Back to GetFilings.com
1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 23, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number 1-13740
------------------------
BORDERS GROUP, INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-3196915
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
100 PHOENIX DRIVE, ANN ARBOR, MICHIGAN 48108
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(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(b) OF THE ACT:
NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
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. [ ]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT WAS APPROXIMATELY $1,209,396,608 BASED UPON THE CLOSING MARKET PRICE
OF $16.00 PER SHARE OF COMMON STOCK ON THE NEW YORK STOCK EXCHANGE AS OF MARCH
29, 2000.
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF MARCH 29, 2000: 78,192,928
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE MAY 24, 2000 ANNUAL
MEETING OF STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III.
THE EXHIBIT INDEX IS LOCATED ON PAGE 43 HEREOF.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
BORDERS GROUP, INC.
INDEX
PAGE
----
PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 8
Item 3. Legal Proceedings........................................... 8
Item 4. Submission of Matters to a Vote of Security Holders......... 9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 10
Item 6. Selected Financial Data..................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 12
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 17
Item 8. Financial Statements and Supplementary Data................. 18
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 35
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 36
Item 11. Executive Compensation...................................... 38
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 39
Item 13. Certain Relationships and Related Party Transactions........ 39
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 40
1
3
PART I
ITEM 1. BUSINESS
GENERAL
Borders Group, Inc. (the Company), through its subsidiaries, Borders, Inc.
(Borders), Walden Book Company, Inc. (Walden), Books etc. and others is the
second largest operator of book superstores and the largest operator of mall-
based bookstores in the world based upon both sales and number of stores. At
January 23, 2000, the Company operated 300 superstores primarily under the
Borders name, including six in the United Kingdom, and one each in Singapore,
Australia and New Zealand. The Company also operated 904 mall-based and other
bookstores primarily under the Waldenbooks name and 27 bookstores under the
Books etc. name in the United Kingdom. Walden is the largest operator of
seasonal kiosks under the Day by Day and All Wound Up names. The Company,
through its subsidiary Borders Online, Inc., is also an online retailer of
books, music, and video through the operation of its Internet commerce site,
Borders.com.
BORDERS
Borders is a premier operator of book and music superstores, offering
customers selection and service that the Company believes to be superior to
other book superstore operators. A key element of the Company's strategy is to
continue its growth and increase its profitability through the ongoing expansion
of its Borders book and music superstore operations. In 1999, the Company opened
46 new domestic Borders book and music superstores. Borders superstore
operations achieved annual growth in net sales and EBITDA for the year ended
January 23, 2000 of 19.9% and 27.1%, respectively. Borders superstores achieved
average sales per square foot of $255 and average sales per superstore of $6.8
million in 1999, each of which the Company believes to be higher than the
comparable figures of any publicly reporting book superstore operator. Borders
superstores achieved compound annual growth in net sales and EBITDA for the
three years ended January 23, 2000 of 23.0% and 40.0%, respectively.
Each Borders superstore offers customers a vast assortment of books,
superior customer service, value pricing and an inviting and comfortable
environment designed to encourage browsing. A Borders superstore typically
carries the broadest selection of book titles in its market. Borders superstores
carry an average of 150,000 book titles, ranging from 85,000 titles to 170,000
titles, across numerous categories, including many hard-to-find titles. As of
January 23, 2000, 276 of the 291 domestic Borders superstores were in a book and
music format, which also features an extensive selection of pre-recorded music,
with an emphasis on hard-to-find recordings and categories such as jazz,
classical and foreign music, and a broad assortment of pre-recorded videotapes
and digital video discs, focusing primarily on classic movies and hard-to-find
titles. Each book and music superstore carries approximately 50,000 titles of
music, 5,500 titles of videotapes and 1,400 titles of digital video discs.
Borders superstores average 26,500 square feet in size, including
approximately 5,000 square feet devoted to music, approximately 700 square feet
devoted to videos and digital video discs and approximately 1,400 square feet
devoted to a cafe. Stores opened in fiscal 1999 averaged 24,600 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.
2
4
The number of domestic Borders stores located in each state and the
District of Columbia as of January 23, 2000 are listed below:
NUMBER OF
STATE STORES
----- ---------
Alaska............................ 1
Arizona........................... 6
California........................ 43
Colorado.......................... 4
Connecticut....................... 5
District of Columbia.............. 2
Delaware.......................... 2
Florida........................... 19
Georgia........................... 10
Hawaii............................ 6
Iowa.............................. 2
Idaho............................. 1
Illinois.......................... 17
Indiana........................... 7
Kansas............................ 5
Louisiana......................... 1
Massachusetts..................... 8
Maryland.......................... 7
Maine............................. 2
Michigan.......................... 14
Minnesota......................... 5
Missouri.......................... 4
NUMBER OF
STATE STORES
----- ---------
North Carolina.................... 6
Nebraska.......................... 2
New Hampshire..................... 2
New Jersey........................ 9
New Mexico........................ 2
Nevada............................ 4
New York.......................... 16
Ohio.............................. 15
Oklahoma.......................... 4
Oregon............................ 5
Pennsylvania...................... 15
Rhode Island...................... 1
South Dakota...................... 1
Tennessee......................... 2
Texas............................. 12
Utah.............................. 3
Virginia.......................... 10
Vermont........................... 1
Washington........................ 5
Wisconsin......................... 4
West Virginia..................... 1
WALDEN
Walden is the leading operator of mall-based bookstores in terms of sales
and number of stores, offering customers a convenient source for new releases,
hardcover and paperback bestsellers, periodicals and a standard selection of
other titles. Walden generates cash flow that the Company plans to use toward
financing the Company's growth initiatives. Walden had sales for the year ended
January 23, 2000 of $989.9 million, and generated EBITDA of $88.2 million.
Walden achieved average sales per square foot of $274 and average sales per
store of $1.0 million for 1999, both of which are higher than its closest
competitor. Walden stores average approximately 3,900 square feet in size and
typically carry between 15,000 and 40,000 titles.
Walden operates one of the longest-running customer affinity programs in
the nation, the Preferred Reader Program. The lessons learned via this program
are helping the Company to develop similar customer affinity programs across its
other business channels, including Borders superstores and Borders.com.
3
5
The number of Waldenbooks stores located in each state and the District of
Columbia as of January 23, 2000 are listed below:
NUMBER OF
STATE STORES
----- ---------
Alaska............................ 6
Alabama........................... 8
Arkansas.......................... 8
Arizona........................... 11
California........................ 71
Colorado.......................... 14
Connecticut....................... 15
District of Columbia.............. 3
Delaware.......................... 3
Florida........................... 56
Georgia........................... 26
Hawaii............................ 12
Iowa.............................. 13
Idaho............................. 5
Illinois.......................... 40
Indiana........................... 21
Kansas............................ 10
Kentucky.......................... 12
Louisiana......................... 10
Massachusetts..................... 28
Maryland.......................... 24
Maine............................. 2
Michigan.......................... 29
Minnesota......................... 7
Missouri.......................... 21
Mississippi....................... 7
NUMBER OF
STATE STORES
----- ---------
Montana........................... 4
North Carolina.................... 31
North Dakota...................... 3
Nebraska.......................... 4
New Hampshire..................... 5
New Jersey........................ 26
New Mexico........................ 5
Nevada............................ 4
New York.......................... 48
Ohio.............................. 43
Oklahoma.......................... 14
Oregon............................ 11
Pennsylvania...................... 56
Rhode Island...................... 5
South Carolina.................... 15
South Dakota...................... 2
Tennessee......................... 18
Texas............................. 61
Utah.............................. 4
Virginia.......................... 34
Vermont........................... 4
Washington........................ 18
Wisconsin......................... 16
West Virginia..................... 9
Wyoming........................... 2
In March 1999, Walden acquired for cash the stock of All Wound Up (AWU) for
a purchase price totaling $19.7 million. AWU operates kiosks, most of which are
seasonal, which sell interactive toys and other novelty merchandise. The
acquisition complements Walden's kiosk operations and will allow for continued
growth by combining the core competencies of each organization. The acquisition
has been accounted for under the purchase method.
INTERNATIONAL
The Company's international initiative 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 in four countries on three continents. The Company opened
four international superstores in 1999, and as of January 23, 2000, operated six
superstores in the United Kingdom, and one each in Singapore, Australia and New
Zealand.
International superstores range between 16,000 and 41,000 square feet in
size. International superstores tend to be multi-level facilities located in
older buildings in urban locations. The Company believes it has a competitive
advantage due to the depth of Borders' system-driven assortment and level of
service which currently does not exist in the international marketplace. In
1999, international sales increased 39% to $168.2 million and generated EBITDA
of $1.7 million. The Company is encouraged by early results with six of the nine
superstores producing positive EBITDA in fiscal 1999, and currently four of the
top ten highest volume Borders superstores are international stores.
4
6
In February 2000, Borders opened its first bilingual superstore in San
Juan, Puerto Rico. This is a significant step for the Company in advancing the
Company's global growth strategy, as well as helping Borders build its domestic
Spanish language book and music assortment.
Books etc. operated 27 stores in the United Kingdom as of January 23, 2000,
all of which are small-format stores located primarily in central London or in
various airports in the United Kingdom. These stores generally range from 2,000
to 5,000 square feet in size, with the largest being 13,000 square feet, and the
smallest being 650 square feet.
BORDERS.COM
The Company, through its subsidiary, Borders Online, Inc., operates an
Internet commerce site, Borders.com. Launched in 1998, Borders.com was the first
fully integrated book, music and video e-Commerce site. This site offers
customers over 700,000 titles and 10 million book, music and video items in
stock and ready for immediate shipping from the Company's state-of-the-art
fulfillment and distribution center. In 1999, the site's infrastructure was
significantly upgraded and the commerce capability improved.
Borders.com is an integral part of the Company's retail convergence
strategy. The Company's retail convergence strategy is to enhance the shopping
experience by offering products to customers in a variety of channels, whether
it be retail stores, the Internet, or special orders. The Company's rollout of
Title Sleuth in 2000 is a component of this convergence. Title Sleuth is a
free-standing computer kiosk based on Web technology that helps customers locate
titles within the store. Customers can utilize the fulfillment center to have
special order items delivered to the store. The convergence strategy also
provides customer acquisition for Borders.com with low-cost access to 30 million
unique retail store customers annually.
DISTRIBUTION
The Company believes that its centralized distribution system, consisting
of 13 distribution facilities worldwide, combined with Borders' use of its
proprietary "expert" system to manage inventory, significantly enhances its
ability to manage inventory on a store-by-store basis. Inventory is shipped from
vendors to one of the Company's distribution centers. Approximately 95% and 70%
of the books carried by Borders and Walden, respectively, are processed through
the Company's distribution facilities. Approximately 90% of the inventory that
arrives from publishers is processed within 48 hours for shipment to the stores.
Newly released titles and rush orders are processed within 24 hours. Borders
purchases substantially all of its music merchandise directly from manufacturers
and utilizes the Company's own distribution center to ship approximately 99% of
its music inventory to its stores.
