(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 o
Accelerated
filer þ
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 $301,483,891
based upon the closing market price of $4.98 per share of Common
Stock on the New York Stock Exchange as of August 2, 2008.
Number of shares of Common Stock outstanding as of
March 24, 2009: 59,471,933
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 our future financial condition
or performance (including earnings per share, gross margins and
inventory turns, liquidity, same-store sales, cost reduction
initiatives and anticipated capital expenditures and
depreciation and amortization amounts), our financing agreements
and other capital resources, strategic plans and benefits
relating to such plans (including steps to be taken to improve
the performance of Borders Superstores, the downsizing of the
Waldenbooks Specialty Retail segment and our 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 our forward-looking statements. These risks
and uncertainties include, but are not limited to, consumer
demand for our 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 our operations and to
carry out our strategic plans; and the performance of our
information technology systems and the development of
improvements to the systems necessary to implement our strategic
plan.
Although it is not possible to predict or identify all such
factors, they may include the risks discussed in
“Item 1A. — Risk Factors.” We do not
undertake any obligation to update forward-looking statements.
General
Borders Group, Inc., through our subsidiaries, Borders, Inc.
(“Borders”), Walden Book Company, Inc.
(“Waldenbooks”), and others (individually and
collectively, “we,”“our” or the
“Company”), is an operator of book, music and movie
superstores and mall-based bookstores. At January 31, 2009,
we operated 518 superstores under the Borders name, including
515 in the United States and three in Puerto Rico. We also
operated 386 mall-based and other small format bookstores,
including stores operated under the Waldenbooks, Borders Express
and Borders Outlet names, as well as Borders-branded airport
stores. In addition, we owned and operated United Kingdom-based
Paperchase Products Limited (“Paperchase”), a designer
and retailer of stationery, cards and gifts. As of
January 31, 2009, Paperchase operated 117 stores, primarily
in the United Kingdom, and Paperchase shops have been added to
333 Borders superstores.
In addition, we operate a proprietary
e-commerce
Web site, www.Borders.com, which was launched in May 2008.
On June 10, 2008, we sold bookstores that we had owned and
operated in Australia, New Zealand and Singapore. On
September 21, 2007, we sold bookstores that we had owned
and operated in the U.K. and Ireland. See “Note 15
— Discontinued Operations” for further discussion
of our disposal of these bookstore operations.
Business
Strategy
Our business strategy is designed to address the most
significant opportunities and challenges facing the company. In
particular, our challenges include maturity in our primary
product categories, an extremely competitive marketplace
(including both store-based and online competitors) and product
formats that are evolving from physical formats to digital
formats. These factors, among others, have contributed to
declines in our comparable store sales measures and in our
sales-per-square-foot measures over the last several years.
These declines have, in turn, negatively impacted profitability.
The U.S. book retailing industry is a mature industry, and
growth has slowed in recent years. Books represent our primary
product category in terms of sales. Rather than opening new book
superstores, we believe that there is greater near-term
opportunity in improving the productivity of existing
superstores and in enhancing Internet-based sales channels. In
particular, we see potential in combining the greater selection
offered by Internet retailing with the inviting atmosphere of
our physical stores. In 2008, we reviewed all cost structures
with the goal of reducing expenses and working capital needs by
driving inventory productivity, thus improving cash flow and
lowering supply chain costs. Driven by these factors, we reduced
expenses, including corporate, stores and distribution expenses,
by $90.0 million in 2008, and expect to reduce expenses,
including corporate, stores and distribution expenses, by
$120.0 million in 2009 compared to 2008.
We believe that Web-based retailing will continue to increase in
popularity and market share as a distribution method for
physical book, music, and movie merchandise. In addition, the
Internet has enabled changes in the formats of many of the
product categories we offer. Sales of music in the physical
compact disc format, for example, have declined over the past
several years, as consumers have increasingly turned to digital
downloads of music. This trend, which we expect to continue, is
also beginning to manifest itself in the book and movie
categories. The shift toward digital formats represents an
opportunity for us as we continue to strengthen our Web-based
capabilities.
Our physical stores, however, remain integral to our future
success. The environment in which our stores operate is
intensely competitive and includes not only Internet-based
retailers and book superstore operators, but also mass merchants
and other non-bookseller retailers. Because of this, the
industry has experienced significant price competition over the
last several years, which has decreased gross margin percentages
for us and some competitors. We anticipate that these trends
will continue, rewarding those who can differentiate themselves
by offering a distinctive customer experience, and who can
operate efficiently. Therefore, we remain dedicated to the
operational improvement of our stores and offering our customers
a rich shopping experience in a relaxing, enjoyable atmosphere.
Please see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” for further
discussion of our business strategy.
Segment
Information
Our business is organized based upon the following reportable
segments: Borders Superstores (including Borders.com, which
launched in May 2008), 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 14 — Segment Information” in the
notes to consolidated financial statements for further
information relating to these segments.
Borders
Superstores
Borders is a premier operator of book, music and movie
superstores in the United States. In 2008, we opened 12 new
Borders superstores, and achieved average sales per square foot
of $203 and average sales per superstore of $5.0 million
across the chain. Borders superstores offer customers a vast
assortment of books, music and movies, gifts and stationery,
superior customer service and an inviting and comfortable
environment designed to encourage browsing. The largest
superstores carry up to 192,000 book, bargain book, music, movie
and periodical titles. On average, Borders Superstores carry
80,000 book titles, with individual store selections ranging
from 39,000 titles to 120,000 titles, across numerous
categories, including many hard-to-find titles.
As of January 31, 2009, the majority of Borders superstores
were in a book, music and movie format. During 2008, we
reallocated floor space in our stores in order to reduce the
floor space allocated to the music category. This primarily
resulted in additional square footage devoted to gifts and
stationery and books. We plan to continue to reduce the space
allocated to music during 2009, as well as movie inventory, and
continue to increase the space devoted to an expanded assortment
of children’s books and other growth categories within
books, gifts and stationery and non-book products such as
teaching materials. We have
placed stores into four tiers, with stores in the
highest-performing tier maintaining their current music and
movie title count (up to 20,000 titles of music and up to 12,000
titles of movies), and stores in the lowest-performing tier
reducing their title count to the top 50 titles in each category.
Borders superstores average 24,700 square feet in size,
including approximately 13,100 square feet devoted to
books, 2,600 square feet devoted to music, 800 square
feet devoted to newsstand and 900 square feet devoted to
movies. The typical Borders superstore also dedicates
approximately 1,000 square feet to gifts and stationery. In
2005, we began to install Paperchase shops in all new and most
remodeled superstores as part of a long-term plan to enhance the
variety and distinctiveness of our gifts and stationery
offering. In addition, we devote approximately 1,400 square
feet to a cafe within virtually all Borders superstores. We have
a licensing agreement with Seattle’s Best Coffee, a
wholly-owned subsidiary of Starbucks Corporation, through which
we operate Seattle’s Best Coffee-branded cafes within
substantially all of our existing Borders superstores in the
continental U.S. and Alaska and new stores as they are
opened.
We are focused on improving key retailing practices at our
superstores in order to become the bookstore for the serious
reader. This includes increasing effectiveness of merchandise
presentation, improving assortment planning, replenishment and
supply chain effectiveness, and ensuring consistency of
execution across the chain. Additionally, we have made
significant reductions in corporate and other selling, general
and administrative costs over the last twelve months. A key
element of this strategy is the enhancement of certain key
categories, which will help to distinguish our domestic
superstores from competitors. These categories include
children’s, wellness, cooking, educational materials,
Seattle’s Best Coffee cafes and Paperchase
gifts & stationery shops, which continue to be drivers
of both sales and increased profitability for their categories.
The number of Borders superstores located in each state and the
District of Columbia as of January 31, 2009 is listed below:
Number of
State
Stores
Alaska
1
Arizona
11
Arkansas
1
California
82
Colorado
14
Connecticut
11
Delaware
2
District of Columbia
3
Florida
26
Georgia
15
Hawaii
8
Idaho
2
Illinois
36
Indiana
13
Iowa
4
Kansas
6
Kentucky
5
Louisiana
3
Maine
3
Maryland
11
Massachusetts
16
Michigan
19
Minnesota
7
Mississippi
1
Missouri
11
Montana
3
Nebraska
3
Nevada
7
New Hampshire
4
New Jersey
15
New Mexico
5
New York
28
North Carolina
10
Ohio
19
Oklahoma
4
Oregon
7
Pennsylvania
25
Rhode Island
2
South Dakota
1
Tennessee
7
Texas
24
Utah
3
Vermont
1
Virginia
15
Washington
13
West Virginia
2
Wisconsin
6
Total
515
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 and our mall-based seasonal
businesses. Average sales per square foot were $266 and average
sales per store were $1.1 million for 2008. Waldenbooks
Specialty Retail stores average approximately 3,700 square
feet in size, and carry an average of 13,500 titles, ranging
from 5,500 in airport stores to 18,000 in large format stores.
The number of Waldenbooks Specialty Retail stores located in
each state and the District of Columbia as of January 31,2009 is listed below:
Number of
State
Stores
Alabama
1
Alaska
2
Arizona
4
Arkansas
2
California
21
Colorado
2
Connecticut
5
Delaware
2
District of Columbia
2
Florida
23
Georgia
8
Hawaii
4
Idaho
1
Illinois
16
Indiana
9
Iowa
3
Kansas
4
Kentucky
7
Louisiana
2
Maine
1
Maryland
13
Massachusetts
12
Michigan
21
Minnesota
2
Mississippi
2
Missouri
5
Montana
2
Nebraska
4
Nevada
3
New Hampshire
5
New Jersey
14
New Mexico
2
New York
18
North Carolina
14
North Dakota
1
Ohio
25
Oklahoma
8
Oregon
6
Pennsylvania
41
Rhode Island
2
South Carolina
6
South Dakota
2
Tennessee
3
Texas
21
Utah
1
Vermont
3
Virginia
12
Washington
5
West Virginia
6
Wisconsin
7
Wyoming
1
Total
386
International
Stores
Our International stores include three Borders superstores in
Puerto Rico and our Paperchase U.K. business. Paperchase is a
brand leader in design-led and innovative stationery retailing
in the United Kingdom. As of January 31, 2009, we
operated 117 Paperchase locations, including 41 stand-alone
stores, 69 concessions in the stores of other retailers, and
seven stores located in railway stations. The vast majority of
Paperchase’s merchandise is developed specifically by and
for Paperchase and, as such, can only be found in Paperchase
stores.
In July 2004, we increased our 15% equity stake in Paperchase to
96.5%, and purchased an additional 0.5% interest in November
2007. During the fourth quarter 2008, we purchased the remaining
3% of shares in Paperchase that we had not previously owned,
bringing our ownership interest in Paperchase to 100% as of
January 31, 2009.
We sold all of our bookstores in Australia, New Zealand, and
Singapore on June 10, 2008. On September 21, 2007, we
sold bookstores that we owned and operated in the United Kingdom
and Ireland. See “Note 15 — Discontinued
Operations” in the notes to consolidated financial
statements for further information relating to the sale of these
bookstores.
Internet
Our business strategy includes the operation of a proprietary
e-commerce
platform, which includes both in-store and online
e-commerce
components. We launched our
e-commerce
Web site during May 2008.
Distribution
Our centralized distribution system, consisting of seven
distribution facilities worldwide, enhances our ability to
manage inventory on a
store-by-store
basis. Inventory is shipped from vendors primarily to our
distribution centers. Approximately 90% of the books carried by
our stores are processed through our distribution facilities.
Borders purchases substantially all of its music and movie
merchandise directly from manufacturers and utilizes our
distribution centers to ship approximately 95% of its music and
movie inventory to stores.
In general, unsold books and magazines can be returned to
vendors at cost. Borders superstores and Waldenbooks Specialty
Retail stores return books to our 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 January 31, 2009, our distribution centers were
located in:
Approx Square
Locality, Country
Number
Footage
Bedfordshire, United Kingdom (services Paperchase)
1
67,000
California, United States
1
414,000
Pennsylvania, United States
1
600,000
Puerto Rico
1
10,500
Tennessee, United States
3
926,000
Total
7
2,017,500
During 2008, we completed a multi-year initiative to enhance the
efficiency of our distribution and logistics network through the
closure of our Ohio multimedia facility and de-consolidation of
our multimedia fulfillment operations to the Tennessee,
Pennsylvania, and California campuses.
Employees
As of January 31, 2009, we had a total of approximately
10,500 full-time employees and approximately
15,100 part-time employees worldwide. When hiring new
employees, we consider 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. We believe that our relations
with employees are generally excellent. Our employees are not
represented by unions.
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.
Ron Marshall was appointed President, Chief Executive Officer
and a Director of the Company effective January 5, 2009.
Mr. Marshall was most recently Principal of Wildridge
Capital Management, a private equity firm he founded
approximately three years ago. Prior to founding Wildridge
Capital, he was Chief Executive Officer for eight years with
Nash Finch Company, a $5 billion food distribution and
retail organization. Mr. Marshall earlier served as
Executive Vice President and Chief Financial Officer from 1994
to 1998. Preceding that, Mr. Marshall served in senior
management positions in a variety of retail companies including
Dart Group Corporation’s Crown Books division and
Barnes & Noble college bookstores.
Anne M. Kubek was appointed Executive Vice President,
Merchandising and Marketing effective January 5, 2009.
Ms. Kubek has been with the company since 1990, beginning
her career as an assistant manager of the Borders store in
Rockville, Maryland, and progressing through a series of
management positions within the store organization. She came to
the corporate office in 1996 and over the years has served as
Vice President, Field Human Resources; Vice President, Book
Merchandising; Vice President, Borders Store Operations and most
recently as Senior Vice President, Borders Stores, a post she
held since 2005.
Mark R. Bierley was appointed Chief Financial Officer and
Executive Vice President, Finance effective January 5,2009. Mr. Bierley has more than 20 years of financial
and accounting experience and has been with Borders Group since
1996. He has progressed through a variety of management
positions within the Company, including inventory and financial
posts, and most recently served as Senior Vice President,
Finance.
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 was appointed to the new position of Executive
Vice President, Chief Administrative Officer effective
January 5, 2009. Mr. Smith, who has been with Borders
Group since 1995 in a variety of leadership roles, including his
most recent position as Executive Vice President, Human
Resources, 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
Our corporate Web site is located at
http://www.borders.com/about
us. The information found on our Web site is not part of this or
any other report filed or furnished to the U.S. Securities
and Exchange Commission. We have made available on our 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 our corporate governance
documents, including our committee charters and our Business
Conduct Policy, Policy and Procedures Regarding Related Party
Transactions, and a Code of Ethics Relating to Financial
Reporting. We will disclose on our 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 our 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, Michigan48108-2202.
We have filed with the Securities and Exchange Commission, as an
exhibit to our
Form 10-K
annual report for fiscal 2008, the Sarbanes-Oxley Act
Section 302 Certifications regarding the quality of our
public disclosure. During calendar 2008 George Jones, in the
capacity as Chief Executive Officer of the Company, 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 we face. Additional risks
and uncertainties not presently known to us or that we currently
deem immaterial also may impair our business operations. If any
of the following risks occur, our business, financial condition,
operating results and cash flows could be materially adversely
affected.
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 our control. We believe that 2009 will be a
challenging year due to continued uncertainty in the economic
environment. We also believe that the increase in consumer
spending via Internet retailers may significantly affect our
ability to generate sales in our 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 our financial
condition and results of operations and our ability to fund our
growth strategy.
Economic
Conditions
Our financial condition and results of operations are dependent
upon discretionary spending by consumers, which may be affected
by general economic conditions and the current global financial
crisis. Worldwide economic conditions and consumer spending have
recently deteriorated significantly and may remain depressed for
some time. Some of the factors that are having an impact on
discretionary consumer
spending include increased unemployment, reductions in
disposable income as a result of recent severe market declines
and declines in residential real estate values, credit
availability and consumer confidence.
Competitive
Environment
We have experienced declines in operating income over the last
three years and such declines may continue. We believe 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 and movies, the downloading of titles has significantly
impacted our sale of CDs and DVDs. Also, the overall consumer
demand for products that we sell, particularly music and movies,
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 other 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 we carry. In particular, the retailing of books,
music and movies over the Internet is highly competitive. In
addition, we face 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
Our success is dependent on the availability of adequate capital
to fund our operations and to carry out our strategic plans. Key
drivers of our cash flows are sales, expense management, capital
spending and our inventory turn improvement initiative. There
can be no assurance that we will have adequate access to capital
markets, which could have a material adverse effect on our
ability to implement our business strategy and our financial
condition and results of operations.
We have 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 limited to and secured by eligible
inventory and accounts receivable and related assets. On
April 9, 2008, we completed a financing agreement with
investment funds managed by Pershing Square Capital Management,
L.P. (“Pershing Square”), which was most recently
amended on March 30, 2009. Under the terms of the most
recent amendment, Pershing Square has extended the maturity date
of the term loan of $42.5 million at a fixed interest rate
of 9.8% to April 1, 2010.
We plan to operate our business and execute our strategic
initiatives principally with funds generated from operations,
financing through the Credit Agreement, credit provided by our
vendors and other sources of new financing as deemed necessary
and available. As of the fourth quarter of 2008, however, we
have determined that the debt and equity capital markets are
currently unavailable to us based on current market conditions.
In addition, our liquidity is impacted by a number of factors,
including our sales levels, the amount of credit that our
vendors extend to us and our borrowing capacity under the Credit
Agreement. We rely upon vendor credit to finance approximately
43% of our inventory (calculated as
trade accounts payable divided by merchandise inventories). We
are working closely with vendors to optimize inventory levels to
improve our performance and to maintain acceptable levels of
payables with our vendors. In addition, the lenders under the
Credit Agreement have the right to periodically obtain third
party valuations of the liquidation value of our inventory, and
the lowering of the liquidation value of our inventory reduces
the amount that we are able to borrow under the Credit
Agreement. Based on current internal sales projections, current
vendor payable support and borrowing capacity, as well as other
initiatives to maximize cash flow, we believe that we will have
adequate capital to fund our operations during fiscal 2009.
However, there can be no assurance that we will achieve our
internal sales projections or that we will be able to maintain
our current vendor payable support or borrowing capacity, and
any failure to do so could result in us having insufficient
funds for our operations.
Planned
Strategy for Borders Superstores
We are focused on improving key retailing practices at our
superstores in order to become the bookstore for the serious
reader. This includes increasing effectiveness of merchandise
presentation, improving assortment planning, expense reduction
initiatives, replenishment and supply chain effectiveness, and
ensuring consistency of execution across the chain. A key
element of this strategy is the enhancement of certain key
categories, which will help to distinguish our domestic
superstores from competitors. These categories include
children’s, wellness, cooking, educational materials, a
Seattle’s Best Coffee cafes, and Paperchase gifts and
stationery shops, which continue to be drivers of both sales and
increased profitability for their categories.
To address declining sales in the music category, as well as
increasing space available for improved merchandise presentation
and expansion of higher margin categories, we have reduced music
inventories and reallocated floor space in our stores. In
general, this has resulted in greater space being allocated to
books and gifts and stationery. We plan to continue to reduce
the space allocated to music during 2009, as well as movie
inventory, and continue to increase the space devoted to an
expanded assortment of children’s books and other growth
categories within books, gifts and stationery and non-book
products such as teaching materials. There can be no assurance
that these changes will be successful in improving sales and
profitability.
