Document/ExhibitDescriptionPagesSize 1: 10-K Annual Report for Fiscal Year Ended February 3, HTML 787K 2007
2: EX-10.34 Employment Terms Between Mr. Armstrong and the HTML 60K
Company
3: EX-10.35 Employment Terms Between Mr. Gruen and the Company HTML 62K
4: EX-10.36 Second Amendment to the Borders Group, Inc. 2004 HTML 10K
Long Term Incentive Plan
5: EX-10.37 Severance Agreement HTML 28K
6: EX-21.1 Subsidiaries of Registrant HTML 11K
7: EX-23.1 Consent of Ernst & Young LLP HTML 9K
8: EX-31.1 Statement of George L. Jones, President and Chief HTML 15K
Executive Officer Pursuant to Section
302
9: EX-31.2 Statement of Edward W. Wilhelm, Executive Vice HTML 15K
President and Chief Financial Officer
Pursuant to Section 302
10: EX-32.1 Statement of George L. Jones, President and Chief HTML 9K
Executive Officer Pursuant to Section
906
11: EX-32.2 Statement of Edward W. Wilhelm, Executive Vice HTML 9K
President and Chief Financial Officer
Pursuant to Section 906
(734) 477-1100
(Registrant’s telephone
number, including area code)
Securities registered pursuant to Section 12(g) 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 þ No o
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 (§229.405 of this chapter) of
Regulation S-K
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. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer 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
$1,186,070,569 based upon the closing market price of
$19.07 per share of Common Stock on the New York Stock
Exchange as of July 28, 2006.
Number of shares of Common Stock outstanding as of
March 27, 2007: 58,568,352
This Annual Report on
Form 10-K
contains forward-looking statements as defined by the Private
Securities Litigation Reform Act of 1995, all of which are
subject to risks and uncertainties. Forward-looking statements
reflect management’s current expectations and are
inherently uncertain. The Company’s actual results may
differ significantly from management’s expectations. One
can identify these forward-looking statements by the use of
words such as “projects,”“expected,”“estimated,”“look toward,”“continuing,”“planning,”“guidance,” ““goal,” “will,”“may,”“intend,”“anticipates,”
and other words of similar meaning. One can also identify them
by the fact that they do not relate strictly to historical or
current facts. These statements are likely to address matters
such as the Company’s future financial performance
(including earnings per share growth, EBIT margins and inventory
turns, same-store sales growth, and anticipated capital
expenditures and depreciation and amortization amounts), its
strategic plans and expected benefits relating to such plans
(including steps to be taken to improve the performance of
domestic superstores, the exploration of strategic alternatives
with respect to certain international operations, the downsizing
of the Specialty Retail segment and the development of a
proprietary Web site) and its intentions with respect to
dividend payments and share repurchases. These statements are
subject to risks and uncertainties that could cause actual
results and plans to differ materially from those included in
the Company’s forward-looking statements. These risks and
uncertainties include, but are not limited to, consumer demand
for the Company’s products, particularly during the holiday
season, which is believed to be related to general economic and
geopolitical conditions, competition and other factors; the
availability of adequate capital to fund the Company’s
operations and to carry out its strategic plans; the performance
of the Company’s information technology systems and the
development of improvements to the systems necessary to
implement the Company’s strategic plan, and, with respect
to the exploration of strategic alternatives for certain
international operations, the ability to attract interested
third parties. Although it is not possible to predict or
identify all such factors, they may include the risks discussed
in “Item 1A. — Risk Factors.” The
Company does not undertake any obligation to update
forward-looking statements.
General
Borders Group, Inc., through its subsidiaries, Borders, Inc.
(“Borders”), Walden Book Company, Inc.
(“Waldenbooks”), Borders (UK) Limited, Borders
Australia Pty Limited and others (individually and collectively,
“the Company”), is the second largest operator of
book, music and movie superstores and the largest operator of
mall-based bookstores in the world based upon both sales and
number of stores. At February 3, 2007, the Company operated
567 superstores under the Borders name, including 499 in the
United States, 41 in the United Kingdom, 20 in Australia, three
in Puerto Rico, two in New Zealand, and one each in Singapore
and Ireland. The Company also operated 564 mall-based and other
bookstores primarily under the Waldenbooks name in the United
States and 30 bookstores under the Books etc. name in the United
Kingdom. In addition, the Company owns and operates United
Kingdom-based Paperchase Products Limited
(“Paperchase”), a designer and retailer of stationery,
cards and gifts. As of February 3, 2007, Paperchase
operated 99 stores, primarily in the United Kingdom, and
Paperchase shops have been added to nearly 250 domestic Borders
superstores.
Business
Strategy
On March 22, 2007, the Company announced a new strategic
plan, the principal components of which are as follows:
grow comparable store sales and profitability in the domestic
Borders superstores, right-size the Waldenbooks Specialty Retail
business, explore strategic alternatives in the International
segment, and leverage innovation, technology and strategic
alliances to differentiate the Company’s business,
primarily through its recently-launched Borders Rewards loyalty
program and through the planned launch of a proprietary
e-commerce
Web site in early 2008. Please see “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” for further discussion of the Company’s
business strategy.
The Company is organized based upon the following operating
segments: domestic Borders superstores, Waldenbooks Specialty
Retail stores, International stores (including Borders, Books
etc. and Paperchase stores), and Corporate (consisting of
certain corporate governance and other costs). See
“Note 15 — Segment Information” in the
notes to consolidated financial statements for further
information relating to these segments.
Domestic
Borders Superstores
Borders is a premier operator of book, music and movie
superstores in the United States, offering customers selection
and service that the Company believes to be superior to other
such superstore operators. A key element of the Company’s
strategy is to grow comparable store sales and profitability of
its domestic Borders superstore operations. In 2006, the Company
opened 31 new Borders superstores, achieved average sales per
square foot of $236 and average sales per superstore of
$5.7 million. Borders superstores also achieved compound
annual net sales growth of 3.6%, 5.3% and 5.0% for the three
years ended February 3, 2007, January 28, 2006 and
January 23, 2005, respectively. Borders superstores offer
customers a vast assortment of books, music and movies, superior
customer service, value pricing and an inviting and comfortable
environment designed to encourage browsing. Borders superstores
carry an average of 94,500 book titles, with individual store
selections ranging from 52,000 titles to 171,000 titles, across
numerous categories, including many
hard-to-find
titles. As of February 3, 2007, 487 of the 499 domestic
Borders superstores were in a book, music and movie format,
which also features an extensive selection of pre-recorded
music, with a broad assortment in categories such as jazz,
classical and world music, and a broad assortment of DVDs,
focusing on new release and catalog movies. A typical Borders
superstore carries approximately 14,000 titles of music and over
7,400 titles of movies.
Borders superstores average 24,800 square feet in
size, including approximately 13,000 square feet devoted to
books, 2,900 square feet devoted to music, 800 square
feet devoted to newsstand and 900 square feet devoted to
movies. Through its remodeling efforts, Borders is realigning
space devoted to specific categories which, in general, results
in an increase in space for categories such as books, movies and
gifts and stationery and a reduction in music space. As part of
those efforts, the Company remodeled 88 Borders superstores
during 2006.
Stores opened in 2006 averaged 22,800 square feet. Each
store is distinctive in appearance and architecture and is
designed to complement its local surroundings, although Borders
utilizes certain standardized specifications to increase the
speed and lower the cost of new store openings.
The typical Borders superstore also dedicates approximately
900 square feet to gifts and stationery. In 2005, the
Company began to install Paperchase shops in all new and most
remodeled domestic superstores as part of a long-term plan to
enhance the variety and distinctiveness of the Company’s
gifts and stationery offering. The Company will continue to
convert gifts and stationery departments to Paperchase shops
through its store remodeling efforts.
In addition, the Company devotes approximately 1,400 square
feet to a cafe within virtually all Borders superstores. In
August 2004, the Company entered into a licensing agreement with
Seattle’s Best Coffee, a wholly-owned subsidiary of
Starbucks Corporation, through which the Company will operate
Seattle’s Best Coffee-branded cafes within substantially
all of the Company’s existing Borders superstores in the
continental U.S. and Alaska and new stores as they are opened.
Cafes located within existing Borders superstores began
conversion to Seattle’s Best Coffee cafes in early 2005,
and will continue through 2007. There is no change expected in
the size of the cafes as a result of the conversion to
Seattle’s Best Coffee.
The number of Borders domestic superstores located in each state
and the District of Columbia as of February 3, 2007 are
listed below:
Number of
State
Stores
Alaska
1
Arizona
12
Arkansas
1
California
80
Colorado
14
Connecticut
10
Delaware
2
District of Columbia
3
Florida
24
Georgia
15
Hawaii
7
Idaho
2
Illinois
35
Indiana
12
Iowa
4
Kansas
7
Kentucky
5
Louisiana
1
Maine
3
Maryland
12
Massachusetts
13
Michigan
17
Minnesota
8
Mississippi
1
Missouri
10
Montana
3
Nebraska
2
Nevada
6
New Hampshire
4
New Jersey
17
New Mexico
5
New York
29
North Carolina
10
Ohio
19
Oklahoma
4
Oregon
7
Pennsylvania
23
Rhode Island
2
South Dakota
1
Tennessee
7
Texas
22
Utah
3
Vermont
1
Virginia
15
Washington
12
West Virginia
2
Wisconsin
6
Total
499
Waldenbooks
Specialty Retail Stores
Waldenbooks Specialty Retail operates small format stores in
malls, airports and outlet malls, offering customers a
convenient source for new releases, hardcover and paperback
bestsellers, periodicals and a standard selection of other
titles. Waldenbooks Specialty Retail operates stores under the
Waldenbooks, Borders Express and Borders Outlet names, as well
as Borders-branded airport stores. Average sales per square foot
were $243 and average sales per store were $1.1 million for
2006. Waldenbooks Specialty Retail stores average approximately
3,800 square feet in size, and carry an average of 19,000
titles, ranging from 9,000 in an airport store to 31,500 in a
large format store.
In 2004 and 2005, the Company converted 135 Waldenbooks stores
to Borders Express stores, with an expanded merchandise
selection, including music, movies and gifts and stationery.
During 2006, another 21 Waldenbooks stores were converted to
Borders Express stores.
The number of Waldenbooks Specialty Retail stores located in
each state and the District of Columbia as of February 3,2007 are listed below:
Number of
State
Stores
Alabama
3
Alaska
2
Arizona
6
Arkansas
3
California
44
Colorado
6
Connecticut
9
Delaware
2
District of Columbia
1
Florida
36
Georgia
14
Hawaii
7
Idaho
3
Illinois
30
Indiana
14
Iowa
6
Kansas
5
Kentucky
11
Louisiana
5
Maine
2
Maryland
18
Massachusetts
19
Michigan
24
Minnesota
4
Mississippi
4
Missouri
8
Montana
3
Nebraska
4
Nevada
4
New Hampshire
5
New Jersey
21
New Mexico
2
New York
24
North Carolina
16
North Dakota
2
Ohio
31
Oklahoma
9
Oregon
7
Pennsylvania
46
Rhode Island
2
South Carolina
10
South Dakota
2
Tennessee
9
Texas
30
Utah
3
Vermont
3
Virginia
16
Washington
12
West Virginia
6
Wisconsin
10
Wyoming
1
Total
564
International
Stores
The Company’s International operations began in 1997 with
the acquisition of Books etc. in the United Kingdom and the
opening of a superstore in Singapore. Since then, the Company
has expanded its International operations to establish a
presence on four continents, and opened 13 International
superstores in 2006.
International superstores as of February 3, 2007 are listed
below:
Number of
Country
Stores
Australia
20
Ireland
1
New Zealand
2
Puerto Rico
3
Singapore
1
United Kingdom
41
Total
68
International superstores, which operate under the Borders name,
achieved average sales per square foot of $413 and average sales
per superstore of $8.2 million in 2006. International
superstores range between 13,500 and 42,400 square feet in
size, and are located in both city center as well as suburban
locations. All International superstores offer book, music,
movie and gifts and stationery merchandise and feature cafes.
Those cafes located in the United Kingdom are licensed to and
operated by Starbucks Coffee Company (U.K.) Limited. Cafes
located in Australia and New Zealand are licensed to and
operated by Gloria Jean’s Coffees. The gifts and stationery
departments in the United Kingdom and select Asia Pacific
superstores are branded Paperchase. The Company owns
substantially all of Paperchase, as discussed below.
The Company also operated 30 stores under the Books etc. name in
the United Kingdom as of February 3, 2007, which are
small-format stores located primarily in central London or in
various airports in the United Kingdom. These stores primarily
offer books and average 4,800 square feet in size,
with the largest being 10,700 square feet and the smallest
being 600 square feet.
In July 2004, the Company increased its 15% equity stake in
Paperchase to 97%. Paperchase is a brand leader in design-led
and innovative stationery retailing in the United Kingdom. As of
February 3, 2007, the Company operated 52 Paperchase
locations as stand-alone stores and concessions in selected
House of Fraser and Selfridges stores. In addition, the Company
operates concessions in certain International Borders
superstores and certain Books etc. stores. The vast majority of
Paperchase’s merchandise is developed specifically by and
for Paperchase and, as such, can only be found in Paperchase
stores.
Internet
The Company, through its subsidiaries, has agreements with
Amazon.com, Inc. (“Amazon”) to operate Web sites
utilizing the Borders.com, Waldenbooks.com, Borders.co.uk and
Booksetc.co.uk URLs (the “Web Sites”). Under these
agreements, Amazon is the merchant of record for all sales made
through the Web Sites, and determines all prices and other terms
and conditions applicable to such sales. Amazon is responsible
for the fulfillment of all products sold through the Web Sites
and retains all payments from customers. The Company receives
referral fees for products purchased through the Web Sites. The
agreements contain mutual indemnification provisions, including
provisions that define between the parties the responsibilities
with respect to any liabilities for sales, use and similar
taxes, including penalties and interest, associated with
products sold on the Web Sites. Currently, taxes are not
collected with respect to products sold on the Web Sites except
in certain states. As previously discussed, the Company plans to
launch its proprietary e-commerce Web site in early 2008.
Distribution
The Company’s centralized distribution system, consisting
of 16 distribution facilities worldwide, significantly enhances
its ability to manage inventory on a
store-by-store
basis. Inventory is shipped from vendors primarily to the
Company’s distribution centers. Approximately 90% of the
books carried by the Company’s stores are processed through
the Company’s distribution facilities. Borders purchases
substantially all of its music and movie merchandise directly
from manufacturers and utilizes the Company’s own
distribution center to ship approximately 95% of its music and
movie inventory to its stores.
In general, unsold books can be returned to their publishers at
cost. Domestic Borders superstores and Waldenbooks Specialty
Retail stores return books to the Company’s centralized
returns center near Nashville, Tennessee to be processed for
return to the publishers. In general, Borders can return music
and movie merchandise to its vendors at cost plus an additional
fee to cover handling and processing costs.
As of February 3, 2007, the Company’s primary
distribution centers were located in the following localities:
Locality, Country
Number
Square Footage
Auckland, New Zealand
1
1,800
Bedfordshire, United Kingdom
1
67,000
California, United States
1
414,000
Christchurch, New Zealand
1
700
Indiana, United States
1
96,000
Kuala Lumpur, Malaysia
1
4,200
Melbourne, Australia
1
35,300
Ohio, United States
1
172,000
Pennsylvania, United States
1
600,000
Perth, Australia
1
12,000
Puerto Rico
1
700
Singapore
1
8,200
St. Columb, United Kingdom
1
100,000
Tennessee, United States
3
926,000
Total
16
2,437,900
The Company has undertaken a multi-year initiative to enhance
the efficiency of its distribution and logistics network. In
continuation of this strategy in 2006 is the completed
relocation of the Company’s Harrisburg, Pennsylvania
distribution facility to a new, 600,000 square foot,
state-of-the-art
facility near Carlisle, Pennsylvania. In addition, some of the
operations of the Company’s Indiana facility, and those of
a facility in Tennessee, were transferred to other facilities in
2006. Subsequently, the Indiana facility will be closed in 2007.
These changes will optimize inventory and supply chain
management, and position the Company for continued future growth.
Employees
As of February 3, 2007, the Company had a total of
approximately 16,600 full-time employees and approximately
17,000 part-time employees worldwide. When hiring new
employees, the Company considers a number of factors, including
education, experience, diversity, personality and orientation
toward customer service. All new store employees participate in
a training program that provides up to two weeks of in-store
training in all aspects of customer service and selling,
including title searches for in-stock and in-print merchandise,
sorting, merchandising, operation of point of sale terminals and
store policies and procedures. The Company believes that its
relations with employees are generally excellent. The
Company’s employees are not represented by unions.
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. Books
etc.®
is a registered trademark and service mark used by Borders (UK)
Limited.
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, Books etc., Borders.com,
Waldenbooks.com, and Borders.co.uk service marks are used as
trade names in connection with their business operations.
Set forth below is certain information regarding the executive
officers of the Company:
Name
Age
Position
George L. Jones
56
President and Chief Executive
Officer
Kenneth H. Armstrong
57
Executive Vice President of
U.S. Stores
Robert P. Gruen
57
Executive Vice President of
Merchandising and Marketing
Cedric J. Vanzura
42
Executive Vice President Emerging
Business, Technology, Chief Strategy Officer
Edward W. Wilhelm
48
Executive Vice President, Chief
Financial Officer
Thomas D. Carney
60
Senior Vice President, General
Counsel and Secretary
Daniel T. Smith
42
Senior Vice President, Human
Resources
George L. Jones was appointed President, Chief Executive Officer
and a Director of the Company effective July 17, 2006.
Mr. Jones has more than three decades of retail experience
including his most recent post as President and Chief Executive
Officer of the Saks Department Store Group. Prior to Saks,
Mr. Jones was President, Worldwide Licensing and Retail,
for Warner Bros., where in addition to his core
responsibilities, he oversaw Warner Bros. Worldwide Publishing,
Kids WB Music, Warner Bros. Interactive Entertainment, WB Sports
and Warner Bros. Studio Stores. His background also includes key
merchandising and operations positions at Target Corporation,
including Executive Vice President-Store Operations and Senior
Vice President-Merchandising.
Kenneth H. Armstrong was appointed Executive Vice President of
U.S. Stores effective February 2007. Mr. Armstrong has
over 30 years of retail experience including the past three
years as Senior Vice President, Director of Stores for Parisian,
a division of Saks Department Store Group. Prior to Parisian,
Mr. Armstrong served as Senior Vice President, Director of
Stores, for Lord & Taylor. Before joining Lord &
Taylor, he spent 15 years in store operations management
positions at Macy’s.
Robert P. Gruen was appointed Executive Vice President,
Merchandising and Marketing effective February 2007.
Mr. Gruen has more than three decades of retail experience
including positions at Target, Roses Stores, Warner Bros., and
Parisian. Most recently, Mr. Gruen served for 1 year
as Executive Vice President of Merchandising for HSN (Home
Shopping Network), where he was responsible for strategic
direction of the merchandise group. Immediately prior to his
role at HSN, Mr. Gruen served for two years as Group Vice
President of Meijer, Inc., and prior to that served for two
years as President and Chief Executive Officer of Parisian.
Previous experience includes key merchandising and marketing
positions at Warner Bros. and Target Stores.
Cedric J. Vanzura has served as Executive Vice President
Emerging Business, Technology, Chief Strategy Officer since
August 2006. From April 2005 until August 2006, he served as
President of Borders Group International, Paperchase Worldwide
and Information Technology. From March 2003 through April 2005,
Mr. Vanzura served as President of Waldenbooks Specialty
Retail and Information Technology. Prior to
rejoining the Company, Mr. Vanzura served as Chief Strategy
Officer, Information Systems and Services for General Motors
Corporation from 2000 to 2003. He was President and Chief
Operating Officer for Lifemasters, a national disease management
provider, from 1999 to 2000. From 1994 to 1999, Mr. Vanzura
served in a variety of management positions with the Company,
most recently as President of Borders Online.
Edward W. Wilhelm has served as Executive Vice President and
Chief Financial Officer of the Company since August 2000. From
1997 through August 2000, Mr. Wilhelm served as Vice
President of Planning, Reporting and Treasury for the Company.
From 1994 through 1997, Mr. Wilhelm served as Vice
President of Finance. Mr. Wilhelm serves as a director of
The Steak n Shake Company.
Thomas D. Carney has served as Senior Vice President, General
Counsel and Secretary of the Company since December 1994. 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, Michigan.
Daniel T. Smith has served as Senior Vice President of Human
Resources of the Company since March 2000. From April 1998 to
March 2000, Mr. Smith served as Vice President of Human
Resources of Waldenbooks. Mr. Smith served as Director of
Human Resources for Waldenbooks from April 1996 to April 1998.