The Company utilizes four distribution centers located in Harrisburg,
Pennsylvania, Indianapolis, Indiana, Columbus, Ohio and Nashville, Tennessee
that provide exclusive service to Borders' stores, one distribution center, also
in Nashville, that services Walden stores exclusively, and one distribution
facility in Columbus that services the All Wound Up seasonal kiosk operations.
In addition, the Company has two distribution facilities located in Mira Loma,
California and Ann Arbor, Michigan that service both Borders and Walden. Three
international distribution centers located in the United Kingdom, Australia, and
Singapore support the Company's growing international business.
The Company has a state-of-the-art 200,000 square-foot fulfillment center
in Laverne, Tennessee that supports Borders.com and Borders and Walden stores .
This facility has over 700,000 titles of books, music and videos in stock and
available for immediate shipping. In addition to serving Borders.com customers,
the fulfillment center also provides delivery services for store-originated
special orders, institutional orders, and call center orders, with the
capability to ship direct to the customer or the store.
In general, books can be returned to their publishers at cost. Borders and
Walden stores return books to the Company's centralized returns center in
Nashville, Tennessee to be processed for return to the publishers. In general,
Borders can return music and videos to its vendors at cost plus an additional
fee to cover handling and processing costs.
5
7
COMPETITION
The retail book business is highly competitive. Competition within the
retail book industry is fragmented with Borders facing direct competition from
other superstores, such as Barnes & Noble, Inc. Walden faces direct competition
from the B. Dalton division of Barnes & Noble, Inc., as well as regional chains
and superstores. In addition, Borders and Walden 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 Walden may face additional competition from other categories of retailers
entering the retail book market.
The music and video businesses are also highly competitive and Borders
faces competition from large established music chains, such as Tower Records and
the Musicland and Media Play divisions of Musicland Stores Corporation (which
also sell videos), established video chains, such as Blockbuster and Suncoast
Motion Picture Company (a division of Musicland Stores Corporation), as well as
specialty retail stores, video 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 has emerged as a significant channel for retailing in all
media categories that the Company carries. In particular, the retailing of books
and music over the Internet is highly competitive. Competitors on the Internet
include Amazon.com, Inc., barnesandnoble.com, inc. and others. In addition, the
Company faces competition from companies engaged in the business of selling
books and music products via electronic means.
EMPLOYEES
As of January 23, 2000, the Company had a total of approximately 17,000
full-time employees and approximately 13,000 part-time employees. When hiring
new employees, the Company considers a number of factors, including education
and experience, personality and orientation towards 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, merchandising, sorting,
operation of point of sale terminals and store policies and procedures. The
Company believes that its relations with its employees are generally excellent.
None of the employees of the Company are represented by unions.
TRADEMARKS AND SERVICE MARKS
Borders(R), Borders Book Shop(R), and Borders Books & Music(R), among other
marks, are all registered trademarks and service marks used by Borders.
Brentano's(R), Coopersmith's(R), Longmeadow Press(R), Waldenbooks(R),
Waldenbooks Preferred Reader(R), Waldenkids(R) and Waldensoftware(R), among
other marks, are all registered trademarks and service marks used by Walden.
Books etc(R) is a registered trademark and service mark used by Books etc.
Borders.com(R) is a registered trademark and service mark used by Borders
Online, Inc. The Borders, Walden, Books etc and Borders.com service marks are
used as trade names in connection with their business operations.
SEASONALITY
The Company's business is highly seasonal, with sales generally highest in
the fourth quarter and lowest in the first quarter. During 1999, 36.5% of the
Company's sales and 99.8% of the Company's operating income were generated in
the fourth quarter. The Company's results of operations, including its seasonal
kiosks, 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. 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Seasonality".
6
8
RELATIONSHIP WITH KMART
General. Prior to its initial public offering in May 1995, the Company was
a subsidiary of Kmart Corporation (Kmart); Kmart currently owns no shares of
common stock of the Company.
Kmart and the Company continue to have the following contractual
relationships.
Tax Allocation and Indemnification Agreement. Prior to the completion of
its initial public offering ("the IPO"), the Company was included in the
consolidated federal income tax returns of Kmart and filed on a combined basis
with Kmart in certain states. Pursuant to a tax allocation and indemnification
agreement between the Company and Kmart (the "Tax Allocation Agreement") the
Company will remain obligated to pay to Kmart any income taxes the Company would
have had to pay if it had filed separate tax returns for the tax period
beginning on January 26, 1995, and ending on June 1, 1995, the date of the
consummation of the IPO (to the extent that it has not previously paid such
amounts to Kmart). In addition, if the tax liability attributable to the Company
for any previous tax period during which the Company was included in a
consolidated federal income tax return filed by Kmart or a combined state return
is adjusted as a result of an action of a taxing authority or a court, then the
Company will pay to Kmart the amount of any increase in such liability and Kmart
will pay to the Company the amount of any decrease in such liability (in either
case together with interest and penalties). The Company's tax liability for
previous years will not be affected by any increase or decrease in Kmart's tax
liability if such increase or decrease is not directly attributable to the
Company. After completion of the IPO, the Company continued to be subject under
existing federal regulations to several liability for the consolidated federal
income taxes for any tax year in which it was a member of any consolidated group
of which Kmart was the common parent. Pursuant to the Tax Allocation Agreement,
however, Kmart agreed to indemnify the Company for any federal income tax
liability of Kmart or any of its subsidiaries (other than that which is
attributable to the Company) that the Company could be required to pay and the
Company agreed to indemnify Kmart for any of the Company's separate company
taxes.
Lease Guaranty Agreement. Borders' leases for 32 of its retail stores and
its distribution center in Harrisburg, Pennsylvania have been guaranteed by
Kmart, on either a full or limited basis. Limited guarantees generally provide
for the release of Kmart's guarantee upon satisfaction by Borders of certain
financial requirements specified in the guarantee. Under the terms of a lease
guaranty, indemnification and reimbursement agreement entered into upon
completion of the IPO (the "Lease Guaranty Agreement"), until termination of all
of the lease guarantees, except during such time as the Company achieves and
maintains the investment grade status specified in the Lease Guaranty Agreement,
the Company will be subject to certain covenants and restrictive covenants under
the Lease Guaranty Agreement including restrictions on indebtedness, dividends,
mergers and certain liens.
Under the terms of the Lease Guaranty Agreement, the underlying leases will
be transferable by Borders, subject to a right of first refusal in favor of
Kmart with respect to sites within a three-mile radius of a Kmart store and,
with respect to all other sites, a right of first offer in favor of Kmart. The
Company and Borders are required to indemnify Kmart with respect to (i) any
liabilities Kmart may incur under the lease guarantees, except those liabilities
arising from the gross negligence or willful misconduct of Kmart, and (ii) any
losses incurred by Kmart after taking possession of any particular premises,
except to the extent such losses arise solely from the acts or omissions of
Kmart. Under the terms of the Lease Guaranty Agreement, in the event of (i) the
Company's or Borders' failure to provide any required indemnity, (ii) a knowing
and material violation of the limitations on transfers of guaranteed leases set
forth in the agreement, (iii) a breach of any of the financial covenants
described above or (iv) certain events of bankruptcy, Kmart will have the right
to assume any or all of the guaranteed leases and to take possession of all of
the premises underlying such guaranteed leases; provided, that in the event of a
failure or failures to provide required indemnities, the remedy of taking
possession of all of the premises underlying the guaranteed leases may be
exercised only if such failures relate to aggregate liability of $10.0 million
or more and only if Kmart has provided 100 days' prior written notice. In the
event of a failure to provide required indemnities resulting in losses of more
than the equivalent of two months rent under a particular lease but less than
$10.0 million, Kmart may exercise such remedy of possession as to the premises
underlying the guaranteed lease or leases to which the failure to provide the
indemnity relates and one additional premise for each such premises to which the
failure relates, up to a maximum, in any event, of five additional premises, and
thereafter, with respect to such additional premises, Kmart remedies and
indemnification rights shall terminate. In the event of a failure to provide
required indemnities resulting in liabilities of less than the equivalent of two
months rent under a particular
7
9
lease, Kmart may exercise such remedy of possession only as to the premises
underlying the guaranteed lease or leases to which the failure to provide the
indemnity relates. The Lease Guaranty Agreement will remain in effect until the
expiration of all lease guarantees, which the Company believes will be on or
after November 2019.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements as
defined by the Private Securities Litigation Reform Act of 1995. Forward-looking
statements reflect management's current expectations and are inherently
uncertain. The Company's actual results may differ significantly from
management's expectations. Exhibit 99.1, "Cautionary Statement Under the Private
Securities Litigation Reform Act of 1995", filed with this Annual Report on Form
10-K identifies the forward-looking statements and describes some, but not all,
of the factors that could cause these differences.
ITEM 2. PROPERTIES
Borders leases all of its stores. Borders' store leases have an average
initial term of 15 to 20 years with several five-year renewal options. At
January 23, 2000, the average unexpired term under Borders' existing store
leases was 11.4 years prior to the exercise of any options.
Walden leases all of its stores. Walden's store leases generally have an
initial term of 10 years, although in recent years many renewals have been
executed for terms less than 10 years. At present, the average unexpired term
under Walden's existing store leases is approximately 3.9 years. The terms of
Walden's mall-based bookstore leases for its leased bookstores open as of
January 23, 2000 expire as follows:
LEASE TERMS TO EXPIRE DURING 12 MONTHS NUMBER OF
ENDING ON OR ABOUT JANUARY 31 MALL STORES
-------------------------------------- -----------
2001........................................................ 245
2002........................................................ 91
2003........................................................ 95
2004........................................................ 110
2005........................................................ 103
2006 and later.............................................. 260
Books etc. operated 27 stores in the United Kingdom as of January 23, 2000.
Books etc. generally leases its stores under operating leases with terms ranging
from 5 to 25 years. The average remaining lease term for Books etc. stores is
11.6 years.
The Company has leased 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
In March 1998, the American Booksellers Association ("ABA") and 26
independent bookstores filed a lawsuit in the United States District Court for
the Northern District of California against the Company and Barnes & Noble, Inc.
alleging violations of the Robinson-Patman Act, the California Unfair Trade
Practice Act and the California Unfair Competition Act. The Complaint seeks
injunctive and declaratory relief; treble damages on behalf of each of the
bookstore plaintiffs, and, with respect to the California bookstore plaintiffs,
any other damages permitted by California law; disgorgement of money, property
and gains wrongfully obtained in connection with the purchase of books for
resale, or offered for resale, in California from March 18, 1994 until the
action is completed and pre-judgment interest on any amounts awarded in the
action, as well as attorney fees and costs. The trial is scheduled for April 9,
2001. The Company intends to vigorously defend the action.
In August 1998, The Intimate Bookshop, Inc. ("Intimate") and its owner,
Wallace Kuralt, filed a lawsuit in the United States District Court for the
Southern District of New York against the Company, Barnes & Noble, Inc., and
others alleging violation of the Robinson-Patman Act and other federal laws, New
York statutes governing trade practices and common law. In response to
Defendants' Motion to Dismiss the Complaint, plaintiff Kuralt withdrew his
claims and plaintiff Intimate voluntarily dismissed all but its Robinson-Patman
claims. Intimate recently filed a
8
10
Second Amended Complaint limited to allegations of violation of the
Robinson-Patman Act. The Second Amended Complaint alleges that Intimate has
suffered $11,250,000 or more in damages and requests treble damages, injunctive
and declaratory relief, interest, costs, attorneys fees and other unspecified
relief. Many of the allegations in the Second Amended Complaint are similar to
those contained in the action instituted by the ABA and 26 bookseller plaintiffs
against the Company and Barnes & Noble, Inc. in March of 1998. The Company
intends to vigorously defend the action.