As a result of our focus on existing stores and the need to
preserve liquidity, we have effectively curtailed our new store
program for fiscal 2009. In addition, we continue to evaluate
the performance of existing stores, and additional store
closures could occur in cases where our store profitability
goals are not met. Closures of underperforming Borders
Superstores may result in asset impairment charges and store
closure costs.
Planned
Strategy for 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 an overall decrease in mall
traffic, sluggish bestseller sales and increased competition
from all channels. Although we expect that comparable store
sales percentages will continue to decrease over the next few
years, we believe that the Company has the potential to operate
mall-based stores profitably. An important element of this
strategy is the signing of short-term lease agreements for
desirable locations, which enables us to negotiate rents that
are responsive to the then-current sales environment. We will,
however, continue to close stores that do not meet our
profitability goals, a process which could result in additional
future asset impairments and store closure costs. We have
recently increased the store profitability targets required for
store lease renewals, which could also lead to increased numbers
of asset impairments and store closures. There can be no
assurance that we will be able to right-size the Waldenbooks
Specialty Retail chain at the correct rate, or that such efforts
will be successful in improving profitability of the Waldenbooks
Specialty Retail business.
These measures are expected to improve profitability and free
cash flow in the long term. We will retain stable mall-based
locations that meet acceptable profit and return on investment
objectives and in those stores, change product assortment and
formats to drive sales and profitability. 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
We have suspended growth and investment in our International
businesses. We sold our bookstore operations in Australia, New
Zealand, Singapore, the U.K., and Ireland, in order to focus on
our domestic business.
We believe that the Borders brand has global potential, and that
future International growth, if pursued, will most profitably
utilize a franchise business model, which we have applied
successfully in Malaysia and the United Arab Emirates. There can
be no assurance that we will be successful or profitable in
applying the franchise business model.
Planned
Strategy for
E-commerce
Business
Our business strategy includes the operation of a proprietary
e-commerce
platform, which includes both in-store and online
e-commerce
components. We launched our
e-commerce
Web site during May 2008. Prior to April 2001 and our agreement
with Amazon, we operated a proprietary
e-commerce
business and experienced significant losses. There can be no
assurance that we will be able to operate our current
proprietary
e-commerce
platform reliably or profitably.
Business
Strategy
Our future results will depend, among other things, on our
success in implementing our business strategy. There can be no
assurance that we will be successful in implementing our
business strategy, or that the strategy will be successful in
sustaining acceptable levels of sales growth and profitability.
Seasonality
Our business is highly seasonal, with sales generally highest in
the fourth quarter. In 2008, 33.4% of our sales and 37.1% of our
gross profit were generated in the fourth quarter. Our results
of operations depend significantly upon the holiday selling
season in the fourth quarter and less than satisfactory net
sales for such period could have a material adverse effect on
our 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 our mall
business, overall mall traffic. Because of the seasonal nature
of our business, our operations typically use cash during the
first three quarters of the year and generate cash from
operations in the fourth quarter.
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, we are 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
We guarantee four store leases relating to our 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 $134.0 million. The leases
provide for periodic rent reviews, which could increase our
potential liability. At January 31, 2009, we have reserved
$9.0 million based upon the likelihood that we will be
required to perform under these guarantees.
Also under the terms of the sale agreement, we indemnified the
buyer of our 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
$7.7 million, and we have recorded a tax liability of
approximately $3.1 million based upon the likelihood that
we will be required to perform under the indemnification.
We also guarantee four store leases relating to our former
subsidiaries in Australia and New Zealand. Based upon current
rents, taxes, common area maintenance charges and exchange
rates, the maximum amount of potential future payments
(undiscounted) is approximately $11.2 million. We have
recorded a contingent liability of approximately
$0.6 million based upon the likelihood that we will be
required to perform under the guarantees. Also under the terms
of the sale agreement, we provided certain tax indemnifications
to the purchasers, with the maximum amount of potential future
payments (undiscounted) totaling approximately
$4.9 million. We have recorded a tax liability of
$1.4 million for this contingency.
New
York Stock Exchange Listing
On December 31, 2008, we received a notice from the NYSE
that we did not satisfy one of the NYSE’s standards for
continued listing applicable to our common stock. The NYSE noted
specifically that we were “below criteria” for the
NYSE’s price criteria for common stock because the average
closing price of our common stock was less than $1.00 per share
over a consecutive 30-trading-day period. The NYSE’s price
criteria standard requires that any listed security trade at a
minimum average closing share price of $1.00 during any
consecutive 30-trading-day period. Under the NYSE’s rules,
in order to cure the deficiency for this continued listing
standard, we must bring our share price and average share price
back above $1.00 by six months following receipt of the
non-compliance notice. The NYSE also has advised us that our
current absolute market capitalization was approaching the
minimum standard of total market capitalization of
$25 million over a 30
trading-day
period, which is a minimum threshold standard that does not
allow for any cure period (this standard was subsequently
temporarily lowered to $15 million).
In February 2009, the NYSE suspended the minimum share price and
market capitalization requirements until June 30, 2009.
Based on this suspension, the cure period for our failure to
comply with the minimum price requirement has been extended
until approximately October of 2009. Subject to shareholder
approval, we may implement a reverse split of our common stock,
if required to enable us to meet the NYSE minimum share price
standards. There can be no assurance that our shares will remain
listed on the NYSE or any reverse split that may be completed
will increase our share price sufficiently to permit us to
continue to satisfy the NYSE’s listing standards.
In connection with our financing agreement with Pershing Square,
we have issued warrants to Pershing Square exercisable for a
total of 14.7 million shares of our common stock at an
exercise price of $0.65 per share. Under the terms of the
warrants, if our common stock ceases to be listed on the NYSE or
one of the trading markets of the Nasdaq Stock Market LLC,
holders of the warrants have the right to require us to redeem
the warrants for an amount in cash equal to the fair value of
the redeemed warrants, as determined by an independent financial
expert. To the extent we are unable to pay the redemption price
in cash when due, we will be obligated to pay interest on the
unpaid redemption amount at a rate of 10% per annum.
Accordingly, our inability to maintain the continued listing of
our common stock could have a material adverse effect on our
liquidity and financial condition.
Potential
for Uninsured Losses
We are 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
We are 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.
The capacity, reliability and security of our information
technology hardware and software infrastructure and our ability
to expand and update this infrastructure in response to changing
needs is essential to our ability to execute our business
strategy. In addition, our strategy is dependent on enhancing
our existing merchandising systems, a process currently under
way. There can be no assurances that we 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 our ability to implement our business strategy
and on our financial condition and results of operations.
The failure of our information systems to perform as designed or
our failure to implement and operate our information systems
effectively could disrupt our operations or subject us to
liability, which could have a material adverse effect on our
financial condition and results of operations.
In addition, the confidentiality of our data, as well as that of
our employees, customers and other third parties, must be
protected. We have 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 our financial condition and
results of operations.
Reliance
on Key Personnel
We believe that our continued success will depend to a
significant extent upon the efforts and abilities of Ron
Marshall, President and Chief Executive Officer, as well as
certain of our other key officers of the Company and of our
subsidiaries. The loss of the services of Mr. Marshall or
of other such key officers could have a material adverse effect
on our results of operations. We do not maintain “key
man” life insurance on any of our key officers.
Other
Risks
We are also subject to numerous other risks and uncertainties
which could adversely affect our 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 implementation of our strategic
plan, higher than anticipated costs associated with the closing
of underperforming stores, the continued availability of
adequate capital to fund our operations, the stability and
capacity of our information systems, unanticipated costs or
problems relating to the information technology systems required
for our operations, and changes in accounting rules.
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
January 31, 2009, the average unexpired term under Borders
existing store leases in the United States was 9.0 years
prior to the exercise of any options. The expirations of Borders
leases for stores open at January 31, 2009 are as follows:
Number of
Lease Terms to
Expire During 12 Months Ending on or About January 31
Stores
2010
11
2011
26
2012
8
2013
17
2014
20
2015 and later
433
Total
515
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
possess renewal terms of one to three years. At present, the
average unexpired term under Waldenbooks Specialty Retail
existing store leases is approximately 1.4 years. The
expirations of Waldenbooks Specialty Retail leases for stores
open at January 31, 2009 are as follows:
Number of
Lease Terms to
Expire During 12 Months Ending on or About January 31
Stores
2010
240
2011
79
2012
32
2013
14
2014
9
2015 and later
12
Total
386
We lease all three of our International superstores in Puerto
Rico, with initial lease terms ranging from 15 to
25 years and which all expire in 2015 or later. The average
unexpired term under these leases is approximately
9.8 years as of January 31, 2009. Our Paperchase
operations in the U.K. generally lease stores under operating
leases with terms ranging from six to 20 years. The average
remaining lease term for Paperchase stores in the U.K. is
8.2 years.
We lease a portion of our corporate headquarters in Ann Arbor,
Michigan and own the remaining building and improvements. We
also lease all distribution centers.
Item 3.
Legal
Proceedings
In February 2009, three former employees, individually and on
behalf of a purported class consisting of all current and former
employees who work or worked as General Managers in Borders
stores in the State of California at any time from
February 19, 2005, through February 19, 2009, have
filed an action against the Company in the Superior Court of
California for the County of Orange. The Complaint alleges,
among other things, that the individual plaintiffs and the
purported class members were improperly classified as exempt
employees and that we violated the California Labor Code by
failing to (i) pay required overtime and (ii) provide
meal periods and rest periods, and (iii) that those
practices also violate the California Business and Professions
Code. The relief sought includes damages, restitution,
penalties, injunctive relief,
interest, costs, and attorneys’ fees and such other relief
as the court deems proper. We have not included any liability in
our consolidated financial statements in connection with this
matter. Discovery has not commenced and the Company cannot
reasonably estimate the potential exposure, if any, at this
time. The Company intends to vigorously defend this action.
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.
From August 2001 through May 2008, the Company had agreements
with Amazon to operate websites utilizing the Borders.com and
Waldenbooks.com URLs. These agreements contained 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. The Company and Amazon have been named as defendants in
an action 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
agreements. 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 us in Tennessee and
Nevada have been dismissed. We have not included any liability
in our consolidated financial statements in connection with this
matter and have expensed as incurred all legal costs to date. We
cannot reasonably estimate the amount or range of potential loss
at this time. The complaint covers time periods both before and
during the period that Amazon operated Borders.com, and the
complaint contains broad allegations that cover both us and
Amazon without specifying the total amount sought or the
allocation of alleged responsibility between us and Amazon. The
Company intends to vigorously defend this action.
In March 2009, Amanda Rudd, on behalf of herself and a putative
class consisting of all other customers who received Borders
Gift Cards from March 2005 to March 2009, filed an action in the
Superior Court for the State of California, County of
San Diego alleging that the Company sells gift cards that
are not redeemable for cash in violation of California’s
Business and Professionals Code Section 17200, et seq. The
Complaint seeks disgorgement of profits, restitution,
attorney’s fees and costs and an injunction. The Company
intends to vigorously defend this action. Discovery has not
commenced and the Company cannot reasonably estimate the
potential exposure, if any, at this time.
In addition to the matters described above, we are, from time to
time, involved in or affected by other litigation incidental to
the conduct of our businesses. 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).
Any such other litigation or claims, if ultimately determined in
a manner adverse to us, could have a material adverse effect on
our 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 our Common
Stock and the quarterly dividends declared.
Dividends
High
Low
Declared
Fiscal Quarter 2008
First Quarter
$
11.23
$
5.07
$
—
Second Quarter
$
7.30
$
4.12
$
—
Third Quarter
$
7.80
$
2.44
$
—
Fourth Quarter
$
3.39
$
0.35
$
—
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
Our Common Stock is traded on the New York Stock Exchange under
the symbol BGP.
On December 31, 2008, we received a notice from the NYSE
that we did not satisfy one of the NYSE’s standards for
continued listing applicable to its common stock. The NYSE noted
specifically that we were “below criteria” for the
NYSE’s price criteria for common stock because the average
closing price of our common stock was less than $1.00 per share
over a consecutive 30-trading-day period. The NYSE’s price
criteria standard requires that any listed security trade at a
minimum average closing share price of $1.00 during any
consecutive 30-trading-day period. Under the NYSE’s rules,
in order to cure the deficiency for this continued listing
standard, we must bring our share price and average share price
back above $1.00 by six months following receipt of the
non-compliance notice. The NYSE also has advised us that our
current absolute market capitalization was approaching the
minimum standard of total market capitalization of
$25 million over a 30
trading-day
period, which is a minimum threshold standard that does not
allow for any cure period (this standard was subsequently
temporarily lowered to $15 million).
In February of 2009, the NYSE submitted a request to the
Securities and Exchange Commission (the “SEC”) to
approve the suspension of the NYSE’s minimum share price
and market capitalization requirements until June 30, 2009.
Based on this suspension, the cure period for our failure to
comply with the minimum price requirement would be extended
until approximately October of 2009. Subject to shareholder
approval, we may implement a reverse split of our common stock,
if required to enable us to meet the NYSE minimum share price
standards.
As of March 24, 2009, there were 2,709 holders of record of
our Common Stock.
The Board of Directors has suspended the quarterly dividend
program in order to preserve capital for operations and
strategic initiatives.
In connection with our financing agreement with Pershing Square,
we have issued warrants to Pershing Square exercisable for a
total of 14.7 million shares of our common stock. The
current exercise price of the warrants is $0.65 per share. The
warrants may be cash-settled at the option of the holder under
certain circumstances, including the occurrence of a change in
control of the Company. The warrants feature full anti-dilution
protection, including preservation of the right to convert into
the same percentage of the fully-diluted shares of our 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. The warrants are exercisable until
October 9, 2014.
The following graph compares the cumulative total shareholder
return on our Common Stock from January 24, 2004 through
January 31, 2009 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 24, 2004.
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 were
authorized for issuance on January 31, 2009 (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)
2,567
$
12.53
4,851
(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
January 31, 2009 there were approximately 0.5 million
stock options outstanding under the Prior Plans with a
weighted-average exercise price of $16.92, which, if forfeited
or cancelled, become available for issuance under the 2004 Plan.
At January 31, 2009, there were 1.8 million stock
options outstanding related to the employment inducement award
granted to Mr. Marshall with an exercise price of $0.57 per
share, representing the fair market value on the date of grant,
which, if forfeited or cancelled, also become available for
issuance under the 2004 Plan.
(2)
Number of awards outstanding as of January 31, 2009
includes approximately 317,131 restricted share units and
approximately 2,249,769 stock options.
(3)
Reflects the weighted-average exercise price of stock options
outstanding as of January 31, 2009.
Purchases
of Equity Securities
There were no shares repurchased during the fourth quarter of
fiscal 2008.
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 our
consolidated financial statements and the notes thereto.
Fiscal Year Ended
Jan. 31,
Feb. 2,
Feb. 3,
Jan. 28,
Jan. 23,
(dollars in millions except per share data)
2009
2008
2007(1)
2006(1)
2005
Statement of Operations Data
Borders Superstores sales
$
2,625.4
$
2,847.2
$
2,750.0
$
2,709.5
$
2,588.9
Waldenbooks Specialty Retail sales
480.0
562.8
663.9
744.8
779.9
International
sales(2)
136.7
145.1
118.4
99.9
63.9
Total
sales(2)
$
3,242.1
$
3,555.1
$
3,532.3
$
3,554.2
$
3,432.7
Operating income
(loss)(2)
$
(149.2
)
$
4.1
$
5.2
$
172.0
$
195.5
Income (loss) from continuing
operations(2)
$
(184.7
)
$
(19.9
)
$
(21.9
)
$
96.7
$
112.9
Income (loss) from operations of discontinued operations
(1.7
)
(8.7
)
(129.4
)
4.3
19.0
Loss from disposal of discontinued operations
(0.3
)
(128.8
)
—
—
—
Income (loss) from discontinued operations
(2.0
)
(137.5
)
(129.4
)
4.3
19.0
Net income (loss)
$
(186.7
)
$
(157.4
)
$
(151.3
)
$
101.0
$
131.9
Per Share Data
Diluted (basic) earnings (loss) from continuing operations per
common
share(2)
(3.07
)
(0.34
)
(0.35
)
1.36
1.45
Diluted (basic) earnings (loss) from discontinued operations per
common share
(0.03
)
(2.34
)
(2.09
)
0.06
0.24
Diluted (basic) earnings (loss) per common share
$
(3.10
)
$
(2.68
)
$
(2.44
)
$
1.42
$
1.69
Cash dividends declared per common share
$
—
$
0.44
$
0.41
$
0.37
$
0.33
Balance Sheet Data
Working capital — continuing
operations(2)
$
77.5
$
(6.3
)
$
69.0
$
254.9
$
486.2
Working capital
$
77.5
$
38.2
$
127.7
$
326.7
$
569.4
Total assets — continuing
operations(2)
$
1,609.0
$
2,147.1
$
2,234.9
$
2,146.8
2,220.6
Total assets
$
1,609.0
$
2,302.7
$
2,613.4
$
2,572.2
$
2,628.8
Short-term borrowings — continuing
operations(2)
$
329.0
$
548.4
$
501.4
$
183.0
$
138.7
Short-term borrowings
$
329.0
$
548.4
$
542.0
$
206.4
$
141.0
Long-term debt, including current portion
$
6.6
$
5.6
$
5.4
$
5.6
$
55.9
Long-term capital lease obligations, including current portion
$
2.0
$
—
$
0.4
$
0.5
$
0.1
Stockholders’ equity
$
262.6
$
476.9
$
642.0
$
927.8
$
1,088.9
(1)
Our 2006 and 2005 fiscal years
consisted of 53 weeks.
(2)
Excludes the results of
discontinued operations (Borders Ireland Limited, Books etc.,
U.K. Superstores, Australia, New Zealand, and Singapore).
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
General
Borders Group, Inc., through our subsidiaries, Borders, Inc.
(“Borders”), Walden Book Company, Inc.
(“Waldenbooks”), and others (individually and
collectively, “we,”“us” or the
“Company”), is an operator of book, music and movie
superstores and mall-based bookstores. At January 31, 2009,
we operated 518 superstores under the Borders name, including
515 in the United States and three in Puerto Rico. We also
operated 386 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, we own and operate United Kingdom-based Paperchase
Products Limited (“Paperchase”), a designer and
retailer of stationery, cards and gifts. As of January 31,2009, Paperchase operated 117 stores, primarily in the United
Kingdom, and Paperchase shops have been added to 333 domestic
Borders superstores.
In addition, we operate a proprietary
e-commerce
Web site, www.Borders.com, which was launched in May 2008.
On June 10, 2008, we sold bookstores that we had owned and
operated in Australia, New Zealand and Singapore. On
September 21, 2007, we sold bookstores that we had owned
and operated in the U.K. and Ireland. The sale of these
businesses is discussed below under the caption
“Discontinued Operations.”
Business
Strategy
Our business strategy is designed to address the most
significant opportunities and challenges facing the company. In
particular, our challenges include maturity in our primary
product categories, an extremely competitive marketplace
(including both store-based and online competitors) and product
formats that are evolving from physical formats to digital
formats. These factors, among others, have contributed to
declines in our comparable store sales measures and in our sales
per square foot measures over the last several years. These
declines have, in turn, negatively impacted profitability.
The U.S. book retailing industry is a mature industry, and
growth has slowed in recent years. Books represent our primary
product category in terms of sales. Rather than opening new book
superstores, we believe that there is greater near-term
opportunity in improving the productivity of existing
superstores and in enhancing Internet-based sales channels. In
particular, we see potential in combining the greater selection
offered by Internet retailing with the inviting atmosphere of a
physical store.