He also served as Director of Compensation and Benefits of the
Company from July 1995 to April 1996.
Additional
Information
The Company’s Web site is located at
www.bordersgroupinc.com. The information found on the
Company’s Web site is not part of this or any other report
filed or furnished to the U.S. Securities and Exchange
Commission. The Company makes available on this Web site under
“Investors,” annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports as soon as reasonably
practicable after having electronically filed or furnished such
materials to the U.S. Securities and Exchange Commission.
Also available on this Web site are the Company’s corporate
governance documents, including its committee charters and its
Business Conduct Policy, Policy and Procedures Regarding Related
Party Transactions, and a Code of Ethics Relating to Financial
Reporting. The Company will disclose on its Web site any
amendments to the Business Conduct Policy or the Code of Ethics
Relating to Financial Reporting and any waiver that would
otherwise be required to be filed on a
Form 8-K.
Printed copies of any of the documents available on the
Company’s Web site will be provided to any shareholder
without charge upon written request to Anne Roman, Investor
Relations, Borders Group, Inc., 100 Phoenix Drive, Ann Arbor,
Michigan48108-2202.
The Company has filed with the Securities and Exchange
Commission, as an exhibit to its
Form 10-K
annual report for fiscal 2006, the Sarbanes-Oxley Act
Section 302 Certifications regarding the quality of the
Company’s public disclosure. During 2006, Mr. Jones
certified to the New York Stock Exchange that he was not aware
of any violation by the Company of any NYSE Corporate Governance
Listing Standards.
Item 1A.
Risk
Factors
Risk
Factors
The following risk factors and other information included in
this Annual Report on
Form 10-K
should be carefully considered. The risks and uncertainties
described below are not the only ones the Company faces.
Additional risks and uncertainties not presently known to the
Company or that the Company currently deems immaterial also may
impair the Company’s business operations. If any of the
following risks occur, the Company’s business, financial
condition, operating results and cash flows could be materially
adversely affected.
The Company has experienced declines in net income in each of
the last two years and such declines may continue, particularly
during early fiscal 2007, which is expected to be a year of
transformation. The decline is attributable to a number of
factors, including increased competition from Internet retailers
and a greater concentration on the sale of books and music by
mass merchants and other non-bookstore retailers. In addition,
with respect to music, the downloading of titles has
significantly impacted sales of CDs sold by the Company. In
addition, the overall consumer demand for products sold by the
Company, particularly music, has either declined or not
experienced significant growth in recent years.
The retail book business is highly competitive. Competition
within the retail book industry is fragmented, with Borders
facing direct competition from other national superstore
operators, as well as regional chains and superstores. In
addition, Borders and Waldenbooks compete with each other, as
well as 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 and mass merchandisers. In the future, Borders and
Waldenbooks may face additional competition from other
categories of retailers entering the retail book market.
The music and movie businesses are also highly competitive and
Borders faces competition from large established music chains,
established movie chains, as well as specialty retail stores,
movie rental stores, discount stores, warehouse clubs and mass
merchandisers. In addition, consumers receive television and
mail order offers and have access to mail order clubs. The
largest mail order clubs are affiliated with major manufacturers
of pre-recorded music and may have advantageous marketing
relationships with their affiliates.
The Internet is a significant channel for retailing in all media
categories that the Company carries. In particular, the
retailing of books, music and movies over the Internet is highly
competitive. In addition, the Company faces competition from
companies engaged in the business of selling books, music and
movies via electronic means, including the downloading of books,
music and movie content.
Planned
Strategy for Domestic Borders Superstores
The Company’s business strategy is dependent principally on
its ability to grow comparable store sales and profitability in
its domestic superstores. The Company is currently exploring
changes to its superstore format, and is in the process of
developing a concept store that incorporates these changes. This
new concept store is expected to improve performance in the
Company’s domestic superstore business. The concept store
will incorporate many new components, including enhancement to
certain categories within the store, as well as certain
technology enhancements. These technology enhancements are
principally tied to the Company’s efforts to launch its own
e-commerce
business. The Company also plans to leverage its recently
launched Borders Rewards loyalty program to drive sales. There
can be no assurance that the concept store changes, Borders
Rewards or the
e-commerce
business will be successful in improving sales and profitability.
Planned
Strategy for the Waldenbooks Specialty Retail
Business
Waldenbooks’ results are highly dependent upon conditions
in the mall retailing industry, including overall mall traffic.
Mall traffic has been sluggish over the past several years and
the Company expects it to remain so for the foreseeable future.
In addition, increased competition from superstores, the
Internet and mass merchants has adversely affected
Waldenbooks’ sales and comparable store sales. As a result,
the Company plans to aggressively right-size the Waldenbooks
mall store base. There can be no assurance that the Company will
be able to do so at the correct rate, or that such efforts will
be successful in improving sales or profitability of the
Waldenbooks Specialty Retail business. The Company’s plans
could result in additional asset impairments and store closure
costs. Also, there can be no assurance that mall traffic will
not decline further or that competition, or other factors, will
not further adversely affect Waldenbooks’ sales.
The Company’s operations in international markets have
additional risks. It is costly to establish international
facilities and operations, and to promote the Company’s
brands internationally. Sales from the Company’s
International segment may not offset the expense of establishing
and maintaining the related operations and, therefore, these
operations may not be profitable on a sustained basis. In
addition, local companies may have a substantial competitive
advantage because of their greater understanding of, and focus
on, the local customer, as well as their more established local
brand name recognition. The Company is currently exploring
strategic alternatives, including possible sale, franchise
opportunity or restructuring, for portions of the International
businesses, including the U.K. superstores, Books etc. stores,
as well as the Ireland, Australia and New Zealand superstores.
There can be no assurance that the Company will be able to
attract interested third parties, or in lieu of that, operate
its International businesses profitably.
Planned
Strategy for
E-commerce
Business
The Company’s business strategy includes development of a
proprietary
e-commerce
platform, which will include both in-store and online
e-commerce
components. The Company expects to launch its
e-commerce
Web site in early 2008. Prior to April 2001, the Company
operated a proprietary
e-commerce
business and experienced significant losses. There can be no
assurance that the Company will be able to launch the planned
e-commerce
Web site on time or operate it profitably.
Business
Strategy
The Company’s future results will depend, among other
things, on its success in implementing its business strategy.
There can be no assurance that the Company will be successful in
implementing its business strategy, or that the strategy will be
successful in sustaining acceptable levels of sales growth and
profitability.
Seasonality
The Company’s business is highly seasonal, with sales
generally highest in the fourth quarter. In 2006, 36.8% of the
Company’s sales and 43.7% of the Company’s gross
profit were generated in the fourth quarter. The Company’s
results of operations depend significantly upon the holiday
selling season in the fourth quarter; less than satisfactory net
sales for such period could have a material adverse effect on
the Company’s financial condition or results of operations
for the year and may not be sufficient to cover any losses which
may be incurred in the first three quarters of the year. Other
factors that could affect the holiday selling season include
general economic and geopolitical conditions, overall consumer
spending patterns, weather conditions and, with respect to the
Company’s mall business, overall mall traffic. The
Company’s expansion program generally is weighted with
store openings in the second half of the fiscal year. In the
future, changes in the number and timing of store openings, or
other factors, may result in different seasonality trends.
Consumer
Spending Patterns
Sales of books, music and movies have historically been
dependent upon discretionary consumer spending, which may be
affected by general economic conditions, consumer confidence and
other factors beyond the control of the Company. In addition,
sales are dependent in part on the strength of new release
products which are controlled by vendors. A decline in consumer
spending on books, music and movies, or in bestseller book,
music and movie buying could have a material adverse effect on
the Company’s financial condition and results of operations
and its ability to fund its growth strategy.
Foreign
Exchange Risk
The results of operations of the International segment are
exposed to foreign exchange rate fluctuations as the financial
results of the applicable subsidiaries are translated from the
local currency into U.S. dollars upon consolidation. As
exchange rates vary, sales and other operating results, when
translated, may differ
materially from expectations. In addition, the Company is
subject to gains and losses on foreign currency transactions,
which could vary based on fluctuations in exchange rates and the
timing of the transactions and their settlement.
Potential
for Uninsured Losses
The Company is subject to the possibility of uninsured losses
from risks such as terrorism, earthquakes, hurricanes or floods,
for which no, or limited, insurance coverage is maintained.
Litigation
and Other Claims
The Company is subject to risk of losses which may arise from
adverse litigation results or other claims, including the
matters described under “Legal Proceedings” in
Item 3.
Information
Technology Systems Risk
The capacity, reliability and security of the Company’s
information technology hardware and software infrastructure and
its ability to expand and update this infrastructure in response
to changing needs is essential to the Company’s ability to
execute its business strategy. In addition, the Company’s
strategy is dependent on enhancing its existing merchandising
systems, a process currently under way. There can be no
assurances that the Company will be able to effectively
maintain, upgrade or enhance systems, or add new systems, in a
timely and cost effective manner and may not be able to
integrate any newly developed or purchased technologies with
existing systems. These disruptions or impacts, if not
anticipated and appropriately mitigated, could have a material
adverse effect on the Company’s ability to implement its
business strategy and on its financial condition and results of
operations.
Availability
of Capital Resources
The Company’s success is dependent on the availability of
adequate capital to fund the company’s operations and to
carry out its strategic plans. There can be no assurance that
the Company will have adequate access to capital markets, which
could have a material adverse effect on the Company’s
ability to implement its business strategy and on its financial
condition and results of operations.
Distribution
and Logistics Network
The Company has undertaken a multi-year initiative to enhance
the efficiency of its distribution and logistics network. A
component of this strategy was the relocation of the
Company’s Harrisburg, Pennsylvania distribution facility to
a new, 600,000 square foot,
state-of-the-art
facility near Carlisle, Pennsylvania in the first quarter of
2006. In addition, some of the operations of the Company’s
Indiana facility, and those of a facility in Tennessee, were
transferred to other facilities in 2006. The remainder of the
operations of the Indiana facility, as well as certain
operations of the Tennessee facility are planned to be
transferred to the new facility in 2007. There can be no
assurances that the Company will successfully transfer the
operations of these facilities. These activities, if not
successfully executed, could have a material adverse effect on
the Company’s financial condition and results of operations.
Reliance
on Key Personnel
Management believes that the Company’s continued success
will depend to a significant extent upon the efforts and
abilities of Mr. George L. Jones, President and Chief
Executive Officer, as well as certain other key officers of the
Company and each of its subsidiaries. The loss of the services
of Mr. Jones or of other such key officers could have a
material adverse effect on the Company. The Company does not
maintain “key man” life insurance on any of its key
officers.
The Company is also subject to numerous other risks and
uncertainties which could adversely affect the Company’s
business, financial condition, operating results and cash flows.
These risks include, but are not limited to, higher than
anticipated interest, occupancy, labor, merchandise,
distribution and inventory shrinkage costs, unanticipated work
stoppages, energy disruptions or shortages or higher than
anticipated energy costs, asset impairments relating to
underperforming stores or other unusual items, including any
charges that may result from the Company’s implementation
of its strategic plan, higher than anticipated costs associated
with the closing of underperforming stores, the continued
availability of adequate capital to fund the Company’s
operations, the stability and capacity of the Company’s
information systems, unanticipated costs or problems relating to
the information technology systems required for the operations
of the Company, and changes in accounting rules.
Item 1B.
Unresolved
Staff Comments
Not applicable.
Item 2.
Properties
Borders leases all of its stores. Borders’ store leases
generally have an average initial term of 15 to 20 years
with multiple three- to five-year renewal options. At
February 3, 2007, the average unexpired term under
Borders’ existing store leases in the United States was
10.6 years prior to the exercise of any options. The
expiration of Borders’ leases for stores open at
February 3, 2007 are as follows:
Number of
Lease Terms to
Expire During 12 Months Ending on or About January 31
Stores
2008
9
2009
5
2010
14
2011
16
2012
20
2013 and later
435
Total
499
Waldenbooks Specialty Retail leases all of its stores.
Waldenbooks Specialty Retail’s store leases generally have
an initial term of five to 10 years, and in certain cases
posses renewal terms of one to three years. At present, the
average unexpired term under Waldenbooks Specialty Retail’s
existing store leases is approximately 2.1 years. The
expiration of Waldenbooks Specialty Retail’s leases for
stores open at February 3, 2007 are as follows:
Number of
Lease Terms to
Expire During 12 Months Ending on or About January 31
The Company leases all of its International superstores.
International store leases generally have an initial term of 15
to 25 years. At present, the average unexpired term under
existing International store leases is approximately
12.1 years. The expiration of International superstore
leases for stores open at February 3, 2007 are as follows:
Number of
Lease Terms to
Expire During 12 Months Ending on or About January 31
Stores
2008
—
2009
2
2010
—
2011
—
2012
1
2013 and later
65
Total
68
Books etc. operated 30 stores in the United Kingdom as of
February 3, 2007. Books etc. generally leases its stores
under operating leases with terms ranging from 5 to
26 years. The average remaining lease term for Books etc.
stores is 9.4 years. Paperchase generally leases its stores
under operating leases with terms ranging from 6 to
20 years. The average remaining lease term for Paperchase
stores is 8.7 years.
The Company leases a portion of its corporate headquarters in
Ann Arbor, Michigan and owns the remaining building and
improvements. The Company leases all distribution centers.
Item 3.
Legal
Proceedings
Two former employees, individually and on behalf of a purported
class consisting of all current and former employees who work or
worked as Inventory Managers or Sales Managers in Borders stores
in the State of California at any time from September 30,2001 through the trial date, have filed an action against the
Company in the Superior Court of California for the County of
San Francisco. The Complaint alleges, among other things,
that the individual plaintiffs and the purported class members
were improperly classified as exempt employees and that the
Company violated the California Labor Code and the California
Business and Professions Code by failing to (i) pay
required overtime, (ii) provide meal periods, rest periods,
and accurate itemized wage statements, (iii) keep accurate
records of employees’ hours of work, and (iv) pay all
compensation owed at the time of termination of employment to
certain members of the purported class. The relief sought
includes damages, restitution, penalties, injunctive relief,
interest, costs, and attorneys’ fees and such other relief
as the court deems proper. The Company intends to vigorously
defend the action. The Company has not included any liability in
its consolidated financial statements in connection with this
matter and has expensed as incurred all legal costs to date.
On October 29, 2002, Gary Gerlinger, individually and on
behalf of all other similarly situated consumers in the United
States who, during the period from August 1, 2001 to the
present, purchased books online from either Amazon.com, Inc.
(“Amazon”) or the Company, instituted an action
against the Company and Amazon in the United States District
Court for the Northern District of California. The Complaint
alleges that the agreement pursuant to which an affiliate of
Amazon operates Borders.com as a co-branded site (the
“Mirror Site”) violates federal anti-trust laws,
California statutory law and the common law of unjust
enrichment. The Complaint seeks injunctive relief, damages,
including treble damages or statutory damages where applicable,
attorneys fees, costs and disbursements, disgorgement of all
sums obtained by allegedly wrongful acts, interest and
declaratory relief. On November 1, 2005, the Court granted
the Company’s Motion to Dismiss all of the remaining claims
of the plaintiff. The anti-trust claims were dismissed with
prejudice, and the unfair competition claims were dismissed
without prejudice. The plaintiff has appealed the decision. The
Company has not included any liability in its consolidated
financial statements in connection with this matter and has
expensed as incurred all legal costs to date.
Certain states and private litigants have sought to impose sales
or other tax collection efforts on
out-of-jurisdiction
companies that engage in
e-commerce.
The Company and Amazon have been named as defendants in actions
filed by a private litigant on behalf of the state of Illinois
under the state’s False Claims Act relating to the failure
to collect use taxes on Internet sales in Illinois for periods
both before and after the implementation of the Mirror Site
Agreement. The Complaints seek judgments, jointly and severally,
against the defendants for, among other things, injunctive
relief, treble the amount of damages suffered by the state of
Illinois as a result of the alleged violations of the
defendants, penalties, costs and expenses, including legal fees.
Similar actions previously filed against the Company in
Tennessee and Nevada have been dismissed.
In addition to the matters described above, the Company is, from
time to time, involved in or affected by other litigation
incidental to the conduct of its businesses. While some of such
matters may involve claims for large sums (including, from time
to time, actions which are asserted to be maintainable as class
action suits) the Company does not believe that any such other
litigation or claims pending at the current time will have a
material adverse effect on its liquidity, financial position, or
results of operations.
Market
for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
The following table sets forth, for the fiscal quarters
indicated, the high and low closing market prices for the
Company’s Common Stock and the quarterly dividends declared.
Dividends
High
Low
Declared
Fiscal Quarter 2006
First Quarter
$
25.31
$
23.60
$
0.10
Second Quarter
$
24.02
$
17.31
$
0.10
Third Quarter
$
21.00
$
18.50
$
0.10
Fourth Quarter
$
24.14
$
20.49
$
0.11
Fiscal Quarter 2005
First Quarter
$
27.47
$
23.59
$
0.09
Second Quarter
$
26.20
$
23.92
$
0.09
Third Quarter
$
25.30
$
18.96
$
0.09
Fourth Quarter
$
24.70
$
18.71
$
0.10
The Company’s Common Stock is traded on the New York Stock
Exchange under the symbol BGP.
In December 2006, the Board of Directors declared a quarterly
cash dividend of $0.11 per share, which equaled
$6.4 million in total, on the Company’s common stock,
payable February 1, 2007 to stockholders of record at the
close of business January 3, 2007. The Company has declared
and paid quarterly cash dividends since November 2003, and
intends to pay regular quarterly cash dividends, subject to
Board approval, going forward. The declaration and payment of
dividends is subject to the discretion of the Board and to
certain limitations under the Michigan Business Corporation Act.
In addition, the Company’s ability to pay dividends is
restricted by certain agreements to which the Company is a
party. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations —
Liquidity and Capital Resources.”
The following graph compares the cumulative total shareholder
return on the Company’s Common Stock from January 28,2002 through February 3, 2007 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 28, 2002.
Equity
Securities Authorized for Issuance Under Equity Compensation
Plans
The following table provides information with respect to the
equity compensation plan under which equity securities of the
Company were authorized for issuance on February 3, 2007
(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)
1,266
$
18.95
3,658
(1)
The 2004 Long-Term Incentive Plan (the “2004 Plan”)
was approved by shareholders in May 2004, and replaced all prior
equity compensation plans (the “Prior Plans”). At
February 3, 2007 there were approximately 4.3 million
stock options outstanding under the Prior Plans with a
weighted-average exercise price of $24.92, which, if forfeited
or cancelled, become available for issuance under the 2004 Plan.
(2)
Number of awards outstanding as of February 3, 2007
includes approximately 695,302 restricted share units and
approximately 570,693 stock options.
(3)
Reflects the weighted-average exercise price of stock options
outstanding as of February 3, 2007.
SELECTED
CONSOLIDATED FINANCIAL AND OPERATING DATA
The information set forth below should be read in conjunction
with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and the
Company’s consolidated financial statements and the notes
thereto.
Fiscal Year Ended
Feb. 3,
Jan. 28,
Jan. 23,
Jan. 25,
Jan. 26,
(dollars in millions except per share data)
2007(1)
2006(1)
2005
2004
2003
Statement of Operations
Data
Domestic Borders superstore sales
$
2,750.0
$
2,709.5
$
2,588.9
$
2,470.2
$
2,319.0
Waldenbooks Specialty Retail sales
663.9
744.8
779.9
820.9
852.2
International sales
650.0
576.4
510.7
407.5
314.9
Total sales
$
4,063.9
$
4,030.7
$
3,879.5
$
3,698.6
$
3,486.1
Operating income (loss)
$
(136.8
)
$
173.4
$
216.7
$
198.1
$
187.6
Income (loss) before cumulative
effect of accounting change
$
(151.3
)
$
101.0
$
131.9
$
117.3
$
107.6
Cumulative effect of accounting
change (net of tax)
—
—
—
2.1
—
Net income (loss)
$
(151.3
)
$
101.0
$
131.9
$
115.2
$
107.6
Per Share Data
Diluted (basic) earnings (loss)
per common share before cumulative effect of accounting change
$
(2.44
)
$
1.42
$
1.69
$
1.48
$
1.31
Diluted loss per common share from
cumulative effect of accounting change
—
—
—
(0.02
)
—
Diluted (basic) earnings (loss)
per common share
$
(2.44
)
$
1.42
$
1.69
$
1.46
$
1.31
Cash dividends declared per common
share
$
0.41
$
0.37
$
0.33
$
0.08
$
—
Balance Sheet Data
Working capital
$
127.7
$
326.7
$
569.4
$
556.0
$
463.0
Total assets
$
2,613.4
$
2,572.2
$
2,628.8
$
2,584.6
$
2,378.0
Short-term borrowings
$
542.0
$
206.4
$
141.0
$
140.7
$
112.1
Long-term debt, including current
portion
$
5.4
$
5.6
$
55.9
$
57.3
$
50.0
Long-term capital lease
obligations, including current portion
$
0.4
$
0.5
$
0.1
$
0.4
$
19.6
Stockholders’ equity
$
642.0
$
927.8
$
1,088.9
$
1,100.6
$
984.0
(1)
The Company’s 2006 and 2005 fiscal years consisted of
53 weeks.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
General
Borders Group, Inc., through its subsidiaries, Borders, Inc.