In April 2000, two former employees, individually and on behalf of a
purported class, filed an action against Borders in the Superior Court of
California for the County of San Francisco. The purported class consists of all
current and former store management employees of Borders in California who,
within the applicable statutes of limitations, were denied payment of overtime
compensation in violation of California law. The Complaint alleges that the
individual plaintiffs and the purported class members worked hours for which
they were entitled to receive, but did not receive, overtime compensation under
California law, and that they were classified as "exempt" store management
employees but were forced to work more than 50% of their time in non-exempt
tasks. The Complaint alleges violations of the California Labor Code, the
California Business and Professions Code and conversion. The relief sought
includes compensatory and punitive damages, penalties, preliminary and permanent
injunctions requiring Borders to pay overtime compensation as required under
California and Federal law, prejudgment interest, costs, attorneys fees and such
other relief as the Court deems proper. The Company intends to vigorously defend
the action.
On November 20, 1998, six independent booksellers instituted an action
entitled Rae Richardson et al vs. Barnes & Noble et al against the Company and
Barnes & Noble in the United States District Court for the Northern District of
California asserting claims, and seeking relief, similar to claims made and
relief sought in the ABA litigation described above. The action has been
voluntarily dismissed by the plaintiffs without any payment by the Company.
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. The Company does not believe that any such other litigation will
have a material adverse effect on its liquidity, financial position or results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
9
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth, for the fiscal quarters indicated, the high
and low closing market prices for the Common Stock on the New York Stock
Exchange.
HIGH LOW
---- ---
FISCAL QUARTER 1998
First Quarter............................................. $34.38 $31.50
Second Quarter............................................ $39.94 $30.69
Third Quarter............................................. $33.00 $18.94
Fourth Quarter............................................ $28.88 $18.31
FISCAL QUARTER 1999
First Quarter............................................. $20.25 $13.56
Second Quarter............................................ $17.50 $14.25
Third Quarter............................................. $14.69 $11.88
Fourth Quarter............................................ $17.88 $12.25
The Common Stock is traded on the New York Stock Exchange.
As of March 29, 2000, the Common Stock was held by 4,521 holders of record.
The Company has not declared any cash dividends and intends to retain its
earnings to finance future growth. Therefore, the Company does not anticipate
paying any cash dividends in the foreseeable future. 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources".
On January 5, 2000, the Company issued to George R. Mrkonic, Vice Chairman
of the Company, options to purchase 100,980 shares of common stock with an
exercise price of $15.69 in lieu of compensation of $515,000. This transaction
involved an offer solely to Mr. Mrkonic pursuant to the terms of his Employment
Agreement with the Company. Reliance was placed by the Company upon the
exemption from registration under Section 4(2) of the Securities Act of 1933,
which exempts transactions by an issuer not involving a public offering.
10
12
ITEM 6. SELECTED FINANCIAL DATA
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
-------------------------------------------------------------------
JANUARY 23, JANUARY 24, JANUARY 25, JANUARY 26, JANUARY 28,
2000 1999 1998 1997 1996(1)
----------- ----------- ----------- ----------- -----------
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA
Borders Sales.............................. $1,823.2 $1,521.0 $1,267.4 $ 979.1 $ 717.5
Waldenbooks Sales.......................... 989.9 948.7 970.0 979.7 1,031.5
International Sales........................ 168.2 120.7 28.6 -- --
-------- -------- -------- -------- --------
Total Store Sales.......................... 2,981.3 2,590.4 2,266.0 1,958.8 1,749.0
Borders.com Sales.......................... 17.9 4.6 -- -- --
-------- -------- -------- -------- --------
Total Sales.............................. $2,999.2 $2,595.0 $2,266.0 $1,958.8 $1,749.0
Operating Income Before Goodwill Writedowns
and FAS 121.............................. $ 166.2 $ 167.3 $ 138.0 $ 103.1 $ 64.5
Goodwill Writedowns........................ -- -- -- -- 201.8
FAS 121 Impairment......................... -- -- -- -- 63.1
-------- -------- -------- -------- --------
Operating Income (Loss).................... $ 166.2 $ 167.3 $ 138.0 $ 103.1 $ (200.4)
Net Income (Loss).......................... $ 90.3 $ 92.1 $ 80.2 $ 57.9 $ (211.1)
Diluted Earnings (Loss) Per Common
Share(2)................................. $ 1.13 $ 1.12 $ 0.98 $ 0.70 $ (2.94)
Pro Forma Diluted Earnings Per Common Share
Before Goodwill Writedowns and FAS
121(2)................................... $ 1.13 $ 1.12 $ 0.98 $ 0.70 $ 0.43
BALANCE SHEET DATA
Working Capital............................ $ 170.3 $ 144.5 $ 137.0 $ 225.1 $ 204.3
Total Assets............................... $1,914.8 $1,766.6 $1,534.9 $1,211.0 $1,052.3
Short-Term Borrowings...................... $ 133.4 $ 131.9 $ 122.5 $ 30.0 $ 60.0
Long-Term Debt and Capital Lease
Obligations, Including Current Portion,
and Redeemable Preferred Stock........... $ 18.8 $ 8.5 $ 10.0 $ 6.7 $ 8.6
Shares Subject to Repurchase............... $ -- $ -- $ -- $ 34.1 $ --
Stockholders' Equity....................... $ 802.6 $ 715.1 $ 598.1 $ 511.4 $ 472.0
- -------------------------
(1) The Company's 1995 fiscal year consisted of 53 weeks.
(2) Earnings (loss) per common share for the fiscal year ended January 28, 1996
are pro forma and are based on actual common shares outstanding after the
Company's initial public offering.
11
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Borders Group, Inc. (the Company), through its subsidiaries, is the second
largest operator of book and music superstores and the largest operator of
mall-based bookstores in the world based upon both sales and number of stores.
At January 23, 2000, the Company operated 300 superstores primarily under the
Borders name, including six in the United Kingdom, and one each in Singapore,
Australia and New Zealand. The Company also operated 904 mall-based and other
bookstores primarily under the Waldenbooks name, and 27 bookstores under the
Books etc. name in the United Kingdom. The Company, through its subsidiary
Borders Online, Inc., is also an online retailer of books, music, and video
through the operation of its Internet commerce site, Borders.com.
The Company's business strategy is to continue its growth and increase its
profitability through (i) the continued expansion and refinement of its Borders
superstore operation in the United States and internationally, (ii) the
continued focus on opportunistic store openings in its mall-based bookstore
operations and expansion of its kiosk operations, (iii) the development of
web-based commerce technologies which enhance the customer experience both
in-store and online, and (iv) realization of synergies and economies of scale
through a combination of certain of its books and music operations.
The Company's fiscal year ends on the Sunday immediately preceding the last
Wednesday in January. Fiscal 1999, 1998, and 1997 each consisted of 52 weeks and
ended on January 23, 2000, January 24, 1999, and January 25, 1998, respectively.
References herein to years are to the Company's fiscal years.
RESULTS OF OPERATIONS
The following table presents the Company's statement of operations data, as
a percentage of sales, for the three most recent fiscal years.
JANUARY 23, JANUARY 24, JANUARY 25,
2000 1999 1998
----------- ----------- -----------
RESULTS OF OPERATIONS
Sales....................................................... 100.0% 100.0% 100.0%
Cost of merchandise sold (includes occupancy)............... 71.6 71.7 72.1
----- ----- -----
Gross margin................................................ 28.4 28.3 27.9
Selling, general and administrative expenses................ 22.5 21.5 21.4
Pre-opening expense......................................... 0.3 0.3 0.4
Goodwill amortization....................................... 0.1 0.1 --
----- ----- -----
Operating income............................................ 5.5 6.4 6.1
Interest expense............................................ 0.6 0.6 0.3
----- ----- -----
Income before income tax.................................... 4.9 5.8 5.8
Income tax provision........................................ 1.9 2.3 2.3
----- ----- -----
Net income.................................................. 3.0% 3.5% 3.5%
===== ===== =====
STORE ACTIVITY
Borders Superstores
Beginning number of stores................................ 250 203 157
Openings.................................................. 50 47 46
----- ----- -----
Ending number of stores................................... 300 250 203
----- ----- -----
Walden Mall Bookstores
Beginning number of stores................................ 900 923 961
Openings.................................................. 39 16 8
Closings.................................................. (35) (39) (46)
----- ----- -----
Ending number of stores................................... 904 900 923
===== ===== =====
12
14
FISCAL YEARS ENDED JANUARY 23, 2000 AND JANUARY 24, 1999
Store sales for the year ended January 23, 2000 were $2,981.3 million,
reflecting a 15.1% increase over the $2,590.4 million in sales achieved in 1998.
The higher number of Borders superstores and Borders' 5.4% comparable store
sales increase were the primary contributors to the growth in sales. Waldenbooks
stores had a 0.7% comparable store sales increase in 1999. Sales for Borders.com
were $17.9 million in 1999, an increase of 289% over the $4.6 million in 1998.
Gross margin as a percent of sales increased slightly from 28.3% in 1998 to
28.4% in 1999. The increase in gross margin percentage primarily reflects
improved inventory shrinkage control and merchandise mix.
As a percentage of sales, SG&A for 1999 was 22.5% as compared to the 21.5%
of sales in the corresponding period of 1998. The increase is due to continued
spending on strategic initiatives, including Borders.com and international, and
a one-time charge of $5.5 million related to the resignation of a former
executive.
Pre-opening expense was $7.8 million in both 1999 and 1998. Pre-opening
expense per store varies primarily as a result of differing levels of grand
opening advertising, depending on the presence of the Company in the market, and
differing levels of labor costs associated with opening the store. The Company
opened 50 Borders superstores and 39 Waldenbooks mall-based stores in 1999 as
compared to 47 Borders superstores and 16 Waldenbooks mall-based stores in 1998.
Goodwill amortization was $3.5 million in 1999, as compared to $2.9 million
in 1998. The increase in goodwill amortization of $0.6 million is a result of
the acquisition of All Wound Up, a seasonal operator of kiosks selling toys and
other novelty merchandise, in March 1999.
Operating income decreased to $166.2 million or 5.5% of sales in 1999, as
compared to $167.3 million or 6.4% of sales in 1998. The decrease is primarily
due to spending on strategic initiatives including Borders.com and
international, and a one-time charge of $5.5 million related to the resignation
of a former executive.
Interest expense was $17.9 million in 1999, as compared to $16.2 million in
1998. The increase represents slightly higher debt levels during the year for
the repurchase of common stock and the acquisition of All Wound Up.