We believe that Web-based retailing will continue to increase in
popularity and market share as a distribution method for
physical book, music, and movie merchandise. In addition, the
Internet has enabled changes in the formats of many of the
product categories we offer. Sales of music in the physical
compact disc format, for example, have declined over the past
several years, as consumers have increasingly turned to digital
downloads of music. This trend, which we expect to continue, is
also beginning to manifest itself in the book and movie
categories. The shift toward digital formats represents an
opportunity for us as we continue to strengthen our Web-based
capabilities.
Our physical stores, however, remain integral to our future
success. The environment in which our stores operate is
intensely competitive and includes not only Internet-based
retailers and book superstore operators, but also mass merchants
and other non-bookseller retailers. Because of this, the
industry has experienced significant price competition over the
last several years, which has decreased gross margin percentages
for us and some competitors. We anticipate that these trends
will continue, rewarding those who can differentiate themselves
by offering a distinctive customer experience, and who can
operate efficiently. Therefore, we remain dedicated to the
operational improvement of our stores and offering our customers
a rich shopping experience in a relaxing, enjoyable atmosphere.
The principal components of our strategic plan are as follows:
Grow comparable
store sales and profitability in Borders
Superstores. We
are focused on improving key retailing practices at our
superstores in order to become the book store for the serious
reader. This includes increasing effectiveness of merchandise
presentation, improving assortment planning, expense
reduction initiatives replenishment and supply chain
effectiveness, and ensuring consistency of execution across the
chain. A key element of this strategy is the enhancement of
certain key categories, which will help to distinguish our
domestic superstores from competitors. These categories include
children’s, wellness, cooking, educational materials,
Seattle’s Best Coffee cafes, and Paperchase
gifts & stationery shops, which continue to be drivers
of both sales and increased profitability for their categories.
To address declining sales in the music category, as well as
increasing space available for improved merchandise presentation
and expansion of higher margin categories, we have reduced music
inventories and reallocated floor space in our stores. In
general, this has resulted in greater space being allocated to
an expanded assortment of children’s books and other growth
categories within books, gifts and stationery and non-book
products such as teaching materials. We plan to continue to
reduce the space allocated to music during 2009, as well as
movie inventory, and continue to increase the space devoted to
gifts and stationery and books.
Also, we continue to develop our loyalty program, Borders
Rewards, which has grown to approximately 32 million
members and continues to grow. We will continue to focus on
increasing the profitability of the program, on driving revenue
through partnerships with other organizations, and increasing
sales by employing customer data to tailor promotions that meet
specific customer needs and interests.
As a result of our focus on existing stores and the need to
preserve liquidity, we have effectively curtailed our new store
program. In addition, we continue to evaluate the performance of
existing stores, and additional store closures could occur in
cases where our store profitability goals are not met.
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 an overall decrease in mall traffic,
sluggish bestseller sales and increased competition from all
channels. Although we expect that comparable store sales
percentages will continue to decrease over the next few years,
we believe that the Company has the potential to operate
mall-based stores profitably. An important element of this
strategy is the signing of short-term lease agreements for
desirable locations, which enables us to negotiate rents that
are responsive to the then-current sales environment. We will,
however, continue to close stores that do not meet our
profitability goals, a process which could result in additional
future asset impairments and store closure costs. We have
recently increased the store profitability targets required for
store lease renewals, which could also lead to increased numbers
of asset impairments and store closures.
These measures are expected to improve profitability and free
cash flow in the long term. We will retain stable mall-based
locations that meet acceptable profit and return on investment
objectives and in those stores, change product assortment and
formats to drive sales and profitability.
Leverage
innovation, technology and strategic alliances to differentiate
our business. We
will continue to drive sales to our recently-launched Web site,
Borders.com, and continue our efforts to integrate the site with
our physical stores. Borders.com launched in May 2008, and
in-store
e-commerce
kiosks were introduced into Borders stores during the fourth
quarter of 2008. This strategy creates a distinctive,
cross-channel experience for customers, allows us to engage in
key partnerships that are expected to build incremental revenues
and margins, and enables the connection of
e-commerce
sales to the Borders Rewards loyalty program.
Borders.com also provides us a platform for delivering digital
content to customers, and we currently offer a limited selection
of digital downloads.
In order to focus on our domestic business, we have suspended
growth and investment in our International businesses. We
believe that the Borders brand has global potential, and that
future international growth, if pursued, will most profitably
utilize a franchise business model, which we have applied
successfully in Malaysia and the United Arab Emirates.
We believe that fiscal 2009 will be challenging for retailers
due to continued uncertainty in the economic environment, and as
a consequence we will sharpen our focus on maximizing cash flow
and profitability. In addition, we will continue to review all
cost structures with the goal of reducing expenses, and will
continue
to reduce working capital needs by further driving inventory
productivity, thus improving cash flow and lowering supply chain
costs. Driven by these factors, we expect to reduce expenses,
including corporate, stores and distribution expenses, by
$120.0 million in 2009 compared to 2008.
We anticipate that such cost- and cash-savings measures will
improve both profitability and liquidity in 2009 as compared to
2008, assuming that 2009 comparable store sales trends are
consistent with those seen in 2008. However, we expect certain
potential liquidity constraints in 2009, which are discussed
further in “Liquidity and Capital Resources.”
Other
Information
We operate a loyalty program, Borders Rewards. Membership in
Borders Rewards is free, with no enrollment costs or annual
fees. 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. In addition, we offer Bonus Rewards Events,
whereby members get special deals periodically throughout the
year.
We have an agreement with Berjaya Corporation Berhad
(“Berjaya”), a publicly-listed diversified corporation
headquartered in Malaysia, establishing a franchise arrangement
under which Berjaya operates Borders stores in Malaysia. We also
have 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 operates Borders stores in the United Arab
Emirates and other Gulf Cooperation Council (“GCC”)
countries.
Through our subsidiaries, we had agreements with Amazon.com,
Inc. (“Amazon”) to operate Web sites utilizing the
Borders.com and Waldenbooks.com URLs (the “Web
Sites”). Under these agreements, Amazon was the merchant of
record for all sales made through the Web Sites, and determined
all prices and other terms and conditions applicable to such
sales. Amazon was responsible for the fulfillment of all
products sold through the Web Sites and retained all payments
from customers. We received referral fees for products purchased
through the Web Sites. The agreements contained 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. Taxes were not collected with respect to products sold on
the Web Sites except in certain states. As previously discussed,
we launched our proprietary
e-commerce
site during May 2008, and the Amazon agreements have been
terminated subject to the survival of indemnification and
certain other provisions.
During the fourth quarter of 2008, we purchased the remaining 3%
ownership interest in Paperchase that we had not previously
owned. As a result, our ownership of Paperchase increased to
100%. The cash consideration was $3.6 million.
Our fiscal year ends on the Saturday closest to the last day of
January. Fiscal 2008 consisted of 52 weeks, and ended on
January 31, 2009. Fiscal 2007 consisted of 52 weeks,
and ended on February 2, 2008. Fiscal 2006 consisted of
53 weeks, and ended on February 3, 2007. References
herein to years are to our fiscal years.
Discontinued
Operations
On June 10, 2008, we sold all of the outstanding shares of
Borders Australia Pty Limited, Borders New Zealand Limited
and Borders Pte. Ltd. to companies affiliated with A&R
Whitcoulls Group Holdings Pty Limited (“the
Purchasers”). Funds managed by Pacific Equity Partners Pty
Limited are the principal shareholders of A&R Whitcoulls
Group Holdings Pty Limited, a leading bookseller in Australia
and New Zealand. The following is a summary of the
principal terms of the Agreement:
The consideration for the sale was (a) a cash payment of
$97.3 million, (b) a deferred payment of
$3.3 million, payable on or about January 1, 2009 if
certain operating results are achieved, and (c) a deferred
payment of up to $6.5 million payable on or about
March 31, 2009 if certain actual operating
results for fiscal 2008 exceed a specified level. We do not
expect payment of the consideration described in (b) or (c).
The sale agreement included all 30 Borders Superstores located
in Australia, New Zealand and Singapore. 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 the Purchasers. With respect to the contingent
lease obligations, based upon current rents, taxes, common area
maintenance charges and exchange rates, the maximum amount of
potential future payments (undiscounted) is approximately
$11.2 million. We have recorded a contingent liability of
approximately $0.6 million based upon the likelihood that
we will be required to perform under the guarantees. Also under
the terms of the sale agreement, we provided certain tax
indemnifications to the Purchasers, with the maximum amount of
potential future payments (undiscounted) totaling approximately
$4.9 million. We have recorded a tax liability of
$1.4 million for this contingency.
We have not recorded any amount related to the contingent
deferred consideration of $9.8 million as of
January 31, 2009. As a result of the sale of the Australia,
New Zealand and Singapore bookstores, a portion of the
intangible asset attributable to these businesses, resulting
from our financing agreement with Pershing Square and which
totaled $17.5 million, was added to the carrying value of
the related businesses and expensed upon disposal, and is
included in the loss on disposal.
On September 21, 2007, we sold our 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 $14.3 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.; and (iv) 7% loan
notes of approximately $2.4 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 $134.0 million. The
leases provide for periodic rent reviews, which could increase
our 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 us to take a new (replacement) lease,
the landlord would have an obligation to attempt to re-lease the
premises, which could further reduce our potential liability. At
January 31, 2009, we have reserved $9.0 million based
upon the likelihood that we will be required to perform under
these guarantees.
Also under the terms of the sale agreement, we 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 $7.7 million, and we
have recorded a tax liability of approximately $3.1 million
based upon the likelihood that we will be required to perform
under the indemnification.
We have not recorded any amount related to the contingent
deferred consideration of $14.3 million as of
January 31, 2009. We will record this amount once the
realization of such amount is resolved beyond a reasonable
doubt. We have attributed only a nominal value to our equity
interest in Bookshop Acquisitions Ltd. and to our 7% loan notes.
These disposals resulted in losses of $0.3 million and
$128.8 million for the years ended January 31, 2009
and February 2, 2008, respectively, while the operation of
the disposed businesses resulted in losses of $1.7 million,
$8.7 million, and $129.4 million for the years ended
January 31, 2009, February 2, 2008 and
February 3, 2007, respectively.
The following table presents our consolidated statements of
operations data, as a percentage of sales, for the three most
recent fiscal years. All amounts reflect the results of our
continuing operations unless otherwise noted.
Consolidated sales decreased $313.0 million, or 8.8%, to
$3,242.1 million in 2008 from $3,555.1 million in
2007. This resulted from decreased sales in all segments.
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 our mall-based seasonal
businesses.
Comparable store sales for Borders Superstores decreased 10.8%
in 2008. This was primarily due to a significant decline in
customer traffic that began in September 2008 and continued
through the fourth quarter, as well as the 2007 release of the
final book in the Harry Potter series. These items both
contributed to negative comparable store sales in trade books of
8.2%. Also contributing to the decline in comparable store sales
were decreased comparable store sales in the multimedia
categories, primarily due to continuing negative sales trends of
the CD and DVD formats and the planned reduction in inventory
and floor space devoted to the category. Partially offsetting
these declines were positive comparable store sales in gifts and
stationery. These items contributed to a comparable store sales
decline in non-book categories of 16.1% in 2008. Also, on a
comparable store basis, transactions decreased by 7.0% and
transaction dollars decreased by 4.1%. The impact of price
changes on comparable store sales was not significant.
Waldenbooks Specialty Retail’s comparable store sales
decreased 5.1% in 2008, also primarily due to a significant
decline in customer traffic that began in September 2008 and
continued through the fourth quarter, as well as the 2007
release of the final book in the Harry Potter series. Also, on a
comparable store
sales basis, transactions decreased by 4.2% and transaction
dollars decreased by 0.8%. The impact of price changes on
comparable store sales was not significant.
Other
revenue
Other revenue for the Borders segment primarily consists of
income recognized from unredeemed gift cards, as well as
marketing revenue earned through partnerships with third
parties, wholesale revenue earned through sales of merchandise
to other retailers and franchisees, and referral fees received
from Amazon as part of the Web site agreement in 2007. Other
revenue in the Waldenbooks Specialty Retail segment primarily
consists of income recognized from unredeemed gift cards.
Other revenue decreased $9.0 million, or 21.3%, to
$33.3 million in 2008 from $42.3 million in 2007, due
to a decrease in the Borders Superstores segment. This resulted
from decreased income recognized from unredeemed gift cards in
2008, which was due to a revised estimate of our gift card
breakage rate. This was partially offset by increased marketing
revenue earned through partnerships with third parties. Also
contributing to the decrease was a decrease in the Waldenbooks
Specialty Retail segment, which was also affected by our
revision of the gift card breakage rate.
Gross
margin
Consolidated gross margin decreased $138.5 million, or
14.9%, to $790.6 million in 2008 from $929.1 million
in 2007. As a percentage of sales, consolidated gross margin
decreased 1.8%, to 24.3% in 2008 from 26.1% in 2007. This was
due to a decrease in the Borders Superstore segment, primarily
due to increased occupancy costs as a percentage of sales, which
was a result of the de-leveraging of costs driven by negative
comparable store sales. Gross margin rate was also negatively
impacted by increased store markdowns, increased freight costs,
and increased cost of sales related to merchandise sales to the
new owners of Borders Asia Pacific, all as a percentage of
sales. Also contributing to the decline in the gross margin rate
was decreased other revenue. These items were partially offset
by decreased promotional discounts and decreased shrinkage
expense as a percentage of sales. Also contributing to the
consolidated decrease in the gross margin rate was a decrease in
the Waldenbooks Specialty Retail segment. This was primarily due
to increased promotional discounts as a percentage of sales.
This increase in promotional discounts was due to lower store
count in 2008 as compared to 2007, while we operated essentially
the same number of calendar kiosks, which discount merchandise
to a higher degree than our stores. In addition, we closed 112
stores in 2008 compared to 75 stores closed in 2007, which
negatively impacted the gross margin rate, due to the
liquidation of inventory prior to the stores’ closing. Also
contributing to the decline in the gross margin rate were
increased occupancy costs as a percentage of sales, due to the
de-leveraging of expense caused by the decrease in comparable
store sales, and decreased other revenue. Partially offsetting
these items were decreased distribution and other costs as a
percentage of sales.
We classify the following items as “Cost of merchandise
sold (includes occupancy)” on our 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). Our gross margin
may not be comparable to that of other retailers, which may
exclude the costs related to their distribution network 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”) decreased $67.4 million, or 7.4%,
to $839.6 million in 2008 from $907.0 million in 2007.
As a percentage of sales, SG&A increased 0.4%, to 25.9% in
2008 from 25.5% in 2007, primarily due to an increase as a
percentage of sales in the Borders Superstores segment. This
resulted from severance costs related to management and staff
reductions in the corporate office and in the stores during
2008. This was partially offset by decreased corporate payroll
and operating expenses and decreased advertising costs as a
percentage of sales, all a result of expense
reduction initiatives. Store payroll and operating expenses in
Borders Superstores were flat as a percentage of sales in 2008
compared to 2007 while comparable store sales declined over the
same period, reflecting the results of our expense reduction
initiatives. Partially offsetting the increase as a percentage
of sales in the Borders Superstores segment was a decrease in
the Waldenbooks Specialty Retail segment. This was primarily due
to a decrease in corporate and store payroll and operating
expenses as a percentage of sales, primarily as a result of
expense reduction initiatives. This was partially offset by
severance costs related to management and staff reductions in
the corporate office and in the stores during 2008, and
increased advertising and other costs as a percentage of sales.
We classify the following items as “Selling, general and
administrative expenses” on our 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.
Goodwill
Impairment
We perform our annual test for goodwill impairment at the end of
each fiscal year. As a result of our annual test on
January 31, 2009, all of the goodwill allocated to the
Borders Superstores segment was impaired, and we recorded a
resulting charge of $40.3 million in the fourth quarter of
2008. This impairment was primarily the result of changes in
fair value due to the material decline in our market
capitalization during the fourth quarter of 2008.
Asset
Impairments and Other Writedowns
During 2008, due to the impairment of the goodwill related to
the Borders Superstores segment, the current economic
environment and our operating results, we concluded that there
were sufficient indicators to require the performance of
long-lived asset impairment tests at the end of the third and
fourth quarters of 2008. As a result of these tests, we recorded
a pre-tax charge of $53.5 million, comprised of the
following: $48.1 million related to Borders Superstores,
$4.7 million related to Waldenbooks Specialty Retail stores
and $0.7 million related to one Borders store in Puerto
Rico.
Also during 2008, we recorded a $3.6 million charge for the
closing costs of our stores, consisting of the following:
$3.5 million related to the closure of six Borders
Superstores and $0.1 million related to the closure of 112
Waldenbooks Specialty Retail stores. The charge for both
segments consisted primarily of asset impairments.
In 2007, assets of underperforming Borders Superstores were
tested for impairment and as a result, we recorded a charge of
$5.5 million. In addition, we recorded a fourth quarter
2007 charge of $0.7 million related to underperforming
Waldenbooks Specialty Retail stores. In the International
segment, we recorded an asset impairment charge of
$0.5 million related to one Borders store in Puerto Rico.
Also during 2007, we recorded a $6.3 million charge for the
closing costs of our stores, consisting of the following:
$5.6 million related to the closure of 8 Borders
Superstores and $0.7 million related to the closure of 75
Waldenbooks Specialty Retail stores. The charge for both
segments consisted primarily of asset impairments.
Interest
expense
Consolidated interest expense decreased $37.8 million, or
87.7%, to $5.3 million in 2008 from $43.1 million in
2007. This was primarily a result of non-cash income recognized
on the fair market value adjustment of the warrant liability of
$40.1 million in 2008. Also impacting interest expense were
lower debt levels during 2008 as compared to 2007, partially
offset by the amortization of the term loan discount of
$7.0 million. We paid cash interest of $36.3 million
in 2008 compared to $43.8 million in 2007.
During 2008, we recorded a non-cash charge of $86.1 million
related to establishing a full valuation allowance against our
domestic net deferred tax assets. In making this determination,
we utilized a consistent approach that considers our three-year
cumulative loss position. During the year, we determined a full
valuation allowance against our net domestic deferred tax assets
was needed, based primarily on our assumption that we would be
in a three-year cumulative loss position as of year-end 2008,
along with certain other factors.
Our effective tax rate was -19.5% in 2008 compared to 49.0% in
2007. The effective tax rate of -19.5% in 2008 differed from the
federal statutory rate primarily due to the unfavorable impact
of recording the valuation allowance described above. Also
impacting the effective rate was the non-deductible goodwill
impairment charge, offset by the favorable impact of non-taxable
book income associated with the re-measure of stock warrants to
fair market value. The effective tax rate of 49.0% in 2007
differed from the federal statutory rate primarily due to the
favorable impact of the realization of the benefit of prior year
foreign net operating loss carry-forwards.
Loss
from continuing operations
Due to the factors mentioned above, loss from continuing
operations as a percentage of sales increased to 5.6% in 2008
from 0.6% in 2007, and loss from continuing operations dollars
increased to $184.7 million in 2008 from $19.9 million
in 2007.
Consolidated
Results — Comparison of 2007 to 2006
Sales
Consolidated sales increased $22.8 million, or 0.6%, to
$3,555.1 million in 2007 from $3,532.3 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. Partially offsetting this increase
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 extra week in
fiscal 2006, sales would have increased 2.5%.
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 our mall-based seasonal
businesses. The calculation of 2007 comparable store sales
increases assume that 2007 and 2006 consisted of 52 weeks.