(“Borders”), Walden Book Company, Inc.
(“Waldenbooks”), Borders (UK) Limited, Borders
Australia Pty Limited and others (individually and collectively,
“the Company”), is the second largest operator of
book, music and movie superstores and the largest operator of
mall-based bookstores in the world based upon both sales and
number of stores. At February 3, 2007, the Company operated
567 superstores under the Borders name, including 499 in the
United States, 41 in the United Kingdom, 20 in Australia, three
in Puerto Rico, two in New Zealand and one each in Singapore and
Ireland. The Company also operated 564 mall-based and other
bookstores primarily under the Waldenbooks name in the United
States and 30 bookstores under the Books etc. name in the United
Kingdom. In addition, the Company owns and operates United
Kingdom-based Paperchase Products Limited
(“Paperchase”), a designer and retailer of stationery,
cards and gifts. As of February 3, 2007, Paperchase
operated 99 stores, primarily in the United Kingdom, and
Paperchase shops have been added to nearly 250 domestic Borders
superstores.
Business
Strategy
On March 22, 2007, the Company announced a new strategic
plan, the principal components of which are as follows:
Grow comparable
store sales and profitability in the domestic Borders
superstores. In
2007, the Company will focus on improving key retailing
practices at its domestic superstores, including increasing
effectiveness of merchandise presentation, improving assortment
planning, replenishment and supply chain effectiveness, and
ensuring consistency of execution across the chain. The Company
will also continue development of a new concept store, which it
began in 2006 and which is scheduled to open in early 2008. The
concept store will include the implementation of
“destination businesses” within certain of the
Company’s most popular categories, which will help to
distinguish the Company’s domestic superstores from
competitors. The concept store will also include a
Seattle’s Best Coffee cafe and a Paperchase shop, which
continue to be drivers of both sales and increased profitability
for their categories. In addition to the changes to the concept
store, the Company is making changes to its loyalty program,
Borders Rewards, which was launched domestically in early 2006
and has grown to nearly 17 million members. The Company has
modified Borders Rewards for 2007 to increase profitability, and
will use the program to drive revenue through partnerships with
other organizations, and drive sales by employing customer data
to tailor promotions that meet specific customer needs and
interests.
Right-size the
Waldenbooks Specialty Retail
business. The
Waldenbooks Specialty Retail segment has experienced negative
comparable store sales percentages for the past several years,
primarily due to the overall decrease in mall traffic, sluggish
bestsellers and increased competition from all channels. The
Company is working to aggressively right-size the Waldenbooks
mall store base, which could result in additional asset
impairments and store closure costs in the next few years, but
will position the Company to improve sales, profitability and
free cash flow in the long term. The Company will retain stable
locations that meet acceptable profit and return on investment
objectives and in those stores, change product mix and formats
to drive sales and profitability.
Explore strategic
alternatives in the International
segment. The
Company will suspend growth and investment in its International
businesses, while focusing on improving the profitability of the
investments the Company has already made. Strategic alternatives
for portions of the International businesses are being explored,
including the U.K. superstores, Books etc. stores, as well as
the Ireland, Australia and New Zealand superstores. The
Company believes the Borders brand has global potential,
however, and believes that future International growth will most
profitably utilize a franchise business model, which the Company
has applied successfully in Malaysia and the United Arab
Emirates.
Leverage
innovation, technology and strategic alliances to differentiate
our business. In
order to achieve the goals of the strategic plan detailed above,
the Company plans to enhance its current systems environment.
This includes a focus on the systems supporting the domestic
Borders superstore business, including supply chain and in-store
technology enhancements. In addition, this effort includes
development of a proprietary
e-commerce
platform, which will include both in-store and online
e-commerce
components. The proprietary
e-commerce
Web site will also allow the Company to engage in key
partnerships that are expected to build incremental revenues and
margins. The Company expects to launch its
e-commerce
Web site in early 2008.
Other
Information
The Company launched Borders Rewards during the first quarter of
2006. Membership in Borders Rewards is free, with no enrollment
costs or annual fees. Five percent of all qualifying purchases
made by members throughout 2006 were credited to personal
Holiday Savings accounts, which were used on holiday purchases
made from November 15 through January 31. The Company
recently announced changes to the Borders Rewards program.
The Company, through its subsidiaries, has agreements with
Amazon.com, Inc. (“Amazon”) to operate Web sites
utilizing the Borders.com, Waldenbooks.com, Borders.co.uk and
Booksetc.co.uk URLs (the “Web Sites”). Under these
agreements, Amazon is the merchant of record for all sales made
through the Web Sites, and determines all prices and other terms
and conditions applicable to such sales. Amazon is responsible
for the fulfillment of all products sold through the Web Sites
and retains all payments from customers. The Company receives
referral fees for products purchased through the Web Sites. The
agreements contain mutual indemnification provisions, including
provisions that define between the parties the responsibilities
with respect to any liabilities for sales, use and similar
taxes, including penalties and interest, associated with
products sold on the Web Sites. Currently, taxes are not
collected with respect to products sold on the Web Sites except
in certain states. As previously discussed, the Company plans to
launch its proprietary
e-commerce
site in early 2008.
In July 2004, the Company invested cash of $24.1 million,
including debt repayment of $4.1 million, in connection
with an increase in its 15% equity stake in Paperchase Products,
Ltd. (Paperchase), a leading stationery retailer in the United
Kingdom, to 97%. The acquisition has been accounted for as a
purchase in the Company’s International segment.
In August 2004, the Company entered into a licensing agreement
with Seattle’s Best Coffee, a wholly-owned subsidiary of
Starbucks Corporation, through which the Company will operate
Seattle’s Best Coffee-branded cafes within substantially
all of the Company’s existing Borders superstores in the
continental U.S. and Alaska, and new stores as they are opened.
Cafes located within existing Borders superstores began
conversion to Seattle’s Best Coffee cafes in early 2005,
and will continue through 2007. These cafes will continue to be
managed and staffed by Company employees, who will be trained on
Seattle’s Best Coffee brand standards and procedures.
Seattle’s Best Coffee will also provide brand direction,
including branded products and oversight, and will receive
royalty payments from the Company.
The Company has signed an agreement with Berjaya Corporation
Berhad (“Berjaya”), a publicly-listed diversified
corporation headquartered in Malaysia, establishing a franchise
arrangement under which Berjaya will operate Borders stores in
Malaysia. As of February 3, 2007, Berjaya operated three
Borders stores in Malaysia. The Company has also signed an
agreement with Al Maya Group (“Al Maya”), a
diversified corporation headquartered in the United Arab
Emirates, establishing a franchise agreement under which Al Maya
or its affiliates will operate Borders stores in the United Arab
Emirates and other Gulf Cooperation Council (“GCC”)
countries, the first of which opened in Dubai during the fourth
quarter of fiscal 2006.
Effective with respect to fiscal 2005, the Company’s fiscal
year ends on the Saturday closest to the last day of January.
Fiscal 2006 consisted of 53 weeks, and ended on
February 3, 2007. Fiscal 2005 consisted of 53 weeks
and ended January 28, 2006. Fiscal 2004 consisted of
52 weeks and ended January 23, 2005. References herein
to years are to the Company’s fiscal years.
The following table presents the Company’s consolidated
statements of operations data, as a percentage of sales, for the
three most recent fiscal years.
Consolidated sales increased $33.2 million, or 0.8%, to
$4,063.9 million in 2006 from $4,030.7 million in
2005. This resulted primarily from increased sales in the
Borders segment, due to the opening of new superstores,
partially offset by negative comparable store sales. Also
contributing to the increase in sales was the International
segment, due to the opening of new superstores, and favorable
foreign currency exchange rates, partially offset by negative
comparable store sales. A decrease in sales of the Waldenbooks
Specialty Retail segment partially offset the increase in
consolidated sales, due primarily to store closures and negative
comparable store sales.
Comparable store sales measures include stores open more than
one year, with new stores included in the calculation upon their
13th month of operation. Comparable store sales measures
for Waldenbooks Specialty Retail include the Company’s
mall-based seasonal businesses, and comparable store sales
measures for International Borders superstores include sales
from licensed departments operating within the superstores.
International comparable store sales are calculated in local
currency. The calculation of 2006 comparable store sales
increases or decreases assume that 2006 and 2005 consisted of
53 weeks.
Comparable store sales for domestic Borders superstores
decreased 2.2% in 2006. This was due primarily to negative
comparable store sales in the music category of 15.1%, as well
as a decline in comparable store sales of books. The decrease in
books was driven by a challenging comparison to a year ago when
the sixth book in the Harry Potter series was released, as well
as weakness in other bestsellers. The cafe and gift and
stationery categories positively impacted comparable store sales
in remodeled stores, resulting primarily from the conversions of
cafes to the Seattle’s Best Coffee brand and gift and
stationery departments to the Paperchase brand. The impact of
price changes on comparable store sales was not significant.
Waldenbooks Specialty Retail’s comparable store sales
decreased 7.5% in 2006. This was primarily due to the sluggish
mall environment, the 2005 release of the latest Harry Potter
title, and weakness in other
bestsellers, which impacted Waldenbooks Specialty Retail to a
greater degree than Borders superstores. The impact of price
changes on comparable store sales was not significant.
Comparable store sales for International Borders superstores
decreased 0.4% in 2006. In particular, the United Kingdom
experienced negative comparable store sales, primarily resulting
from the slow economic environment and increased competition, as
did Singapore and Puerto Rico. Partially offsetting these
decreases were positive comparable store sales in Australia and
New Zealand. The impact of price changes on comparable store
sales was not significant.
Other
Revenue
Other revenue for the Borders and International segments
primarily consists of income recognized from unredeemed gift
cards, as well as wholesale revenue earned through sales of
merchandise to Berjaya, as part of a franchise agreement under
which Berjaya operates Borders stores in Malaysia. Other revenue
for the Borders segment also includes wholesale revenue earned
through sales of merchandise to other retailers, as well as
referral fees received from Amazon as part of the Web Site
agreement. Other revenue for the International segment also
includes license fees received from Starbucks Coffee Company
(U.K.) Limited. Other revenue in the Waldenbooks Specialty
Retail segment primarily consists of income recognized from
unredeemed gift cards.
Other revenue has increased $1.1 million, or 2.3%, to
$49.6 million in 2006 from $48.5 million in 2005. This
is mainly due to the increased license fees received by the
International segment from Starbucks Coffee Company (U.K.)
Limited in 2006.
Gross
Margin
Consolidated gross margin decreased $91.4 million, or 8.0%,
to $1,048.3 million in 2006 from $1,139.7 million in
2005. This was due to a decrease in all segments’ gross
margin as a percentage of sales. The decrease in the Borders
segment was primarily the result of increased promotional
discounts as a percentage of sales, mainly due to the
Company’s loyalty program, Borders Rewards, as well as
increased supply chain and occupancy costs as a percentage of
sales resulting from the decline in comparables store sales. The
decrease in the Waldenbooks Specialty Retail segment was also
due to increased promotional discounts as a percentage of sales
resulting from Borders Rewards. Increased occupancy and supply
chain costs as a percentage of sales, resulting from the decline
in comparable store sales, also contributed to the decrease in
gross margin rate for the Waldenbooks Specialty Retail segment.
The decrease in the International segment primarily resulted
from increased occupancy costs as a percentage of sales, due to
the decline in comparable store sales, as well as increased
product markdowns, shrinkage and supply chain costs as a
percentage of sales.
The Company classifies the following items as “Cost of
merchandise sold (includes occupancy)” on its consolidated
statements of operations: product costs and related discounts,
markdowns, freight, shrinkage, capitalized inventory costs,
distribution center costs (including payroll, rent, supplies,
depreciation, and other operating expenses), and store occupancy
costs (including rent, common area maintenance, depreciation,
repairs and maintenance, taxes, insurance, and others). The
Company’s gross margin may not be comparable to that of
other retailers, which may exclude the costs related to their
distribution network and store occupancy from cost of sales and
include those costs in other financial statement lines.
Selling,
General and Administrative Expenses
Consolidated selling, general and administrative expenses
(“SG&A”) increased $35.5 million, or 3.7%, to
$987.6 million in 2006 from $952.1 million in 2005. As
a percentage of sales, it increased by 0.7%, to 24.3% in 2006
from 23.6% in 2005. This increase primarily resulted from
increased SG&A expenses as a percentage of sales for all
segments. SG&A expenses as a percentage of sales for the
Borders segment increased primarily due to increased store
payroll and operating expenses as a percentage of sales,
resulting from the launch of Borders Rewards and the decline in
comparable store sales. The impact of these factors was
partially offset by income received from the Visa Check/Master
Money Antitrust
Litigation settlement and a gain on the sale of investments. The
Visa Check/MasterMoney Antitrust Litigation was a class action
lawsuit brought against Visa and MasterCard related to their
debit card policies. The Waldenbooks Specialty Retail increase
was primarily due to increased store payroll and operating
expenses as a percentage of sales, driven by the decline in
comparable store sales, partially offset by decreased corporate
and operating expenses as a percentage of sales and income
received from the Visa Check/Master Money Antitrust Litigation
settlement. International SG&A expenses as percentage of
sales increased primarily as a result of increased corporate
payroll and corporate and store operating expenses, due to the
decline in comparable store sales and the increased spending
needed to support international new store growth, partially
offset by a decrease as a percentage of sales of store payroll
expense.
The Company classifies the following items as “Selling,
general and administrative expenses” on its consolidated
statements of operations: store and administrative payroll,
rent, depreciation, utilities, supplies and equipment costs,
credit card and bank processing fees, bad debt, legal and
consulting fees, certain advertising income and expenses and
others.
Asset
Impairments and Other Writedowns
In 2006, the Company recorded a $60.1 million writedown
related to the impairment of assets (primarily leasehold
improvements, furniture, and fixtures) of certain
underperforming stores. Of this, $9.0 million related to
domestic Borders superstores, $10.1 million related to
Waldenbooks Specialty Retail stores, $30.5 million related
to U.K. Superstores and $10.5 million related to Books etc.
stores.
In addition, the Company recorded a charge of $7.2 million
in 2006 related to the closure costs of certain stores. Of this,
$4.1 million related to domestic Borders superstores and
$3.1 million related to Waldenbooks Specialty Retail stores.
The Company also recorded a charge of $34.5 million related
to certain non-store assets. Of this, $34.3 million related
to Waldenbooks Specialty Retail’s merchandising system and
$0.2 million related to certain assets located at the U.K.
corporate office.
Also in 2006, the Company recorded a charge of
$84.4 million to impair all goodwill of the International
segment. Subsequent to this impairment, all of the
Company’s remaining goodwill relates to the domestic
Borders superstores. Please see the Company’s discussion of
Critical Accounting Policies and Estimates for further
discussion of its test for asset and goodwill impairments.
In 2005, the Company recorded a $4.3 million writedown
related to the impairment of certain long-lived assets
(primarily leasehold improvements, furniture, and fixtures), at
certain underperforming Borders, Waldenbooks Specialty Retail
and Books etc. stores. In addition, the Company recorded a
$1.3 million charge related to the closure costs of certain
Waldenbooks Specialty Retail stores.
Interest
Expense
Consolidated interest expense increased $18.1 million, or
126.6%, to $32.4 million in 2006 from $14.3 million in
2005. This was primarily a result of increased borrowings to
fund capital expenditures, inventory growth and common stock
repurchases in 2006.
Taxes
The effective tax rate differed for the years presented from the
federal statutory rate primarily due to the non-deductibility of
certain losses, including goodwill impairment, in the U.K. The
effective tax rate used was 10.6% in 2006 and 36.5% in 2005.
Net
Income (Loss)
Due to the factors mentioned above, net loss as a percentage of
sales was 3.7% in 2006, as compared to net income of 2.5% in
2005, and 2006 net loss was $151.3 million, as
compared to net income of $101.0 million in 2005.
Consolidated sales increased $151.2 million, or 3.9%, to
$4,030.7 million in 2005 from $3,879.5 million in
2004. This resulted primarily from increased sales in the
Borders segment, due to the opening of new superstores and
positive comparable store sales. Also contributing to the
increase in sales was the International segment, due to the
opening of new superstores, the acquisition of Paperchase and
positive comparable store sales, partially offset by unfavorable
foreign currency exchange rates. A decrease in sales in the
Waldenbooks Specialty Retail segment partially offset the
increase in consolidated sales, due primarily to store closures
and negative comparable store sales.
Comparable store sales measures include stores open more than
one year, with new stores included in the calculation upon their
13th month of operation. Domestic Borders superstores’
comparable store sales exclude those stores not offering music,
of which there are 12, representing approximately 2% of
total sales. Comparable store sales measures for Waldenbooks
Specialty Retail include the Company’s mall-based seasonal
businesses, and comparable store sales measures for
International Borders superstores include sales from licensed
departments operating within the superstores. International
comparable store sales are calculated in local currency. The
calculation of 2005 comparable store sales increases or
decreases assume that 2005 and 2004 consisted of 53 weeks.
Comparable store sales for domestic Borders superstores
increased 1.1% in 2005. This was due primarily to the book
category, with positive comparable stores sales of 4.2% in 2005.
This increase was driven by strong sales of titles in adult
fiction, young adult fiction, health, home, religion and
business and money management titles. Comparable store sales of
movies increased in 2005 as well, growing 2.8%. The cafe and
gift and stationery categories also positively impacted
comparable store sales in remodeled stores, resulting primarily
from the conversions of cafes to the Seattle’s Best Coffee
brand and gift and stationery departments to the Paperchase
brand. Partially offsetting these increases were comparable
store sales decreases in the music category of 12.1%. The impact
of price changes on comparable store sales was not significant.
Waldenbooks Specialty Retail’s comparable store sales
decreased 2.4% in 2005. This was primarily due to the sluggish
mall environment and weaker book bestsellers, which impacted
Waldenbooks Specialty Retail to a greater degree than Borders
superstores. The impact of price changes on comparable store
sales was not significant.
Comparable store sales for International Borders superstores
increased 0.4% in 2005. Comparable store sales increased in
Singapore, Australia, New Zealand and Puerto Rico. Partially
offsetting these increases were negative comparable store sales
in the United Kingdom, primarily resulting from the slow sales
environment that persisted following the terrorist bombings in
central London during the second quarter of 2005. The impact of
price changes on comparable store sales was not significant.
Other
Revenue
Other revenue for the Borders and International segments
primarily consists of income recognized from unredeemed gift
cards, as well as wholesale revenue earned through sales of
merchandise to Berjaya, as part of a franchise agreement under
which Berjaya operates Borders stores in Malaysia. Other revenue
for the Borders segment also includes wholesale revenue earned
through sales of merchandise to other retailers, as well as
referral fees received from Amazon as part of the Web Site
agreement. Other revenue for the International segment also
includes license fees received from Starbucks Coffee Company
(U.K.) Limited. Other revenue in the Waldenbooks Specialty
Retail segment primarily consists of income recognized from
unredeemed gift cards.
Until October 2004, Waldenbooks sold memberships in its
Preferred Reader Program, which offered members discounts on
purchases and other benefits. Waldenbooks has phased out its
Preferred Reader Program and has replaced it with other
promotional programs, including Borders Rewards. The Company
recognized membership income on a straight-line basis over the
12-month
term of the Preferred Reader
membership, and categorized the income as “Other
revenue” in the Company’s consolidated statements of
operations. Discounts on purchases were netted against
“Sales” in the Company’s consolidated statements
of operations.
Other revenue has decreased $3.4 million, or 6.6%, to
$48.5 million in 2005 from $51.9 million in 2004. The
decrease is mainly due to the change in the Preferred Reader
Program, partially offset by an increase in the Borders and
International segments, due primarily to wholesale revenue
earned through the franchise agreement with Berjaya in 2005, as
well as increased third party cafe income in the International
segment.