Income tax expense in 1999 was $58.0 million as compared to $59.0 million
in 1998. The effective tax rate for both periods differed from the federal
statutory rate primarily as a result of non-deductible goodwill amortization and
state income taxes. The Company's effective tax rate was 39.1% in 1999, as
compared to 39.0% in 1998.
As a result of the foregoing, store net income for the year ended January
23, 2000 was $107.5 million as compared to $102.6 million for the year ended
January 24, 1999. Borders.com had a net loss of $17.2 million in 1999, as
compared to a net loss of $10.5 million in 1998. On a consolidated basis, net
income in 1999 was $90.3 million, as compared to $92.1 million in 1998.
FISCAL YEARS ENDED JANUARY 24, 1999 AND JANUARY 25, 1998
Store sales for the year ended January 24, 1999 were $2,590.4 million,
reflecting a 14.3% increase over the $2,266.0 million in sales achieved in 1997.
Both the higher number of Borders superstores and Borders' 4.4% comparable store
sales increase contributed to the growth, which was partially offset by a lower
number of Waldenbooks stores and a 1.0% comparable store sales decrease.
Comparable store sales at Borders and Waldenbooks were impacted by increased
superstore and Internet competition. Sales for Borders.com were $4.6 million in
1998.
Gross margin as a percent of sales rose from 27.9% in 1997 to 28.3% in
1998. The increase in gross margin percentage primarily reflects improved
inventory shrinkage control and merchandise mix.
As a percentage of sales, SG&A for 1998 was 21.5%, or 0.1% higher than the
21.4% of sales in the corresponding period of 1997. The increase is due to
increased spending on strategic initiatives, including Borders.com and
international, which offset operating leverage in the Company's core business.
Pre-opening expense in 1998 was $7.8 million, an increase of $0.6 over the
1997 expense of $7.2 million. Pre-opening expense per store varies primarily as
a result of differing levels of grand opening advertising, depending on the
presence of the Company in the market, and differing levels of labor costs
associated with opening the store. The
13
15
Company opened 47 Borders superstores and 16 Waldenbooks mall-based stores in
1998 as compared to 46 Borders superstores and 8 Waldenbooks mall-based stores
in 1997.
Goodwill amortization was $2.9 million in 1998, as compared to $1.6 million
in 1997. The increase in goodwill amortization of $1.3 million is a result of a
full year of amortization relating to the acquisition of Books etc. in October
1997.
Operating income improved to $167.3 million or 6.4% of sales in 1998, as
compared to $138.0 million or 6.1% of sales in 1997.
Interest expense was $16.2 million in 1998, as compared to $7.2 million in
1997. The increase represents interest on borrowings for the repurchase of
common stock and the acquisition of Books etc.
Income tax expense in 1998 was $59.0 million as compared to $50.6 million
in 1997. The effective tax rate for both periods differed from the federal
statutory rate primarily as a result of non-deductible goodwill amortization and
state income taxes. The Company's effective tax rate was 39.0% in 1998, as
compared to 38.7% in 1997. The increase in the effective rate is primarily due
to the mix of Borders store openings in higher-taxed states.
As a result of the foregoing, store net income for the year ended January
24, 1999 was $102.6 million as compared to $86.2 million for the year ended
January 25, 1998. Borders.com had a net loss of $10.5 million in 1998, as
compared to a net loss of $6.0 million in 1997. On a consolidated basis, net
income in 1998 was $92.1 million, as compared to $80.2 million in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund working capital
needs, the opening of new stores, the refurbishment and expansion of existing
stores, and continued development of Borders.com.
Net cash provided by operations in 1999 was $173.0 million, as compared to
$166.2 million in 1998. The current year activity primarily reflects income
before non-cash charges for depreciation and amortization offset by cash used
for inventories as a result of store expansion at Borders. Inventory net of
accounts payable increased primarily due to 50 new Borders stores.
Net cash used for investing was primarily for capital expenditures for new
stores, including the opening of three superstores in the United Kingdom and one
superstore in New Zealand, and continued investment in Borders.com. Capital
expenditures in 1999 reflect the opening of 50 new superstores in total and 39
new Waldenbooks stores. Capital expenditures in 1998 reflected the opening of 47
new superstores, 16 new Waldenbooks stores, a new distribution center and
expansion of the home office facility. Capital expenditures in 1997 reflected
the opening of 46 new Borders superstores and 8 new Waldenbooks stores.
Net cash used by financing in 1999 was $15.0 million, resulting primarily
from the repurchase of common stock of $25.4 million, partially offset by the
issuance of common stock under the Company's employee benefit plans. Net cash
used for financing in 1998 was $8.7 million, which resulted from the repurchase
of common stock partially offset by the issuance of stock under employee benefit
plans.
The Company expects capital expenditures to be approximately $180.0 million
in 2000, resulting primarily from domestic and international store openings,
refurbishment of a number of existing stores, and continued investment in
web-based technology. The Company currently plans to open approximately 50
Borders superstores, including approximately 5 to 7 international stores, and 15
new Waldenbooks mall stores in 2000. Average cash requirements for the opening
of a domestic prototype Borders books and music superstore are $2.3 million,
representing capital expenditures of $1.1 million, inventory requirements, net
of related accounts payable, of $1.1 million and $0.1 million of pre-opening
costs. Average cash requirements to open a new or expanded Waldenbooks store
range from $0.4 million to $0.7 million, depending on the size and format of the
store. The Company plans to lease new store locations predominantly under
operating leases. Also, the Company expects capital expenditures of
approximately $50.0 million related to web-based, retail convergence and other
technology, and approximately $27.0 million related to existing store
refurbishments.
14
16
The Company plans to execute its expansion plans for its Borders
superstores and other strategic initiatives principally with funds generated
from operations and financing through the lease facility in 2000 and beyond. In
the event that working capital requirements are in excess of operating cash
flows and lease financing, the Company may fund such excess with borrowings
under the credit facility. The Company believes funds generated from operations,
borrowings under the Credit Facility and financing through the Lease Facility
will be sufficient to fund its anticipated capital requirements for at least the
next two to three years.
The Company currently has a share repurchase program in place with
remaining authorization to repurchase approximately $62.3 million. During 1999
and 1998, $25.4 million and $51.7 million of common stock was repurchased,
respectively.
The Company has a $425.0 million multicurrency credit agreement (the Credit
Facility) which expires in October, 2002. Borrowings under the Credit Facility
bear interest at a base rate or an increment over LIBOR at the Company's option.
The Credit Facility contains covenants which limit, among other things, the
Company's ability to incur indebtedness, grant liens, make acquisitions, merge,
declare dividends, dispose of assets, and issue or repurchase its common stock
in excess of $100.0 million (plus any proceeds and tax benefits resulting from
stock option exercises and tax benefits resulting from restricted shares
purchased by employees from the Company), and require the Company to meet
certain financial measures regarding fixed charge coverage, leverage and
tangible net worth. The Company is prohibited under the Credit Facility from
paying cash dividends on common shares. Effective February 2000, the Company
increased the credit available under the Credit Facility to $472.8 million.
During 1999, the Company entered into a $130.0 million multicurrency
seasonal revolving credit facility (the Seasonal Facility) which expires in
July, 2000. Borrowings under the Seasonal Facility bear interest at a base rate
or an increment over LIBOR at the Company's option. The Seasonal Facility
contains covenants and events of defaults that are similar to those contained in
the Credit Facility described above. The Company had no borrowings outstanding
under the Seasonal Facility as of January 23, 2000. Effective February 2000, the
Company reduced the credit available under the Seasonal Facility to $25.0
million, in accordance with provisions of the agreement.
The Company has a $250.0 million lease financing facility (the Lease
Facility) to finance new stores and other property through operating leases
which expires in October, 2002. The Lease Facility provides financing to lessors
through loans from a third party lender for up to 95% of a project cost. It is
expected that lessors will make equity contributions approximating 5% of each
project. Independent of its obligations as lessee, the Company guarantees
payment when due of all amounts required to be paid to the third party lender.
The principal amount guaranteed will be limited to approximately 89% of the
original cost of a project, so long as the Company is not in default under the
lease relating to such project. The Lease Facility contains covenants and events
of default that are similar to those contained in the Credit Facility described
above. Effective February 2000, the Company decreased the credit available under
the Lease Facility to $175.0 million.
There were 41 properties financed through the Lease Facility, with a
financed value of $162.9 million, at January 23, 2000. Management believes that
the rental payments for properties financed through the Lease Facility may be
lower than those which the Company could obtain elsewhere due to, among other
factors, (i) the lower borrowing rates available to the Company's landlords
under the facility, and (ii) the fact that rental payments for properties
financed through the facility do not include amortization of the principal
amounts of the landlords' indebtedness related to the properties. Rental
payments relating to such properties will be adjusted when permanent financing
is obtained to reflect the interest rates available at the time of the
refinancing and the amortization of principal. In December, 1998, 17 properties
previously financed through the Lease Facility with a total financed value of
$70.9 million were permanently financed through operating leases.
During 1994, the Company entered into agreements in which leases with
respect to four Borders' locations serve as collateral for certain mortgage
pass-through certificates. These mortgage pass-through certificates include a
provision requiring the Company to repurchase the underlying mortgage notes in
certain events, including the failure by the Company to make payments of rent
under the related leases, the failure by Kmart Corporation (the former parent of
the Company) to maintain required investment grade ratings or the termination of
the guarantee by Kmart Corporation of the Company's obligations under the
related leases (which would require mutual consent of Kmart and Borders). In the
event the Company is required to repurchase all of the underlying mortgage
notes, the Company would be obligated to pay approximately $36.6 million. The
Company would expect to fund this obligation
15
17
through its line of credit. Since February 1995, Kmart Corporation has failed to
maintain investment grade ratings and, therefore, these notes are now subject to
put by the holder. To date, the holder has not exercised its right to put the
notes.
The Company is subject to risk resulting from interest rate fluctuations,
as interest on the Company's borrowings is principally 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. The Company primarily utilizes interest
rate swaps and collars to achieve this objective, effectively converting a
portion of its variable-rate exposures to fixed interest rates.
LIBOR is the rate upon which the Company's variable rate debt, and its
payments under the Lease Facility, are principally based. If LIBOR were to
increase 1% for the full year in 2000 as compared to the end of 1999, the
Company's after-tax earnings, after considering the effects of its interest rate
swap and collar agreements, would decrease $0.9 million based on the Company's
expected average outstanding debt, including its indirect borrowings under the
Lease Facility, as of January 23, 2000.
OTHER MATTERS
Year 2000 Issue
The Company experienced no significant disruption to operations or business
systems as a result of the transition from 1999 to 2000. The Company does not
expect any material subsequent disruption to its operations or business systems
from this transition.
Subsequent Event
Subsequent to the Company's fiscal year-end, the Board of Directors
authorized the Company to explore strategic alternatives in order to increase
shareholder value. These alternatives could include a recapitalization, a
leveraged buyout, or a business combination with another company; however, there
is no assurance that any transaction will occur.