Comparable store sales for 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.
Other
Revenue
Other revenue for the Borders segment primarily consists of
income recognized from unredeemed gift cards, as well as revenue
from franchisees. It 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 increased $5.2 million, or 14.0%, to
$42.3 million in 2007 from $37.1 million in 2006. The
increase is primarily due to an increase in the Borders
Superstores, partially offset by a decrease in the Waldenbooks
Specialty Retail segment. The increase in Borders Superstores
was primarily due to increased income recognized from unredeemed
gift cards in 2007.
Gross
Margin
Consolidated gross margin decreased $24.6 million, or 2.6%,
to $929.1 million in 2007 from $953.7 million in 2006.
As a percentage of sales, it decreased by 0.9%, to 26.1% in 2007
from 27.0% in 2006. This was due to a decrease in the Borders
Superstores segment, partially offset by an increase in the
Waldenbooks Specialty Retail segment’s gross margin as a
percentage of sales. The decrease in the 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 Harry Potter title and Borders
Rewards, and increased distribution costs, primarily due to
increased product returns and the associated handling costs.
We classify the following items as “Cost of merchandise
sold (includes occupancy)” on our 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). Our 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 $27.2 million, or 3.1%,
to $907.0 million in 2007 from $879.8 million in 2006.
As a percentage of sales, it increased by 0.5%, to 25.5% in 2007
from 25.0% in 2006. This increase primarily resulted from
increased SG&A expenses as a percentage of sales for the
Borders Superstores segment, partially offset by decreased
SG&A expense in the Waldenbooks Specialty Retail segment.
The 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 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.
We classify the following items as “Selling, general and
administrative expenses” on our 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 2007, we 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 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, we recorded a charge of $6.3 million in
2007 related to the closure costs of certain stores. Of this,
$5.6 million related to Borders Superstores and
$0.7 million related to Waldenbooks Specialty Retail stores.
In 2006, we 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 Borders Superstores and
$10.1 million related to Waldenbooks Specialty Retail
stores. In addition, we recorded a charge of $7.2 million
in 2006 related to the closure costs of certain stores. Of this,
$4.1 million related to 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
44.1%, to $43.1 million in 2007 from $29.9 million in
2006. This was primarily a result of increased borrowings to
fund capital expenditures, seasonal inventory growth and
dividend payments. We paid cash interest of $43.8 million
in 2007 compared to $32.8 million in 2006.
Taxes
The effective tax rate differed for the years presented from the
federal statutory rate primarily due to the favorable impact of
the realization of the benefits of prior year foreign net
operating loss carry-forwards in 2007, partially offset by the
unfavorable impact of non-deductible losses. The effective tax
rate was 49.0% in 2007 and 11.3% in 2006.
Loss
from Continuing Operations
Due to the factors mentioned above, loss from continuing
operations as a percentage of sales remained flat at 0.6% in
2007 compared to 2006, and loss from continuing operations
dollars decreased to $19.9 million in 2007 from
$21.9 million in 2006.
Borders
Superstores
(dollar amounts in
millions)
2008
2007
2006
Sales
$
2,625.4
$
2,847.2
$
2,750.0
Other revenue
$
26.5
$
35.3
$
31.6
Operating income (loss)
$
(100.9
)
$
30.6
$
92.4
Operating income (loss) as % of sales
(3.8
)%
1.1
%
3.4
%
Store openings
12
18
31
Store closings
6
8
5
Store count
515
509
499
Borders
Superstores — Comparison of 2008 to 2007
Sales
Borders Superstore sales decreased $221.8 million, or 7.8%,
to $2,625.4 million in 2008 from $2,847.2 million in
2007. This decrease was driven by declining comparable store
sales of $303.4 million, partially offset by
non-comparable sales of $35.9 million associated with 2008
and 2007 store openings, and Borders.com sales of
$45.7 million in 2008.
Other
revenue
Other revenue decreased $8.8 million, or 24.9%, to
$26.5 million in 2008 from $35.3 million in 2007. This
was primarily due to decreased income recognized from unredeemed
gift cards in 2008 of $11.5 million, due to a revised
estimate of our gift card breakage rate. This was partially
offset by marketing revenue earned through partnerships with
third parties of $2.3 million.
Gross
margin
Gross margin as a percentage of sales decreased 1.7%, to 24.3%
in 2008 from 26.0% in 2007. This was primarily due to increased
occupancy costs of 1.3% as a percentage of sales, which was a
result of the de-leveraging of costs driven by negative
comparable store sales. Gross margin rate was also negatively
impacted by increased store markdowns and other costs of 0.6%,
increased freight costs of 0.3% and increased cost of sales
related to merchandise sales to the new owners of Borders Asia
Pacific of 0.2%, all as a percentage of sales. Also contributing
to the decline in the gross margin rate was decreased other
revenue of 0.2% as a percentage of sales. These items were
partially offset by decreased promotional discounts of 0.6% and
decreased shrinkage expense of 0.3% as a percentage of sales.
Gross margin dollars decreased $103.4 million, or 14.0%, to
$636.8 million in 2008 from $740.2 million in 2007,
due primarily to the decrease in gross margin percentage noted
above, and the decrease in comparable store sales, partially
offset by a landlord lease termination payment of
$7.5 million received during the third quarter of 2008.
Selling,
general and administrative expenses
SG&A as a percentage of sales increased 0.1%, to 24.5% in
2008 from 24.4% in 2007, primarily due to severance costs of
0.4% as a percentage of sales, related to management and staff
reductions in the corporate office and in the stores during
2008. This was partially offset by decreased corporate payroll
and operating expenses of 0.2% and decreased advertising costs
of 0.1% as a percentage of sales, all a result of expense
reduction initiatives. Store payroll and operating expenses were
flat as a percentage of sales in 2008 compared to 2007 while
comparable store sales declined over the same period, reflecting
the results of our expense reduction initiatives.
SG&A dollars decreased $10.2 million, or 1.5%, to
$683.4 million in 2008 from $693.6 million in 2007,
primarily due to the company’s expense reduction initiative.
Goodwill
Impairment
We perform our annual test for goodwill impairment at the end of
each fiscal year. As a result of our annual test on
January 31, 2009, all of the goodwill allocated to the
Borders Superstores segment was impaired, and we recorded a
resulting charge of $40.3 million in the fourth quarter of
2008. This impairment was primarily the result of changes in
fair value due to the material decline in our market
capitalization during the fourth quarter of 2008.
Asset
Impairments and Other Writedowns
During 2008, due to the impairment of the goodwill related to
the Borders Superstores segment, the current economic
environment and our operating results, we concluded that there
were sufficient indicators to require the performance of
long-lived asset impairment tests at the end of the third and
fourth quarters of 2008. As a result of these tests, we recorded
a pre-tax charge of $48.1 related to Borders Superstores. In
addition, we recorded a charge of $3.5 million related to
the closure costs of certain Borders stores.
In 2007, we recorded a $5.5 million writedown related to
the impairment of assets at underperforming Borders stores. In
addition, we recorded a charge of $5.6 million related to
the closure costs of certain Borders stores.
Operating
loss
Due to the factors mentioned above, operating loss as a
percentage of sales increased to a loss of 3.8% in 2008 compared
to income of 1.1% in 2007, and operating loss dollars increased
to a loss of $100.9 million in 2008 compared to income of
$30.6 million in 2007.
Borders
Superstores — Comparison of 2007 to 2006
Sales
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
Other revenue for Borders Superstores 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 2007.
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.
We have processes in place to monitor store performance and
other factors for indicators of asset impairment. When an
indicator of impairment is present, we evaluate the
recoverability of the affected assets. As a result of this
evaluation in 2007, we recorded a $5.5 million writedown
related to the impairment of assets at underperforming Borders
stores. In addition, we recorded a charge of $5.6 million
related to the closure costs of certain Borders stores.
In 2006, we recorded a $9.0 million writedown related to
the impairment of assets at certain underperforming Borders
stores. In addition, we 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.
Waldenbooks
Specialty Retail
(dollar amounts in
millions)
2008
2007
2006
Sales
$
480.0
$
562.8
$
663.9
Other revenue
$
1.7
$
3.8
$
4.3
Operating loss
$
(27.5
)
$
(21.4
)
$
(78.0
)
Operating loss as % of sales
(5.7
)%
(3.8
)%
(11.7
)%
Store openings
8
1
10
Store closings
112
75
124
Store count
386
490
564
Waldenbooks
Specialty Retail — Comparison of 2008 to
2007
Sales
Waldenbooks Specialty Retail sales decreased $82.8 million,
or 14.7%, to $480.0 million in 2008 from
$562.8 million in 2007. This was comprised of decreased
non-comparable store sales associated with 2008 and 2007 store
closings of $57.7 million and decreased comparable store
sales of $25.1 million.
Other
revenue
Other revenue decreased $2.1 million, or 55.3%, to
$1.7 million in 2008 from $3.8 million in 2007. This
was due to decreased income recognized from unredeemed gift
cards in 2008 of $2.1 million, due to a revised estimate of
our gift card breakage rate.
Gross
margin
Gross margin as a percentage of sales decreased 1.7%, to 21.7%
in 2008 from 23.4% in 2007. This was primarily due to increased
promotional discounts of 1.3% as a percentage of sales. This
increase in promotional discounts was primarily due to lower
store count in 2008 as compared to 2007, while we operated
essentially the same number of calendar kiosks, which discount
merchandise to a higher degree than our stores. In addition, we
closed 112 stores in 2008 compared to 75 stores closed in 2007,
which negatively impacted the gross margin rate by 0.8% as a
percentage of sales, due to the liquidation of inventory prior
to the stores’ closing. Also contributing to the decline in
the gross margin rate were increased occupancy costs of 0.3% as
a percentage of sales, due to the de-leveraging of expense
caused by
the decrease in comparable store sales, and decreased other
revenue of 0.3% as a percentage of sales. Partially offsetting
these items were decreased distribution and other costs of 1.0%
as a percentage of sales.
Gross margin dollars decreased $27.6 million, or 20.9%, to
$104.3 million in 2008 from $131.9 million in 2007,
primarily due to the decline in the gross margin rate noted
above, store closings and the decline in comparable store sales.
Selling,
general and administrative expenses
SG&A as a percentage of sales decreased 0.6%, to 26.4% in
2008 from 27.0% in 2007. This was primarily due to a decrease in
corporate payroll and operating expenses of 0.9% and decreased
store payroll and operating expenses of 0.2% as a percentage of
sales, primarily as a result of expense reduction initiatives.
This was partially offset by severance costs of 0.3% as a
percentage of sales, related to management and staff reductions
in the corporate office and in the stores during 2008, and
increased advertising and other costs of 0.2% as a percentage of
sales.
SG&A dollars decreased $24.9 million, or 16.4%, to
$126.9 million in 2008 from $151.8 million in 2007,
primarily due to store closures and expense reductions.
Asset
Impairments and Other Writedowns
During 2008, due to the current economic environment and
Waldenbooks Specialty Retail’s operating results, we
concluded that there were sufficient indicators to require the
performance of long-lived asset impairment tests at the end of
the third and fourth quarters of 2008. As a result of these
tests, we recorded a pre-tax charge of $4.7 million related
to Waldenbooks Specialty Retail stores. In addition, we recorded
a charge of $0.1 million related to the closure of 112
Waldenbooks Specialty Retail stores.
In 2007, Waldenbooks Specialty Retail incurred asset impairment
charges of $0.7 million related to underperforming stores.
In addition, we recorded a charge of $0.7 million related
to the closure costs of certain Waldenbooks Specialty Retail
stores in 2007.
Operating
loss
Due to the factors mentioned above, operating loss as a
percentage of sales increased to 5.7% in 2008 from 3.8% in 2007,
while operating loss dollars increased to $27.5 million in
2008 from $21.4 million in 2007.
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 $28.9 million, or 16.0%, to
$152.1 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
In 2007, due to the segment’s operating results,
Waldenbooks Specialty Retail incurred asset impairment charges
of $0.7 million related to underperforming stores. In
addition, we 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 we 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 we 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.
International
(dollar amounts in
millions)
2008
2007
2006
Operating income
$
3.7
$
8.0
$
6.1
International —
Comparison of 2008 to 2007
Operating
Income
Operating income decreased $4.3 million to
$3.7 million in 2008 from $8.0 million in 2007. This
was primarily a result of decreased operating income generated
by our Paperchase U.K. business, primarily due to a decline in
sales in 2008.
International —
Comparison of 2007 to 2006
Operating
Income
Operating income increased $1.9 million to
$8.0 million in 2007 from $6.1 million in 2006. This
was primarily a result of increased operating income generated
by our Paperchase U.K. business.
The Corporate segment includes various corporate governance and
corporate incentive costs.
Corporate —
Comparison of 2008 to 2007
Operating loss dollars increased $11.4 million, or 87.0%,
to $24.5 million in 2008 from $13.1 million in 2007.
This was primarily due to costs incurred to explore strategic
alternatives and expense reduction initiatives in 2008 of
$11.2 million, and an increase in the U.K. lease guarantee
liability of $2.9 million. These increases were partially
offset by expense reductions.
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.
Costs
Associated with Turnaround Effort
During 2008 we launched a turnaround effort designed to return
our business to profitability. This effort included exploring
strategic alternatives for our business, including the possible
sale of some or all of our business, expense reduction
initiatives, management consolidation and staff reductions in
our corporate office and in our stores, as well as a reduction
in our investment in music inventory.
A summary of the costs associated with our turnaround effort
follows:
(dollar amounts in
millions)
2008
Consulting and legal fees
$
11.2
Severance costs
16.4
Retention costs
2.3
Music inventory markdowns
6.5
Paperchase strategic alternative costs
0.1
Total
$
36.5
The charge related to music inventory markdowns is categorized
as “Cost of merchandise sold” on our consolidated
statements of operations. All other charges are categorized as
“Selling, general and administrative expenses” on our
consolidated statements of operations.
Liquidity
and Capital Resources
Cash
Flows
Operating
Activities
Cash flow from operating activities of continuing operations
increased $128.6 million, or 122.5%, to $233.6 million
in 2008 from $105.0 million in 2007. This was primarily due
to an increase in cash generated through a reduction in
inventories (net of accounts payable) in 2008 as compared to
2007, primarily due to improved inventory management and store
closures in 2008. Partially offsetting the cash generated by
lower inventory levels was a larger net loss in 2008 as compared
to 2007 (see discussion of our operating results under the
caption “Results of Operations”), offset by larger
non-cash charges for depreciation, goodwill impairments, asset
impairments and other writedowns and deferred tax asset
impairments. Also
contributing to the increase in cash generated from operating
activities was a decrease in accrued payroll and other
liabilities, primarily due to the timing of payments to
employees and a lower gift card liability.
Cash flow from operating activities of continuing operations
increased $65.9 million, or 168.5% to $105.0 million
in 2007 from $39.1 million in 2006. This was primarily due
to cash provided by a decrease in inventories (net of accounts
payable) in 2007 compared to cash used for an increase in
inventories (net of accounts payable) in 2006. This change was
driven by a reduction in the investment in music inventory in
our superstores and the closure of underperforming mall stores
in 2007. Also contributing to the increase in operating cash
flow was decreased cash used for taxes payable in 2007 as
compared to 2006, primarily due to variations in the adjustments
to each year’s pre-tax loss for temporary and permanent
differences, and a decreased operating loss in 2007 (see
discussion of our operating results under the caption
“Results of Operations”). Partially offsetting these
items was a lower increase in accrued payroll and other
liabilities, primarily due to the timing of payments to
employees, and lower non-cash charges for depreciation and asset
impairments and other writedowns in 2007 as compared to 2006.
During fiscal 2008 we implemented an initiative to actively
reduce inventory in our stores. As a result, we significantly
reduced inventories in the music category, as well as space
allocated to that category. In addition, we reduced inventories
in the book and movie categories, in order to make our
inventories more productive. These two factors significantly
contributed to the reduction in inventories compared to the same
period last year. We will continue to actively manage inventory
levels throughout 2009 to drive inventory productivity and to
maximize cash flows. A key component of this strategy is our
ability to maintain current payment terms and credit limits with
our vendors. We are involved in ongoing discussions with vendors
on appropriate inventory levels, credit limits and other
measures.
Investing
Activities
Net cash provided by investing activities of continuing
operations was $13.8 million in 2008. This was primarily
the result of the cash proceeds of $97.3 million received
during 2008 from the sale of our Australia, New Zealand and
Singapore businesses. These proceeds were partially offset by
capital expenditures of $79.9 million for new stores, new
information technology systems including spending on our
e-commerce
Web site, and maintenance of existing stores, distribution
centers and management information systems. Net cash used for
investing activities of continuing operations was
$111.7 million in 2007. This was primarily the result of
capital expenditures of $131.3 million, partially offset by
the cash proceeds of $20.4 million received during 2007
from the sale of our U.K. bookstore operations. Net cash used
for investing activities was $144.0 million in 2006, due to
capital expenditures of $165.6 million, partially offset by
the cash proceeds from the sale of investments of
$21.6 million.
Financing
Activities
Net cash used for financing activities of continuing operations
was $226.4 million in 2008, resulting primarily from the
repayment of borrowings under the Credit Agreement of
$261.7 million and the payment of cash dividends during the
first quarter on shares of our common stock of
$6.5 million. Partially offsetting these items were funding
generated by the short-term note financing from Pershing Square
of $42.5 million. Net cash provided by financing activities
of continuing operations was $27.4 million in 2007,
resulting primarily from funding from the credit facility of
$43.4 million, partially offset by the payment of cash
dividends of $19.4 million. Net cash provided by financing
activities of continuing operations was $155.6 million in
2006, resulting primarily from funding from the credit facility
of $303.4 million and the issuance of common stock of
$21.9 million, partially offset by share repurchases of
$148.7 million and the payment of cash dividends of
$25.2 million.
Capital
Expenditures
We will reduce capital expenditures significantly in 2009 to
approximately $15 million, compared to $79.9 million
in 2008. Capital spending in 2009 will be limited to a minimal
number of new store openings, as well as maintenance spending on
existing stores, distribution centers, and management
information
systems. This will allow continued focus on improving the
profitability of our existing stores and reduce our cash
requirements.
Dividends
The Board of Directors has suspended the company’s
quarterly dividend program in order to preserve capital for
operations and strategic initiatives.
Sources
of Liquidity
Our most significant sources of liquidity are funds generated by
operating activities and borrowings under the Credit Agreement.
Borrowings typically peak in the fall as we build inventories in
anticipation of the holiday selling season. Conversely,
borrowings reach their lowest levels during December.
The Credit Agreement expires in July 2011. The Credit Agreement
provides for borrowings of up to $1,125.0 million limited
to and 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 our option. Eligible inventory is based upon the
approximate liquidation value, as determined from time to time
by an independent third party. 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 maximum permitted borrowings
thereunder, (ii) contains covenants that limit, among other
things, our 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 and a default
provision should we receive a going concern qualification on our
annual financial statements from our independent registered
public accounting firm. We had borrowings outstanding under the
Credit Agreement of $286.7 million, $547.3 million and
$499.0 million at January 31, 2009, February 2,2008 and February 3, 2007, respectively. There was an
additional $40.6 million of borrowings outstanding related
to our discontinued operations at February 3, 2007.
At January 31, 2009, the additional funding available under
the Credit Agreement was $194.0 million. This amount,
however, is not necessarily indicative of our future funding
capacity, due to the substantial fluctuation in this amount
throughout the year and within a given month. This amount varies
not only in response to seasonal factors, such as the
accumulation of inventory in advance of the holiday selling
season, but also due to day-to-day operating factors, such as
the timing of payments to vendors. These factors, among others,
can significantly impact the amount of funding available on any
given day.