Gross
Margin
Consolidated gross margin increased $20.7 million, or 1.8%,
to $1,139.7 million in 2005 from $1,119.0 million in
2004. As a percentage of sales, consolidated gross margin
decreased by 0.5%, to 28.3% in 2005 from 28.8% in 2004. This
primarily resulted from a decrease in gross margin as a
percentage of sales for all segments. The decrease in the
Borders segment was primarily due to increased promotional
discounts, distribution and freight costs as a percentage of
sales, partially offset by increased other revenue as a
percentage of sales. The decrease in the Waldenbooks Specialty
Retail segment was due to decreased other revenue as a
percentage of sales due to the change in the Preferred Reader
Program. The decrease in the International segment resulted from
an increase in occupancy costs as a percentage of sales, due to
a non-cash correction of prior years’ straight-line rent
calculation and the increased supply chain costs of Paperchase.
Partially offsetting these items as a percentage of sales were
increased other revenue and decreased product costs, primarily
due to the higher product margins generated by Paperchase.
The Company classifies the following items as “Cost of
merchandise sold (includes occupancy)” on its consolidated
statements of operations: product costs and related discounts,
markdowns, freight, shrinkage, capitalized inventory costs,
distribution center costs (including payroll, rent, supplies,
depreciation, and other operating expenses), and store occupancy
costs (including rent, common area maintenance, depreciation,
repairs and maintenance, taxes, insurance, and others). The
Company’s gross margin may not be comparable to that of
other retailers, which may exclude the costs related to their
distribution network and store occupancy from cost of sales and
include those costs in other financial statement lines.
Selling,
General and Administrative Expenses
Consolidated selling, general and administrative expenses
(“SG&A”) increased $61.8 million, or 6.9%, to
$952.1 million in 2005 from $890.3 million in 2004. As
a percentage of sales, it increased by 0.7%, to 23.6% in 2005
from 22.9% in 2004. This increase primarily resulted from
increases in SG&A expenses as a percentage of sales for the
Borders, Waldenbooks Specialty Retail and International
segments. Borders SG&A expenses as a percentage of sales
increased primarily due to increased corporate payroll and store
operating expenses, partially offset by decreased advertising
and store payroll expenses. The Waldenbooks Specialty Retail
increase was primarily due to increased corporate and store
payroll and operating expenses as a percentage of sales. The
International increase in SG&A expenses as a percentage of
sales was primarily the result of the increased store and
corporate payroll expenses and store operating costs of
Paperchase, partially offset by decreased advertising.
The Company classifies the following items as “Selling,
general and administrative expenses” on its consolidated
statements of operations: store and administrative payroll,
rent, depreciation, utilities, supplies and equipment costs,
credit card and bank processing fees, bad debt, legal and
consulting fees, certain advertising income and expenses and
others.
Asset
Impairments and Other Writedowns
In 2005, the Company recorded a $4.3 million writedown
related to the impairment of certain long-lived assets
(primarily leasehold improvements, furniture, and fixtures), at
certain underperforming Borders, Waldenbooks Specialty Retail
and Books etc. stores. In addition, the Company recorded a
$2.3 million charge related to the closure costs of certain
Borders and Waldenbooks Specialty Retail stores.
In 2004, the Company recorded a $6.2 million writedown
related to the impairment of certain long-lived assets
(primarily leasehold improvements, furniture, and fixtures), at
certain underperforming Borders, Waldenbooks Specialty Retail
and Books etc. stores. In addition, the Company recorded a
$1.0 million charge related to the closure costs of certain
Waldenbooks Specialty Retail stores.
Interest
Expense
Consolidated interest expense increased $5.2 million, or
57.1%, to $14.3 million in 2005 from $9.1 million in
2004. This was primarily a result of increased borrowings to
fund corporate stock repurchases, dividends and capital
expenditures in 2005.
Taxes
The effective tax rate differed for the years presented from the
federal statutory rate primarily as a result of state income
taxes, partially offset by international operations. The
effective tax rate used was 36.5% in 2005 and 2004.
Net
Income
Due to the factors mentioned above, net income as a percentage
of sales decreased 0.9%, to 2.5% from 3.4% in 2004, and net
income dollars decreased to $101.0 million in 2005 from
$131.9 million in 2004.
Domestic
Borders Superstores
(dollar amounts in
millions)
2006
2005
2004
Sales
$
2,750.0
$
2,709.5
$
2,588.9
Other revenue
$
31.6
$
32.8
$
28.7
Operating income
$
92.4
$
174.1
$
177.5
Operating income as % of sales
3.4
%
6.4
%
6.9
%
Store openings
31
15
19
Store closings
5
4
2
Store count
499
473
462
Domestic
Borders Superstores — Comparison of 2006 to
2005
Sales
Domestic Borders superstore sales increased $40.5 million,
or 1.5%, to $2,750.0 million in 2006 from
$2,709.5 million in 2005. This increase was comprised of
non-comparable sales of $99.5 million, associated with 2006
and 2005 store openings, partially offset by decreased
comparable store sales of $59.0 million.
Other
Revenue
Borders’ other revenue decreased $1.2 million, or
3.7%, to $31.6 million in 2006 from $32.8 million in
2005. This was primarily due to higher wholesale revenue earned
through sales of merchandise in 2005 to Berjaya, related to the
opening and initial stock of inventory of its first franchise
store in April of 2005.
Gross
Margin
Gross margin as a percentage of sales decreased approximately
2.2%, to 27.6% in 2006 from 29.8% in 2005. This was primarily
due to increased promotional discounts of 1.1% as a percentage
of sales, mainly related to the Company’s loyalty program,
Borders Rewards. Additionally, occupancy costs increased 0.7% as
a percentage of sales, due to the de-leveraging that resulted
from negative comparable store sales. Also
contributing to the decline in gross margin were increased
supply chain costs of 0.4% as a percentage of sales, primarily
related to the cost of opening of the Company’s new
distribution center in Pennsylvania.
Gross margin dollars decreased $50.9 million, or 6.3%, to
$757.9 million in 2006 from $808.8 million in 2005,
which was primarily due to the decrease in gross margin as a
percentage of sales noted above, partially offset by increased
sales.
Selling,
General and Administrative Expenses
SG&A as a percentage of sales increased 0.3%, to 23.4% in
2006 from 23.1% in 2005. This was primarily due to increased
store payroll and operating expenses of 0.7% as a percentage of
sales, as well as increased advertising expense of 0.1% as a
percentage of sales, related to the launch of Borders Rewards,
and the decline in comparable store sales. Partially offsetting
these increases were decreased corporate payroll and operating
expenses of 0.5% as a percentage of sales, resulting from
disciplined cost controls at the corporate level, income
received from the Visa Check/MasterMoney Antitrust Litigation
settlement, and a gain on the sale of investments.
SG&A dollars increased $17.2 million, or 2.7%, to
$644.5 million in 2006 from $627.3 million in 2005,
primarily due to new store openings and the increased store
payroll and operating expenses required, as well as the store
payroll and other costs necessary to launch Borders Rewards.
Partially offsetting these increases was income received from
the Visa Check/MasterMoney Antitrust Litigation settlement of
$2.6 million, and income received from the sale of
investments of $5.0 million.
Asset
Impairments and Other Writedowns
The Company has processes in place to monitor store performance
and other factors for indicators of asset impairment. When an
indicator of impairment is present, the Company evaluates the
recoverability of the affected assets. As a result of this
evaluation in 2006, the Company recorded a $9.0 million
writedown related to the impairment of assets at underperforming
Borders stores. In addition, the Company recorded a charge of
$4.1 million related to the closure costs of certain
Borders stores.
In 2005, the Company recorded a $2.1 million writedown
related to the impairment of assets at certain underperforming
Borders stores.
Operating
Income
Due to the factors mentioned above, operating income as a
percentage of sales decreased to 3.4% in 2006 compared to 6.4%
in 2005, and operating income dollars decreased
$81.7 million, or 46.9%, to $92.4 million in 2006 from
$174.1 million in 2005.
Domestic
Borders Superstores — Comparison of 2005 to
2004
Sales
Domestic Borders superstore sales increased $120.6 million,
or 4.7%, to $2,709.5 million in 2005 from
$2,588.9 million in 2004. This increase was comprised of
non-comparable sales of $92.1 million, associated with 2005
and 2004 store openings and the calendar change, which resulted
in 2005 consisting of 53 weeks while 2004 consisted of
52 weeks, and increased comparable store sales of
$28.5 million.
Other
Revenue
Borders’ other revenue increased $4.1 million, or
14.3%, to $32.8 million in 2005 from $28.7 million in
2004. This was primarily due to wholesale revenue earned through
the franchise agreement with Berjaya in 2005, as well as
increased income recognized from unredeemed gift cards.
Gross margin as a percentage of sales decreased approximately
0.2%, to 29.8% in 2005 from 30.0% in 2004. This decrease was due
to increased promotional discounts, distribution and freight
costs of 0.3% as a percentage of sales, partially offset by
increased other revenue as a percentage of sales of 0.1%, due to
the franchise agreement with Berjaya in 2005, as well as
increased income recognized from unredeemed gift cards. The
overall mix of merchandise sold by Borders stores did not
significantly change, or affect margin rates significantly, in
2005 as compared to 2004.
Gross margin dollars increased $33.3 million, or 4.3%, to
$808.8 million in 2005 from $775.5 million in 2004,
primarily due to new store openings, partially offset by the
decrease in gross margin percentage noted above.
Selling,
General and Administrative Expenses
SG&A as a percentage of sales increased 0.3%, to 23.1% in
2005 from 22.8% in 2004, primarily due to increased corporate
payroll and store operating expenses of 0.6% as a percentage of
sales, due to cost increases to support strategic initiatives.
Partially offsetting these increases were decreased advertising
expense of 0.1% as a percentage of sales, primarily due to
reduced newsprint advertising, and decreased store payroll
expenses of 0.2% as a percentage of sales, resulting from
disciplined cost controls at the store level.
SG&A dollars increased $37.2 million, or 6.3%, to
$627.3 million in 2005 from $590.1 million in 2004,
primarily due to new store openings and the increased store
payroll and operating expenses required.
Asset
Impairments and Other Writedowns
In 2005, the Company recorded a $2.1 million writedown
related to the impairment of assets at underperforming Borders
stores. In addition, the Company recorded a charge of
$1.0 million related to the closure costs of certain
Borders stores.
In 2004, the Company recorded a $4.5 million writedown
related to the impairment of assets at underperforming Borders
stores.
Operating
Income
Due to the factors mentioned above, operating income as a
percentage of sales decreased to 6.4% in 2005 compared to 6.9%
in 2004, and operating income dollars decreased
$3.4 million, or 1.9%, to $174.1 million in 2005 from
$177.5 million in 2004.
Waldenbooks
Specialty Retail — Comparison of 2006 to
2005
Sales
Waldenbooks Specialty Retail sales decreased $80.9 million,
or 10.9%, to $663.9 million in 2006 from
$744.8 million in 2005. This was comprised of decreased
comparable store sales of $51.4 million and decreased
non-comparable sales of $29.5 million associated with 2006
and 2005 store closings.
Other
Revenue
Waldenbooks Specialty Retail other revenue decreased
$0.5 million, or 10.4%, to $4.3 million in 2006 from
$4.8 million in 2005.
Gross
Margin
Gross margin as a percentage of sales decreased 3.4%, to 22.7%
in 2006 from 26.1% in 2005. This was primarily due to increased
promotional discounts and other costs of 1.7% as a percentage of
sales, mainly related to the Company’s loyalty program,
Borders Rewards, as well as increased occupancy costs as a
percentage of sales of 1.4%, primarily due to the de-leveraging
that resulted from negative comparable store sales. Also
contributing to the decline in gross margin as a percentage of
sales were increased supply chain costs of 0.3% as a percentage
of sales, due to the decline in comparable store sales.
Gross margin dollars decreased $43.8 million, or 22.5%, to
$150.8 million in 2006 from $194.6 million in 2005,
primarily due to store closures, decreased comparable store
sales and the decrease in gross margin percentage noted above.
Selling,
General and Administrative Expenses
SG&A as a percentage of sales increased 1.8%, to 27.3% in
2006 from 25.5% in 2005. This was primarily due to increased
store payroll and operating expenses of 2.8% as a percentage of
sales, resulting from the decrease in comparable store sales.
Partially offsetting the increase were decreased corporate
payroll and operating expenses of 1.0% as a percentage of sales,
resulting from disciplined cost controls at the corporate level
and income received from the Visa Check/MasterMoney Antitrust
Litigation settlement.
SG&A dollars decreased $8.8 million, or 4.6%, to
$181.0 million in 2006 from $189.8 million in 2005,
primarily due to store closures and income received from the
Visa Check/MasterMoney Antitrust Litigation settlement of
$0.9 million.
Asset
Impairments and Other Writedowns
Waldenbooks Specialty Retail has experienced declining sales and
profits over the past several years. In 2006, for the first
time, the segment generated an operating loss, and the Company
tested all assets of the segment for impairment. As a result,
Waldenbooks Specialty Retail incurred asset impairment charges
of $10.1 million related to underperforming stores, and
recorded an impairment charge of $34.3 million related to
its merchandising system. In addition, the Company recorded a
charge of $3.1 million related to the closure costs of
certain Waldenbooks Specialty Retail stores in 2006.
In 2005, Waldenbooks Specialty Retail incurred asset impairment
charges of $0.5 million related to underperforming
Waldenbooks Specialty Retail stores, and recorded a charge of
$1.3 million related to the closure costs of certain
Waldenbooks Specialty Retail stores.
Operating
Income (Loss)
Due to the factors mentioned above, operating loss as a
percentage of sales was 11.7% in 2006, as compared to operating
income of 0.3% in 2005, and 2006 operating loss was
$78.0 million in 2006, as compared to operating income of
$2.5 million in 2005.
Waldenbooks
Specialty Retail — Comparison of 2005 to
2004
Sales
Waldenbooks Specialty Retail sales decreased $35.1 million,
or 4.5%, to $744.8 million in 2005 from $779.9 million
in 2004. This decrease was comprised of decreased comparable
store sales of $14.0 million and decreased non-comparable
sales of $21.1 million, associated with 2005 and 2004 store
closings, partially offset by the calendar change, which
resulted in 2005 consisting of 53 weeks while 2004
consisted of 52 weeks.
Other
Revenue
Waldenbooks Specialty Retail other revenue decreased
$12.6 million, or 72.4%, to $4.8 million in 2005 from
$17.4 million in 2004. This was primarily due to the
elimination of the Preferred Reader Program.
Gross
Margin
Gross margin as a percentage of sales decreased 1.6%, to 26.1%
in 2005 from 27.7% in 2004. This was due to a 1.6% decrease in
other revenue as a percentage of sales, due to the change in the
Preferred Reader Program.
Gross margin dollars decreased $21.2 million, or 9.8%, to
$194.6 million in 2005 from $215.8 million in 2004,
primarily due to store closures, decreased comparable store
sales and the decrease in gross margin percentage noted above.
Selling,
General and Administrative Expenses
SG&A as a percentage of sales increased 1.4%, to 25.5% in
2005 from 24.1% in 2004, primarily due to increased corporate
payroll and operating expenses of 1.0% as a percentage of sales,
due to the de-leveraging of fixed costs resulting from
comparable store sales declines and cost increases to support
strategic initiatives. Also contributing to the increase in
SG&A as a percentage of sales is increased store payroll and
other operating expenses of 0.4% as a percentage of sales, due
to sales decreasing at a faster rate than payroll and other
operating expenses.
SG&A dollars increased $1.5 million, or 0.8%, to
$189.8 million in 2005 from $188.3 million in 2004,
primarily due to increased corporate payroll and operating cost
increases to support strategic initiatives, partially offset by
decreased store payroll costs due to store closings.
Asset
Impairments and Other Writedowns
Waldenbooks Specialty Retail incurred asset impairment charges
of $0.5 million and $0.4 million related to
underperforming Waldenbooks Specialty Retail stores in 2005 and
2004, respectively. In addition, the Company recorded charges of
$1.3 million and $1.0 million related to the closure
costs of certain Waldenbooks Specialty Retail stores in 2005 and
2004, respectively.
Operating
Income
Due to the factors mentioned above, operating income as a
percentage of sales decreased to 0.3% in 2005 from 3.3% in 2004,
while operating income dollars decreased to $2.5 million in
2005 from $25.9 million in 2004.
International sales increased $73.6 million, or 12.8%, to
$650.0 million in 2006 from $576.4 million in 2005. Of
this increase in sales, 3.2%, or $18.4 million, was due to
the translation of foreign currencies to U.S. dollars. The
remaining 9.6% was the result of new superstore openings,
partially offset by a decline in comparable store sales.
Other
Revenue
Other revenue increased $2.8 million, or 25.7%, to
$13.7 million in 2006 from $10.9 million in 2005. This
was primarily due to increased license fees received from
Starbucks Coffee Company (U.K.) Limited in 2006 due to increased
store count, partially offset by higher wholesale revenue earned
through sales of merchandise in 2005, related to the opening and
initial stock of inventory of the first franchise store operated
by Berjaya in April of 2005.
Gross
Margin
Gross margin as a percentage of sales decreased 2.1%, to 21.5%
in 2006 from 23.6% in 2005, primarily the result of an increase
in occupancy costs of 0.8% as a percentage of sales. Positively
impacting occupancy costs was a correction of prior years’
lease accounting that was recorded in 2005. Excluding this
adjustment, occupancy costs would have increased by 1.6% as a
percentage of sales, mainly due to the decline in comparable
store sales. Also negatively affecting gross margin were
increased product markdowns of 0.7% as a percentage of sales,
increased shrink expense of 0.3% as a percentage of sales, and
increased supply chain and other costs of 0.3% as a percentage
of sales.
Gross margin dollars increased $3.3 million, or 2.4%, to
$139.6 million in 2006 from $136.3 million in 2005. Of
this increase, $5.1 million is the result of translation of
foreign currencies to U.S. dollars. This was partially
offset by the decline in the gross margin rate.
SG&A as a percentage of sales increased approximately 0.8%,
to 22.6% in 2006 from 21.8% in 2005. This was primarily the
result of increased corporate payroll expenses and increased
corporate and store operating expenses of 0.9% as a percentage
of sales, resulting from the decline in comparable store sales
and increased spending to support international new store
growth. Partially offsetting these increases were decreased
store payroll expenses of 0.1% as a percentage of sales.
SG&A dollars increased $21.3 million, or 17.0%, to
$146.7 million in 2006 from $125.4 million in 2005.
The increase is primarily due to new store openings and the
increased store payroll and operating expenses required,
partially offset by decreased advertising spending. Also
contributing to the increase in SG&A are the translation of
foreign currencies to U.S. dollars of $5.5 million.
Asset
Impairments and Other Writedowns
The retail environment in the U.K. has been challenging over the
last two years, resulting in declining comparable stores sales
and profits in the Company’s U.K. Superstores and Books
etc. chains. The Company initially believed the change in the
environment was temporary, due to the terrorist attacks that
occurred in central London during the second quarter of 2005.
However, sales for the U.K. operations did not improve as
expected, and the Company tested all assets of the U.K.
Superstores and Books etc. chains for impairment in 2006. As a
result, the International segment incurred asset impairment
charges of $30.5 million related to underperforming U.K.
Superstores and $10.5 million related underperforming Books
etc. stores. Also in 2006, the Company recorded asset impairment
charges of $0.2 million related to certain assets located
at the U.K. corporate office. Additionally, the International
segment recorded a charge of $84.4 million to impair all
goodwill allocated to the segment.
In 2005, the International segment incurred $1.7 million of
asset impairment charges related to underperforming Books etc.
stores.
Operating
Income (Loss)
Due to the factors mentioned above, operating loss as a
percentage of sales was 20.9% in 2006, as compared to operating
income of 1.1% in 2005, and 2006 operating loss was
$135.9 million, as compared to operating income of
$6.4 million in 2005.
International —
Comparison of 2005 to 2004
Sales
International sales increased $65.7 million, or 12.9%, to
$576.4 million in 2005 from $510.7 million in 2004,
primarily resulting from new superstore openings, comparable
store sales increases of 0.4%, and the acquisition of
Paperchase. Because the Company acquired Paperchase in July
2004, 2004 financial results include only a partial year of
Paperchase’s operations, whereas 2005 results include a
full year. Partially offsetting these increases were unfavorable
exchange rates, which decreased the sales growth percentage
1.5%, or $7.7 million.
Other
Revenue
Other revenue increased $5.1 million, or 87.9%, to
$10.9 million in 2005 from $5.8 million in 2004. This
increase was primarily due to wholesale revenue earned through
the franchise agreement with Berjaya in 2005 and increased third
party cafe income.
Gross
Margin
Gross margin as a percentage of sales decreased 1.4%, to 23.6%
in 2005 from 25.0% in 2004, primarily the result of increased
occupancy costs of 2.5% as a percentage of sales, due primarily
to new store openings, landlord-imposed rent adjustments and the
correction of prior years’ straight-line rent calculation.