SEASONALITY
The Company's business is highly seasonal, with sales significantly higher
and substantially all operating income realized during the fourth quarter, which
includes the Christmas selling season.
FISCAL 1999 QUARTER ENDED
---------------------------------------------
APRIL JULY OCTOBER JANUARY
(DOLLARS IN MILLIONS) ----- ---- ------- -------
SALES................................................... $618.7 $631.0 $656.3 $1,093.2
Operating income (loss)................................. (2.6) 0.3 2.6 165.9
% of full year:
Sales................................................. 20.6% 21.0% 21.9% 36.5%
Operating income (loss)............................... (1.6) 0.2 1.6 99.8
16
18
FISCAL 1998 QUARTER ENDED
--------------------------------------------
APRIL JULY OCTOBER JANUARY
(DOLLARS IN MILLIONS) ----- ---- ------- -------
SALES.................................................... $545.3 $546.0 $558.3 $945.4
Operating income......................................... 9.0 7.9 3.2 147.2
% of full year:
Sales.................................................. 21.0% 21.1% 21.5% 36.4%
Operating income....................................... 5.4 4.7 1.9 88.0
FISCAL 1997 QUARTER ENDED
--------------------------------------------
APRIL JULY OCTOBER JANUARY
(DOLLARS IN MILLIONS) ----- ---- ------- -------
SALES.................................................... $463.6 $466.3 $477.3 $858.8
Operating income......................................... 1.8 2.3 2.2 131.7
% of full year:
Sales.................................................. 20.5% 20.6% 21.0% 37.9%
Operating income....................................... 1.3 1.7 1.6 95.4
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
17
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Consolidated Statements of Operations for the fiscal years
ended January 23, 2000, January 24, 1999 and January 25,
1998...................................................... 19
Consolidated Balance Sheets as of January 23, 2000 and
January 24, 1999.......................................... 20
Consolidated Statements of Cash Flows for the fiscal years
ended January 23, 2000, January 24, 1999 and January 25,
1998...................................................... 21
Consolidated Statements of Stockholders' Equity for the
fiscal years ended January 23, 2000, January 24, 1999 and
January 25, 1998.......................................... 22
Notes to Consolidated Financial Statements.................. 23
Report of Independent Accountants........................... 34
18
20
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 23, JANUARY 24, JANUARY 25,
2000 1999 1998
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) ----------- ----------- -----------
Sales....................................................... $2,999.2 $2,595.0 $2,266.0
Cost of merchandise sold (includes occupancy)............... 2,148.2 1,859.4 1,634.3
-------- -------- --------
Gross margin................................................ 851.0 735.6 631.7
Selling, general and administrative expenses................ 673.5 557.6 484.9
Pre-opening expense......................................... 7.8 7.8 7.2
Goodwill amortization....................................... 3.5 2.9 1.6
-------- -------- --------
Operating income............................................ 166.2 167.3 138.0
Interest expense............................................ 17.9 16.2 7.2
-------- -------- --------
Income before income tax.................................... 148.3 151.1 130.8
Income tax provision........................................ 58.0 59.0 50.6
-------- -------- --------
Net income.................................................. $ 90.3 $ 92.1 $ 80.2
======== ======== ========
Earnings per common share data (Note 2)
Diluted earnings per common share......................... $1.13 $1.12 $.98
======== ======== ========
Diluted weighted average common shares outstanding (in
thousands)............................................. 80,218 82,503 82,241
======== ======== ========
Basic earnings per common share........................... $1.16 $1.20 $1.06
======== ======== ========
Basic weighted average common shares outstanding (in
thousands)............................................. 77,577 76,631 75,825
======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
19
21
CONSOLIDATED BALANCE SHEETS
FISCAL YEAR ENDED
--------------------------
JANUARY 23, JANUARY 24,
2000 1999
(DOLLARS IN MILLIONS EXCEPT SHARE AMOUNTS) ----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 41.6 $ 42.8
Merchandise inventories................................... 1,077.7 1,019.6
Accounts receivable and other current assets.............. 68.9 62.9
Deferred income taxes..................................... 10.0 8.0
-------- --------
Total Current Assets................................... 1,198.2 1,133.3
Property and equipment, net................................. 558.2 493.8
Other assets................................................ 36.5 25.1
Deferred income taxes....................................... 0.1 8.4
Goodwill, net of accumulated amortization of $49.5 and
$46.0, respectively....................................... 121.8 106.0
-------- --------
$1,914.8 $1,766.6
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings and current portion of long-term
debt................................................... $ 136.1 $ 134.1
Trade accounts payable.................................... 580.4 607.2
Accrued payroll and other liabilities..................... 232.2 221.7
Taxes, including income taxes............................. 79.2 25.8
-------- --------
Total Current Liabilities.............................. 1,027.9 988.8
Long-term debt and capital lease obligations................ 16.2 6.3
Other long-term liabilities................................. 68.1 56.4
Commitments and contingencies (Note 6)...................... -- --
-------- --------
Total Liabilities...................................... 1,112.2 1,051.5
-------- --------
Stockholders' Equity
Common stock, 200,000,000 shares authorized; 77,687,829
and 77,695,124 shares issued and outstanding at January
23, 2000 and January 24, 1999, respectively............ 679.6 687.3
Deferred compensation and officer receivables............. (3.9) (7.7)
Accumulated other comprehensive income.................... 0.2 (0.9)
Retained earnings......................................... 126.7 36.4
-------- --------
Total Stockholders' Equity........................... 802.6 715.1
-------- --------
$1,914.8 $1,766.6
======== ========
See accompanying Notes to Consolidated Financial Statements.
20
22
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 23, JANUARY 24, JANUARY 25,
2000 1999 1998
(DOLLARS IN MILLIONS) ----------- ----------- -----------
Cash Provided by (used for):
Operations
Net income................................................ $ 90.3 $ 92.1 $ 80.2
Adjustments to reconcile net income to operating cash
flows:
Depreciation and amortization.......................... 84.7 66.7 54.8
Decrease in deferred income taxes...................... 6.3 10.2 3.9
Increase in other long-term assets and liabilities..... 6.2 1.9 2.3
Cash provided by (used for) current assets and current
liabilities:
Increase in inventories................................ (55.1) (140.5) (130.4)
Increase (decrease) in accounts payable................ (26.9) 126.5 121.9
Increase in taxes payable.............................. 59.6 2.9 12.0
Other -- net........................................... 7.9 6.4 2.3
------- ------- -------
Net cash provided by operations........................ 173.0 166.2 147.0
------- ------- -------
Investing
Capital expenditures...................................... (144.7) (179.8) (113.6)
Acquisitions.............................................. (14.5) -- (61.4)
------- ------- -------
Net cash used for investing............................ (159.2) (179.8) (175.0)
------- ------- -------
Financing
Repayment of long-term debt and capital lease
obligations............................................ (1.2) (4.6) (0.9)
Increase in capital lease obligations..................... 0.5 3.0 --
Repayment of debt assumed in acquisition.................. (2.0) -- --
Repurchase of put option.................................. -- -- (0.8)
Proceeds from construction funding........................ -- 1.3 6.8
Net funding from credit facility.......................... 1.5 9.4 85.8
Issuance of common stock.................................. 11.6 33.9 21.4
Repurchase of common stock................................ (25.4) (51.7) (61.8)
------- ------- -------
Net cash provided by (used for) financing.............. (15.0) (8.7) 50.5
------- ------- -------
Net increase (decrease) in cash and equivalents............. (1.2) (22.3) 22.5
Cash and equivalents at beginning of year................... 42.8 65.1 42.6
------- ------- -------
Cash and equivalents at end of year......................... $ 41.6 $ 42.8 $ 65.1
======= ======= =======
Supplemental Cash Flow Disclosures:
Interest paid............................................. $ 18.0 $ 16.2 $ 9.8
Income taxes paid......................................... $ 6.4 $ 42.1 $ 40.0
Common stock issued for business acquisition.............. -- -- $ 6.5
Debt and liabilities assumed in business acquisition...... $ 6.5 -- $ 26.9
See accompanying Notes to Consolidated Financial Statements.
21
23
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
DEFERRED ACCUMULATED RETAINED
COMMON STOCK COMPENSATION OTHER EARNINGS
------------------- AND OFFICER COMPREHENSIVE (ACCUMULATED
SHARES AMOUNT RECEIVABLES INCOME DEFICIT) TOTAL
------ ------ ------------ ------------- ------------ -----
(DOLLARS IN MILLIONS EXCEPT SHARE AMOUNTS)
Balance at January 26, 1997......... 75,858,016 $648.1 $(0.8) $ -- $(135.9) $511.4
---------- ------ ----- ----- ------- ------
Net income.......................... -- -- -- -- 80.2 80.2
Foreign currency translation
adjustments....................... -- -- -- (0.9) -- (0.9)
------
Comprehensive income................ 79.3
Issuance of common stock............ 1,916,844 29.4 (5.5) -- -- 23.9
Repurchase and retirement of common
stock............................. (2,518,800) (61.8) -- -- -- (61.8)
Tax benefit of equity
compensation...................... -- 5.5 -- -- -- 5.5
Cancellation of put options:
Payment of premium................ -- (0.8) -- -- -- (0.8)
Shares subject to repurchase...... -- 34.1 -- -- -- 34.1
Acquisition......................... 139,938 6.5 -- -- -- 6.5
---------- ------ ----- ----- ------- ------
Balance at January 25, 1998......... 75,395,998 $661.0 $(6.3) $(0.9) $ (55.7) $598.1
---------- ------ ----- ----- ------- ------
Net income.......................... -- -- -- -- 92.1 92.1
Issuance of common stock............ 4,171,059 38.3 (6.6) -- -- 31.7
Repurchase and retirement of common
stock............................. (1,871,933) (51.7) -- -- -- (51.7)
Tax benefit of equity
compensation...................... -- 39.7 -- -- -- 39.7
Change in receivables and deferred
compensation...................... -- -- 5.2 -- -- 5.2
---------- ------ ----- ----- ------- ------
Balance at January 24, 1999......... 77,695,124 $687.3 $(7.7) $(0.9) $ 36.4 $715.1
---------- ------ ----- ----- ------- ------
Net income.......................... -- -- -- -- 90.3 90.3
Foreign currency translation
adjustments....................... -- -- -- 1.1 -- 1.1
------
Comprehensive income................ 91.4
Issuance of common stock............ 2,444,055 11.5 -- -- -- 11.5
Repurchase and retirement of common
stock............................. (2,451,350) (25.4) -- -- -- (25.4)
Tax benefit of equity
compensation...................... -- 6.2 -- -- -- 6.2
Change in receivables and deferred
compensation...................... -- -- 3.8 -- -- 3.8
---------- ------ ----- ----- ------- ------
Balance at January 23, 2000......... 77,687,829 $679.6 $(3.9) $ 0.2 $ 126.7 $802.6
========== ====== ===== ===== ======= ======
See accompanying Notes to Consolidated Financial Statements.