On April 9, 2008, we completed a financing agreement with
Pershing Square, which was most recently amended on
March 30, 2009. Under the terms of the most recent
amendment, Pershing Square has extended the maturity date of the
term loan of $42.5 million at a fixed interest rate of 9.8%
to April 1, 2010. This agreement contains covenants,
restrictions and default provisions similar to those contained
in the Credit agreement described above.
As of January 31, 2009, we were in compliance with our
financial and other covenants under the Credit Agreement. We
currently do not meet the Credit Agreement’s fixed charge
coverage ratio requirement. This covenant is not currently
applicable, however, because borrowings under the Credit
Agreement have not exceeded 90% of the maximum permitted
borrowings.
We plan to operate our business and execute our strategic
initiatives principally with funds generated from operations,
financing through the Credit Agreement, credit provided by our
vendors and other sources of new financing as deemed necessary
and available. As of the fourth quarter of 2008, however,
through our investigation of strategic alternatives, we have
determined that the debt and equity capital markets are
currently unavailable to us based on current market conditions.
Our liquidity is impacted by a number of
factors, including our sales levels, the amount of credit that
our vendors extend to us and our borrowing capacity under the
Credit Agreement. We rely on vendor credit to finance
approximately 43% of our inventory (calculated as trade accounts
payable divided by merchandise inventories). We are working
closely with vendors to optimize inventory levels to improve our
performance and to maintain acceptable levels of payables with
our vendors. In addition, the lenders under the Credit Agreement
have the right to periodically obtain third party valuations of
the liquidation value of our inventory, and the lowering of the
liquidation value of our inventory reduces the amount that we
are able to borrow under the Credit Agreement. Based on current
internal sales projections, current vendor payable support and
borrowing capacity, as well as other initiatives to maximize
cash flow, we believe that we will have adequate capital to fund
our operations during fiscal 2009. Also in 2009, we will
continue to explore other financing alternatives with Pershing
Square, and, if available, access other capital sources.
Warrants
Our financing agreement with Pershing Square included the
issuance of 14.7 million warrants to purchase our common
stock at $7.00 per share, all of which are outstanding as of
January 31, 2009. These warrants are required to be settled
for cash in certain circumstances, including the sale of the
Company to a non-publicly-held entity or the de-listing of our
common stock from trading on the NYSE. We estimate the fair
value of this cash settlement liability to be $0.7 million
as of January 31, 2009, based upon a Black-Scholes
valuation, and have recorded this liability as a component of
“Other long-term liabilities” in our consolidated
balance sheets. The Black-Scholes valuation model takes into
account several inputs, one of which is our share price.
Fluctuations in our share price may have a material impact on
this liability and the cash required to settle this liability,
thus impacting our liquidity. Ignoring changes in all other
factors, an increase in our share price would result in an
increase in the liability and an increase in the potential cash
exposure. During 2008, we recognized $40.1 million of
non-cash income related to the re-measurement of this liability.
As a result of the March 30, 2009 amendment of our
financing agreement with Pershing Square, the exercise price of
the 14.7 million warrants outstanding was reduced to $0.65
per share, through the operation of the antidilution provisions
of the warrants. As a result of the reduction in the exercise
price of the warrants, we expect the liability, and potential
cash exposure, to increase to approximately $6.0 million.
Off-Balance
Sheet Arrangements
At January 31, 2009, we were the primary beneficiary of two
variable interest entities (“VIEs”), due to our
guarantee of the debt of these entities. These entities were
established by third-party developers to own, construct, and
lease two of our store locations. To refinance the debt
associated with the construction of these stores, we were
required to guarantee the debt of these two entities. As a
result, we consolidate these VIEs and have recorded property and
equipment, net of accumulated depreciation, of
$4.7 million, long-term debt (including current portion) of
$5.0 million and minority interest of $0.3 million at
January 31, 2009. The existence of these VIEs does not
significantly impact our liquidity, capital resources or market
risk support, or confer significant benefits to us.
As discussed previously, we guarantee the leases of four stores
that we previously owned in Australia and New Zealand. These
guarantees were required by certain of our landlords as
conditions of the leases upon inception, and were not impacted
by our disposition of our Australian and New Zealand operations.
The maximum amount of potential future payments under these
guarantees (undiscounted) is approximately $11.2 million.
We have recorded a contingent liability of approximately
$0.6 million based upon the likelihood that we will be
required to perform under the guarantees. Also under the terms
of the sale agreement, we provided certain tax indemnifications
to the Purchasers, with the maximum amount of potential future
payments (undiscounted) totaling approximately
$4.9 million. We previously reserved for this item.
We also guarantee the leases of four stores that we previously
owned in the U.K. and Ireland. These guarantees were required by
certain of our landlords as conditions of the leases upon
inception, and were unrelated to our disposition of operations
in the U.K. and Ireland. The maximum potential liability under
these lease guarantees is approximately $134.0 million. The
leases provide for periodic rent reviews, which could increase
our potential liability. One of the applicable lease guarantee
agreements provides that the guarantee 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 us to take a new (replacement) lease,
the landlord would have an obligation to attempt to re-lease the
premises, which could further reduce our potential liability. At
January 31, 2009, we have reserved $9.0 million based
upon the likelihood that we will be required to perform under
these guarantees.
We also have agreed to indemnify the purchasers of 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 us. The maximum potential
liability is approximately $7.7 million, and we have
recorded a liability of approximately $3.1 million based
upon the likelihood that we will be required to perform under
the indemnification.
The various guarantees and indemnifications related to our
Australian, New Zealand, U.K., and Ireland businesses are not
currently expected to significantly impact our liquidity,
capital resources or market risk support, or confer significant
benefits to us. If, however, we are required to perform under
these obligations, there is the potential for a significant
adverse impact on our liquidity.
Significant
Contractual Obligations
The following table summarizes the Company’s significant
contractual obligations at January 31, 2009, excluding
interest expense:
Fiscal Year
2014 and
(dollars in millions)
2009
2010-2011
2012-2013
Thereafter
Total
Credit Agreement borrowings
$
286.7
$
—
$
—
$
—
$
286.7
Term Loan borrowings(1)
42.5
—
—
—
42.5
Operating lease obligations
310.9
562.0
518.6
1,248.7
2,640.2
Capital lease obligations
0.7
1.3
—
—
2.0
Debt of consolidated VIEs
0.2
0.4
0.6
3.8
5.0
Letters of credit
32.9
—
—
—
32.9
Other borrowings
0.3
—
—
—
0.3
Total
$
674.2
$
563.7
$
519.2
$
1,252.5
$
3,009.6
(1)
Subsequent to year-end, the maturity date of the term loan was
extended to April 1, 2010.
The table above excludes any amounts related to the payment of
uncertain tax positions as we 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 $23.5 million at
January 31, 2009.
The table above excludes any amounts related to required
interest payments on the Credit Agreement, which are expected to
range from $15.2 million to $16.8 million in fiscal
2009. This range was developed using the interest rate in effect
at January 31, 2009 and utilized estimates of the amount
and timing of borrowings and payments. Currently, we are
required to pay interest on Credit Agreement borrowings when
various short-term tranches mature. At any given time we have
multiple outstanding tranches with various principal amounts,
interest rates and maturity dates. Due to these factors, as well
as the uncertainty of future borrowing amounts and rates, we
cannot make a reasonably reliable estimate of the cash required
to pay interest on Credit Agreement borrowings in years beyond
fiscal 2009. We paid $25.4 million and $35.6 million
of interest on Credit Agreement borrowings in fiscal 2008 and
2007, respectively.
The table above also excludes any amounts related to taxes,
insurance and other charges payable under operating lease
agreements, which are expected to range from $87.0 million
to $96.2 million in fiscal 2009. This range was based on
the historical trend of these expenses, as adjusted for store
activity. Because of the future variability of these amounts,
which are dependent on future store count and ongoing
negotiations with our landlords, among other things, we cannot
make a reasonably reliable estimate in years beyond fiscal 2009.
We paid $93.5 million and $104.9 million related to
these expenses in fiscal 2008 and 2007, respectively.
Seasonality
The Company’s business is highly seasonal, with sales
significantly higher during the fourth quarter, which includes
the holiday selling season.
In the ordinary course of business, we make a number of
estimates and assumptions relating to the reporting of results
of operations and financial condition in the preparation of our
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. We believe that the following discussion addresses
our most critical accounting policies and estimates.
Long-Lived
Assets
The carrying value of long-lived assets is evaluated whenever
changes in circumstances indicate the carrying amount of such
assets may not be recoverable. In performing such reviews for
recoverability, we compare the assets’ undiscounted
expected future cash flows to their carrying values. If the
expected future cash flows are less than the carrying amount of
the assets, we recognize 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.
We have not made any material changes in the accounting
methodology used to calculate long-lived asset impairment losses
during the past three years, and we do not believe there is a
reasonable likelihood that there will be a material change in
the estimates or assumptions we use in the future. However, if
actual
results are not consistent with our estimates and assumptions
used in estimating future cash flows and asset fair values,
material additional asset impairment losses could occur.
Inventory
Reserves
The carrying value of our inventory is affected by reserves for
shrinkage (i.e., physical loss due to theft, etc.) and
markdowns. We have not made any material changes in the
accounting methodologies used to establish these reserves during
the past three years.
Our shrinkage reserve represents anticipated physical inventory
losses that have occurred since the last physical inventory
date. Physical inventory counts are taken on a regular basis to
ensure the inventory reported in our financial statements is
properly stated. During the interim period between physical
inventory counts, we reserve for anticipated losses on a
location-by-location
basis. Shrinkage estimates are typically based upon our most
recent experience of losses for each particular location. We do
not believe there is a reasonable likelihood that there will be
a material change in the estimates or assumptions we use to
calculate our shrinkage reserve. However, if our estimates are
inaccurate, we may be exposed to losses or gains that could be
material. A 10% difference in actual shrinkage reserved for at
January 31, 2009 would have affected net income by
approximately $3 million in 2008.
Our reserve for the markdown of inventories below cost is based
on our estimates of inventory aging, customer demand, and the
promotional environment. We do not believe there is a reasonable
likelihood that there will be a material change in the estimates
or assumptions we use to calculate our markdown reserve.
However, if our estimates are inaccurate, we may be exposed to
losses or gains that could be material. A 10% difference in our
actual markdown reserve at January 31, 2009 would have
affected net income by approximately $2 million in 2008.
Costs
Associated With Exit Activities
We occasionally vacate stores and other locations prior to the
expiration of the related lease. For vacated locations that are
under long-term leases, we record a liability for the difference
between our future lease payments and related costs from the
date of closure through the end of the remaining lease term, net
of expected sublease rental income. This liability contains
estimates of the amount and duration of potential sublease
rental income, which are based upon historical experience and
knowledge of the relevant real estate markets. We have not made
any material changes in our accounting methodology used to
establish this reserve during the past three years, and we do
not believe there is a reasonable likelihood that there will be
a material change in the estimates or assumptions we use in the
future. However, if actual results are not consistent with our
estimates and assumptions, we may be exposed to losses or gains
that could be material. A 10% difference in our reserve at
January 31, 2009 would have affected net income by
approximately $3 million in 2008.
Self-Insured
Liabilities
We are self-insured for certain losses related to health,
workers’ compensation and general liability claims.
However, we obtain third-party insurance coverage to limit our
exposure to these claims. Our self-insured liabilities contains
estimates, based in part upon historical experience, of the
ultimate cost to settle reported claims and claims incurred but
not reported at the balance sheet date. We have not made any
material changes in our accounting methodologies used to
establish these reserves during the past three years, and we do
not believe there is a reasonable likelihood that there will be
a material change in the estimates or assumptions we use in the
future. However, if actual results are not consistent with our
estimates and assumptions, we may be exposed to losses or gains
that could be material. A 10% difference in our reserve at
January 31, 2009 would have affected net income by
approximately $2 million in 2008.
Liabilities
For Lease Guarantees of Disposed Foreign
Businesses
We guarantee eight store leases relating to former subsidiaries
in the United Kingdom, Ireland, Australia and New Zealand. Our
liabilities for these guarantees contain estimates of the
likelihood that we would be
required to perform under the guarantees, changes in anticipated
rental amounts, and the amount and duration of potential
sublease rental income. We have not made any material changes in
our accounting methodology used to establish these reserves
during the past three years, and we do not believe there is a
reasonable likelihood that there will be a material change in
the estimates or assumptions we use in the future. However, if
actual results are not consistent with our estimates and
assumptions, we may be exposed to losses or gains that could be
material.
Gift
Cards
We sell gift cards to our customers and record a liability for
the face value of all cards issued and unredeemed within the
last 12 months. For cards older than 12 months, we
record a liability for a portion of the cards’ face value
based upon historical redemption trends. This methodology has
been materially consistent during the past three years. We do
not believe there is a reasonable likelihood that there will be
a material change in the estimates or assumptions we use to
calculate our gift card liability. However, if our estimates are
inaccurate, we may be exposed to losses or gains that could be
material. A 10% change in our unredeemed gift card breakage rate
at January 31, 2009 would have affected net income by
approximately $13.8 million in 2008.
Income
Taxes
We 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 our tax liabilities involves
dealing with uncertainties in the application of complex tax
regulations. We recognize 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. These liabilities are calculated in accordance with
FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes — an interpretation of FASB Statement
No. 109 (“FIN 48”).
We recognize 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.
Our 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. We record a
valuation allowance against deferred tax assets when it is more
likely than not that some portion or all of the assets will not
be realized. During 2008, we recorded a non-cash charge related
to establishing a full valuation allowance against our domestic
net deferred tax assets. The year-end valuation allowance charge
was $86.1 million, and was calculated in accordance with
Statement of Financial Accounting Standards No. 109,
“Accounting for Income Taxes”
(“FAS 109”). FAS 109 requires that deferred
tax assets be reduced by a valuation allowance if, based on the
weight of available evidence, it is more-likely-than-not that
some portion or all of the deferred tax assets will not be
realized.
If, in the future, we realize domestic taxable income on a
sustained basis of the appropriate character and within the net
operating loss carry-forward period, we would be allowed to
reverse some or all of this valuation allowance, resulting in an
income tax benefit. Further, changes in existing tax laws could
also affect valuation allowance needs in the future.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, “Fair Value
Measurements” (FAS 157), which provides a consistent
definition of fair value that focuses on exit price and
prioritizes, within a measurement of fair value, the use of
market-based inputs over entity-specific inputs. FAS 157
requires expanded disclosures about fair value measurements and
establishes a three-level hierarchy for fair value measurements
based on the observability of inputs to the valuation of an
asset or liability as of the measurement date. The standard also
requires that a company consider its own nonperformance risk
when measuring liabilities carried at fair value, including
derivatives. In February 2008, the FASB approved FASB Staff
Position
No. 157-2,
“Effective Date of FASB Statement No. 157” (FSP
No. 157-2),
that permits companies to partially defer the effective date of
FAS 157 for one year for nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at
fair value in the financial statements on a nonrecurring basis.
FSP
No. 157-2
does not permit companies to defer recognition and disclosure
requirements for financial assets and financial liabilities or
for nonfinancial assets and nonfinancial liabilities that are
remeasured at least annually. FAS 157 is effective for
financial assets and financial liabilities and for nonfinancial
assets and nonfinancial liabilities that are remeasured at least
annually for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. The provisions of
FAS 157 are applied prospectively. We decided to defer
adoption of FAS 157 for nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at
fair value in the financial statements on a nonrecurring basis.
The effect of the adoption of FAS 157 on February 3,2008 was not material and no adjustment to retained earnings was
required.
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. We adopted FAS 159 during fiscal
2008, and the adoption did not have a material impact on our
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. We do not expect the adoption of FAS 141(R) to have a
material impact on our 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. We do
not expect the adoption of FAS 160 to have a material
impact on our consolidated financial position or results of
operations.
In March 2008, the FASB issued Statement of Financial Accounting
Standards No. 161, “Disclosures about Derivative
Instruments and Hedging Activities — an Amendment of
FASB Statement No. 133” (FAS 161), that expands
the disclosure requirements of Statement of Financial Accounting
Standards No. 133, “Accounting for Derivative
Instruments and Hedging Activities” (FAS 133).
FAS 161 requires additional disclosures regarding:
(1) how and why an entity uses derivative instruments;
(2) how derivative instruments and related hedged items are
accounted for under FAS 133; and (3) how derivative
instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. In
addition, FAS 161 requires qualitative disclosures about
objectives and strategies for using derivatives described in the
context of an entity’s risk exposures, quantitative
disclosures about the location and fair
value of derivative instruments and associated gains and losses,
and disclosures about credit-risk-related contingent features in
derivative instruments. FAS 161 is effective for fiscal
years and interim periods within these fiscal years, beginning
after November 15, 2008. As of the end of fiscal 2008, we
held no derivative instruments.
In May 2008, the FASB issued of Financial Accounting Standards
No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (FAS 162), which identifies the
sources of accounting principles and the framework for selecting
principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with
GAAP. FAS 162 emphasizes that an organization’s
management and not its auditors has the responsibility to follow
GAAP and categorizes sources of accounting principles that are
generally accepted in descending order of authority. We will be
required to adopt FAS 162 within 60 days following the
Securities and Exchange Commission’s (“SEC”)
approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly
in Conformity With Generally Accepted Accounting Principles. AU
Section 411 has not yet been approved by the SEC. We do not
expect FAS 162 to materially impact our consolidated
financial statements.
Related
Party Transactions
We have not engaged in any related party transactions, with the
exception of the financing agreement with Pershing Square
Capital Management, L.P., as discussed in this report, which
would have had a material effect on our financial position, cash
flows, or results of operations.
Item 7A.
Quantitative
and Qualitative Disclosures About Market Risk
We are 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
We are subject to risk resulting from interest rate
fluctuations, as interest on certain of our borrowings is based
on variable rates. Our objective in managing our exposure to
interest rate fluctuations is to limit the impact of interest
rate changes on earnings and cash flows and to lower our overall
borrowing costs. Historically, we had utilized interest rate
swaps to achieve this objective, effectively converting a
portion of our variable rate exposure to fixed interest rates.
Currently, we have no such agreements in effect.
LIBOR is the rate upon which our variable rate debt is
principally based. If LIBOR were to increase 1% for the full
year of 2008 as compared to 2007, our after-tax losses would
increase approximately $2.9 million based on our
outstanding debt as of January 31, 2009.
Foreign
Currency Exchange Risk
We are 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, we
do not attempt to hedge the foreign currency translation
fluctuations in the net investments in its foreign subsidiaries.
We do, 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 our
policy not to purchase financial
and/or
derivative instruments for speculative purposes. At
January 31, 2009, we 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
$
329.8
$
548.6
Trade accounts payable
350.0
511.9
Accrued payroll and other liabilities
279.8
321.6
Taxes, including income taxes
30.1
18.3
Deferred income taxes
4.0
9.9
Current liabilities of discontinued operations
—
57.5
Total current liabilities
993.7
1,467.8
Long-term debt
6.4
5.4
Other long-term liabilities
345.8
325.0
Noncurrent liabilities of discontinued operations
—
25.4
Contingencies (Note 8)
—
—
Total liabilities
1,345.9
1,823.6
Minority interest
0.5
2.2
Total liabilities and minority interest
1,346.4
1,825.8
Stockholders’ equity:
Common stock, 300,000,000 shares authorized; 59,903,232 and
58,794,224 shares issued and outstanding at
January 31, 2009 and February 2, 2008, respectively
186.9
184.0
Accumulated other comprehensive income
11.9
42.4
Retained earnings
63.8
250.5
Total stockholders’ equity
262.6
476.9
Total liabilities, minority interest and stockholders’
equity
$
1,609.0
$
2,302.7
See accompanying notes to consolidated financial statements.