Excluding the adjustment of straight-line rent, occupancy costs
would have increased by 2.0% as a percentage of sales. Also
contributing to the decrease in gross margin as a percentage of
sales was increased distribution and other costs of 0.1% as a
percentage of sales, largely due to the higher supply chain
costs of Paperchase. Partially offsetting these items was
increased other revenue of 0.8% as a percentage of sales, due to
the franchise agreement with Berjaya in 2005 and increased third
party cafe income. In addition, product costs decreased 0.4% as
a percentage of sales. This was primarily due to the acquisition
of Paperchase, which offers merchandise with higher margins than
the International superstores’ core products. The overall
mix of book, music, movie, cafe, and gifts and stationery
merchandise of the International segment changed slightly, due
to the acquisition and consolidation of Paperchase, which
occurred near the end of the second quarter of 2004.
Gross margin dollars increased $8.6 million, or 6.7%, to
$136.3 million in 2005 from $127.7 million in 2004.
The increase is due to new superstore openings and the
acquisition of Paperchase, partially offset by the correction of
prior years’ straight-line rent calculation and the decline
in the gross margin rate. Excluding the impact of the
translation of foreign currencies to U.S. dollars, gross
margin dollars would have increased by an additional
$2.1 million.
Selling,
General and Administrative Expenses
SG&A as a percentage of sales increased approximately 2.1%,
to 21.8% in 2005 from 19.7% in 2004. This was primarily the
result of increases, as a percentage of sales, in store payroll
of 1.0%, store operating expenses of 0.8%, and corporate payroll
of 0.5%, all of which are due primarily to the acquisition of
Paperchase, which occurred near the end of the second quarter of
2004. These increases were partially offset by decreased
advertising costs of 0.2% as a percentage of sales.
SG&A dollars increased $24.6 million, or 24.4%, to
$125.4 million in 2005 from $100.8 million in 2004.
The increase is primarily due to new superstore openings and the
increased store payroll and operating expenses required, and the
acquisition of Paperchase. Excluding the impact of the
translation of foreign currencies to U.S. dollars, SG&A
dollars would have increased by an additional $0.3 million.
Asset
Impairments and Other Writedowns
The International segment incurred $1.7 million and
$1.3 million of asset impairment charges related to
underperforming Books etc. stores in 2005 and 2004, respectively.
Operating
Income
Due to the factors mentioned above, operating income as a
percentage of sales was 1.1% in 2005 compared to 4.8% in 2004,
and operating income dollars decreased to $6.4 million in
2005 from $24.4 million in 2004.
Corporate
(dollar amounts in
millions)
2006
2005
2004
Operating loss
$
(15.3
)
$
(9.6
)
$
(11.1
)
The Corporate segment includes various corporate governance and
other costs.
Corporate —
Comparison of 2006 to 2005
Operating loss increased $5.7 million, or 59.4%, to
$15.3 million in 2006 from $9.6 million in 2005. This
was primarily due to increased compensation expense related to
the departure of several executive officers during 2006,
including the Company’s former Chief Executive Officer, and
a gain on the sale of investments in 2005.
Operating loss decreased $1.5 million, or 13.5%, to
$9.6 million in 2005 from $11.1 million in 2004. This
was primarily due to a gain on the sale of investments recorded
in 2005.
Liquidity
and Capital Resources
The Company’s principal capital requirements are to fund
investment in its strategic plan, including the refurbishment of
existing stores, the opening of new stores, continued investment
in new corporate information technology systems such as its
e-commerce Web site, and maintenance spending on stores,
distribution centers and corporate information technology.
Additional capital requirements include shareholder returns in
the form of dividends.
Net cash provided by operations was $47.7 million,
$169.9 million, and $226.8 million in 2006, 2005, and
2004, respectively. The current year operating cash inflows
primarily reflect non-cash charges for depreciation, asset
impairments and other writedowns, a loss on disposal of assets
related to the remodel program and an increase in minority
interest, as well as an increase in other long-term liabilities,
accrued payroll and other liabilities, and a decrease in prepaid
expenses. Operating cash outflows for the period resulted from
operating results, increases in inventories, accounts receivable
and other long-term assets, and decreases in taxes payable and
accounts payable. Also affecting operating cash was an
adjustment to net income resulting from a gain on the sale of
investments, as well as a non-cash increase in deferred income
taxes.
Net cash used for investing in 2006 was $182.6 million,
which primarily funded capital expenditures for new stores, the
refurbishment of existing stores, new corporate information
technology systems, a new distribution center and maintenance of
existing stores, distribution centers and management information
systems. These expenditures were partially offset by proceeds
from the Company’s sale of investments of
$21.6 million. Net cash used for investing in 2005 was
$91.1 million, which primarily funded capital expenditures
for new stores, the refurbishment of existing stores, new
corporate information technology systems and maintenance of
existing stores, distribution centers and management information
systems. These expenditures were offset by proceeds from the
Company’s sale of investments of $105.2 million, which
primarily consisted of auction rate securities. Net cash used
for investing in 2004 was $91.8 million, which primarily
funded capital expenditures for new stores, new corporate
information technology systems, the acquisition of Paperchase
and the refurbishment maintenance of existing stores,
distribution centers and management information systems. In
addition, the Company invested $95.4 million, and sold
$118.0 million, of auction rate securities.
Capital expenditures in 2006 were $204.2 million, and
reflect the opening of 44 new superstores and 10 new Waldenbooks
Specialty Retail stores, including six new airport stores and
three new outlet stores, as well as the remodeling of 88
domestic superstores. Additional 2006 capital spending reflected
continued investment in new buying and merchandising systems,
spending on a new distribution center and maintenance spending
for new stores, distribution centers and management information
systems. Capital expenditures in 2005 were $196.3 million,
which reflected the opening of 28 new superstores and 23 new
Waldenbooks Specialty Retail stores, including 5 new airport
stores and 16 new outlet stores, as well as the remodeling of
100 domestic superstores and the conversion of 98 Waldenbooks
stores to Borders Express. Additional 2005 capital spending
reflected continued investment in new buying and merchandising
systems, partial spending on the new distribution center and
maintenance spending for new stores, distribution centers and
management information systems. Capital expenditures in 2004
were $115.5 million, which reflects the opening of 24 new
superstores and 15 new Waldenbooks Specialty Retail stores,
including two new airport stores and ten new outlet stores, as
well as the remodeling of 33 domestic superstores and the
conversion of 37 Waldenbooks stores to Borders Express.
Additional 2004 capital spending reflected continued investment
in new buying and merchandising systems and maintenance spending
for new stores, distribution centers and management information
systems.
Net cash used for investing in 2004 was partially offset by the
proceeds received from the sale-leaseback of a Company-owned
store and office building in the United Kingdom. The proceeds
from the sale totaled
$32.3 million, and a deferred gain of $3.5 million was
recorded on the consolidated balance sheets in “Other
long-term liabilities.” The gain is being amortized over
the 20 year term of the operating lease.
Net cash provided by financing was $173.6 million in 2006,
resulting primarily from funding from the credit facility of
$317.3 million, as well as proceeds from the exercise of
employee stock options and the associated excess tax benefit of
$30.3 million. Partially offsetting these items were the
repurchase of common stock of $148.7 million, the payment
of cash dividends on shares of the Company’s common stock
of $25.2 million and the repayment of long-term capital
lease obligations of $0.1 million. Net cash used for
financing was $241.0 million in 2005, resulting primarily
from the Company’s repurchase of common stock of
$265.9 million and the payment of cash dividends on shares
of the Company’s common stock of $25.5 million,
partially offset by proceeds of $27.6 million from the
exercise of employee stock options and funding from the credit
facility of $23.3 million. Net cash used for financing was
$150.8 million in 2004, resulting primarily from the
Company’s repurchase of common stock of $177.3 million
and the payment of cash dividends on shares of the
Company’s common stock of $25.1 million, partially
offset by proceeds of $44.8 million from the exercise of
employee stock options.
The Company expects capital expenditures to be approximately
$170.0 million in 2007, resulting primarily from investment
in management information systems of domestic Borders
superstores, in the Company’s new
e-commerce
strategy, as well as a reduced number of new superstore openings
and store refurbishments. In addition, capital expenditures will
result from maintenance spending for existing stores and
distribution centers. The Company currently plans to open
approximately 20 to 25 domestic Borders superstores and 6 to 8
international Borders superstores in 2007, as the majority of
these stores were committed to prior to the Company’s
finalizing its strategic plan. Average cash requirements for the
opening of a prototype Borders Books and Music superstore are
$2.4 million, representing capital expenditures of
$1.2 million, inventory requirements (net of related
accounts payable) of $1.0 million, and $0.2 million of
pre-opening costs. Average cash requirements to open a new
airport or outlet mall store range from $0.3 million to
$0.8 million, depending on the size and format of the
store. Average cash requirements for a major remodel of a
Borders superstore are between $0.1 million and
$0.5 million, and average cash requirements for a Borders
Express conversion are less than $0.1 million. The Company
plans to lease new store locations predominantly under operating
leases.
The Company plans to execute its expansion plans for Borders
superstores and other strategic initiatives principally with
funds generated from operations, financing through the Credit
Agreement and other sources of new financing as deemed
necessary. The Company believes funds generated from operations,
borrowings under the Credit Agreement and from other financing
sources, which the Company will explore as necessary, will be
sufficient to fund its anticipated capital requirements for the
next several years.
In January 2006, the Board of Directors authorized
$250.0 million of potential share repurchases. The Company
currently has remaining authorization to repurchase
approximately $92.8 million. During 2006, 2005, and 2004,
$148.7 million, $265.9 million, and
$177.3 million of common stock was repurchased,
respectively. Although the Company may in the future continue
the repurchase of its common stock, its priority for cash
utilization in 2007 will be to fund investment in its strategic
plan, support the dividend and to repay debt with the cash flow
generated by the Company’s operations.
During 2004, 2005 and 2006, the Company paid a regular quarterly
dividend, and intends to pay regular quarterly cash dividends,
subject to Board approval, going forward. In December 2006, the
Board of Directors increased the quarterly dividend by 10.0% to
$0.11 per share. The declaration and payment of dividends,
if any, is subject to the discretion of the Board and to certain
limitations under the Michigan Business Corporation Act. In
addition, the Company’s ability to pay dividends is
restricted by certain agreements to which the Company is a party.
The Company has a Multicurrency Revolving Credit Agreement (the
“Credit Agreement”), which was restated as of
July 31, 2006 and which will expire in July 2011. The
Credit Agreement provides for borrowings of up to
$1,125.0 million secured by eligible inventory and accounts
receivable and related assets. Borrowings under the Credit
Agreement are limited to a specified percentage of eligible
inventories
and accounts receivable and bear interest at a variable base
rate plus the applicable increment or LIBOR plus the applicable
increment at the Company’s option. The Credit Agreement
(i) includes a fixed charge coverage ratio requirement of
1.1 to 1 that is applicable only if outstanding borrowings under
the facility exceed 90% of permitted borrowings thereunder,
(ii) contains covenants that limit, among other things, the
Company’s ability to incur indebtedness, grant liens, make
investments, consolidate or merge or dispose of assets,
(iii) prohibits dividend payments and share repurchases
that would result in borrowings under the facility exceeding 90%
of permitted borrowings thereunder, and (iv) contains
default provisions that are typical for this type of financing,
including a cross default provision relating to other
indebtedness of more than $25.0 million. As of
February 3, 2007the Company was in compliance with all
covenants contained within this agreement. The Company had
borrowings outstanding under the Credit Agreement (or a prior
agreement) of $539.6 million at February 3, 2007,
$153.6 million at January 28, 2006 and
$131.7 million at January 23, 2005.
On July 30, 2002, the Company issued $50.0 million of
senior guaranteed notes (the “Notes”) due
July 30, 2006 and bearing interest at 6.31% (payable
semi-annually). The proceeds of the sale of the Notes were used
to refinance existing indebtedness of the Company and its
subsidiaries and for general corporate purposes. The Company
repaid the Notes with funds from the Credit Agreement on
July 31, 2006.
Off-Balance
Sheet Arrangements
The Company is the primary beneficiary of two variable interest
entities (“VIEs”) due to the Company’s guarantee
of the debt of these entities. As a result, the Company
consolidates these VIEs and has recorded property and equipment,
net of accumulated depreciation, of $5.1 million, long-term
debt (including current portion) of $5.4 million and
minority interest of $0.3 million at February 3, 2007,
and has recorded property and equipment, net of accumulated
depreciation, of $5.3 million, long-term debt (including
current portion) of $5.6 million, and minority interest of
$0.3 million at January 28, 2006. These amounts have
been treated as non-cash items on the consolidated statements of
cash flows.
Significant
Contractual Obligations
The following table summarizes the Company’s significant
contractual obligations, excluding interest expense:
In the ordinary course of business, the Company has made a
number of estimates and assumptions relating to the reporting of
results of operations and financial condition in the preparation
of its financial statements in conformity with accounting
principles generally accepted in the United States. Actual
results could differ from those estimates under different
assumptions and conditions. The Company believes that the
following discussion addresses the Company’s most critical
accounting policies and estimates.
Asset
Impairments
The carrying value of long-lived store assets is evaluated
whenever changes in circumstances indicate the carrying amount
of such assets may not be recoverable. In performing such
reviews for recoverability, the Company compares the expected
cash flows to the carrying value of long-lived assets for the
applicable stores. If the expected future cash flows are less
than the carrying amount of such assets, the Company recognizes
an impairment loss for the difference between the carrying
amount and the estimated fair value. Expected future cash flows,
which are estimated over the assets’ remaining useful
lives, contain estimates of sales and the impact those future
sales will have upon cash flows. Future sales are estimated
based, in part, upon a projection of each store’s sales
trend based on the actual sales of the past several years.
Additionally, each store’s future cash contribution is
based upon the most recent year’s actual cash contribution,
but is adjusted based upon projected trends in sales and store
operating costs. Fair value is
estimated using expected discounted future cash flows, with the
discount rate approximating the Company’s borrowing rate.
Significant deterioration in the performance of the
Company’s stores compared to projections could result in
significant additional asset impairments.
The carrying value of non-store long-lived assets is also
evaluated whenever changes in circumstances indicate the
carrying amount of such assets may not be recoverable. Expected
future cash flows, which are estimated over each asset’s
remaining useful life, contain estimates of future cash flows
based on projected trends in sales and operating costs. Fair
value is estimated using expected discounted future cash flows,
with the discount rate approximating the Company’s
borrowing rate.
Goodwill
Impairment
Pursuant to the provisions of Statement of Financial Accounting
Standards No. 142, “Goodwill and Other Intangible
Assets” (“FAS 142”), the Company’s
goodwill is tested for impairment annually (or more frequently
if impairment indicators arise). Pursuant to FAS 142, a
reporting unit is defined as an operating segment or one level
below an operating segment (a component), for which discrete
financial information is available and reviewed by management.
The Company’s reporting units were identified as the
operating segments of Domestic Borders superstores, Waldenbooks
Specialty Retail and Corporate, 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 of February 3, 2007, the carrying amount of the net
assets of the U.K. reporting unit exceeded its fair value. The
Company then allocated the fair value of the U.K. reporting unit
to the assets and liabilities of the reporting unit, and based
on that allocation, determined that the entire amount of
goodwill allocated to the U.K. reporting unit was impaired, and
recorded a charge of $84.4 million. As of February 3,2007, no impairment of domestic goodwill existed.
Inventory
The carrying value of the Company’s inventory is affected
by reserves for shrinkage, markdowns and non-returnable
inventory. Projections of shrinkage are based upon the results
of regular, periodic physical counts of the Company’s
inventory. The Company’s shrinkage reserve is adjusted as
warranted based upon the trends yielded by the physical counts.
Reserves for non-returnable inventory are based upon the
Company’s history of liquidating non-returnable inventory.
The markdown percentages utilized in developing the reserve are
evaluated against actual, ongoing markdowns of non-returnable
inventory to ensure that they remain consistent. Significant
differences between future experience and that which was
projected (for either the shrinkage or non-returnable inventory
reserves) could affect the recorded amounts of inventory and
cost of sales.
The Company includes certain distribution and other expenses in
its inventory costs, particularly freight, distribution payroll,
and certain occupancy expenses. In addition, certain selling,
general and administrative expenses are included in inventory
costs. These amounts totaled approximately $114.1 million
and
$102.1 million as of February 3, 2007 and
January 28, 2006, respectively. The extent to which these
costs are included in inventory is based on certain estimates of
space and labor allocation.
Leases
All leases are reviewed for capital or operating classification
at their inception under the guidance of Statement of Financial
Accounting Standards No. 13, “Accounting for
Leases” (“FAS 13”), as amended. The Company
uses its incremental borrowing rate in the assessment of lease
classification.
Gift
Cards
The Company sells gift cards to its customers and records a
liability for the face value of all certificates issued and
unredeemed within the last 12 months. For certificates
older than 12 months, the Company records a liability for a
portion of the certificates’ face value based upon
historical redemption trends, and records the related income as
a component of “Other revenue”. To the extent that
future redemption patterns differ from those historically
experienced, significant variations in the recorded reserves may
result.
Advertising
and Vendor Incentive Programs
The Company receives payments and credits from vendors pursuant
to co-operative advertising programs, shared markdown programs,
purchase volume incentive programs and magazine slotting
programs. These programs continue to be beneficial for both the
Company and vendors, and the Company expects continued
participation in these types of programs. Changes in vendor
participation levels, as well as changes in the volume of
merchandise purchased, among other factors, could adversely
impact the Company’s results of operations and liquidity.
Pursuant to co-operative advertising programs offered by
vendors, the Companycontracts with vendors to promote
merchandise for specified time periods. Pursuant to the
provisions of Emerging Issues Task Force Issue
No. 02-16,
“Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor” (“EITF
02-16”),
vendor consideration which represents a reimbursement of
specific, incremental, identifiable costs is included in the
“Selling, general and administrative” line on the
consolidated statements of operations, along with the related
costs, in the period the promotion takes place. Consideration
which exceeds such costs is classified as a reduction of the
“Cost of merchandise sold” line on the consolidated
statements of operations. Additionally, the Company has recorded
$1.2 million and $1.1 million of vendor consideration
as a reduction to its inventory balance at February 3, 2007
and January 28, 2006, respectively.
The Company also receives credits from vendors pursuant to
shared markdown programs, purchase volume programs, and magazine
slotting programs. Credits received pursuant to these programs
are classified in the “Cost of merchandise sold” line
on the consolidated statements of operations, and are recognized
upon certain product volume thresholds being met or product
placements occurring.
Income
Taxes
The Company must make certain estimates and judgments in
determining income tax expense for financial statement purposes.
These estimates and judgments occur in the calculation of
certain tax assets and liabilities, which arise from differences
in the timing of recognition of revenue and expense for tax and
financial statement purposes. In addition, the calculation of
the Company’s tax liabilities involves dealing with
uncertainties in the application of complex tax regulations. The
Company recognizes liabilities for anticipated tax issues in the
United States and other tax jurisdictions based on an estimate
of whether, and to the extent which, additional taxes will be
due.
The Company also records a valuation allowance against deferred
tax assets arising from certain net operating losses when it is
more likely than not that some portion of all of such net
operating losses will not be realized. The Company’s
effective tax rate in a given financial statement period may be
materially
impacted by changes in the mix and level of earnings, changes in
the expected outcome of audit controversies or changes in the
deferred tax valuation allowance.
New
Accounting Guidance
In February 2006, the FASB issued Statement of Financial
Accounting Standards No. 155, “Accounting for Certain
Hybrid Instruments” (“FAS 155”).
FAS 155 allows financial instruments that have embedded
derivatives to be accounted for as a whole (eliminating the need
to bifurcate the derivative from its host) if the holder elects
to account for the whole instrument on a fair value basis. This
statement is effective for all financial instruments acquired or
issued after the beginning of an entity’s first fiscal year
that begins after September 15, 2006. The Company does not
expect the adoption of FAS 155 to have a material impact on
its consolidated financial position or results of operations.
In June 2006, the FASB issued Statement of FASB Interpretation
No. 48, “Accounting for Uncertainty in Income
Taxes — an Interpretation of FASB Statement No.
109” (“FIN 48”). FIN 48 requires that the tax
effects of a position be recognized only if it is
“more-likely-than-not” to be sustained based solely on
its technical merits as of the reporting date. The
more-likely-than-not threshold represents a positive assertion
by management that a company is entitled to the economic
benefits of a tax position. If a tax position is not considered
more-likely-than-not to be sustained based solely on its
technical merits, no benefits of the 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. FIN 48 is effective for fiscal years
beginning after December 15, 2006, and is required to be adopted
by the Company beginning in the first quarter of fiscal 2007.
