statement of George L. Jones, President and Chief Executive
Officer of Borders Group, Inc. pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32
.2
Statement of Edward W. Wilhelm, Executive Vice President and
Chief Financial Officer of Borders Group, Inc. pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable and therefore have been omitted.
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned
thereunto duly authorized.
BORDERS GROUP, INC.
(Registrant)
By:
/s/ GEORGE
L. JONES
George L. Jones
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
First Amendment to the Restated By laws of Borders Group, Inc.
3
.5(20)
Second Amendment to the Restated By laws of Borders Group, Inc.
3
.6(23)
Third Amendment to the Restated By laws of Borders Group, Inc.
3
.7(24)
Fourth Amendment to the Restated By laws of Borders Group, Inc.
4
.1(27)
Warrant and Registration Rights Agreement, dated as of April 9,2008, among Borders Group, Inc. and Computershare Inc. and
Computershare Trust Company, N.A., as Warrant Agent.
4
.2(27)
Side Letter, dated as of April 9, 2008, between Pershing
Square Capital Management, L.P. and Borders Group, Inc.
10
.1(11)
Restated Borders Group, Inc. Annual Incentive Bonus Plan
10
.2
First Amendment to the Restated Borders Group, Inc. Annual
Incentive Bonus Plan dated as of March 31, 2008
10
.3(7)
Borders Group, Inc. 2004 Long-Term Incentive Plan
10
.4(8)
First Amendment to the Borders Group, Inc. 2004 Long Term
Incentive Plan dated as of May 20, 2004
10
.5(26)
Second Amendment to the Borders Group, Inc. 2004 Long Term
Incentive Plan dated as of March 30, 2007
10
.6(1)
Borders Group, Inc. Stock Option Plan
10
.7(5)
Amendment to the Borders Group, Inc. Stock Option Plan
10
.8(2)
Borders Group, Inc. Stock Option Plan for International Employees
10
.9(3)
1998 Borders Group, Inc. Stock Option Plan
10
.10(4)
Amendment No. 1 to 1998 Borders Group, Inc. Stock Option
Plan
10
.11(9)
Non-Qualified Deferred Compensation Plan
10
.12(10)
Restricted Share Unit Grant Agreement
10
.13(12)
Restricted Share Grant Agreement
10
.14(14)
2006 Restricted Share Unit Grant Agreement
10
.15(14)
Summary of terms of fiscal 2006 compensation for non-employee
directors and executive officers
10
.16(18)
Summary of terms of fiscal 2006 compensation for
Mr. Lawrence I. Pollock related to his role as
non-executive chairman of the board of directors
10
.17(13)
Employment and Consultancy Agreement between Mr. Josefowicz
and the Company
10
.18(15)
Revised Form of Severance Agreement for Executive Officers
(other than Mr. Josefowicz)
10
.19(16)
Summary of Employment Agreement between Mr. Jones and the
Company
10
.20(16)
Employment Agreement between Mr. Jones and the Company
10
.21(25)
Employment terms between Mr. Armstrong and the Company
10
.22(25)
Employment terms between Mr. Gruen and the Company
10
.23(3)
Participation Agreement dated as of December 1, 1998 by and
among Borders Group, Inc., Borders, Inc. and Parties thereto
10
.24(5)
Participation Agreement dated as of January 22, 2001 by and
among Borders Group, Inc., Borders, Inc. and Parties thereto
Participation Agreement dated as of November 15, 2002 by
and among Borders Group, Inc., Borders, Inc. and Parties thereto
10
.26(8)
Security Agreement dated as of July 30, 2004 among Borders
Group, Inc., its subsidiaries and Parties thereto
10
.27(17)
Second Amended and Restated Multicurrency Revolving Credit
Agreement dated as of July 31, 2006 among Borders Group,
Inc., its subsidiaries and Parties thereto
10
.28(19)
Amendment No. 1 to the Second Amended and Restated
Multicurrency Revolving Credit Agreement dated as of
April 2, 2007, among the Company, its subsidiaries named
therein and the lenders named therein
10
.29(21)
Amendment No. 2 to the Second Amended and Restated
Multicurrency Revolving Credit Agreement dated as of
July 31, 2006 among Borders Group, Inc. its subsidiaries
and Parties thereto
10
.30(27)
Amendment No. 3 to the Second Amended and Restated
Multicurrency Revolving Credit Agreement among Borders Group,
Inc. its subsidiaries and Parties thereto
10
.31(22)
Deed of Tax Covenant between BGI (UK) limited and Bookshop
Acquisitions Limited
10
.32(22)
Brand License Agreement between Borders Properties, Inc. and
Borders (UK) Limited and Borders Books Ireland Limited
10
.33(22)
Transitional Services Agreement between Borders International
Services, Inc. and Borders (UK) Limited and Borders Books
Ireland Limited
10
.34(22)
Subscription and Shareholders Agreement between Bookshop
Acquisitions Limited and, Luk Johnson and BGI (UK) Limited
10
.35(26)
Commitment Letter from Pershing Square Capital Management, L.P.
to Borders Group, Inc., dated as of March 19, 2008
10
.36(27)
Purchase Offer Letter, dated as of April 9, 2008, between
Pershing Square Capital Management, L.P. and Borders Group, Inc.
10
.37(27)
Deed of Charge Over Shares between BGP (UK) Limited (as Chargor)
and Pershing Square Capital Management, L.P. (as Collateral
Agent).
10
.38(27)
Senior Secured Credit Agreement among Borders Group, Inc. (the
Borrower), Pershing Square Capital Management, L.P. (as
Administrative Agent and as Collateral Agent) and the lenders
named therein, dated as of April 9, 2008.
Statement of George L. Jones, President and Chief Executive
Officer of Borders Group, Inc. pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31
.2
Statement of Edward W. Wilhelm, Executive Vice President and
Chief Financial Officer of Borders Group, Inc. pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32
.1
Statement of George L. Jones, President and Chief Executive
Officer of Borders Group, Inc. pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32
.2
Statement of Edward W. Wilhelm, Executive Vice President and
Chief Financial Officer of Borders Group, Inc. pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