Nature of
Business: Borders
Group, Inc., through its subsidiaries, Borders, Inc.
(“Borders”), Walden Book Company, Inc.
(“Waldenbooks”), and others (individually and
collectively, “we,”“our” or the
“Company”), is an operator of book, music and movie
superstores and mall-based bookstores. At January 31, 2009,
we operated 518 superstores under the Borders name, including
515 in the United States and three in Puerto Rico. We also
operated 386 mall-based and other small format bookstores,
including stores operated under the Waldenbooks, Borders Express
and Borders Outlet names, as well as Borders-branded airport
stores. In addition, we owned and operated United Kingdom-based
Paperchase Products Limited (“Paperchase”), a designer
and retailer of stationery, cards and gifts. As of
January 31, 2009, Paperchase operated 117 stores, primarily
in the United Kingdom, and Paperchase shops have been added to
333 Borders superstores.
In addition, we operate a proprietary
e-commerce
Web site, www.Borders.com, which was launched in May 2008.
On June 10, 2008, we sold bookstores that we had owned and
operated in Australia, New Zealand and Singapore. On
September 21, 2007, we sold bookstores that we had owned
and operated in the U.K. and Ireland. See
“Note 15 — Discontinued Operations” for
further discussion of our disposal of these bookstore operations.
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., U.K.
Superstores, Borders Australia, New Zealand, and Singapore 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: Our fiscal
year ends on the Saturday closest to the last day of January.
Fiscal 2008 consisted of 52 weeks and ended on
January 31, 2009. Fiscal 2007 consisted of 52 weeks
and ended February 2, 2008. Fiscal 2006 consisted of
53 weeks and ended February 3, 2007. References herein
to years are to our fiscal years.
Foreign Currency
and Translation of Foreign
Subsidiaries: The
functional currencies of the our foreign operations are the
respective local currencies. All assets and liabilities of our
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 $1.5, $(1.9), and $(0.8) in 2008, 2007, and
2006, respectively.
Cash and
Equivalents: Cash
and equivalents include short-term investments with original
maturities of 90 days or less. The recorded value of our
cash and cash equivalents approximates their fair value.
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 $80.9 and $98.1 as of January 31, 2009, and
February 2, 2008, respectively.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
The carrying value of our inventory is affected by reserves for
shrinkage (i.e., physical loss due to theft, etc.) and
markdowns. Our shrinkage reserve represents anticipated physical
inventory losses that have occurred since the last physical
inventory date. Our reserve for the markdown of inventories
below cost is based on our estimates of inventory aging,
customer demand, and the promotional environment.
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
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 assets is evaluated whenever
changes in circumstances indicate the carrying amount of such
assets may not be recoverable. In performing such reviews for
recoverability, we compare the assets’ undiscounted
expected future cash flows to their carrying values. If the
expected future cash flows are less than the carrying amount of
the assets, we recognize 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.
Goodwill: Pursuant
to the provisions of Statement of Financial Accounting Standards
No. 142, “Goodwill and Other Intangible Assets”
(“FAS 142”), our 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. Our reporting units were
identified as the operating segments of 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.
As a result of our annual test on January 31, 2009, all of
the goodwill allocated to the domestic Borders Superstores
segment was impaired. We recorded a charge of $40.3 in the
fourth quarter of 2008 related to this impairment. This
impairment was primarily the result of changes in fair value due
to the material decline in our market capitalization during the
fourth quarter of 2008.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
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. We use our
incremental borrowing rate in the assessment of lease
classification, and define initial lease term to include the
construction build-out period, but to exclude lease extension
period(s). We conduct operations primarily under operating
leases. For leases that contain rent escalations, we record the
total rent payable during the lease term, as defined above, on a
straight-line basis over the term of the lease and record the
difference between the rents paid and the straight-line rent as
a deferred rent liability, under “Other long-term
liabilities” on our consolidated balance sheets, totaling
$125.3 and $126.6 as of January 31, 2009 and
February 2, 2008, respectively.
Landlord
Allowances: We
classify landlord allowances as deferred rent liabilities, under
“Other long-term liabilities” on our consolidated
balance sheets, totaling $106.7 and $114.4 as of
January 31, 2009 and February 2, 2008, 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 our consolidated statements of
cash flows. Also in accordance with the provisions of FTB
88-1, we
amortize landlord allowances over the life of the initial lease
term, and classify this amortization as a reduction of occupancy
expense, included as a component of “Cost of merchandise
sold (includes occupancy)” in our consolidated statements
of operations.
Financial
Instruments: The
recorded values of our 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, we recognize the fair
value of derivatives on the consolidated balance sheets when
applicable.
Accumulated Other
Comprehensive Income
(Loss): Accumulated
other comprehensive income (loss) 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 $11.9 and $42.4 for
exchange rate fluctuations as of January 31, 2009 and
February 2, 2008, respectively.
Revenue: Revenue
is recognized, net of estimated returns, at the point of sale
for all of our segments. Revenue excludes sales taxes and any
value-added taxes.
Through our subsidiaries, we had 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 expired in early
2008, Amazon was the merchant of record for all sales made
through the Web Sites, and determined all prices and other terms
and conditions applicable to such sales. Amazon was responsible
for the fulfillment of all products sold through the Web Sites
and retained all payments from customers. We received referral
fees for products purchased through the Web Sites. The
agreements contained mutual indemnification provisions,
including provisions that defined 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. Taxes were not collected
with respect to products sold on the Web Sites except in certain
states.
Pre-Opening
Costs: We expense
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.
For vacated locations that are under long-term leases, we record
a liability for the difference between our
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
future lease payments and related costs from the date of closure
through the end of the remaining lease term, net of expected
sublease rental income.
Borders
Rewards: We
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 eligible for use
on holiday purchases made from November 15, 2006 through
January 31, 2007. Beginning April 12, 2007, we
replaced the program’s previous member benefits with
Borders 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. We accrue 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: We sell
gift cards to our customers and record a liability for the face
value of all certificates issued and unredeemed within the last
12 months. For certificates older than 12 months, we
record a liability for a portion of the certificates’ face
value based upon historical redemption trends, and record the
related income as a component of “Other revenue” in
our consolidated statements of operations. We have included the
liability for gift cards as a component of “Accrued payroll
and other liabilities” on our consolidated balance sheets,
totaling $122.9 and $138.6 as of January 31, 2009 and
February 2, 2008, respectively.
Advertising
Costs: We expense
advertising costs as incurred, and recorded approximately $24.8,
$32.5 and $33.4 of gross advertising expenses in 2008, 2007 and
2006, respectively.
We receive 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, we contract 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. As a percentage
of gross advertising expenses, such consideration totaled
approximately (78.4%), (65.2%) and (61.5%) in 2008, 2007, and
2006, 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, we recorded $2.5 and $2.6 of vendor consideration
as a reduction to our inventory balance at January 31, 2009
and February 2, 2008, respectively.
We also receive 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: We 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.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
In addition, the calculation of our tax liabilities involves
dealing with uncertainties in the application of complex tax
regulations. We recognize 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. These liabilities are calculated in accordance with
FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes — an interpretation of FASB Statement
No. 109 (“FIN 48”).
We recognize 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.
Our 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 audits or changes
in the deferred tax valuation allowance. We record a valuation
allowance against deferred tax assets when it is more likely
than not that some portion or all of the assets will not be
realized.
Equity-Based
Compensation: We
account 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)”). We use 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. We record compensation
cost for equity-based compensation in the “Selling, general
and administrative” line of the consolidated statements of
operations.
See “Note 12 — Stock-Based Compensation
Plans” for further discussion of our 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), which provides a consistent
definition of fair value that focuses on exit price and
prioritizes, within a measurement of fair value, the use of
market-based inputs over entity-specific inputs. FAS 157
requires expanded disclosures about fair value measurements and
establishes a three-level hierarchy for fair value measurements
based on the observability of inputs to the valuation of an
asset or liability as of the measurement date. The standard also
requires that a company consider its own nonperformance risk
when measuring liabilities carried at fair value, including
derivatives. In February 2008, the FASB approved FASB Staff
Position
No. 157-2,
“Effective Date of FASB Statement No. 157” (FSP
No. 157-2),
that permits companies to partially defer the effective date of
FAS 157 for one year for nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at
fair value in the financial statements on a nonrecurring basis.
FSP
No. 157-2
does not permit companies to defer recognition and disclosure
requirements for financial assets and financial liabilities or
for nonfinancial assets and nonfinancial liabilities that are
remeasured at least annually. FAS 157 is effective for
financial assets and financial liabilities and for nonfinancial
assets and nonfinancial liabilities that are remeasured at least
annually for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. The provisions of
FAS 157 are applied prospectively. We decided to defer
adoption of FAS 157 for nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at
fair value in the financial statements on a nonrecurring basis.
The effect of the adoption of FAS 157 on February 3,2008 was not material and no adjustment to retained earnings was
required.
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
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
November 15, 2007. We adopted FAS 159 during fiscal
2008, and the adoption did not have a material impact on our
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. We do not expect the adoption of FAS 141(R) to have a
material impact on our 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. We do
not expect the adoption of FAS 160 to have a material
impact on our consolidated financial position or results of
operations.
In March 2008, the FASB issued Statement of Financial Accounting
Standards No. 161, “Disclosures about Derivative
Instruments and Hedging Activities — an Amendment of
FASB Statement No. 133” (FAS 161), that expands
the disclosure requirements of Statement of Financial Accounting
Standards No. 133, “Accounting for Derivative
Instruments and Hedging Activities” (FAS 133).
FAS 161 requires additional disclosures regarding:
(1) how and why an entity uses derivative instruments;
(2) how derivative instruments and related hedged items are
accounted for under FAS 133; and (3) how derivative
instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. In
addition, FAS 161 requires qualitative disclosures about
objectives and strategies for using derivatives described in the
context of an entity’s risk exposures, quantitative
disclosures about the location and fair value of derivative
instruments and associated gains and losses, and disclosures
about credit-risk-related contingent features in derivative
instruments. FAS 161 is effective for fiscal years and
interim periods within these fiscal years, beginning after
November 15, 2008. As of the end of fiscal 2008, we held no
derivative instruments.
In May 2008, the FASB issued of Financial Accounting Standards
No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (FAS 162), which identifies the
sources of accounting principles and the framework for selecting
principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with
GAAP. FAS 162 emphasizes that an organization’s
management and not its auditors has the responsibility to follow
GAAP and categorizes sources of accounting principles that are
generally accepted in descending order of authority. We will be
required to adopt FAS 162 within 60 days following the
Securities and Exchange Commission’s (“SEC”)
approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly
in Conformity With Generally Accepted Accounting Principles. AU
Section 411 has not yet been approved by the SEC. We do not
expect FAS 162 to materially impact our consolidated
financial statements.
Reclassifications: Certain
prior year amounts have been reclassified to conform to current
year presentation.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
NOTE 2 —
WEIGHTED-AVERAGE
SHARES OUTSTANDING
Weighted-average shares outstanding are calculated as follows
(thousands):
2008
2007
2006
Weighted-average common shares outstanding — basic
60,212
58,742
61,940
Dilutive effect of employee stock options
—
—
—
Weighted-average common shares outstanding — diluted
60,212
58,742
61,940
Unexercised employee stock options and unvested restricted share
units to purchase 3.8 million, 3.6 million, and
2.8 million common shares as of January 31, 2009,
February 2, 2008, and February 3, 2007, 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 our share price
at the end of the respective fiscal years. Similarly,
unexercised warrants which were issued to Pershing Square to
purchase 14.7 million common shares as of January 31,2009, were not included in the weighted-average shares
outstanding calculation, due to the exercise price of these
shares exceeding our share price at the end of 2008 and because
to do so would be antidilutive.
NOTE 3 —
GOODWILL IMPAIRMENT
Pursuant to the provisions of Statement of Financial Accounting
Standards No. 142, “Goodwill and Other Intangible
Assets” (“FAS 142”), we test for goodwill
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. Our reporting units were
identified as the operating segments of the Borders Superstores
reporting segment, the Waldenbooks Specialty Retail operating
segment, and the 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.
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.
We perform our annual test for goodwill impairment at the end of
each fiscal year. As a result of our annual test on
January 31, 2009, all of the goodwill allocated to the
Borders Superstores segment was impaired, and we recorded a
resulting charge of $40.3 in the fourth quarter of 2008. This
impairment was primarily the result of changes in fair value due
to the material decline in our market capitalization during the
fourth quarter of 2008.
Subsequent to this impairment, we have $0.2 of goodwill
remaining on our consolidated balance sheet, relating to our
Paperchase U.K. business. As of January 31, 2009, no
impairment of this goodwill was required.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
The charge taken for this impairment is categorized as
“Goodwill impairment” on our consolidated statements
of operations.
NOTE 4 —
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,” we
evaluate 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, we evaluate the recoverability of the affected
assets.
During 2008, due to the impairment of the goodwill related to
the Borders Superstores segment, the current economic
environment and our operating results, we concluded that there
were sufficient indicators to require the performance of
long-lived asset impairment tests at the end of the third and
fourth quarters of 2008. As a result of these tests, we recorded
a pre-tax charge of $53.5, comprised of the following: $48.1
related to Borders Superstores, $4.7 related to Waldenbooks
Specialty Retail stores and $0.7 related to one Borders store in
Puerto Rico. There was no impairment of non-store assets in 2008.
In 2007, assets of underperforming Borders Superstores were
tested for impairment and as a result, we recorded a charge of
$5.5. Due to the Waldenbooks Specialty Retail segment’s
operating results, we 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, we recorded an asset
impairment charge of $0.5 related to one Borders store in Puerto
Rico.
In 2006, assets of underperforming Borders Superstores were
tested for impairment and as a result, we recorded a charge of
$9.0. The Waldenbooks Specialty Retail segment generated an
operating loss for the first time in 2006, and we 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.
Significant deterioration in our operating performance compared
to projections could result in significant additional asset
impairments.
The charges taken for these impairments are categorized as
“Asset impairments and other writedowns” on our
consolidated statements of operations.
Store
Closings: In
accordance with the provisions of FAS 146, “Accounting
for Costs Associated with Exit or Disposal Activities,” we
expense when incurred all amounts related to the discontinuance
of operations of stores identified for closure. These expenses
typically pertain to inventory markdowns, asset impairments,
occupancy costs, and store payroll and other costs. When we
close any of our 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 2008 averaged approximately
30 employees per store and Waldenbooks Specialty Retail
stores closed during 2008 averaged between five to seven
employees per store, who have been or will be displaced by the
closures, with a portion being transferred to other 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 2008, we recorded a $4.9 charge for the closing costs of
our stores, consisting of the following: $3.9 related to the
closure of six Borders Superstores (of which $0.4 were occupancy
costs) and $1.0 related to
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
the closure of 112 Waldenbooks Specialty Retail stores (of which
$0.9 were occupancy costs). The non-occupancy charge for both
segments consisted primarily of asset impairments.
During 2007, we recorded a $12.3 charge for the closing costs of
our stores, consisting of the following: $11.0 related to the
closure of eight Borders Superstores (of which $5.4 were
occupancy costs) and $1.3 related to the closure of 75
Waldenbooks Specialty Retail stores (of which $0.6 were
occupancy costs). The non-occupancy charge for both segments
consisted primarily of asset impairments.
During 2006, we recorded a $10.4 charge for the closing costs of
our stores, consisting of the following: $5.9 relating to the
closure of five Borders Superstores (of which $1.8 were
occupancy costs), and $4.5 relating to the closure of 124
Waldenbooks Specialty Retail stores (of which $1.4 were
occupancy costs). The non-occupancy charge for Borders consisted
primarily of asset impairments, and the non-occupancy charge for
Waldenbooks Specialty Retail included $0.8 of asset impairments
and $2.3 of store payroll and other costs.
Asset impairment and store payroll costs related to store
closings are categorized as “Asset impairments and other
writedowns,” and occupancy costs are categorized as
“Cost of merchandise sold (includes occupancy),” on
our consolidated statements of operations.
The following table summarizes the sales and operating loss for
Borders superstores closed in each of the following fiscal years:
2008
2007
2006
Sales
$
21.9
$
28.0
$
6.9
Operating loss
(2.6
)
(3.8
)
(2.0
)
The following table summarizes the sales and operating loss for
the Waldenbooks Specialty Retail stores closed in each of the
following fiscal years:
2008
2007
2006
Sales
$
64.4
$
37.1
$
76.0
Operating loss
(5.7
)
(3.2
)
(4.9
)
NOTE 5 —
COSTS ASSOCIATED WITH TURNAROUND EFFORT
During 2008 we launched a turnaround effort designed to return
our business to profitability. This effort included exploring
strategic alternatives for our business, including the possible
sale of some or all of our business, expense reduction
initiatives, management consolidation and staff reductions in
our corporate office and in our stores, as well as a reduction
in our investment in music inventory.
A summary of the costs associated with our turnaround effort
follows:
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
The charge related to music inventory markdowns is categorized
as “Cost of merchandise sold” on our consolidated
statements of operations. All other charges are categorized as
“Selling, general and administrative expenses” on our
consolidated statements of operations.
NOTE 6 —
PROPERTY
AND EQUIPMENT
Property and equipment consists of the following:
2008
2007
Property and equipment
Buildings
$
6.3
$
6.3
Leasehold improvements
585.0
586.8
Furniture and fixtures
1,008.0
997.8
Construction in progress
3.2
9.7
1,602.5
1,600.6
Less — accumulated depreciation and amortization
(1,108.3
)
(1,007.8
)
Property and equipment, net
$
494.2
$
592.8
NOTE 7 —
INCOME
TAXES
The income tax provision (benefit) from continuing operations
consists of the following:
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
We have a domestic net operating loss (NOL) carryforward of
$96.5, which can be carried forward through 2028, and a capital
loss carryforward of $66.0, which can be carried forward through
2012. We have recorded a full valuation allowance against both
the NOL carryforward and the capital loss carryforward, as it is
not more-likely-than-not that a future benefit will be realized
from the deferred tax assets recognized for these carryforwards
. We also have tax net operating loss carryforwards from
continuing operations in foreign jurisdictions totaling $1.0 as
of January 31, 2009, $10.1 as of February 2, 2008, and
$18.1 as of February 3, 2007. These losses have an
indefinite carryforward period. We 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.
We evaluate our deferred income tax assets and liabilities
quarterly to determine whether or not a valuation allowance is
necessary. During the third quarter of 2008, we recorded a
non-cash charge related to establishing a valuation allowance
against substantially all of our domestic net deferred tax
assets. This reserve was adjusted based on our fourth quarter
results of operations, resulting in a full year valuation
allowance charge of $86.1, which was calculated in accordance
with Statement of Financial Accounting Standards No. 109,
“Accounting for Income Taxes”
(“FAS 109”). FAS 109 requires that deferred
tax assets be reduced by a valuation allowance if, based on the
weight of available evidence, it is more-likely-than-not that
some portion or all of the deferred tax assets will not be
realized.