Although the Company will continue to evaluate the application
of FIN 48, management does not currently believe adoption will
have a material impact on the Company’s results of
operations or financial position.
Also in June 2006, the FASB ratified the Emerging Issues Task
Force (“EITF”) consensus on EITF Issue
No. 06-3,
“How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation)”
(“EITF
06-3”).
EITF
06-3 states
that the classification of taxes as gross or net is an
accounting policy decision that is dependent on the type of tax
and that similar taxes are to be presented in a similar manner.
EITF 06-3 is
effective for reporting periods beginning after
December 15, 2006. The Company does not expect the adoption
of EITF 06-3
to have an impact on its consolidated financial position or
results of operations.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, “Fair Value
Measurements” (“FAS 157”). FAS 157
provides guidance for using fair value to measure assets and
liabilities and only applies when other standards require or
permit the fair value measurement of assets and liabilities.
FAS 157 does not expand the use of fair value measurement.
FAS 157 is effective for fiscal years beginning after
November 15, 2007. The Company does not expect the adoption
of FAS 157 to have a material impact on its consolidated
financial position or results of operations.
Related
Party Transactions
The Company has not engaged in any related party transactions
which would have had a material effect on the Company’s
financial position, cash flows, or results of operations.
Item 7A.
Quantitative
and Qualitative Disclosures About Market Risk
The Company is exposed to market risk during the normal course
of business from changes in interest rates and foreign currency
exchange rates. The exposure to these risks is managed though a
combination of normal operating and financing activities, which
may include the use of derivative financial instruments in the
form of interest rate swaps and forward foreign currency
exchange contracts.
The Company is subject to risk resulting from interest rate
fluctuations, as interest on certain of the Company’s
borrowings is based on variable rates. The Company’s
objective in managing its exposure to interest rate fluctuations
is to limit the impact of interest rate changes on earnings and
cash flows and to lower its overall borrowing costs.
Historically, the Company had utilized interest rate swaps to
achieve this objective, effectively converting a portion of its
variable rate exposure to fixed interest rates. Currently, the
Company has no such agreements in effect.
LIBOR is the rate upon which the Company’s variable rate
debt is principally based. If LIBOR were to increase 1% for the
full year of 2007 as compared to 2006, the Company’s
after-tax earnings would decrease approximately
$3.5 million based on the Company’s expected average
outstanding debt as of February 3, 2007.
Foreign
Currency Exchange Risk
The Company is subject to foreign currency exchange exposure for
operations with assets and liabilities that are denominated in
currencies other than U.S. dollars. On a normal basis, the
Company does not attempt to hedge the foreign currency
translation fluctuations in the net investments in its foreign
subsidiaries. The Company does, from time to time, enter into
short-term forward exchange contracts to sell or purchase
foreign currencies at specified rates based on estimated foreign
currency cash flows. It is the policy of the Company not to
purchase financial
and/or
derivative instruments for speculative purposes. At
February 3, 2007, the Company had no foreign currency
forward contracts outstanding.
Liabilities, Minority Interest
and Stockholders’ Equity
Current liabilities:
Short-term borrowings and current
portion of long-term debt
$
542.6
$
207.1
Trade accounts payable
631.4
660.3
Accrued payroll and other
liabilities
333.1
293.4
Taxes, including income taxes
60.4
135.8
Deferred income taxes
28.4
14.5
Total current liabilities
1,595.9
1,311.1
Long-term debt
5.2
5.4
Other long-term liabilities
368.3
326.6
Commitments and contingencies
(Note 9)
—
—
Total liabilities
1,969.4
1,643.1
Minority interest
2.0
1.3
Total liabilities and minority
interest
1,971.4
1,644.4
Stockholders’ equity:
Common stock,
300,000,000 shares authorized; 58,476,306 and
64,149,397 shares issued and outstanding at
February 3, 2007 and January 28, 2006, respectively
175.5
293.9
Accumulated other comprehensive
income
28.5
19.4
Retained earnings
438.0
614.5
Total stockholders’ equity
642.0
927.8
Total liabilities, minority
interest and stockholders’ equity
$
2,613.4
$
2,572.2
See accompanying notes to consolidated financial statements.
Nature of
Business: Borders
Group, Inc., through its subsidiaries, Borders, Inc.
(“Borders”), Walden Book Company, Inc.
(“Waldenbooks”), Borders (UK) Limited, Borders
Australia Pty Limited and others (individually and collectively,
“the Company”), is the second largest operator of
book, music and movie superstores and the largest operator of
mall-based bookstores in the world based upon both sales and
number of stores. At February 3, 2007, the Company operated
567 superstores under the Borders name, including 499 in the
United States, 41 in the United Kingdom, 20 in Australia, three
in Puerto Rico, two in New Zealand and one each in Singapore and
Ireland. The Company also operated 564 mall-based and other
bookstores primarily under the Waldenbooks name in the United
States and 30 bookstores under the Books etc. name in the United
Kingdom. In addition, the Company owns and operates United
Kingdom-based Paperchase Products Limited
(“Paperchase”), a designer and retailer of stationery,
cards and gifts. As of February 3, 2007, Paperchase
operated 99 stores, primarily in the United Kingdom, and
Paperchase shops have been added to nearly 250 domestic Borders
Superstores.
Principles of
Consolidation: The
consolidated financial statements include the accounts of the
Company and all majority-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.
Use of
Estimates: The
preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Fiscal
Year: Effective
with respect to fiscal 2005, the Company’s fiscal year ends
on the Saturday closest to the last day of January. Fiscal 2006
consisted of 53 weeks, and ended on February 3, 2007.
Fiscal 2005 consisted of 53 weeks and ended
January 28, 2006. Fiscal 2004 consisted of 52 weeks
and ended January 23, 2005. References herein to years are
to the Company’s fiscal years.
Foreign Currency
and Translation of Foreign
Subsidiaries: The
functional currencies of the Company’s foreign operations
are the respective local currencies. All assets and liabilities
of the Company’s foreign operations are translated into
U.S. dollars at fiscal period-end exchange rates. Income
and expense items are translated at average exchange rates
prevailing during the year. The resulting translation
adjustments are recorded as a component of stockholders’
equity and comprehensive income. Foreign currency transaction
gains/(losses) were $(1.3), $2.1, and $(0.2) in 2006, 2005, and
2004, respectively.
Cash and
Equivalents: Cash
and equivalents include short-term investments with original
maturities of 90 days or less.
Inventories: Merchandise
inventories are valued on a
first-in,
first-out (“FIFO”) basis at the lower of cost or
market using the retail inventory method. The Company includes
certain distribution and other expenses in its inventory costs,
totaling $114.1 and $102.1 as of February 3, 2007, and
January 28, 2006, respectively.
Property and
Equipment: Property
and equipment are recorded at cost, including capitalized
interest, and depreciated over their estimated useful lives on a
straight-line basis for financial statement purposes and on
accelerated methods for income tax purposes. Store properties
are leased and improvements are amortized over the shorter of
their estimated useful lives or the initial term of the related
lease, generally over three to 20 years. Other annual rates
used in computing depreciation for financial statement purposes
approximate 3% for buildings and 10% to 33% for other fixtures
and equipment. Amortization of assets under capital leases is
included in depreciation expense.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
The carrying value of long-lived store assets is evaluated
whenever changes in circumstances indicate the carrying amount
of such assets may not be recoverable. In performing such
reviews for recoverability, the Company compares the expected
cash flows to the carrying value of long-lived assets for the
applicable stores. If the expected future cash flows are less
than the carrying amount of such assets, the Company recognizes
an impairment loss for the difference between the carrying
amount and the estimated fair value. Expected future cash flows,
which are estimated over the assets’ remaining useful
lives, contain estimates of sales and the impact those future
sales will have upon cash flows. Future sales are estimated
based, in part, upon a projection of each store’s sales
trend based on the actual sales of the past several years.
Additionally, each store’s future cash contribution is
based upon the most recent year’s actual cash contribution,
but is adjusted based upon projected trends in sales and store
operating costs. Fair value is estimated using expected
discounted future cash flows, with the discount rate
approximating the Company’s borrowing rate. Significant
deterioration in the performance of the Company’s stores
compared to projections could result in significant additional
asset impairments.
The carrying value of non-store long-lived assets is also
evaluated whenever changes in circumstances indicate the
carrying amount of such assets may not be recoverable. Expected
future cash flows, which are estimated over each asset’s
remaining useful life, contain estimates of future cash flows
based on projected trends in sales and operating costs. Fair
value is estimated using expected discounted future cash flows,
with the discount rate approximating the Company’s
borrowing rate.
Goodwill: Pursuant
to the provisions of Statement of Financial Accounting Standards
No. 142, “Goodwill and Other Intangible Assets”
(“FAS 142”), the Company’s goodwill is
tested for impairment annually (or more frequently if impairment
indicators arise). Pursuant to FAS 142, a reporting unit is
defined as an operating segment or one level below an operating
segment (a component), for which discrete financial information
is available and reviewed by management. The Company’s
reporting units were identified as the operating segments of
Domestic Borders superstores, Waldenbooks Specialty Retail and
Corporate, 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 of February 3, 2007, the carrying amount of the net
assets of the U.K. reporting unit exceeded its fair value. The
Company then allocated the fair value of the U.K. reporting unit
to the assets and liabilities of the reporting unit, and based
on that allocation, determined that the entire amount of
goodwill allocated to the U.K. reporting unit was impaired, and
recorded a charge of $84.4 million. As of February 3,2007, no impairment of domestic goodwill existed.
Leases: All
leases are reviewed for capital or operating classification at
their inception under the guidance of Statement of Financial
Accounting Standards No. 13, “Accounting for
Leases” (“FAS 13”), as amended. The Company
uses its incremental borrowing rate in the assessment of lease
classification, and defines
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
initial lease term to include the construction build-out period,
but to exclude lease extension period(s). The Company conducts
operations primarily under operating leases. For leases that
contain rent escalations, the Company records the total rent
payable during the lease term, as defined above, on a
straight-line basis over the term of the lease and records the
difference between the rents paid and the straight-line rent as
a deferred rent liability, under “Other long-term
liabilities” on the Company’s consolidated balance
sheets, totaling $158.6 and $154.7 as of February 3, 2007
and January 28, 2006, respectively.
Landlord
Allowances: The
Company classifies landlord allowances as deferred rent
liabilities, under “Other long-term liabilities” on
the Company’s consolidated balance sheets, totaling $150.5
and $132.0 as of February 3, 2007 and January 28,2006, respectively, in accordance with the provisions of FASB
Technical
Bulletin No. 88-1,
“Issues Relating to Accounting for Leases” (“FTB
88-1”),
and as an operating activity on the Company’s consolidated
statements of cash flows. Also in accordance with the provisions
of FTB 88-1,
the Company classifies the amortization of landlord allowances
as a reduction of occupancy expense, included as a component of
“Cost of merchandise sold (includes occupancy)” in the
Company’s consolidated statements of operations.
Financial
Instruments: The
recorded values of the Company’s financial instruments,
which include accounts receivable, accounts payable and
indebtedness, approximate their fair values.
Pursuant to the provisions of Statement of Financial Accounting
Standards No. 133, “Accounting For Derivative
Instruments and Hedging Activities”
(“FAS 133”), as amended, the Company recognizes
the fair value of its derivatives on the consolidated balance
sheets. Changes in derivative fair values are either recognized
in earnings as offsets to the changes in fair value of related
hedged assets, liabilities and firm commitments, or, for
forecasted transactions, deferred and recorded as a component of
other stockholders’ equity until the hedged transactions
occur and are recognized in earnings. The ineffective portion of
a hedging derivative’s change in fair value is immediately
recognized in earnings.
Accumulated Other
Comprehensive Income
(Loss): Accumulated
other comprehensive income (loss) for the Company includes fair
value changes of derivatives (net of tax) and 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 $28.5 and $19.4 for
exchange rate fluctuations as of February 3, 2007 and
January 28, 2006, respectively.
Revenue: Revenue
is recognized, net of estimated returns, at the point of sale
for all of the Company’s segments. Revenue excludes sales
taxes and any value-added taxes.
The Company, through its subsidiaries, has agreements with
Amazon.com, Inc. (“Amazon”) to operate Web sites
utilizing the Borders.com, Waldenbooks.com, Borders.co.uk and
Booksetc.co.uk URLs (the “Web Sites”). Under these
agreements, which expire in early 2008, Amazon is the merchant
of record for all sales made through the Web Sites, and
determines all prices and other terms and conditions applicable
to such sales. Amazon is responsible for the fulfillment of all
products sold through the Web Sites and retains all payments
from customers. The Company receives referral fees for products
purchased through the Web Sites. The agreements contain mutual
indemnification provisions, including provisions that define
between the parties the responsibilities with respect to any
liabilities for sales, use and similar taxes, including
penalties and interest, associated with products sold on the Web
Sites. Currently, taxes are not collected with respect to
products sold on the Web Sites except in certain states.
Pre-Opening
Costs:The Company
expenses pre-opening costs as incurred in accordance with
SOP 98-5,
“Reporting on the Costs of
Start-Up
Activities.”
Closing
Costs: Pursuant to
the provisions of Statement of Financial Accounting Standards
No. 146, “Accounting for Costs Associated with Exit or
Disposal Activities” (“FAS 146”), the
Company expenses when incurred all amounts related to the
discontinuance of operations of stores identified for closure.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
Borders
Rewards: The
Company launched the Borders Rewards loyalty program during the
first quarter of 2006. Membership in Borders Rewards is free,
with no enrollment costs or annual fees. Five percent of all
qualifying purchases made by members throughout 2006 were
credited to personal Holiday Savings accounts, which were used
on holiday purchases made from November 15 through
January 31. The Company accrues the full cost of all
rewards as they are earned by members. This cost is categorized
as “Cost of merchandise sold” on the consolidated
statements of operations.
Preferred Reader
Program: Until
October 2004, Waldenbooks sold memberships in its Preferred
Reader Program, which offered members discounts on purchases and
other benefits. The Company recognized membership income on a
straight-line basis over the
12-month
term of the membership, and categorized the income as
“Other revenue” in the Company’s consolidated
statements of operations. Discounts on purchases were netted
against “Sales” in the Company’s consolidated
statements of operations.
Gift
Cards:The Company
sells gift cards to its customers and records a liability for
the face value of all certificates issued and unredeemed within
the last 12 months. For certificates older than
12 months, the Company records a liability for a portion of
the certificates’ face value based upon historical
redemption trends, and records the related income as a component
of “Other revenue” in the Company’s consolidated
statements of operations. The Company has included the liability
for gift cards as a component of “Accrued payroll and other
liabilities” on its consolidated balance sheets, totaling
$151.7 and $145.4 as of February 3, 2007 and
January 28, 2006, respectively.
Advertising
Costs:The Company
expenses advertising costs as incurred, and recorded
approximately $41.9, $39.4 and $44.7 of gross advertising
expenses in 2006, 2005 and 2004, respectively.
The Company receives payments and credits from vendors pursuant
to co-operative advertising programs, shared markdown programs,
purchase volume incentive programs and magazine slotting
programs.
Pursuant to co-operative advertising programs offered by
vendors, the Companycontracts with vendors to promote
merchandise for specified time periods. Pursuant to the
provisions of Emerging Issues Task Force Issue
No. 02-16,
“Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor” (“EITF
02-16”),
which the Company adopted effective January 1, 2003, vendor
consideration which represents a reimbursement of specific,
incremental, identifiable costs is included in the
“Selling, general and administrative” line on the
consolidated statements of operations, along with the related
costs, in the period the promotion takes place. Consideration
which exceeds such costs is classified as a reduction of the
“Cost of merchandise sold” line on the consolidated
statements of operations. Additionally, the Company recorded
$1.2 and $1.1 of vendor consideration as a reduction to its
inventory balance at February 3, 2007 and January 28,2006, respectively.
The Company also receives credits from vendors pursuant to
shared markdown programs, purchase volume programs, and magazine
slotting programs. Credits received pursuant to these programs
are classified in the “Cost of merchandise sold” line
on the consolidated statements of operations, and are recognized
upon certain product volume thresholds being met or product
placements occurring.
Advertising costs not part of the programs listed above are
included in the “Selling, general and administrative”
line of the consolidated statements of operations.
Income
Taxes: Income
taxes are accounted for in accordance with Statement of
Financial Accounting Standards No. 109, “Accounting for
Income Taxes” (“FAS 109”). FAS 109 requires
recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences
between the book carrying amounts and the tax basis of assets
and liabilities. FAS 109 also requires that deferred tax assets
be reduced by a valuation allowance if it is more likely than
not that some portion of or all of the deferred tax asset will
not be realized.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
The Company and its subsidiaries file separate foreign, state
and local income tax returns and, accordingly, provide for such
income taxes on a separate company basis.
Equity-Based
Compensation: Beginning
in 2006, the Company accounted for equity-based compensation in
accordance with the provisions of Statement of Financial
Accounting Standards No. 123 (revised 2004),
“Share-Based Payment” (“FAS 123(R)”).
The Company adopted FAS 123(R) using the modified
prospective method. Under the modified prospective method,
compensation cost is recognized for all share-based payments
granted after the adoption of FAS 123(R) and for all awards
granted to employees prior to the adoption date of
FAS 123(R) that remain unvested on the adoption date.
Accordingly, no restatements were made to prior periods. The
Company records compensation cost for equity-based compensation
in the “Selling, general and administrative” line of
the consolidated statements of operations.
Prior to 2006, the Company accounted for equity-based
compensation under the guidance of Accounting Principles Board
Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB No. 25”). As permitted, the
Company had adopted the disclosure-only option of Statement of
Financial Accounting Standards No. 123, “Accounting
for Stock Based Compensation” (“FAS 123”),
as amended by Statement of Financial Accounting Standards
No. 148, “Accounting for Stock-Based
Compensation — Transition and Disclosure.” The
following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value
recognition provisions of FAS 123 to stock-based employee
compensation during the respective years:
2005
2004
Net income, as reported
$
101.0
$
131.9
Add: Stock-based employee
compensation expense included in reported net income, net of
related tax effects
0.9
0.7
Deduct: Total stock-based employee
compensation expense determined under fair value method for all
awards, net of tax
1.8
4.1
Pro forma net income
$
100.1
$
128.5
Earnings per share:
Diluted — as reported
$
1.42
$
1.69
Diluted — pro forma
$
1.41
$
1.65
Basic — as reported
$
1.45
$
1.72
Basic — pro forma
$
1.43
$
1.68
See “Note 13 — Stock-Based Compensation
Plans” for further discussion of the Company’s
equity-based compensation plans.
New Accounting
Guidance: In
February 2006, the FASB issued Statement of Financial Accounting
Standards No. 155, “Accounting for Certain Hybrid
Instruments” (“FAS 155”). FAS 155
allows financial instruments that have embedded derivatives to
be accounted for as a whole (eliminating the need to bifurcate
the derivative from its host) if the holder elects to account
for the whole instrument on a fair value basis. This statement
is effective for all financial instruments acquired or issued
after the beginning of an entity’s first fiscal year that
begins after September 15, 2006. The Company does not
expect the adoption of FAS 155 to have a material impact on
its consolidated financial position or results of operations.
In June 2006, the FASB issued Statement of FASB Interpretation
No. 48, “Accounting for Uncertainty in Income
Taxes — an Interpretation of FASB Statement
No. 109” (“FIN 48”). FIN 48
requires that the tax
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
effects of a position be recognized only if it is
“more-likely-than-not” to be sustained based solely on
its technical merits as of the reporting date. The
more-likely-than-not threshold represents a positive assertion
by management that a company is entitled to the economic
benefits of a tax position. If a tax position is not considered
more-likely-than-not to be sustained based solely on its
technical merits, no benefits of the 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. FIN 48 is effective for fiscal
years beginning after December 15, 2006, and is required to
be adopted by the Company beginning in the first quarter of
fiscal 2007. Although the Company will continue to evaluate the
application of FIN 48, management does not currently
believe adoption will have a material impact on the
Company’s results of operations or financial position.
Also in June 2006, the FASB ratified the Emerging Issues Task
Force (“EITF”) consensus on EITF Issue
No. 06-3,
“How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation)”
(“EITF
06-3”).
EITF
06-3 states
that the classification of taxes as gross or net is an
accounting policy decision that is dependent on the type of tax
and that similar taxes are to be presented in a similar manner.
EITF 06-3 is
effective for reporting periods beginning after
December 15, 2006. The Company does not expect the adoption
of EITF 06-3
to have an impact on its consolidated financial position or
results of operations.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, “Fair Value
Measurements” (“FAS 157”). FAS 157
provides guidance for using fair value to measure assets and
liabilities and only applies when other standards require or
permit the fair value measurement of assets and liabilities.