22
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: Borders Group, Inc. (the Company), through its
subsidiaries, operates book and music superstores, mall-based bookstores and
other bookstores in the United States, United Kingdom, Singapore, Australia and
New Zealand. The Company, through its subsidiary Borders Online, Inc., is also
an online retailer of books, music, and video through the operation of its
Internet commerce site, Borders.com. The Company owns all of the outstanding
stock of Borders, Inc. (Borders), Walden Book Company, Inc. (Walden), Borders
(UK) Limited (formerly Books etc.) and Borders Online, Inc.
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 generally accepted accounting principles 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 and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Fiscal Year: The Company's fiscal year ends on the Sunday immediately
preceding the last Wednesday in January. Fiscal 1999, 1998, and 1997 each
consisted of 52 weeks and ended on January 23, 2000, January 24, 1999, and
January 25, 1998, 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.
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. Most store properties are leased
and improvements are amortized over the term of the lease, generally over 5 to
20 years. Other annual rates used in computing depreciation for financial
statement purposes are 2% to 3% for buildings and 10% to 33% for other fixtures
and equipment. Amortization of assets under capital leases is included in
depreciation expense.
During fiscal 1999, the Company shortened the estimated depreciable lives
of certain categories of personal computer equipment to three years and extended
the estimated depreciable lives of certain store fixtures up to ten years. The
Company believes that these changes better reflect the useful lives of these
assets. The Company accounted for this as a change in estimate; accordingly, the
Company will utilize the new depreciable lives prospectively. These changes did
not have a material impact on the Company's financial position or results of
operations during fiscal 1999.
The carrying value of long-lived assets and certain identifiable intangible
assets are evaluated whenever changes in circumstances indicate the carrying
amount of such assets may not be recoverable.
Goodwill: Goodwill is amortized over 20-40 years on a straight-line basis.
The Company evaluates the recoverability of goodwill using a fair value
methodology on a quarterly basis. This methodology is applied separately to each
of the businesses for which the Company has recorded goodwill. In determining
the fair value, the median price/earnings (P/E) multiple for similar growth
retail companies, or the median earnings before depreciation and amortization,
interest and taxes (EBITDA) multiple for mature companies, is calculated based
upon actual quoted market prices per share and analysts' consensus earnings
estimates for these companies. The applicable multiple is applied to earnings or
EBITDA to arrive at an overall fair value of the respective companies. The
Company evaluates any indicated impairment as temporary or permanent, and
records appropriate charges (if any) to operations for permanent impairments.
23
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
Financial Instruments: The recorded values of the Company's financial
instruments, which include accounts receivable, accounts payable, and
indebtedness, approximate their fair values.
The Company has entered into interest rate swap and collar agreements to
reduce the impact of changes in interest rates on its variable-rate debt and
amounts outstanding under the Lease Facility. The net cash amounts paid or
received by the Company resulting from these agreements are recognized as an
adjustment to interest expense in the period to which the amounts paid or
received relate.
Pre-Opening and Closing Costs: In fiscal 1999, the Company adopted the
American Institute of Certified Public Accountants' Statement of Position (SOP)
98-5, "Reporting on the Costs of Start-Up Activities," which requires store
pre-opening costs to be expensed as incurred. The Company had expensed store
pre-opening costs in the first fiscal month of a store's operations. This SOP
does not permit restatement of amounts recorded prior to the adoption of the
SOP; however, adoption of this SOP did not have a material impact on the
Company's financial position, results of operations, or liquidity in fiscal
1999.
When the decision to close a store is made, the Company provides for the
future net lease obligation and other expenses directly related to
discontinuance of operations.
Preferred Reader Program: Walden sells memberships in its Preferred Reader
Program, which offers members discounts on purchases and other benefits.
Membership fees are deferred and recognized over the 12-month membership period.
Equity-Based Compensation: The Company accounts for equity-based
compensation under the guidance of APB No. 25. See Note 10 for discussion of the
pro forma net income calculated under FAS 123.
New Accounting Guidance: In June 1998, the Financial Accounting Standards
Board issued Statement No. 133, "Accounting For Derivative Instruments and
Hedging Activities" (FAS 133), which the Company is required to adopt effective
January 29, 2001. Changes in derivative fair values will either be 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 will be immediately recognized in
earnings. The Company does not believe the effect of adopting FAS 133 will be
material to its financial position or results of operations.
Reclassifications: Certain prior year amounts have been reclassified to
conform to fiscal 1999 presentation.
NOTE 2 -- WEIGHTED AVERAGE SHARES OUTSTANDING
Weighted average shares outstanding are calculated as follows (thousands):
1999 1998 1997
---- ---- ----
Weighted average common shares outstanding -- basic
earnings per share................................. 77,577 76,631 75,825
Dilutive effect of employee stock options............ 2,641 5,872 6,416
------ ------ ------
Weighted average common shares outstanding -- diluted
earnings per share................................. 80,218 82,503 82,241
====== ====== ======
Unexercised employee stock options to purchase 10.2 million, 9.1 million
and 7.6 million common shares as of January 23, 2000, January 24, 1999, and
January 25, 1998, respectively, were not included in the weighted average shares
outstanding calculation because to do so would have been antidilutive.
24
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
NOTE 3 -- ACQUISITIONS
In March 1999, the Company purchased All Wound Up, a seasonal retailer of
interactive toys and novelty merchandise for a purchase price of $19.7
(excluding debt repayment), allocated primarily to fixed assets, inventory and
goodwill of $19.7. The acquisition has been accounted for as a purchase.
Effective October 20, 1997, the Company purchased 100% of the outstanding
stock of Borders (UK) Limited (formerly Books etc.), a London-based retailer of
books and associated products for a purchase price of $71.1, allocated primarily
to fixed assets, inventory and goodwill of $64.1. At the time of acquisition,
Books etc. operated 23 stores in the United Kingdom. The acquisition has been
accounted for as a purchase. This transaction did not have a material impact on
earnings in 1997.
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
1999 1998
---- ----
Property and equipment:
Land...................................................... $ 10.2 $ 10.2
Buildings................................................. 5.3 5.7
Leasehold improvements.................................... 307.8 251.9
Furniture and fixtures.................................... 593.9 507.6
Construction in progress.................................. 36.4 50.0
------- -------
953.6 825.4
Less -- accumulated depreciation and amortization........... (395.4) (331.6)
------- -------
Property and equipment, net................................. $ 558.2 $ 493.8
======= =======
NOTE 5 -- INCOME TAXES
The income tax provision consists of:
1999 1998 1997
---- ---- ----
Current:
Federal................................................... $44.5 $40.9 $42.7
State and local........................................... 7.0 7.9 4.3
Foreign................................................... 0.2 -- 0.4
Deferred:
Federal................................................... 9.1 11.7 3.2
State and local........................................... 0.7 -- --
Foreign................................................... (3.5) (1.5) --
----- ----- -----
Total income tax provision................................ $58.0 $59.0 $50.6
===== ===== =====
A reconciliation of the federal statutory rate to the Company's effective
tax rate follows:
1999 1998 1997
---- ---- ----
Federal statutory rate...................................... $51.9 $52.9 $45.8
State and local taxes, net of federal tax benefit........... 5.0 5.2 3.5
Other....................................................... 1.1 0.9 1.3
----- ----- -----
Total income tax provision.................................. $58.0 $59.0 $50.6
===== ===== =====
25
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
Deferred tax assets and liabilities resulted from the following:
1999 1998
---- ----
Deferred tax assets:
Federal benefit for state deferred taxes.................. $ 0.9 $ 1.6
Accruals and other current liabilities.................... 8.6 11.2
Deferred revenue.......................................... 7.0 7.0
Other long-term liabilities............................... 2.6 1.5
Deferred compensation..................................... 8.1 7.4
Deferred rent............................................. 19.4 16.8
Net operating losses...................................... 5.0 1.5
FAS 121 impairment........................................ 6.3 7.9
----- -----
Total deferred tax assets................................. 57.9 54.9
----- -----
Deferred tax liabilities:
Inventory................................................. 9.1 8.6
Property and equipment.................................... 35.3 26.5
Other..................................................... 3.4 3.4
----- -----
Total deferred tax liabilities............................ 47.8 38.5
----- -----
Net deferred tax assets..................................... $10.1 $16.4
===== =====
The Company has tax net operating loss carryforwards in foreign
jurisdictions totaling $16.3 as of January 23, 2000, $5.7 as of January 24, 1999
and $1.2 as of January 25, 1998. These losses have an indefinite carryforward
period.
NOTE 6 -- COMMITMENTS AND CONTINGENCIES
During 1994, the Company entered into agreements in which leases with
respect to four Borders' locations serve as collateral for certain mortgage
pass-through certificates. These mortgage pass-through certificates include a
provision requiring the Company to repurchase the underlying mortgage notes in
certain events, including the failure by the Company to make payments of rent
under the related leases, the failure by Kmart Corporation to maintain required
investment grade ratings or the termination of the guarantee by Kmart
Corporation of the Company's obligations under the related leases (which would
require the mutual consent of Kmart Corporation and Borders). In the event the
Company is required to repurchase all of the underlying mortgage notes, the
Company would be obligated to pay approximately $36.6. Since February 1995,
Kmart Corporation has failed to maintain investment grade ratings and,
therefore, these notes are now subject to put by the holder. To date, the holder
has not exercised its rights to put the notes.
In March 1998, the American Booksellers Association ("ABA") and 26
independent bookstores filed a lawsuit in the United States District Court for
the Northern District of California against the Company and Barnes & Noble, Inc.
alleging violations of the Robinson-Patman Act, the California Unfair Trade
Practice Act and the California Unfair Competition Act. The Complaint seeks
injunctive and declaratory relief, treble damages on behalf of each of the
bookstore plaintiffs, and with respect to the California bookstore plaintiffs,
any other damages permitted by California law; disgorgement of money, property
and gains wrongfully obtained in connection with the purchase of books for
resale, or offered for resale, in California from March 18, 1994 until the
action is completed and prejudgment interest on any amounts awarded in the
action, as well as attorney fees and costs. The trial is scheduled for April 9,
2001. The Company intends to vigorously defend the action.
In August 1998, The Intimate Bookshop, Inc. ("Intimate") and its owner,
Wallace Kuralt, filed a lawsuit in the United States District Court for the
Southern District of New York against the Company, Barnes & Noble, Inc., and
others alleging violation of the Robinson-Patman Act and other federal laws, New
York statutes governing trade
26
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
practices and common law. In response to Defendants' Motion to Dismiss the
Complaint, plaintiff Kuralt withdrew his claims and plaintiff Intimate
voluntarily dismissed all but its Robinson-Patman claims. Intimate recently
filed a Second Amended Complaint limited to allegations of violation of the
Robinson-Patman Act. The Second Amended Complaint alleges that Intimate has
suffered $11.3 million or more in damages and requests treble damages,
injunctive and declaratory relief, interest, costs, attorneys fees and other
unspecified relief. Many of the allegations in the Second Amended Complaint are
similar to those contained in the action instituted by the ABA and 26 bookseller
plaintiffs against the Company and Barnes & Noble, Inc. in March, 1998. The
Company intends to vigorously defend the action.