We believe that a valuation allowance is now required due to
developments that occurred during the year. In making this
determination, we utilized a consistent approach that considers
our three-year cumulative income or loss. During the year, we
determined a full valuation allowance against our net domestic
deferred tax assets was needed, based primarily on our
assumption that we would be in a three-year cumulative loss
position as of year-end 2008, along with certain other factors.
These other factors include the impact on our financial results
of the difficult retail environment brought about by the decline
in general economic conditions and the current global financial
crisis, and uncertainty as to when conditions will improve to
the extent that we will have sufficient taxable income of the
appropriate character available to utilize our deferred tax
assets. Further, the lack of practical tax-planning strategies
available in the short term and the lack of other objectively
verifiable positive evidence supported the conclusion that a
full valuation allowance against our federal and state net
deferred tax assets was necessary.
If, in the future, we realize domestic taxable income on a
sustained basis of the appropriate character and within the net
operating loss carry-forward period, we would be allowed to
reverse some or all of this valuation allowance, resulting in an
income tax benefit. Further, changes in existing tax laws could
also affect valuation allowance needs in the future.
Consolidated domestic income (loss) from continuing operations
before taxes was $(167.0) in 2008, $(46.1) in 2007, and $(23.2)
in 2006. The corresponding amounts for foreign operations were
$12.5 in 2008, $7.1 in 2007, and $(1.5) in 2006.
Undistributed earnings of foreign subsidiaries are considered to
be permanently reinvested outside the United States. As such,
U.S. income taxes are not provided on these undistributed
earnings. Cumulative foreign earnings considered permanently
reinvested totaled $37.9 as of January 31, 2009 and $52.5
as of February 2, 2008.
We adopted FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes — an Interpretation of
FASB Statement No. 109” (FIN 48), as amended, on
February 4, 2007. Upon adoption, we 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 ultimately be settled.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
As of February 2, 2008, gross unrecognized tax benefits
totaled $21.2. As of January 31, 2009 this balance
increased to $23.5. The increase in the liability for income
taxes associated with uncertain tax positions of $2.3 primarily
relates to uncertainty with respect to ultimately realizing the
full benefit of certain domestic tax positions. This increase
was partially offset by the favorable 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 following table summarizes the total amount of unrecognized
tax benefits for the current and prior year:
2008
2007
Beginning balance
$
21.2
$
11.2
Additions to tax positions related to current year
5.0
15.3
Additions to tax positions related to prior years
2.0
0.3
Reductions to tax positions related to prior years
(3.7
)
(3.2
)
Reductions to tax positions related to settlements with tax
authorities
(0.2
)
(0.2
)
Reductions to tax positions related to lapse of statutory
limitations
(0.8
)
(2.2
)
Ending balance
$
23.5
$
21.2
Increases or decreases to these unrecognized tax benefits that
are reasonably possible in the next 12 months are not
expected to be significant.
We recognize interest and penalties related to uncertain tax
positions in our income tax provision. We recognized net tax
expense for tax related interest and penalties of $0.3 for year
ended January 31, 2009 and $0.8 for year ended
February 2, 2008 in the consolidated statement of
operations. We recognized a gross liability for the payment of
tax related interest and penalties of $8.0 for year-ended
January 31, 2009 and $7.5 million for year-ended
February 2, 2008 in our consolidated balance sheets.
A number of our tax returns remain subject to examination by
taxing authorities. These include federal tax returns for 2005
through 2007, tax returns in certain states for 1996 through
2007, and tax returns in certain foreign jurisdictions for 2004
through 2007.
NOTE 8 —
CONTINGENCIES
Litigation: In
February 2009, three former employees, individually and on
behalf of a purported class consisting of all current and former
employees who work or worked as General Managers in Borders
stores in the State of California at any time from
February 19, 2005, through February 19, 2009, have
filed an action against us in the Superior Court of California
for the County of Orange. The Complaint alleges, among other
things, that the individual plaintiffs and the purported class
members were improperly classified as exempt employees and that
we violated the California Labor Code by failing to (i) pay
required overtime and (ii) provide meal periods and rest
periods, and (iii) that those practices also violate the
California Business and Professions Code. The relief sought
includes damages, restitution, penalties, injunctive relief,
interest, costs, and attorneys’ fees and such other relief
as the court deems proper. We have not included any liability in
our consolidated financial statements in connection with this
matter. Discovery has not commenced and the Company cannot
reasonably estimate the potential exposure, if any, at this
time. The Company intends to vigorously defend this action.
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.
From August 2001 through May 2008, the Company had agreements
with Amazon to operate websites utilizing the Borders.com and
Waldenbooks.com URLs.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
These agreements contained 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. The Company and Amazon have
been named as defendants in an action 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 agreements. 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 us in Tennessee and Nevada have been
dismissed. We have not included any liability in our
consolidated financial statements in connection with this matter
and have expensed as incurred all legal costs to date. We cannot
reasonably estimate the amount or range of potential loss at
this time. The complaint covers time periods both before and
during the period that Amazon operated Borders.com, and the
complaint contains broad allegations that cover both us and
Amazon without specifying the total amount sought or the
allocation of alleged responsibility between us and Amazon. The
Company intends to vigorously defend this action.
In March 2009, Amanda Rudd, on behalf of herself and a putative
class consisting of all other customers who received Borders
Gift Cards from March 2005 to March 2009, filed an action in the
Superior Court for the State of California, County of
San Diego alleging that the Company sells gift cards that
are not redeemable for cash in violation of California’s
Business and Professionals Code Section 17200, et seq. The
Complaint seeks disgorgement of profits, restitution,
attorney’s fees and costs and an injunction. The Company
intends to vigorously defend this action. Discovery has not
commenced and the Company cannot reasonably estimate the
potential exposure, if any, at this time.
In addition to the matters described above, we are, from time to
time, involved in or affected by other litigation incidental to
the conduct of our businesses.
NOTE 9 —
DEBT
Credit
Facility: We have
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
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 our option. Eligible inventory is based upon the
approximate liquidation value, as determined from time to time
by an independent third party. 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, our
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 and a default provision should we receive a going concern
qualification on our annual financial statements from our
independent registered public accounting firm.
We had borrowings outstanding under the Credit Agreement of
$286.7, $547.3 and $499.0 at January 31, 2009,
February 2, 2008, and February 3, 2007, respectively,
excluding any borrowings outstanding related to our discontinued
operations. There were an additional $40.6 of borrowings
outstanding related to our discontinued operations at
February 3, 2007. The weighted average interest rate on
Credit Agreement borrowings in 2008, 2007 and 2006 was
approximately 5.4%, 7.1% and 6.5%, respectively.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
At January 31, 2009, the funding available under the Credit
Agreement was $194.0 million. This amount, however, is not
necessarily indicative of our future funding capacity, due to
the substantial fluctuation in this amount throughout the year
and within a given month. This amount varies not only in
response to seasonal factors, such as the accumulation of
inventory in advance of the holiday selling season, but also due
to day-to-day operating factors, such as the timing of payments
to vendors. These factors, among others, can significantly
impact the amount of funding available on any given day.
In April of 2008, we amended our Credit Agreement. Pursuant to
this amendment lenders (i) approved a loan to us 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.
Term
Loan: On
April 9, 2008, we 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 loaned
$42.5 to us with an original maturity of January 15, 2009.
This agreement contains covenants, restrictions, and default
provisions similar to those contained in the Credit Agreement
described above. The agreements were subsequently amended twice,
in December 2008 and February 2009, which extended the maturity
date of the term loan to April 15, 2009. The agreement was
most recently amended on March 30, 2009, extending the
expiration date of the term loan to April 1, 2010. Please
see “Note 18 — Subsequent Event” for
further discussion of this amendment.
As of January 31, 2009, we were in compliance with our debt
covenants. We currently do not meet the Credit Agreement’s
fixed charge coverage ratio requirement; however, borrowings
under the Credit Agreement have not exceeded 90% of permitted
borrowings.
Debt of
Consolidated
VIEs: We include
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 our
consolidated balance sheets. Scheduled principal payments of
this debt as of January 31, 2009 total $0.2 in 2009, $0.2
in 2010, $0.2 in 2011, $0.3 in 2012, $0.3 in 2013, $3.8 in all
later years, and in the aggregate, total $5.0. See
“Note 10 — Leases” for further
discussion of the Company’s consolidation of these VIEs.
The borrowings outstanding under the Credit Facility and the
Pershing Square term loan are categorized as “Short-term
borrowings and current portion of long-term debt” on our
consolidated balance sheets. The recorded value of these
borrowings approximates their fair value.
We plan to operate our business and execute our strategic
initiatives principally with funds generated from operations,
financing through the Credit Agreement, credit provided by our
vendors and other sources of new financing as deemed necessary
and available. However, there can be no assurance that we will
achieve our internal sales projections or that we will be able
to maintain our current vendor payable support or borrowing
capacity, and any failure to do so could result in our having
insufficient funds for our operations. We have taken a number of
steps to enhance our liquidity in 2008 and 2009 including
reduction of inventory, reduction in headcount and reduction of
actual and planned capital expenditures.
NOTE 10 —
LEASES
Operating
Leases: We conduct
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
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
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
January 31, 2009 total $310.9 in 2009, $289.5 in 2010,
$272.5 in 2011, $264.8 in 2012, $253.8 in 2013, and $1,248.7 in
all later years, and in the aggregate, total $2,640.2. Future
minimum lease payments to be received under subleasing
arrangements at January 31, 2009 total $5.4 in 2009, $4.8
in 2010, $4.5 in 2011, $4.3 in 2012, $3.8 in 2013, and $11.7 in
all later years, and in the aggregate, total $34.5.
Rental
Expenses: A
summary of operating lease minimum and percentage rental
expense, excluding discontinued operations, follows:
2008
2007
2006
Minimum rentals
$
353.4
$
340.2
$
341.0
Percentage rentals
1.7
30.3
23.2
Total
$
355.1
$
370.5
$
364.2
Capitalized
Leases: We, at
times, account for certain items under capital leases. Scheduled
principal payments of capitalized leases as of January 31,2009 total $0.7 in 2009, $0.8 in 2010, $0.5 in 2011, and in the
aggregate, total $2.0.
Consolidated
VIEs: At
January 31, 2009, we are the primary beneficiary of two
variable interest entities (“VIEs”), due to our
guarantee of the debt of these entities. These entities were
established by third-party developers to own, construct, and
lease two of our store locations. To refinance the debt
associated with the construction of these stores, we were
required to guarantee the debt of these two entities. As a
result, we consolidate these VIEs and have recorded property and
equipment, net of accumulated depreciation, of $4.7, long-term
debt (including current portion) of $5.0 and minority interest
of $0.3 at January 31, 2009, and have 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.
NOTE 11 —
EMPLOYEE
BENEFIT PLANS
Employee Savings
Plan: Employees
who meet certain requirements as to age and service are eligible
to participate in our 401(K) Savings Plan. Our expense related
to this plan was $1.6, $4.0, and $4.2 for 2008, 2007 and 2006,
respectively, and consisted primarily of a match of certain
employee contributions. We suspended this match payment as of
July 1, 2008.
NOTE 12 —
STOCK-BASED
COMPENSATION PLANS
2004 Long-Term
Incentive Plan: We
maintain the 2004 Long-Term Incentive Plan (the “2004
Plan”), under which we may grant stock-based awards to our
employees and non-employee directors, including restricted
shares and share units of our common stock and options to
purchase our 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 January 31, 2009, 4.9 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 our common stock at the date
of grant. The plan provides for vesting periods as determined by
our Compensation Committee of the Board of Directors. We
recognize compensation expense for options granted on a
straight-line basis over the vesting period.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
We grant time-vested restricted stock and restricted share units
to our senior management personnel. We recognize compensation
expense for 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), we record compensation cost
based on the fair market value of the RSUs on the date of grant.
In addition, we had previously granted performance-based share
units of our common stock (“RSUs”) to our senior
management personnel. RSUs vest in amounts based on the
achievement of performance goals. The Compensation Committee of
our Board of Directors established the RSUs performance criteria
and vesting period.
A summary of the information relative to our stock option plans
are as follows (number of shares in thousands):
The weighted-average fair values of options at their grant date
were $0.52, $3.66 and $3.84 in 2008, 2007 and 2006, respectively.
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:
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
We recognized stock-based compensation expense of $2.7, or $0.04
per share, net of a $0.3 tax benefit, for the year ended
January 31, 2009, expense of $3.2, or $0.05 per share, net
of a $1.9 tax benefit, for the year ended February 2, 2008,
and expense of $2.6, or $0.04 per share, net of a $1.5 tax
benefit, for the year ended February 3, 2007.
The following table summarizes the information regarding stock
options outstanding at January 31, 2009 (number of shares
in thousands):
Outstanding
Exercisable
Range of
Number of
Weighted-Average
Weighted-Average
Number of
Weighted-Average
Exercise Prices
Shares
Remaining Life
Exercise Price
Shares
Exercise Price
$0.00-$3.40
2,500
6.94
0.57
—
—
$3.41-$6.81
—
—
—
—
—
$6.82-$10.22
—
—
—
—
—
$10.23-$13.63
65
3.6
12.19
40
12.62
$13.64-$17.03
800
4.6
15.20
219
14.62
$17.04-$20.44
935
2.7
19.10
744
18.77
$20.45-$23.84
141
3.8
21.84
116
21.86
$23.85-$27.25
68
4.1
24.60
68
24.60
A summary of the information relative to our granting of
stock-based awards other than options follows (number of shares
in thousands):
ACQUISITION
OF REMAINING INTEREST IN PAPERCHASE PRODUCTS, LTD.
In 2007, we purchased an additional 0.5% interest in Paperchase
from the minority owners for cash consideration of $0.8.
During the fourth quarter of 2008, we purchased the remaining 3%
ownership interest in Paperchase that we had not previously
owned. As a result, our ownership of Paperchase increased to
100%. The cash consideration was $3.6.
NOTE 14 —
SEGMENT
INFORMATION
We are organized based upon the following reportable segments:
Borders Superstores (including Borders.com, which launched in
May 2008), Waldenbooks Specialty Retail stores, International
stores (including Borders Superstores in Puerto Rico, Paperchase
stores and our franchise business), and Corporate (consisting of
certain corporate governance and incentive costs). Segment data
includes charges allocating all corporate support costs to each
segment. Transactions between segments, consisting principally
of inventory transfers, are recorded primarily at cost. We
evaluate the performance of our segments and allocate resources
to them based on operating income and anticipated future
contribution.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
2008
2007
2006
Operating income (loss)
Borders Superstores
$
(100.9
)
$
30.6
$
92.4
Waldenbooks Specialty Retail
(27.5
)
(21.4
)
(78.0
)
International
3.7
8.0
6.1
Corporate
(24.5
)
(13.1
)
(15.3
)
Total operating income (loss)
$
(149.2
)
$
4.1
$
5.2
Total assets
Borders Superstores
$
1,312.7
$
1,719.5
$
1,714.6
Waldenbooks Specialty Retail
185.9
264.9
322.3
International
74.2
86.2
69.6
Corporate
36.2
76.5
128.4
Total assets of continuing operations
$
1,609.0
$
2,147.1
$
2,234.9
Discontinued operations
—
155.6
378.5
Total assets
$
1,609.0
$
2,302.7
$
2,613.4
Capital expenditures
Borders Superstores
$
55.2
$
101.1
$
133.3
Waldenbooks Specialty Retail
6.5
8.9
13.4
International
14.5
10.0
4.8
Corporate
3.7
11.3
14.1
Total capital expenditures
$
79.9
$
131.3
$
165.6
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:
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
Long-lived assets by geographic area are as follows:
2008
2007
2006
Long-lived assets:
Domestic
$
508.9
$
714.5
$
705.3
International
28.9
28.6
17.5
Total long-lived assets of continuing operations
$
537.8
$
743.1
$
722.8
Discontinued operations
—
53.6
167.0
Total long-lived assets
$
537.8
$
796.7
$
889.8
Sales by merchandise category are as follows:
2008
2007
2006
Sales
Books
$
2,001.8
$
2,148.4
$
2,295.8
Music
182.5
264.8
308.6
Video
188.0
248.6
235.5
Gifts & stationery
283.8
287.0
249.3
Other
586.0
606.3
443.1
Total Sales
$
3,242.1
$
3,555.1
$
3,532.3
NOTE 15 —
DISCONTINUED
OPERATIONS
On June 10, 2008, we sold all of the outstanding shares of
Borders Australia Pty Limited, Borders New Zealand Limited
and Borders Pte. Ltd. to companies affiliated with A&R
Whitcoulls Group Holdings Pty Limited (“the
Purchasers”). Funds managed by Pacific Equity Partners Pty
Limited are the principal shareholders of A&R Whitcoulls
Group Holdings Pty Limited, a leading bookseller in Australia
and New Zealand. The following is a summary of the
principal terms of the Agreement:
The consideration for the sale was (a) a cash payment of
$97.3, (b) a deferred payment of $3.3, payable on or about
January 1, 2009 if certain actual operating results were
achieved, and (c) a deferred payment of up to $6.5 payable
on or about March 31, 2009 if certain actual operating
results for fiscal 2008 exceed a specified level. We do not
expect payment of the consideration described in (b) or (c).
The sale agreement included all 30 Borders Superstores located
in Australia, New Zealand and Singapore. 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 the Purchasers. With respect to the contingent
lease obligations, based upon current rents, taxes, common area
maintenance charges and exchange rates, the maximum amount of
potential future payments (undiscounted) is approximately $11.2.
We have recorded a contingent liability of approximately $0.6
based upon the likelihood that we will be required to perform
under the guarantees. Also under the terms of the sale
agreement, we provided certain tax indemnifications to the
Purchasers, with the maximum amount of potential future payments
(undiscounted) totaling approximately $4.9. We previously
reserved for this item.
We have not recorded any amount related to the contingent
deferred consideration of $9.8 as of January 31, 2009. As a
result of the sale of the Australia, New Zealand and Singapore
bookstores, a
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
portion of the intangible asset attributable to these
businesses, resulting from the Pershing Square Financing
Agreement and which totaled $17.5, was added to the carrying
value of the related businesses and expensed upon disposal, and
is included in the loss on disposal.
On September 21, 2007, we sold our 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 $14.3 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.; and (iv) 7% loan notes of approximately
$2.4 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 $134.0. The leases
provide for periodic rent reviews, which could increase our
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 us to take a new (replacement) lease,
the landlord would have an obligation to attempt to re-lease the
premises, which could further reduce our potential liability. At
January 31, 2009, we have reserved $9.0 million based
upon the likelihood that we will be required to perform under
these guarantees.
Also under the terms of the sale agreement, we 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 $7.7, and we have recorded
a liability of approximately $3.1 based upon the likelihood that
we will be required to perform under the indemnification.