FAS 157 does not expand the use of fair value measurement.
FAS 157 is effective for fiscal years beginning after
November 15, 2007. The Company does not expect the adoption
of FAS 157 to have a material impact on its consolidated
financial position or results of operations.
Reclassifications: Certain
prior year amounts have been reclassified to conform to current
year presentation.
NOTE 2 —
WEIGHTED-AVERAGE SHARES OUTSTANDING
Weighted-average shares outstanding are calculated as follows
(thousands):
2006
2005
2004
Weighted-average common shares
outstanding — basic
61,940
69,785
76,553
Dilutive effect of employee stock
options
—
1,303
1,387
Weighted-average common shares
outstanding — diluted
61,940
71,088
77,940
Unexercised employee stock options to purchase 1.5 million
shares as of February 3, 2007 were not included in the
fiscal 2006 weighted-average shares outstanding calculation
because to do so would have been antidilutive, due to the
Company’s net loss. Unexercised employee stock options and
unvested restricted share units to purchase 2.8 million,
4.1 million, and 3.1 million common shares as of
February 3, 2007, January 28, 2006, and
January 23, 2005, respectively, were not included in the
weighted-average shares outstanding calculation because to do so
would have been antidilutive, due to the exercise price of these
shares exceeding the Company’s share price at the end of
the respective fiscal years.
NOTE 3 —
ASSET IMPAIRMENTS AND OTHER WRITEDOWNS
Asset
Impairments: In
accordance with the provisions of FAS 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets,” the
Company evaluates the carrying values of long-lived assets
whenever changes in circumstances indicate the carrying amounts
of such assets may not be recoverable. When an indicator of
impairment is present, the Company evaluates the recoverability
of the affected assets. As a
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
result of such an evaluation, the Company recorded a charge of
$94.6 in the fourth quarter of 2006 related to the impairment of
certain long-lived assets.
In 2006, assets of underperforming domestic Borders superstores
were tested for impairment and as a result, the Company recorded
a charge of $9.0 in the fourth quarter. The Waldenbooks
Specialty Retail segment has experienced declining sales and
profits over the past several years. For the first time in 2006,
the segment generated an operating loss, and the Company tested
all assets of the segment for impairment. This resulted in a
fourth quarter 2006 charge of $10.1 related to underperforming
Waldenbooks Specialty Retail stores and a $34.3 charge related
to Waldenbooks Specialty Retail’s merchandising system. In
the International segment, the retail environment in the U.K.
has been challenging over the last two years, resulting in
declining sales and profits in the Company’s U.K.
Superstores and Books etc. chains. The Company initially
believed the change in the environment was temporary, due to the
terrorist attacks that occurred in central London during the
second quarter of 2005. However, sales for the U.K. operations
did not improve as expected, and the Company tested all assets
of the U.K. Superstores and Books etc. chains for impairment in
2006. As a result, the Company recorded asset impairment charges
in the fourth quarter of 2006 of $30.5 related to
underperforming U.K. superstores and $10.5 related to Books etc.
stores, as well as $0.2 related to certain assets located at the
U.K. corporate office.
In the fourth quarter of 2005, the Company recorded a charge of
$4.3 related to the impairment of certain long-lived assets
(primarily leasehold improvements, furniture, and fixtures),
consisting of the following: $2.1 related to underperforming
domestic Borders superstores, $0.5 related to underperforming
Waldenbooks Specialty Retail stores and $1.7 related to
underperforming Books etc. stores.
In the fourth quarter of 2004, the Company recorded a charge of
$6.2 related to the impairment of certain long-lived assets
(primarily leasehold improvements, furniture, and fixtures),
consisting of the following: $4.5 related to underperforming
domestic Borders superstores, $0.4 related to underperforming
Waldenbooks Specialty Retail stores and $1.3 related to
underperforming Books etc. stores.
The charges taken for these impairments are categorized as
“Asset impairments and other writedowns” on the
consolidated statements of operations.
Goodwill
Impairment: In
accordance with the provisions of FAS 142, “Goodwill
and Other Intangible Assets,”the Company evaluates the
carrying values of goodwill annually or more frequently when
impairment indicators arise. As a result of the decline in sales
and profits of the U.K. Superstores and Books etc. chains,
driven by the economic factors discussed above, the carrying
amount of the net assets of the U.K. reporting unit exceeded its
fair value, as calculated using principally a discounted future
cash flows approach. As a result, the Company determined that
the entire amount of goodwill allocated to the U.K. reporting
unit was impaired, and recorded a charge of $84.4 in the fourth
quarter of 2006. Subsequent to this impairment, all of the
Company’s remaining goodwill relates to the domestic
Borders superstores. As of February 3, 2007, no impairment
of domestic goodwill existed.
The charge taken for this impairment is categorized as
“Asset impairments and other writedowns” on the
consolidated statements of operations.
Store
Closings: In
accordance with the provisions of FAS 146, “Accounting
for Costs Associated with Exit or Disposal Activities,” the
Company expenses when incurred all amounts related to the
discontinuance of operations of stores identified for closure.
These expenses typically pertain to inventory markdowns, asset
impairments, and store payroll and other costs. When the Company
closes any of its stores, the inventory of the closed stores is
either returned to vendors or marked down and sold. Stores’
leasehold improvements, furniture, fixtures and equipment are
generally discarded or sold for nominal amounts.
Borders superstores closed during 2006 averaged approximately 25
employees per store and Waldenbooks Specialty Retail stores
closed during 2006 averaged between five to seven employees per
store, who have been or will be displaced by the closures, with
the majority being transferred to other Waldenbooks
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
Specialty Retail or domestic Borders superstore locations. Those
employees not transferred are eligible for involuntary
termination benefits, but the total amount of these benefits for
the stores affected by the closing plans is not significant.
During 2006, the Company recorded a $9.0 charge for the closing
costs of its stores, consisting of the following: $4.1 relating
to the closure of five domestic Borders superstores, and $4.9
relating to the closure of 124 Waldenbooks Specialty Retail
stores. The charge for Borders consisted primarily of asset
impairments, and the charge for Waldenbooks Specialty Retail
included $0.8 of asset impairments and $2.3 of store payroll and
other costs. Also included in the $4.9 charge is a $1.8 charge
for inventory markdowns of the stores to be closed.
During 2005, the Company recorded a $3.4 charge for the closing
costs of its stores, consisting of the following: $1.0 relating
to the closure of two Borders stores, and $2.4 relating to the
closure of 50 Waldenbooks Specialty Retail stores (net of a $0.1
adjustment of the prior year reserve resulting from actual costs
differing from estimates). The charge for Borders consisted
primarily of asset impairments, and the charge for Waldenbooks
Specialty Retail included $0.4 of asset impairments and $0.9 of
store payroll and other costs. Also included in the $2.4 charge
is a $1.1 charge for inventory markdowns of the stores to be
closed.
During 2004, the Company recorded a $2.2 charge for the closing
costs relating to the closure of 43 underperforming Waldenbooks
Specialty Retail stores (net of a $0.2 adjustment of the prior
year reserve resulting from actual costs differing from
estimates). The charge included $0.1 of asset impairments and
$0.9 of store payroll and other costs. Also included in the $2.2
charge is a $1.2 charge for inventory markdowns of the stores to
be closed.
Asset impairment and store payroll costs related to store
closings are categorized as “Asset impairments and other
writedowns” on the consolidated statements of operations.
Inventory markdowns related to store closings are categorized as
“Cost of merchandise sold (includes occupancy)” on the
consolidated statements of operations.
The following table summarizes Waldenbooks Specialty
Retail’s store closing reserve:
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
The following table summarizes the sales and operating loss for
the Waldenbooks Specialty Retail stores closed in each of the
following fiscal years:
2006
2005
2004
Sales
$
76.0
$
25.9
$
19.2
Operating loss
(4.9
)
(0.3
)
(0.6
)
During 2006, 2005 and 2004, the Company recorded charges for the
estimated future lease obligations of Books etc. store closures
of $2.1, $0.5 and $1.1, respectively. These amounts were
categorized as “Cost of merchandise sold (includes
occupancy)” on the consolidated statements of operations.
NOTE 4 —
SALE-LEASEBACK TRANSACTION
In March 2004, the Company entered into an agreement with GE
Pension Limited to sell and subsequently leaseback a
Company-owned property owned by its Books etc. subsidiary. There
were no future commitments, obligations, provisions, or
circumstances included in either the sale contract or the lease
contract that would result in the Company’s continuing
involvement; therefore, the assets associated with the property
were removed from the Company’s consolidated balance sheets.
The transaction was recorded in the International segment. The
sale proceeds were $32.3 and the net book value of the property
upon the completion date of the sale was $28.4, and direct costs
associated with the transaction were $0.4. A deferred gain of
$3.5 was recorded on the consolidated balance sheets in
“Other long-term liabilities” and is being amortized
over the
20-year term
of the operating lease.
NOTE 5 —
ACQUISITION OF PAPERCHASE PRODUCTS, LTD.
In July 2004, the Company invested cash of $24.1, including debt
repayment of $4.1, in connection with an increase in its 15%
equity stake in Paperchase Products, Ltd.
(“Paperchase”), a leading stationery retailer in the
United Kingdom, to 97%, which was allocated primarily to fixed
assets, inventory and $22.4 of goodwill. The Company also
recorded minority interest of $1.0. The acquisition has been
accounted for as a purchase in the Company’s International
segment. The acquisition was not material to the consolidated
statements of operations, the consolidated balance sheets, or
the consolidated statements of cash flows of the Company.
NOTE 6 —
SEATTLE’S BEST COFFEE LICENSING AGREEMENT
In August 2004, the Company entered into a licensing agreement
with Seattle’s Best Coffee, a wholly-owned subsidiary of
Starbucks Corporation, through which the Company will operate
Seattle’s Best Coffee-branded cafes within substantially
all of the Company’s existing Borders superstores in the
continental U.S. and Alaska and new stores as they are opened.
Cafes located within existing Borders superstores began
conversion to Seattle’s Best Coffee cafes beginning in
early 2005, and will continue through 2007. These cafes will
continue to be managed and staffed by Company employees, who
will be trained on Seattle’s Best Coffee brand standards
and procedures. Seattle’s Best Coffee will also provide
brand direction and oversight, as well as in-store promotional
support, and will receive royalty payments from the Company.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
Deferred tax assets and liabilities resulted from the following:
2006
2005
Deferred tax assets
Accruals and other current
liabilities
$
7.9
$
4.2
Deferred revenue
8.6
4.6
Other long-term liabilities
2.6
3.0
Deferred compensation
2.0
2.2
Deferred rent
59.3
70.0
State deferred tax assets
9.5
1.9
Foreign deferred tax assets
36.5
20.6
Asset impairments and other
writedowns
21.8
8.7
Valuation allowance
(14.6
)
(9.4
)
Total deferred tax assets
133.6
105.8
Deferred tax liabilities
Inventory
18.6
18.2
Property and equipment
51.6
64.5
Foreign deferred tax liabilities
15.1
11.3
Total deferred tax liabilities
85.3
94.0
Net deferred tax assets
$
48.3
$
11.8
The Company has tax net operating loss carryforwards in foreign
jurisdictions totaling $48.8 as of February 3, 2007, $30.4
as of January 28, 2006, and $28.0 as of January 23,2005. These losses have an indefinite carryforward period. The
Company has established a valuation allowance to reflect the
uncertainty of realizing a portion of the benefits of these net
operating losses and deferred assets in foreign jurisdictions.
Consolidated domestic income (loss) before taxes was $(23.2) in
2006, $172.4 in 2005, and $200.6 in 2004. The corresponding
amounts for foreign operations were $(146.0) in 2006, $(13.3) in
2005 and $7.0 in 2004.
Deferred income taxes are not provided on undistributed earnings
of foreign subsidiaries that are considered to be permanently
reinvested outside the United States. Cumulative foreign
earnings considered permanently reinvested totaled $31.5 as of
February 3, 2007 and $21.9 as of January 28, 2006.
NOTE 9 —
COMMITMENTS AND CONTINGENCIES
Litigation: Two
former employees, individually and on behalf of a purported
class consisting of all current and former employees who work or
worked as Inventory Managers or Sales Managers in Borders stores
in the State of California at any time from September 30,2001 through the trial date, have filed an action against the
Company in the Superior Court of California for the County of
San Francisco. The Complaint alleges, among other things,
that the individual plaintiffs and the purported class members
were improperly classified as exempt employees and that the
Company violated the California Labor Code and the California
Business and Professions Code by failing to (i) pay
required overtime, (ii) provide meal periods, rest periods,
and accurate itemized wage statements, (iii) keep accurate
records of employees’
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
hours of work, and (iv) pay all compensation owed at the
time of termination of employment to certain members of the
purported class. The relief sought includes damages,
restitution, penalties, injunctive relief, interest, costs, and
attorneys’ fees and such other relief as the court deems
proper. The Company has not included any liability in its
consolidated financial statements in connection with this matter
and has expensed as incurred all legal costs to date.
On October 29, 2002, Gary Gerlinger, individually and on
behalf of all other similarly situated consumers in the United
States who, during the period from August 1, 2001 to the
present, purchased books online from either Amazon.com, Inc.
(“Amazon”) or the Company, instituted an action
against the Company and Amazon in the United States District
Court for the Northern District of California. The Complaint
alleges that the agreement pursuant to which an affiliate of
Amazon operates Borders.com as a co-branded site (the “Web
Site”) violates federal anti-trust laws, California
statutory law and the common law of unjust enrichment. The
Complaint seeks injunctive relief, damages, including treble
damages or statutory damages where applicable, attorneys fees,
costs and disbursements, disgorgement of all sums obtained by
allegedly wrongful acts, interest and declaratory relief. On
November 1, 2005, the Court granted the Company’s
Motion to Dismiss all of the remaining claims of the plaintiff.
The anti-trust claims were dismissed with prejudice, and the
unfair competition claims were dismissed without prejudice. The
plaintiff has appealed the decision. The Company has not
included any liability in its consolidated financial statements
in connection with this matter and has expensed as incurred all
legal costs to date.
Certain states and private litigants have sought to impose sales
or other tax collection efforts on
out-of-jurisdiction
companies that engage in
e-commerce.
The Company and Amazon have been named as defendants in actions
filed by a private litigant on behalf of the state of Illinois
under the state’s False Claims Act relating to the failure
to collect use taxes on Internet sales in Illinois for periods
both before and after the implementation of the Web Site
agreement with Amazon. The Complaints seek judgments, jointly
and severally, against the defendants for, among other things,
injunctive relief, treble the amount of damages suffered by the
state of Illinois as a result of the alleged violations of the
defendants, penalties, costs and expenses, including legal fees.
Similar actions previously filed against the Company in
Tennessee and Nevada have been dismissed.
Although an adverse resolution of any of the matters described
above could have a material adverse effect on the results of the
operations of the Company for the applicable period or periods,
the Company does not believe that these matters will have a
material effect on its liquidity or financial position.
In addition to the matters described above, the Company is, from
time to time, involved in or affected by other litigation
incidental to the conduct of its businesses.
NOTE 10 —
DEBT
Credit
Facility: The
Company has a Multicurrency Revolving Credit Agreement (the
“Credit Agreement”), which was restated as of
July 31, 2006 and which will expire 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 the Company’s option. The Credit Agreement
(i) includes a fixed charge coverage ratio requirement of
1.1 to 1 that is applicable only if outstanding borrowings under
the facility exceed 90% of permitted borrowings thereunder,
(ii) contains covenants that limit, among other things, the
Company’s ability to incur indebtedness, grant liens, make
investments, consolidate or merge or dispose of assets,
(iii) prohibits dividend payments and share repurchases
that would result in borrowings under the facility exceeding 90%
of permitted borrowings thereunder, and (iv) contains
default provisions that are typical for this type of financing,
including a cross default provision relating to other
indebtedness of more than $25.0. The Company had borrowings
outstanding under the Credit Agreement (or a prior
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
agreement) of $539.6 million at February 3, 2007 and
$153.6 at January 28, 2006. The weighted average interest
rate in 2006 and 2005 was approximately 6.5% and 6.0%,
respectively.
Term
Loan: On
July 30, 2002, the Company issued $50.0 of senior
guaranteed notes (the “Notes”) due July 30, 2006
and bearing interest at 6.31% (payable semi-annually). The
proceeds of the sale of the Notes were used to refinance
existing indebtedness of the Company and its subsidiaries and
for general corporate purposes. The Company repaid the Notes
with funds from the Credit Agreement on July 31, 2006.
Debt of
Consolidated
VIEs:The Company
includes the debt of two variable interest entities
(“VIEs”), consolidated pursuant to Financial
Accounting Standards Board Interpretation No. 46R,
“Consolidation of Variable Interest Entities”
(“FIN 46R”), in its consolidated balance sheets.
Scheduled principal payments of this debt as of February 3,2007 total $0.2 in 2007, $0.2 in 2008, $0.2 in 2009, $0.2 in
2010, $0.3 in 2011, $4.3 in all later years, and in the
aggregate, total $5.4. See “Note 11 —
Leases” for further discussion of the Company’s
consolidation of these VIEs.
Operating
Leases: The
Company conducts operations primarily in leased facilities.
Store leases are generally for terms of three to 20 years.
Borders’ leases generally contain multiple three- to
five-year renewal options which allow Borders the option to
extend the life of the leases up to 25 years beyond the
initial noncancellable term. Waldenbooks Specialty Retail’s
leases generally do not contain renewal options. Certain leases
provide for additional rental payments based on a percentage of
sales in excess of a specified base. Also, certain leases
provide for the payment by the Company of executory costs
(taxes, maintenance, and insurance).
Lease
Commitments: Future
minimum lease payments under operating leases at
February 3, 2007 total $390.7 in 2007, $373.9 in 2008,
$352.2 in 2009, $331.4 in 2010, $314.3 in 2011, and $2,182.9 in
all later years, and in the aggregate, total $3,945.4.
Rental
Expenses: A
summary of operating lease minimum and percentage rental expense
follows:
2006
2005
2004
Minimum rentals
$
409.6
$
378.0
$
369.5
Percentage rentals
21.4
18.9
8.7
Total
$
431.0
$
396.9
$
378.2
Capitalized
Leases: The
Company accounts for certain items under capital leases.
Scheduled principal payments of capitalized leases as of
February 3, 2007 total $0.4, due in 2007.
Consolidated
VIEs:The Company
is the primary beneficiary of two variable interest entities
(“VIEs”) due to the Company’s guarantee of the
debt of these entities. As a result, the Company consolidates
these VIEs and has recorded property and equipment, net of
accumulated depreciation, of $5.1, long-term debt (including
current portion) of $5.4 and minority interest of $0.3 at
February 3, 2007, and has recorded property and equipment,
net of accumulated depreciation, of $5.3, long-term debt
(including current portion) of $5.6 and minority interest of
$0.3 at January 28, 2006.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
NOTE 12 —
EMPLOYEE BENEFIT PLANS
Employee Savings
Plan: Employees of
the Company who meet certain requirements as to age and service
are eligible to participate in the Company’s Savings Plan.
The Company’s expense related to this plan was $4.9, $5.0,
and $4.7 for 2006, 2005 and 2004, respectively.
NOTE 13 —
STOCK-BASED COMPENSATION PLANS
2004 Long-Term
Incentive
Plan:The Company
maintains the 2004 Long-Term Incentive Plan (the “2004
Plan”), pursuant to which the Company may grant stock-based
awards to employees and non-employee directors of the Company,
including restricted shares and share units of its common stock
and options to purchase its common stock. The 2004 Plan was
approved by shareholders in May 2004, and replaced all prior
stock-based benefit plans on a go-forward basis. Three million
shares were authorized for the grant of stock-based awards under
the 2004 Plan (plus any shares forfeited or cancelled under the
2004 Plan or any prior plan). At February 3, 2007,
3.7 million shares remained available for grant.
Under the 2004 Plan, the exercise price of options granted will
not be less than the fair value of the Company’s common
stock at the date of grant. The plan provides for vesting
periods as determined by the Compensation Committee of the
Company’s Board of Directors. The Company recognizes
compensation expense for options granted on a straight-line
basis over the vesting period.
The Company’s senior management personnel are required to
use 20%, and may use up to 100%, of their annual incentive
bonuses to purchase restricted shares of the Company’s
common stock, at a 20% to 40% discount from the fair value of
the same number of unrestricted shares of common stock. In
addition, the Company’s senior management personnel may
elect to make a one-time purchase of restricted shares.
Restricted shares of common stock purchased under the 2004 Plan
will generally be restricted from sale or transfer for at least
two and up to four years from date of purchase.
The Company recognizes compensation expense for the discount on
restricted shares of common stock purchased under the 2004 Plan
(or prior plan). Such discounts are recognized as expense on a
straight-line basis over the period during which the shares are
restricted from sale or transfer.