The Company has not included any liability in its financial statements in
connection with the lawsuits described above and has expensed as incurred all
costs to date.
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. The Company does not believe that any such other litigation will
have a material adverse effect on its liquidity, financial position or results
of operations.
NOTE 7 -- DEBT
The Company has a $425.0 multicurrency credit agreement (the Credit
Facility) which expires in October, 2002. Borrowings under the Credit Facility
bear interest at a base rate or an increment over LIBOR at the Company's option.
The Credit Facility contains covenants which limit, among other things, the
Company's ability to incur indebtedness, grant liens, make acquisitions, merge,
declare dividends, dispose of assets, and issue or repurchase its common stock
in excess of $100.0 (plus any proceeds and tax benefits resulting from stock
option exercises and tax benefits resulting from restricted shares purchased by
employees from the Company), and require the Company to meet certain financial
measures regarding fixed charge coverage, leverage and tangible net worth. The
Company is prohibited under the Credit Facility from paying cash dividends on
common shares. Effective February 2000, the Company increased the credit
available under the Credit Facility to $472.8. The Company had borrowings
outstanding under the Credit Facility of $133.4 at January 23, 2000 and $131.9
at January 24, 1999. The weighted average interest rate in 1999 and 1998 was
approximately 5.7% and 6.4%, respectively.
During 1999, the Company entered into a $130.0 multicurrency seasonal
revolving credit facility (the Seasonal Facility) which expires in July, 2000.
Borrowings under the Seasonal Facility bear interest at a base rate or an
increment over LIBOR at the Company's option. The Seasonal Facility contains
covenants and events of default that are similar to those contained in the
Credit Facility described above. The Company had no borrowings outstanding under
the Seasonal Facility as of January 23, 2000. Effective February 2000, the
Company reduced the credit available under the Seasonal Facility to $25.0, in
accordance with provisions of the agreement.
The Company's long-term debt obligations consist of capital lease
liabilities at January 23, 2000. Scheduled principal payments of capitalized
lease obligations as of January 23, 2000 are as follows: 2000 -- $2.6;
2001 -- $0.6; 2002 -- $11.4; 2003 -- $0.2; 2004 -- $0.2; 2005 and,
thereafter, -- $3.9.
NOTE 8 -- LEASES
Operating Leases: The Company conducts operations primarily in leased
facilities. Store leases are generally for terms of 5 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. Walden'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
January 23, 2000 total $235.8 in 2000, $228.1 in 2001, $216.9 in 2002, $198.2 in
2003, $180.1 in 2004, $1,582.1 in all later years and, in the aggregate, total
$2,641.2.
27
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
Rental Expenses: A summary of operating lease rental expense and short-term
rentals follows:
1999 1998 1997
---- ---- ----
Rental Expenses:
Minimum rentals..................................... $257.1 $222.3 $190.3
Percentage rentals.................................. 2.0 2.3 2.7
------ ------ ------
$259.1 $224.6 $193.0
====== ====== ======
Capitalized Leases: The Company accounts for three stores and certain
computer equipment under capital leases. At January 23, 2000, the Company's
commitments under leases accounted for as capital leases aggregated $18.9.
Lease Financing Facility: The Company has a $250.0 lease financing facility
(the Lease Facility) to finance new stores and other property through operating
leases, which expires in October, 2002. The Lease Facility provides financing to
lessors through loans from a third party lender for up to 95% of a project cost.
It is expected that lessors will make equity contributions approximating 5% of
each project. Independent of its obligations as lessee, the Company guarantees
payment when due of all amounts required to be paid to the third party lender.
The principal amount guaranteed is limited to approximately 89% of the original
cost of a project so long as the Company is not in default under the lease
relating to such project. The Lease Facility contains covenants and events of
default that are similar to those contained in the Credit Facility described
above. Effective February 2000, the Company decreased the credit available under
the Lease Facility to $175.0. There was $162.9 and $123.9 outstanding under the
Lease Facility at January 23, 2000 and January 24, 1999, respectively. In
December, 1998, 17 properties previously financed through the Lease Facility
with a total financed value of $70.9 were permanently financed through operating
leases.
NOTE 9 -- EMPLOYEE BENEFIT PLAN
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 $2.9, $2.5 and $2.5
for 1999, 1998 and 1997, respectively.
NOTE 10 -- STOCK-BASED BENEFIT PLANS
Stock Option Plans: The Company has various stock option plans pursuant to
which the Company may grant options to purchase its common stock. The exercise
price of options granted under these plans will generally not be less than the
fair value per share of the Company's common stock at the date of grant with
vesting periods up to six years from grant date and maximum option terms up to
ten years from grant date. At January 23, 2000, the Company has 34.5 million
shares authorized for the grant of stock options under these plans.
The Company has established a compensation philosophy that is designed to
foster a performance-oriented ownership culture. The stock option plans are an
integral part of the Company's employee ownership culture and compensation
program. Options have been granted under the plans to all full-time employees of
the Company and its subsidiaries with 30 days or more of service, consisting of
approximately 17,000 employees. The Company's executive compensation is heavily
oriented toward equity incentives that includes a combination of stock and
options. Restrictions on the equity incentives promote a long-term focus on the
part of management and maximize retention of personnel. Management believes the
equity incentives have been integral to its success in meeting operating
objectives and reducing employee turnover.
Stock Purchase Plans: The Company has a management stock purchase plan (the
Management Plan) and an employee stock purchase plan (the Employee Plan). Under
the Management Plan, 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% discount from the fair
value of the same number of
28
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
unrestricted shares of common stock. Restricted shares of common stock purchased
under the Management Plan will generally be restricted from sale or transfer for
three years from date of purchase. The Employee Plan allows the Company's
employees not covered under the Management Plan to purchase shares of the
Company's common stock at a 15% discount from their fair market value.
The Company recognizes compensation expense for the discount on restricted
shares of common stock purchased under the Management Plan. Such discounts are
recognized as expense on a straight-line basis over the three-year period during
which the shares are restricted from sale or transfer. The Company is not
required to record compensation expense with respect to shares purchased under
the Employee Plan.
A summary of the information relative to the Company's stock option plans
follows:
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
--------- --------------
(NUMBER OF SHARES
IN THOUSANDS)
STOCK OPTIONS
Outstanding at January 26, 1997............................. 16,187 $ 8.92
Granted................................................... 8,304 27.99
Exercised................................................. 1,800 3.43
Forfeited................................................. 1,394 12.63
Outstanding at January 25, 1998............................. 21,297 16.58
Granted................................................... 3,549 27.17
Exercised................................................. 3,759 9.57
Forfeited................................................. 1,901 22.51
Outstanding at January 24, 1999............................. 19,186 19.36
Granted................................................... 5,468 14.49
Exercised................................................. 2,181 7.53
Forfeited................................................. 3,909 21.24
Outstanding at January 23, 2000............................. 18,564 18.89
Balance exercisable at:
January 25, 1998.......................................... 2,791 9.51
January 24, 1999.......................................... 5,365 11.87
January 23, 2000.......................................... 4,639 14.26
The weighted average fair values of options at their grant date where the
exercise price equals the market price on the grant date were $5.84, $11.52 and
$12.27 in 1999, 1998 and 1997, respectively.
As permitted, the Company has adopted the disclosure-only option of
Financial Accounting Standards Board Statement No. 123, "Accounting for Stock
Based Compensation" (FAS 123). The pro forma net income had the Company adopted
the fair-value accounting provisions of FAS 123 would have been $68.3, $72.6 and
$69.0 in 1999, 1998, and 1997 respectively. Pro forma diluted and basic earnings
per share would have been $0.85, $0.88 and $0.84 and $0.88, $0.95, and $0.91 in
1999, 1998 and 1997 respectively.
29
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
The Black-Scholes option valuation model was used to calculate the fair
market value of the options at the grant date for the purpose of disclosures
required by FAS 123. The following assumptions were used in the calculation:
1999 1998 1997
---- ---- ----
Risk-Free Interest Rate.................................. 4.9-6.7% 4.2-6.8% 5.5-6.8%
Expected Life............................................ 3-10 years 3-10 years 2-10 years
Expected Volatility...................................... 33.3-40.3% 33.3-40.7% 33.3-39.0%
Expected Dividends....................................... 0% 0% 0%
The following table summarizes the information regarding stock options
outstanding at January 23, 2000 (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
- --------------- --------- ---------------- ---------------- --------- ----------------
$ 3.54-$ 4.63 280 0.4 $ 4.35 280 $ 4.35
$ 6.86-$ 9.88 4,402 5.2 8.58 2,525 8.49
$10.56-$13.63 1,295 9.0 12.95 29 10.80
$13.81-$17.03 3,750 8.8 14.62 327 15.84
$17.13-$20.44 1,427 6.4 17.63 361 17.42
$21.00-$27.25 1,453 7.0 24.15 343 24.25
$27.50-$34.06 5,957 7.3 30.17 774 30.25
A summary of the information relative to the Company's stock purchase plans
follows:
NUMBER OF WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES PURCHASE PRICE AT GRANT DATE FMV
--------- ---------------- -----------------
(NUMBER OF SHARES IN THOUSANDS)
STOCK ISSUED UNDER STOCK PURCHASE PLANS
Management Plan
1997.......................................... 923 $18.09 $22.62
1998.......................................... 68 19.52 24.40
1999.......................................... 106 10.91 13.64
Employee Plan
1997.......................................... 157 20.06 23.60
1998.......................................... 115 24.78 29.15
1999.......................................... 118 12.79 15.05
NOTE 11 -- FINANCIAL INSTRUMENTS
The Company enters into interest rate swap and collar agreements to reduce
the impact of changes in interest rates on its variable-rate debt and amounts
outstanding under the Lease Facility. The swap agreements are contracts to
exchange variable-rate for fixed-interest payments periodically over the life of
the agreements without the exchange of the underlying notional amounts. The
collar agreements are contracts to effectively limit the variability of interest
on a portion of the Company's variable-rate debt. The notional amounts of these
agreements are used to measure interest paid or received and do not represent
the amount of exposure to credit loss.
30
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
As of January 23, 2000 and January 24, 1999, the Company had the following
interest rate instruments in effect:
JANUARY 23, 2000
-----------------------------------------------------
FAIR
NOTIONAL STRIKE MARKET
AMOUNT RATE PERIOD VALUE
-------- ------ ------ ------
Interest Rate Swaps.............. $175.0 4.6% 1/99-1/00 $ 0.1
$ 33.0(a) 6.6% 9/98-9/03 $ 0.3
$ 33.0(a) 6.9% 9/98-9/03 $ 0.2
Interest Rate Collar............. $100.0 4.1%-5.5% 1/99-12/00 $ 0.7
---------------------------------------
(a) Notional amount is the U.S. Dollar equivalent of 20.0 British
Pounds.
JANUARY 24, 1999
-----------------------------------------------------
FAIR
NOTIONAL STRIKE MARKET
AMOUNT RATE PERIOD VALUE
-------- ------ ------ ------
Interest Rate Swaps.............. $ 33.1(a) 6.6% 9/98- 9/03 $(2.1)
$ 33.1(a) 6.9% 9/98- 9/03 $(1.6)
Interest Rate Collar............. $100.0 4.1%-5.5% 1/99-12/00 $ 0.1
---------------------------------------
(a) Notional amount is the U.S. Dollar equivalent of 20.0 British
Pounds.