We have not recorded any amount related to the contingent
deferred consideration of $14.3 as of January 31, 2009. We
will record this amount once the realization of such amount is
resolved beyond a reasonable doubt. We have attributed only a
nominal value to our equity interest in Bookshop Acquisitions
Ltd. and to our 7% loan notes.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
We have accounted for the sale of the U.K., Ireland, Australia,
New Zealand, and Singapore operations as discontinued
operations, and all previous years have been restated to reflect
the results of our continuing operations excluding these
operations. The results of all the discontinued operations were
previously reported as part our International segment. The
financial results of discontinued operations were as follows:
2008
2007
2006
Total revenue
$
80.8
$
455.6
$
544.1
Loss from operations of discontinued operations before income tax
(2.6
)
(11.6
)
(144.6
)
Loss from operations of discontinued operations (net of income
tax benefit of $0.9, $2.9 and $15.2, respectively)
(1.7
)
(8.7
)
(129.4
)
Loss on disposal of discontinued operations (net of income tax
benefit of $3.1, $7.6, and $0.0 respectively)
(0.3
)
(128.8
)
—
Loss from discontinued operations (net of income tax benefit of
$4.0, $10.5 and $15.2, respectively)
Property and equipment (net of accumulated depreciation)
46.0
Other assets
7.6
Noncurrent assets of discontinued operations
53.6
Short-term borrowings and current portion of long-term debt
—
Accounts payable
38.4
Accrued payroll and other liabilities
23.0
Deferred income taxes
(3.9
)
Current liabilities of discontinued operations
57.5
Long-term liabilities
25.4
Noncurrent liabilities of discontinued operations
$
25.4
NOTE 16 —
PERSHING
SQUARE FINANCING ARRANGEMENT
On April 9, 2008, we completed a financing agreement with
Pershing Square on behalf of certain of its affiliated
investment funds. Under the terms of the agreement, Pershing
Square loaned $42.5 to us and committed to purchase, at our
discretion, certain of our international businesses pursuant to
an initial $135.0 backstop purchase commitment. The terms of the
Pershing Square financing agreement were approved by the lenders
under the Credit Agreement, and the Credit Agreement has been
amended accordingly. These agreements were subsequently amended
twice, in December 2008 and February 2009,
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
which extended the maturity date of the term loan and the
expiration date of the backstop purchase offer to April 15,2009. The agreements were most recently amended on March 30,2009, extending the expiration date of the term loan to
April 1, 2010, and re-pricing the exercise price of the
warrants to $0.65 per share, subject to adjustment. The
expiration date of the backstop purchase offer was not extended
and will be allowed to expire. Please see
“Note 18 — Subsequent Event” for
further discussion of the March 30, 2009 amendment to the
Pershing Square financing arrangement.
The financing agreement with Pershing Square, prior to the
March 30, 2009 amendment, consisted of three main
components:
1. A $42.5 senior secured term loan maturing April 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 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 our existing Credit
Agreement, other than some relating to Paperchase. Such
exceptions are not expected to interfere with our operations or
the operations of Paperchase in the ordinary course of business.
2. A backstop purchase offer that gave us the right but not
the obligation, until April 15, 2009, to require Pershing
Square to purchase our Paperchase, Australia, New Zealand and
Singapore subsidiaries, as well as our interest in Bookshop
Acquisitions, Inc. (Borders U.K.) after we have pursued a sale
process to maximize the value of those assets. Pursuant to this
sale process, we sold our Australia, New Zealand and Singapore
subsidiaries during the second quarter of 2008 to companies
affiliated with A&R Whitcoulls Group Holdings Pty Limited.
Pershing Square’s remaining obligation to purchase our
Paperchase subsidiary remains in effect until April 15,2009. Pershing Square’s purchase obligation for Paperchase
is at a price of $65.0 (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. We have
retained the right, in our 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 our sale of these
businesses to other parties. Pershing Square’s purchase
obligation is also subject to the absence of a material adverse
change.
3. The issuance to Pershing Square of 14.7 million
warrants to purchase our common stock at $7.00 per share. The
warrants will be cash-settled in certain circumstances and
expire October 9, 2014. Except as otherwise noted, the
warrants will be settled in exchange for shares of the
Company’s stock, and will be settled at such time
determined by the warrants’ holder. In the event of a
Public Stock Merger (defined as a business combination pursuant
to which all of the outstanding common stock of the Company is
exchanged for, converted into or constitute solely the right to
receive common stock listed on a national securities exchange)
the Company may elect to (i) keep all the unexercised
warrants outstanding after the Public Stock Merger, in which
case the warrants will remain outstanding, or (ii) cause
the outstanding warrants to be redeemed for an amount in cash
equal to the Cash Redemption Value of the warrants. The
Cash Redemption Value in respect of each warrant means
(1) its fair value, as determined by an independent
financial expert mutually agreed by the Company and the person
holding the greatest number of warrants, using standard option
pricing models for American style options; plus
(2) interest on such fair value from the consummation of
the Public Stock Merger to the payment date at the rate of 10%
per annum. Upon the occurrence of any change of control other
than a Public Stock Merger, or a delisting of the Common Stock
underlying the warrants, each holder of warrants may elect to
(i) keep such warrants outstanding, or (ii) require
the Company to redeem the warrants for an amount in cash equal
to the Cash Redemption Value.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
For accounting purposes, we 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 resulted in
the recognition of a discount on the secured term loan of $7.2,
which is being amortized to earnings over the term of the loan
using the effective interest method. As of January 31,2009, the discount on the term loan totaled $0.2, and is
categorized as “Short-term borrowings and current portion
of long-term debt” in our consolidated balance sheets.
In accordance with Statement of Financial Accounting Standards
No. 150, “Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity”
(“FAS 150”), we recorded the value of the
warrants at their fair market value, and used the Black-Scholes
valuation model in the calculation of their fair value. The
assumptions used in the model to determine the
$40.8 million fair value on the date of issuance were:
Warrant exercise price:
$7.00 per
warrant(1)
Stock price at issuance date:
$6.60 per share
Stock volatility:
38.18%(2)
Risk-free interest rate:
3.21%(3)
Annual dividend yield:
0%
Expected life:
6.5 years(4)
(1)
Represents contractual value.
(2)
Represents volatility over the period matching the
warrants’ expected life.
(3)
Represents the seven-year treasury note rate.
(4)
Assumes that the warrants will be held the duration of their
contractual lives.
The warrants are required to be remeasured to their fair value
at the end of each period with the change in fair value
recognized in earnings. At January 31, 2009, the warrants
were valued at $0.7 million. The assumptions used in the
calculation were:
The warrants are categorized as “Other long-term
liabilities” in our consolidated balance sheets. The
decrease in the fair value from the date of issuance through the
end of the fourth quarter of $40.1 (all of which is unrealized)
was recognized as income and is categorized as an offset to
“Interest expense” on our consolidated statements of
operations. This fair value measurement is based upon
significant unobservable inputs, referred to as a Level 3
measurement under FASB Statement of Financial Accounting
Standards No. 157, “Fair Value Measurements.” An
intangible asset in the amount of $33.7 related to the backstop
purchase offer was also recorded, and is categorized as
“Accounts receivable and other current assets” on our
consolidated balance sheets. During the second quarter of 2008,
the portion of the intangible asset that related to our
Australia, New Zealand and Singapore businesses which were sold
during the quarter, totaling $17.5, was added to the carrying
value of those businesses and expensed upon disposition. The
remaining intangible asset of $16.2 relates to our Paperchase
subsidiary.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
NOTE 17 —
UNAUDITED
QUARTERLY FINANCIAL DATA
Fiscal 2008
Q1
Q2
Q3
Q4
Total revenue
$
735.8
$
758.5
$
693.4
$
1,087.7
Gross margin
168.2
182.0
147.0
293.4
Income (loss) from continuing operations
(30.1
)
(11.3
)
(172.2
)
28.9
Income (loss) from discontinued operations
(1.6
)
2.1
(3.2
)
0.7
Net income (loss)
(31.7
)
(9.2
)
(175.4
)
29.6
Diluted:
Income (loss) from continuing operations per common share
(0.50
)
(0.19
)
(2.85
)
0.48
Income (loss) from discontinued operations per common share
(0.03
)
0.04
(0.05
)
0.01
Net income (loss) per common share
(0.53
)
(0.15
)
(2.90
)
0.49
Basic:
Income (loss) from continuing operations per common share
(0.50
)
(0.19
)
(2.85
)
0.48
Income (loss) from discontinued operations per common share
(0.03
)
0.04
(0.05
)
0.01
Net income (loss) per common share
(0.53
)
(0.15
)
(2.90
)
0.49
Fiscal 2007
Q1
Q2
Q3
Q4
Total revenue
$
757.1
$
812.6
$
765.3
$
1,262.4
Gross margin
175.3
202.6
166.8
384.4
Income (loss) from continuing operations
(28.9
)
(18.4
)
(39.9
)
67.3
Loss from discontinued operations
(7.0
)
(6.7
)
(121.2
)
(2.6
)
Net income (loss)
(35.9
)
(25.1
)
(161.1
)
64.7
Diluted:
Income (loss) from continuing operations per common share
(0.49
)
(0.31
)
(0.68
)
1.15
Loss from discontinued operations per common share
(0.12
)
(0.11
)
(2.06
)
(0.05
)
Net income (loss) per common share
(0.61
)
(0.42
)
(2.74
)
1.10
Basic:
Income (loss) from continuing operations per common share
(0.49
)
(0.31
)
(0.68
)
1.15
Loss from discontinued operations per common share
(0.12
)
(0.11
)
(2.06
)
(0.05
)
Net income (loss) per common share
(0.61
)
(0.42
)
(2.74
)
1.10
Earnings per share amounts for each quarter are required to be
computed independently and may not equal the amount computed for
the total year.
NOTE 18 —
SUBSEQUENT
EVENT
On March 30, 2009, the Pershing Square financing
arrangement was amended to extend the maturity date of the term
loan to April 1, 2010. The amendment also resulted in a
reduction of the exercise price of the
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
warrants to $0.65 per share, through the operation of the
antidilution provisions of the warrants. The $65.0 backstop
purchase offer related to our Paperchase subsidiary was not
extended and will be allowed to expire.
As a result of the reduction in the exercise price of the
warrants, we expect the associated liability to increase to
approximately $6.0, and the discount on the secured term loan to
also increase, in approximately the same amount. The discount
will be amortized to earnings over the term of the loan using
the effective interest method. The subsequent changes in the
fair market value of the warrants will continue to be recognized
in earnings. The intangible asset related to the backstop
purchase offer related to our Paperchase subsidiary of $16.2
will be expensed during the first quarter of 2009.
We have audited the accompanying consolidated balance sheets of
Borders Group, Inc. and subsidiaries as of January 31, 2009
and February 2, 2008, and the related consolidated
statements of operations, stockholders’ equity, and cash
flows for each of the three years in the period ended
January 31, 2009. Our audits also included the financial
statement schedule listed in the Index at Item 15(a)(2).
These financial statements and schedule are the responsibility
of the Company’s management. Our responsibility is to
express an opinion on these financial statements and schedule
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 at
January 31, 2009 and February 2, 2008, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended January 31,2009, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial
statements, 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 January 31, 2009, based on criteria
established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 31, 2009 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: Our
Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of our 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 January 31, 2009 (the
“Evaluation Date”). Based on such evaluation, such
officers have concluded that our 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 our 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 our internal control
over financial reporting as of January 31, 2009. 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 January 31, 2009, our 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. Our independent registered public
accounting firm, Ernst & Young LLP, has issued an
audit report on our effectiveness of internal control over
financial reporting as of January 31, 2009, 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 January 31, 2009, 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 January 31, 2009, 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 as of January 31, 2009 and
February 2, 2008, and the related consolidated statements
of operations, stockholders’ equity and cash flows for each
of the three years in the period ended January 31, 2009 of
Borders Group, Inc. and our report dated March 31, 2009
expressed an unqualified opinion thereon.
Directors,
Executive Officers and Corporate Governance
Information regarding our executive officers 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 our directors required by Item 10
is included under the caption “Election of Directors”
in our Proxy Statement related to our 2009 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 our 2009
Annual Meeting of Stockholders.
Code
of Ethics and Other Corporate Governance
Information
Information regarding our Business Conduct Policy and our 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 our 2009 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 our 2009
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 our 2009 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 our 2009 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 our 2009 Annual
Meeting of Stockholders.
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
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
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
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
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.
10
.39(28)
Sale and Purchase Agreement between Borders Group, Inc.,
A&R Whitcoulls Group Holdings Pty Limited, Spine Newco (NZ)
Limited and Spine Newco Pty Limited.
10
.40(28)
Brand License Deed between Borders Properties, Inc. and Spine
Newco Pty Limited
10
.41(28)
Purchasing Agreement between Borders Group, Inc., Borders
Australia Pty Limited, Borders New Zealand Limited, Borders Pte.
Limited, Spine Newco Pty Limited, Spine Newco (NZ) Limited and
A&R Witcoulls Group Holdings Pty Limited.
10
.42(28)
Transition Services Agreement between Borders International
Services, Inc., Borders Australia Pty Limited, Borders New
Zealand Limited, Borders Pte. Limited, Spine Newco Pty Limited,
and Spine Newco (NZ) Limited.
10
.43(29)
Stock Option Agreement between Mr. Jones and the Company.
10
.44(29)
Restricted Share Agreement between Mr. Jones and the
Company.
10
.45(29)
Form of Executive Officer Severance Agreement.
10
.46(29)
Form of Restricted Share Agreement for Executive Officers.
10
.47(29)
Form of Enhanced Incentive Bonus for Executive Officers.
10
.48(29)
Form of Enhanced Incentive Bonus Agreement between
Mr. Jones and the Company
10
.49(30)
Non-Qualified Deferred Compensation Plan for Directors of
Borders Group, Inc.
10
.50(31)
Borders Group, Inc. Indemnification Letter Agreement with
Directors and Officers
10
.51(32)
Third Amendment to the Borders Group, Inc. 2004 Long Term
Incentive Plan dated December 9, 2008.
10
.52
Fourth Amendment to the Borders Group, Inc. 2004 Long Term
Incentive Plan dated March 20, 2009.
10
.53(33)
Extension of Purchase Offer Letter, dated as of
December 22, 2008, between Pershing Square Capital
Management, L.P. and Borders Group, Inc.
10
.54(34)
Amendment to Purchase Offer Letter, dated as of January 16,2009, between Pershing Square Capital Management, L.P. and
Borders Group, Inc.
10
.55(35)
Extension and Amendment of Purchase Offer Letter, dated as of
February 13, 2009, between Pershing Square Capital
Management, L.P. and Borders Group, Inc.
10
.56(33)
First Amendment to the Senior Secured Credit Agreement, dated as
of December 22, 2008, among Borders Group, Inc. as borrower
and the guarantors listed therein, the Lenders listed therein
and Pershing Square Capital Management, L.P. as administrative
agent and collateral agent
10
.57(35)
Second Amendment to the Senior Secured Credit Agreement, dated
as of February 13, 2009, among Borders Group, Inc. as
borrower and the guarantors listed therein, the Lenders listed
therein and Pershing Square Capital Management, L.P. as
administrative agent and collateral agent
10
.58(36)
Employment Agreement by and between Borders Group, Inc. and Ron
Marshall dated as of January 3, 2009
Third Amendment to the Senior Secured Credit Agreement, dated as
of March 30, 2009, among Borders Group, Inc. as borrower and the
guarantors listed therein, the lenders listed therein and
Pershing Square Capital Management, L.P. as administrative agent
and collateral agent.
10
.64(37)
Side Letter to the Warrant and Registration Rights Agreement,
dated as of March 30, 2009 from Borders Group, Inc. to Pershing
Square Capital Management, L.P.
10
.65(37)
Subscription and Purchase Agreement, dated as of March 30, 2009
by and between Pershing Square, L.P. and Borders Group, Inc.
Statement of Ron Marshall, President and Chief Executive Officer
of Borders Group, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31
.2
Statement of Mark R. Bierley, 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 Ron Marshall, President and Chief Executive Officer
of Borders Group, Inc. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32
.2
Statement of Mark R. Bierley, Executive Vice President and Chief
Financial Officer of Borders Group, Inc. pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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/ RON
MARSHALL
Ron Marshall
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
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
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.
10
.39(28)
Sale and Purchase Agreement between Borders Group, Inc.,
A&R Whitcoulls Group Holdings Pty Limited, Spine Newco (NZ)
Limited and Spine Newco Pty Limited.
10
.40(28)
Brand License Deed between Borders Properties, Inc. and Spine
Newco Pty Limited
10
.41(28)
Purchasing Agreement between Borders Group, Inc., Borders
Australia Pty Limited, Borders New Zealand Limited, Borders Pte.
Limited, Spine Newco Pty Limited, Spine Newco (NZ) Limited and
A&R Witcoulls Group Holdings Pty Limited.
10
.42(28)
Transition Services Agreement between Borders International
Services, Inc., Borders Australia Pty Limited, Borders New
Zealand Limited, Borders Pte. Limited, Spine Newco Pty Limited,
and Spine Newco (NZ) Limited.
10
.43(29)
Stock Option Agreement between Mr. Jones and the Company.
10
.44(29)
Restricted Share Agreement between Mr. Jones and the
Company.
10
.45(29)
Form of Executive Officer Severance Agreement.
10
.46(29)
Form of Restricted Share Agreement for Executive Officers.
10
.47(29)
Form of Enhanced Incentive Bonus for Executive Officers.
Form of Enhanced Incentive Bonus Agreement between
Mr. Jones and the Company
10
.49(30)
Non-Qualified Deferred Compensation Plan for Directors of
Borders Group, Inc.
10
.50(31)
Borders Group, Inc. Indemnification Letter Agreement with
Directors and Officers
10
.51(32)
Third Amendment to the Borders Group, Inc. 2004 Long Term
Incentive Plan dated December 9, 2008.
10
.52
Fourth Amendment to the Borders Group, Inc. 2004 Long Term
Incentive Plan dated March 20, 2009.
10
.53(33)
Extension of Purchase Offer Letter, dated as of
December 22, 2008, between Pershing Square Capital
Management, L.P. and Borders Group, Inc.
10
.54(34)
Amendment to Purchase Offer Letter, dated as of January 16,2009, between Pershing Square Capital Management, L.P. and
Borders Group, Inc.
10
.55(35)
Extension and Amendment of Purchase Offer Letter, dated as of
February 13, 2009, between Pershing Square Capital
Management, L.P. and Borders Group, Inc.
10
.56(33)
First Amendment to the Senior Secured Credit Agreement, dated as
of December 22, 2008, among Borders Group, Inc. as borrower
and the guarantors listed therein, the Lenders listed therein
and Pershing Square Capital Management, L.P. as administrative
agent and collateral agent
10
.57(35)
Second Amendment to the Senior Secured Credit Agreement, dated
as of February 13, 2009, among Borders Group, Inc. as
borrower and the guarantors listed therein, the Lenders listed
therein and Pershing Square Capital Management, L.P. as
administrative agent and collateral agent
10
.58(36)
Employment Agreement by and between Borders Group, Inc. and Ron
Marshall dated as of January 3, 2009
10
.59(36)
Resignation Letter of Edward Wilhelm dated as of January 4,2009
10
.60
Separation Agreement between Kenneth H. Armstrong and the
Company dated as of February 6, 2009.
Third Amendment to the Senior Secured Credit Agreement, dated as
of March 30, 2009, among Borders Group, Inc. as borrower and the
guarantors listed therein, the lenders listed therein and
Pershing Square Capital Management, L.P. as administrative agent
and collateral agent.
10
.64(37)
Side Letter to the Warrant and Registration Rights Agreement,
dated as of March 30, 2009 from Borders Group, Inc. to Pershing
Square Capital Management, L.P.
10
.65(37)
Subscription and Purchase Agreement, dated as of March 30, 2009
by and between Pershing Square, L.P. and Borders Group, Inc.
Statement of Ron Marshall, President and Chief Executive Officer
of Borders Group, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31
.2
Statement of Mark R. Bierley, 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 Ron Marshall, President and Chief Executive Officer
of Borders Group, Inc. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32
.2
Statement of Mark R. Bierley, Executive Vice President and Chief
Financial Officer of Borders Group, Inc. pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002