The Company grants performance-based share units of its common
stock (“RSUs”) to its senior management personnel.
RSUs vest in amounts based on the achievement of performance
goals. The Compensation Committee of the Company’s Board of
Directors establishes the RSU’s performance criteria and
vesting period. The Company also grants time-vested restricted
stock to its senior management personnel.
The Company previously recognized compensation expense for the
RSUs granted under the 2004 Plan using variable accounting, in
accordance with the provisions of Accounting Principles Board
Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB No. 25”). Under variable
accounting, estimates of compensation costs were recorded and
updated each period until the measurement date, based on changes
in the Company’s share price and the estimated vesting
period of the RSUs. Beginning in 2006, the Company recognized
compensation expense for the RSUs in accordance with the
provisions of Statement of Financial Accounting Standards
No. 123 (revised 2004), “Share-Based Payment”
(“FAS 123(R)”). In accordance with
FAS 123(R), the Company records compensation cost based on
the fair market value of the RSUs on the date of grant.
Employee Stock
Purchase Plan: The
Company maintained an employee stock purchase plan (the
“Employee Plan”), which allowed the Company’s
associates not eligible under the 2004 Plan to purchase shares
of the Company’s common stock at a 15% discount from their
fair market value. The Employee Plan expired as of
December 31, 2005.
The weighted-average fair values of options at their grant date
where the exercise price equals the market price on the grant
date were $3.84, $4.49, and $7.30 in 2006, 2005 and 2004,
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:
2006
2005
2004
Risk-free interest rate
4.7-5.1
%
3.8-4.1
%
2.8-4.7
%
Expected life
3-5 years
3-5 years
3-5 years
Expected volatility
25.1-25.5
%
25.6-27.6
%
29.9-35.2
%
Expected dividends
1.6-2.3
%
1.3-1.6
%
1.3-1.6
%
Under FAS 123(R), the Company recognized $2.1, or
$0.03 per share, net of $1.3 tax benefit, of stock-based
compensation expense related to stock options, restricted stock
grants, and employee stock purchases for the year ended
February 3, 2007. As of February 3, 2007, unrecognized
compensation cost was $1.1 with a weighted-average future
vesting period of 2.5 years related to stock options and
$3.4 with a weighted-average future vesting period of
1.6 years related to restricted stock grants and employee
stock purchases. Stock-based compensation expense is included in
Selling, general and administrative expenses. Upon adoption of
FAS 123(R), the balance of $0.4 of deferred compensation
was charged to additional paid in capital.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
The following table summarizes the information regarding stock
options outstanding at February 3, 2007 (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
$10.23-$13.63
35
2.6
13.11
35
13.11
$13.64-$17.03
281
2.7
14.45
281
14.45
$17.04-$20.44
962
4.2
17.45
512
17.34
$20.45-$23.84
1,268
1.8
22.28
1,200
22.23
$23.85-$27.25
296
2.7
25.02
211
25.14
$27.26-$30.66
1,636
0.9
29.79
1,636
29.79
$30.67-$34.06
363
1.2
31.78
363
31.78
A summary of the information relative to the Company’s
granting of stock-based awards other than options follows
(number of shares in thousands):
Number of
Weighted-Average
Weighted-Average
Shares
Purchase Price
at Grant Date FMV
Stock purchased:
2004 Plan (or prior plan)
2004
45
17.74
23.59
2005
32
17.80
26.05
2006
75
14.17
17.75
Employee plan
2004
28
20.64
24.29
2005
26
20.28
23.86
2006
—
—
—
Stock and stock units issued:
Time-vested shares issued:
2004 Plan
2004
17
—
23.59
2005
50
—
23.96
2006
114
—
24.16
Performance-based stock units
issued:
2004 Plan
2004
288
—
23.50
2005
395
—
26.24
2006
405
—
23.59
NOTE 14 —
FINANCIAL INSTRUMENTS
The Company is subject to risk resulting from interest rate
fluctuations, as interest on certain of the Company’s
borrowings is based on variable rates. The Company’s
objective in managing its exposure to
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
interest rate fluctuations is to limit the impact of interest
rate changes on earnings and cash flows and to lower its overall
borrowing costs. During 2005, the Company utilized two interest
rate swaps to achieve this objective, effectively converting a
portion of its variable rate exposure to fixed interest rates.
In accordance with the provisions of FAS 133, the Company
designated these interest rate swap agreements as cash flow
hedges. These two interest rate swaps settled during the second
quarter of 2005, and a cumulative loss was realized, totaling
less than $0.1.
A portion of the Company’s borrowings is based on a fixed
interest rate. In August 2003, the Company entered into an
interest rate swap to convert the fixed rate, upon which the
$50.0 of Notes were based, to a variable rate based on LIBOR. In
accordance with the provisions of FAS 133, the Company
designated this swap agreement as a fair market value hedge.
Changes in the fair value of a derivative that is designated as,
and meets all the required criteria for, a fair market value
hedge are recorded in the Company’s consolidated statements
of operations, as are changes in the fair value of the hedged
debt. This fair market value hedge settled during the second
quarter of 2006.
The Company is organized based upon the following operating
segments: domestic Borders superstores, Waldenbooks Specialty
Retail stores, International stores (including Borders, Books
etc. and Paperchase stores), and Corporate (consisting of the
unallocated portion of certain corporate governance and other
costs). The accounting policies of the segments are the same as
those described in the “Summary of Significant Accounting
Policies.” Segment data includes charges allocating all
corporate headquarters costs to each segment. Transactions
between segments, consisting principally of inventory transfers,
are recorded primarily at cost. The Company evaluates the
performance of its segments and allocates resources to them
based on operating income and anticipated future contribution.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
2006
2005
2004
Operating income (loss)
Domestic Borders superstores
$
92.4
$
174.1
$
177.5
Waldenbooks Specialty Retail
(78.0
)
2.5
25.9
International
(135.9
)
6.4
24.4
Corporate
(15.3
)
(9.6
)
(11.1
)
Total operating income
$
(136.8
)
$
173.4
$
216.7
Total assets
Domestic Borders superstores
$
1,714.6
$
1,615.2
$
1,484.7
Waldenbooks Specialty Retail
322.3
345.8
328.3
International
448.1
476.5
452.8
Corporate
128.4
134.7
363.0
Total assets
$
2,613.4
$
2,572.2
$
2,628.8
Capital expenditures
Domestic Borders superstores
$
128.9
$
98.1
$
64.5
Waldenbooks Specialty Retail
12.0
19.8
12.2
International
47.7
45.9
20.6
Corporate
15.6
32.5
18.2
Total capital expenditures
$
204.2
$
196.3
$
115.5
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:
2006
2005
2004
Domestic Borders superstores
$
12.9
$
10.6
$
10.2
Waldenbooks Specialty Retail
6.1
4.9
4.8
International
0.3
0.2
0.2
Total
$
19.3
$
15.7
$
15.2
Long-lived assets by geographic area are as follows:
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(dollars in millions except per share data)
NOTE 16 —
UNAUDITED QUARTERLY FINANCIAL DATA
Fiscal 2006
Q1
Q2
Q3
Q4
Total revenue
$
867.8
$
866.3
$
860.4
$
1,519.0
Gross margin
200.7
204.8
185.1
457.7
Net loss
(20.2
)
(18.4
)
(39.1
)
(73.6
)
Diluted loss per common share
(0.31
)
(0.29
)
(0.64
)
(1.25
)
Basic loss per common share
(0.31
)
(0.29
)
(0.64
)
(1.25
)
Fiscal 2005
Q1
Q2
Q3
Q4
Total revenue
$
857.3
$
901.1
$
845.8
$
1,475.0
Gross margin
216.6
231.2
203.0
488.9
Net income (loss)
(5.3
)
1.3
(14.1
)
119.1
Diluted earnings (loss) per common
share
(0.07
)
0.02
(0.20
)
1.78
Basic earnings (loss) per common
share
(0.07
)
0.02
(0.20
)
1.80
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 17 —
SUBSEQUENT EVENT
Subsequent to the 2006 fiscal year end, the Company announced it
was exploring strategic alternatives, including possible sale,
franchise opportunity or restructuring, for portions of its
International businesses, including the U.K. superstores, Books
etc. stores, as well as the Ireland, Australia and New Zealand
superstores.
We have audited the accompanying consolidated balance sheets of
Borders Group, Inc. (the Company) as of February 3, 2007
and January 28, 2006, and the related consolidated
statements of operations, stockholders’ equity, and cash
flows for each of the three years in the period ended
February 3, 2007. These financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of the Company at February 3, 2007 and
January 28, 2006, and the consolidated results of its
operations and its cash flows for each of the three years in the
period ended February 3, 2007, in conformity with
U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial
statements, the Company changed its method of accounting for
stock-based compensation in 2006.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Borders Group, Inc.’s internal control
over financial reporting as of February 3, 2007, 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 30, 2007
expressed an unqualified opinion thereon.
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Item 9A.
Controls
and Procedures
Controls and
Procedures: The
Company’s Chief Executive Officer and Chief Financial
Officer have evaluated the effectiveness of the Company’s
disclosure controls and procedures, as such term is defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), as of February 3, 2007 (the
“Evaluation Date”). Based on such evaluation, such
officers have concluded that, as of the Evaluation Date, the
Company’s disclosure controls and procedures were effective
in alerting them on a timely basis to material information
relating to the Company (including its consolidated
subsidiaries) required to be included in the Company’s
periodic filings under the Exchange Act.
Changes in
Internal
Control: During
the quarter ended February 3, 2007, the Company
substantially completed implementation of a new merchandising
system in Waldenbooks, which it began during the third quarter
of 2005. The Company believes the controls over the processes
affected by the implementation are functioning effectively as of
February 3, 2007. Also during the quarter ended
February 3, 2007, the Company substantially completed the
review of both its disclosure controls and procedures and its
internal control over financial reporting specific to the
International segment. The Company believes these controls are
functioning effectively as of February 3, 2007.
Management’s
Annual Report on Internal Control over Financial
Reporting: Management
is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in
Rule 13a-15(f)
under the Securities Exchange Act of 1934, as amended).
Management assessed the effectiveness of the Company’s
internal control over financial reporting as of February 3,2007. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”) in Internal
Control — Integrated Framework. Based on this
assessment, management has concluded that, as of
February 3, 2007, the Company’s internal control over
financial reporting was effective to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. The
Company’s independent registered public accounting firm,
Ernst & Young LLP, has issued an audit report on the
Company’s assessment of the effectiveness of internal
control over financial reporting as of February 3, 2007,
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 management’s assessment, included in the
accompanying Management’s Annual Report on Internal Control
Over Financial Reporting included in Item 9A, that Borders
Group, Inc. maintained effective internal control over financial
reporting as of February 3, 2007 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. Our responsibility is to express an opinion on
management’s assessment and an opinion on the effectiveness
of 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, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, 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, management’s assessment that Borders Group,
Inc. maintained effective internal control over financial
reporting as of February 3, 2007, is fairly stated, in all
material respects, based on the COSO criteria. Also, in our
opinion, Borders Group, Inc. maintained, in all material
respects, effective internal control over financial reporting as
of February 3, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Borders Group, Inc. as of
February 3, 2007 and January 28, 2006, and the related
consolidated statements of operations, stockholders’
equity, and cash flows for each of the three years in the period
ended February 3, 2007, and our report dated March 30,2007 expressed an unqualified opinion thereon.
On March 29, 2007, the Board of Directors of the Company
adopted an amendment to the Company’s 2004 Long-Term
Incentive Plan to provide that awards made to non-employee
directors will consist only of restricted stock or restricted
stock units. The amendment to the Company’s 2004 Long-Term
Incentive Plan is attached as Exhibit 10.36 to this report and
incorporated herein by reference.
Directors,
Executive Officers and Corporate Governance
Information regarding the executive officers of the Company
required by this Item 10 is set forth in Item 1 of
Part I herein under the caption “Executive Officers of
the Company.” Information pertaining to directors of the
Company required by Item 10 is included under the caption
“Election of Directors” in the Company’s Proxy
Statement dated April 17, 2007 for the Company’s
May 24, 2007 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 dated April 17,2007 for the Company’s May 24, 2007 Annual Meeting of
Stockholders.
Code
of Ethics and Other Corporate Governance
Information
Information regarding the Company’s Business Conduct Policy
and its Code of Ethics Relating to Financial Reporting, as well
the names of the individuals determined by the Board of
Directors to be “audit committee financial experts,”
is included in the “Election of Directors — Board
of Directors Meetings and Committees” and “Election of
Directors — Corporate Governance” sections of the
Company’s Proxy Statement dated April 17, 2007 for the
Company’s May 24, 2007 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 dated April 17, 2007
for the Company’s May 24, 2007 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 dated April 17, 2007 for the Company’s
May 24, 2007 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 dated April 17, 2007 for the
Company’s May 24, 2007 Annual Meeting of Stockholders.
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 dated April 17, 2007 for
the Company’s May 24, 2007 Annual Meeting of
Stockholders.
Report of Independent Registered
Public Accounting Firm
68
2. Financial Statement Schedules
All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable and therefore have been omitted.
3. The following exhibits are filed herewith unless
otherwise indicated:
Exhibit
Number
Description
2
.1(3)
Agreement and plan of Merger dated
as of April 8, 1997 between Michigan Borders Group, Inc.
and Borders Group, Inc.
Participation Agreement dated as
of December 1, 1998 by and among Borders Group, Inc.,
Borders, Inc. and Parties thereto
10
.12(6)
Amendment No. 1 to 1998
Borders Group, Inc. Stock Option Plan
10
.13(7)
Participation Agreement dated as
of January 22, 2001 by and among Borders Group, Inc.,
Borders, Inc. and Parties thereto
10
.14(8)
Note Purchase Agreement dated
as of July 30, 2002 relating to the 6.31% Senior
Guaranteed Notes of Borders Group, Inc.
10
.15(9)
Borders Group, Inc. Long Term
Incentive Plan
10
.16(10)
Participation Agreement dated as
of November 15, 2002 by and among Borders Group, Inc.,
Borders, Inc. and Parties thereto
10
.17(11)
Borders Group, Inc. 2004 Long-Term
Incentive Plan
10
.18(12)
First Amendment to the Borders
Group, Inc. 2004 Long Term Incentive Plan dated as of
May 20, 2004
10
.19(12)
Security Agreement dated as of
July 30, 2004 among Borders Group, Inc., its subsidiaries
and Parties thereto
10
.20(12)
Amendment No. 1 to the
Note Purchase Agreement dated as of July 30, 2004
among Borders Group, Inc., its subsidiaries and Parties thereto
10
.21(14)
Restricted Share Unit Grant
Agreement
10
.22(16)
Restricted Share Grant Agreement
10
.23(17)
Increase of Total Commitment and
Amendment No. 1 dated as of October 25, 2005 to the
Amended and Restated Multicurrency Revolving Credit Agreement,
among Borders Group, Inc., its subsidiaries and Parties thereto
10
.24(18)
Employment and Consultancy
Agreement between Mr. Josefowicz and the Company
10
.25(13)
Non-Qualified Deferred
Compensation Plan
10
.26(19)
2006 Restricted Share Unit Grant
Agreement
10
.27(19)
Summary of terms of fiscal 2006
compensation for non-employee directors and executive officers
10
.28(20)
Revised Form of Severance
Agreement for Executive Officers (other than Mr. Josefowicz
10
.29(21)
Summary of Employment Agreement
between Mr. Jones and the Company
10
.30(21)
Employment Agreement between Mr.
Jones and the Company
10
.31(22)
Second Amended and Restated
Multicurrency Revolving Credit Agreement dated as of
July 31, 2006 among Borders Group, Inc., its subsidiaries
and Parties thereto
10
.32(23)
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
.33(24)
Description of Special Incentive
Program for 2007
10
.34
Employment terms between
Mr. Armstrong and the Company
10
.35
Employment terms between
Mr. Gruen and the Company
10
.36
Second Amendment to the Borders
Group, Inc. 2004 Long Term Incentive Plan dated as of
March 30, 2007
10
.37
Severance Agreement between
Mr. Altruda and the Company
Statement of George L. Jones,
President and Chief Executive Officer of Borders Group, Inc.
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31
.2
Statement of Edward W. Wilhelm,
Executive Vice President and Chief Financial Officer of Borders
Group, Inc. pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32
.1
Statement of George L. Jones,
President and Chief Executive Officer of Borders Group, Inc.
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32
.2
Statement of Edward W. Wilhelm,
Executive Vice President and Chief Financial Officer of Borders
Group, Inc. pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable and therefore have been omitted.
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned
thereunto duly authorized.
BORDERS GROUP, INC.
(Registrant)
By:
/s/ GEORGE
L. JONES
George L. Jones
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
First Amendment to the Restated By
laws of Borders Group, Inc.
10
.2(3)
Borders Group, Inc. Stock Option
Plan
10
.3(7)
Amendment to the Borders Group,
Inc. Stock Option Plan
10
.4(1)
Borders Group, Inc. Employee Stock
Purchase Plan
10
.5(2)
First Amendment to the Borders
Group, Inc. Employee Stock Purchase Plan
10
.6(5)
Second Amendment to the Borders
Group, Inc. Employee Stock Purchase Plan
10
.7(5)
Third Amendment to the Borders
Group, Inc. Employee Stock Purchase Plan
10
.8(15)
Restated Borders Group, Inc.
Annual Incentive Bonus Plan
10
.9(4)
Borders Group, Inc. Stock Option
Plan for International Employees
10
.10(5)
1998 Borders Group, Inc. Stock
Option Plan
10
.11(5)
Participation Agreement dated as
of December 1, 1998 by and among Borders Group, Inc.,
Borders, Inc. and Parties thereto
10
.12(6)
Amendment No. 1 to 1998
Borders Group, Inc. Stock Option Plan
10
.13(7)
Participation Agreement dated as
of January 22, 2001 by and among Borders Group, Inc.,
Borders, Inc. and Parties thereto
10
.14(8)
Note Purchase Agreement dated
as of July 30, 2002 relating to the 6.31% Senior
Guaranteed Notes of Borders Group, Inc.
10
.15(9)
Borders Group, Inc. Long Term
Incentive Plan
10
.16(10)
Participation Agreement dated as
of November 15, 2002 by and among Borders Group, Inc.,
Borders, Inc. and Parties thereto
10
.17(11)
Borders Group, Inc. 2004 Long-Term
Incentive Plan
10
.18(12)
First Amendment to the Borders
Group, Inc. 2004 Long Term Incentive Plan dated as of
May 20, 2004
10
.19(12)
Security Agreement dated as of
July 30, 2004 among Borders Group, Inc., its subsidiaries
and Parties thereto
10
.20(12)
Amendment No. 1 to the
Note Purchase Agreement dated as of July 30, 2004
among Borders Group, Inc., its subsidiaries and Parties thereto
10
.21(14)
Restricted Share Unit Grant
Agreement
10
.22(16)
Restricted Share Grant Agreement
10
.23(17)
Increase of Total Commitment and
Amendment No. 1 dated as of October 25, 2005 to the
Amended and Restated Multicurrency Revolving Credit Agreement,
among Borders Group, Inc., its subsidiaries and Parties thereto
10
.24(18)
Employment and Consultancy
Agreement between Mr. Josefowicz and the Company
Summary of terms of fiscal 2006
compensation for non-employee directors and executive officers
10
.28(20)
Revised Form of Severance
Agreement for Executive Officers (other than Mr. Josefowicz
10
.29(21)
Summary of Employment Agreement
between Mr. Jones and the Company
10
.30(21)
Employment Agreement between Mr.
Jones and the Company
10
.31(22)
Second Amendment and Restated
Multicurrency Revolving Credit Agreement dated as of
July 31, 2006 among Borders Group, Inc., its subsidiaries
and Parties thereto
10
.32(23)
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
.33(24)
Description of Special Incentive
Program for 2007
10
.34
Employment terms between
Mr. Armstrong and the Company
10
.35
Employment terms between
Mr. Gruen and the Company
10
.36
Second Amendment to the Borders
Group, Inc. 2004 Long Term Incentive Plan dated as of
March 30, 2007
10
.37
Severance Agreement between Mr.
Altruda and the Company
Statement of George L. Jones,
President and Chief Executive Officer of Borders Group, Inc.
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31
.2
Statement of Edward W. Wilhelm,
Executive Vice President and Chief Financial Officer of Borders
Group, Inc. pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32
.1
Statement of George L. Jones,
President and Chief Executive Officer of Borders Group, Inc.
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32
.2
Statement of Edward W. Wilhelm,
Executive Vice President and Chief Financial Officer of Borders
Group, Inc. pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002