In the first month of fiscal 2000, the Company entered into interest rate
swaps with notional amounts of $75.0 and $50.0, which effectively converted
variable-rate U.S. dollar-denominated borrowings to fixed rates of 5.7% and
6.0%, respectively. These swap agreements expire within one to three years from
the date the Company entered into the agreements.
NOTE 12 -- SEGMENT INFORMATION
The Company is organized based upon the following operating segments:
domestic Borders stores, international Borders and Books etc. stores, Walden
stores, online retailing through Borders.com, and other (consisting of interest
expense and certain corporate governance costs).
31
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
The accounting policies of the segments are the same as those described in
the "Summary of Significant Accounting Policies." Segment data includes charges
allocating certain 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 anticipated future contribution.
1999 1998 1997
---- ---- ----
Sales:
Borders................................................... $1,823.2 $1,521.0 $1,267.4
Walden.................................................... 989.9 948.7 970.0
International............................................. 168.2 120.7 28.6
-------- -------- --------
Total stores.............................................. 2,981.3 2,590.4 2,266.0
-------- -------- --------
Borders.com............................................... 17.9 4.6 --
-------- -------- --------
$2,999.2 $2,595.0 $2,266.0
======== ======== ========
Interest expense: (income):
Borders................................................... $ 16.4 $ 16.5 $ 14.3
Walden.................................................... (21.0) (18.9) (15.2)
International............................................. 8.9 7.4 1.6
Other..................................................... 9.2 8.5 6.2
-------- -------- --------
Total stores.............................................. 13.5 13.5 6.9
-------- -------- --------
Borders.com............................................... 4.4 2.7 0.3
-------- -------- --------
$ 17.9 $ 16.2 $ 7.2
======== ======== ========
Income tax expense (benefit):
Borders................................................... $ 48.4 $ 34.6 $ 22.1
Walden.................................................... 32.3 36.8 36.3
International............................................. (5.8) (3.8) (0.1)
Other..................................................... (6.7) (2.4) (4.0)
-------- -------- --------
Total stores.............................................. 68.2 65.2 54.3
-------- -------- --------
Borders.com............................................... (10.2) (6.2) (3.7)
-------- -------- --------
$ 58.0 $ 59.0 $ 50.6
======== ======== ========
Depreciation and amortization expense:
Borders................................................... $ 47.3 $ 42.3 $ 36.8
Walden.................................................... 25.1 18.8 17.0
International............................................. 6.5 3.5 0.7
Other..................................................... 0.3 0.2 0.3
-------- -------- --------
Total stores.............................................. 79.2 64.8 54.8
-------- -------- --------
Borders.com............................................... 5.5 1.9 --
-------- -------- --------
$ 84.7 $ 66.7 $ 54.8
======== ======== ========
Net income (loss):
Borders................................................... $ 72.9 $ 52.1 $ 33.7
Walden.................................................... 51.8 61.0 60.5
International............................................. (7.9) (3.2) (0.3)
Other..................................................... (9.3) (7.3) (7.7)
-------- -------- --------
Total stores.............................................. 107.5 102.6 86.2
-------- -------- --------
Borders.com............................................... (17.2) (10.5) (6.0)
-------- -------- --------
$ 90.3 $ 92.1 $ 80.2
======== ======== ========
32
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
1999 1998
---- ----
Total assets:
Borders................................................... $1,136.7 $1,040.9
Walden.................................................... 447.7 450.0
International............................................. 200.9 161.4
Other..................................................... 72.5 66.1
-------- --------
Total stores........................................... 1,857.9 1,718.4
-------- --------
Borders.com............................................... 57.0 48.2
-------- --------
$1,914.8 $1,766.6
======== ========
Capital expenditures:
Borders................................................... $ 64.1 $ 73.0
Walden.................................................... 27.7 23.6
International............................................. 24.4 32.8
Other..................................................... 17.1 38.8
-------- --------
Total stores........................................... 133.3 168.2
-------- --------
Borders.com............................................... 11.4 11.6
-------- --------
$ 144.7 $ 179.8
======== ========
Total assets for the "Other" operating segment includes 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.
Long-lived assets by geographic area are as follows:
1999 1998 1997
---- ---- ----
Long-lived assets:
Domestic.................................................. $567.9 $510.8 $426.5
International............................................. 148.7 122.5 90.0
------ ------ ------
$716.6 $633.3 $516.5
====== ====== ======
NOTE 13 -- UNAUDITED QUARTERLY FINANCIAL DATA
FISCAL 1999 QUARTER ENDED
---------------------------------------
APRIL JULY OCTOBER JANUARY
----- ---- ------- -------
(DOLLARS IN MILLIONS EXCEPT
PER SHARE AMOUNTS)
Sales...................................................... $618.7 $631.0 $656.3 $1,093.2
Cost of merchandise sold (includes occupancy).............. 457.2 468.9 483.7 738.4
Operating income (loss).................................... (2.6) 0.3 2.6 165.9
Net income (loss).......................................... (4.1) (2.6) (1.5) 98.5
Diluted earnings (loss) per common share................... (0.05) (0.03) (0.02) 1.23
Basic earnings (loss) per common share..................... (0.05) (0.03) (0.02) 1.27
FISCAL 1998 QUARTER ENDED
---------------------------------------
APRIL JULY OCTOBER JANUARY
----- ---- ------- -------
Sales...................................................... $545.3 $546.0 $558.3 $ 945.4
Cost of merchandise sold (includes occupancy).............. 405.5 406.1 412.9 634.9
Operating income........................................... 9.0 7.9 3.2 147.2
Net income (loss).......................................... 3.8 2.4 (0.8) 86.7
Diluted earnings (loss) per common share................... 0.05 0.03 (0.01) 1.06
Basic earnings (loss) per common share..................... 0.05 0.03 (0.01) 1.13
Earnings per share amounts for each quarter are required to be computed
independently and may not equal the amount computed for the total year.
33
35
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Borders Group, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of cash flows and of
stockholders' equity present fairly, in all material respects, the financial
position of Borders Group, Inc. and its subsidiaries at January 23, 2000 and
January 24, 1999, and the results of their operations and their cash flows for
each of the three years in the period ended January 23, 2000, in conformity with
accounting principles generally accepted in the United States. 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 of these statements in accordance with
auditing standards generally accepted in the United States which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Bloomfield Hills, Michigan
March 6, 2000
34
36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
35
37
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information regarding the directors and
executive officers of the Company:
NAME AGE POSITION
---- --- --------
Robert F. DiRomualdo................. 55 Chairman and Director
George R. Mrkonic.................... 47 Vice Chairman and Director
Gregory P. Josefowicz................ 47 President, Chief Executive Officer and Director
Bruce A. Quinnell.................... 51 Vice Chairman
Vincent E. Altruda................... 50 President, International
Thomas D. Carney..................... 53 Vice President, General Counsel and Secretary
Tamara L. Heim....................... 42 President, Borders Stores and Borders Online, Inc.
Timothy J. Hopkins................... 46 President, Merchandising and Distribution
Richard D. Joseph.................... 42 Chairman and Chief Executive Officer, Borders (UK) Ltd.
Kenneth E. Scheve.................... 53 Senior Vice President, Chief Financial Officer and Treasurer
Ronald S. Staffieri.................. 50 President, Waldenbooks Stores
Kathryn L. Winkelhaus................ 43 President, Borders Group Stores
Peter R. Formanek.................... 56 Director
Victor L. Lund....................... 52 Director
Dr. Edna Greene Medford.............. 48 Director
Larry Pollock........................ 52 Director
Beth M. Pritchard.................... 52 Director
The Company's Certificate provides, among other things, that Directors will
be elected annually for one year terms. Directors hold office until their
successors are elected and qualified.
Robert F. DiRomualdo has served as the Chairman and a director of the
Company since its formation in August 1994. Mr. DiRomualdo also served as Chief
Executive Officer of the Company from August 1994 until November 1998, and as
President and Chief Executive Officer from April 1999 until November 1999.
George R. Mrkonic has served as the Vice Chairman of the Company since
December 1994, and a director since its formation in August 1994. He has also
served as President of the Company from December 1994 until January 1997. Mr.
Mrkonic is also a director of Champion Enterprises, Inc., a manufacturer and
seller of manufactured homes, Syntel, Inc., a computer software and development
company, and Cheap Tickets, Inc., a retail seller of discount tickets for
domestic leisure air travel.
Gregory P. Josefowicz has served as President, Chief Executive Officer and
director of the Company since November 1999. For more than five years prior to
joining the Company, he served in a variety of executive positions with
Jewel-Osco, a food and drug retailer that is currently a division of
Albertson's, Inc., most recently as President. Mr. Josefowicz also serves as a
director of Ryerson Tull, Inc., a distributor and processor of metals.
Bruce A. Quinnell has served as Vice Chairman of the Company since April
1999. Mr. Quinnell served as President and Chief Operating Officer of the
Company from February 1997 to April 1999. Mr. Quinnell served as President and
Chief Operating Officer of Walden from November 1994 to February 1997. From
January 1994 to November 1994, Mr. Quinnell held the position of Executive Vice
President and Chief Operating Officer of Walden. Prior to joining Walden, Mr.
Quinnell was Executive Vice President, Finance and Administration for PACE
Membership Warehouse, Inc., a former subsidiary of Kmart, from October 1992 to
January 1994. Mr. Quinnell is also a director of Hot Topic, Inc., a retailer of
music-licensed and music-related merchandise and apparel.
Vincent E. Altruda has served as President of the Company's international
operations since December 1997. From February 1997 through December 1997, Mr.
Altruda served as Senior Vice President of Borders Store
36
38
Development. From February 1995 through February 1997, Mr. Altruda served as
Senior Vice President of Borders Store Operations. From December 1992 through
February 1995, Mr. Altruda served as Vice President of Borders Store Operations.
Thomas D. Carney has been 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.
Tamara L. Heim has served as President of Borders Stores and Borders
Online, Inc. since January 2000. From February 1999 to January 2000, Ms. Heim
served as Senior Vice President of Sales and Marketing for Borders. Ms. Heim
served as a Territorial Vice President of Borders from December 1996 to February
1999. Since 1980, Ms. Heim held several key positions of increasing
responsibility for Federated Department Stores, and served as Regional Vice
President and Director of Stores for Rich's Lazarus Goldsmith, a division of
Federated Department Stores, prior to joining the Company.
Timothy J. Hopkins has served as President of Merchandising and
Distribution since February 1997. From 1995 to February 1997, Mr. Hopkins served
as Sr. Vice President, Merchandising and Marketing for Walden. Prior to joining
the company, Mr. Hopkins served as Vice President, International and also Vice
President, Merchandising with QVC Network from 1992 through 1995.
Richard D. Joseph is the Chairman and Chief Executive Officer of Borders
(UK) Ltd. and served in executive positions with Books etc. since he co-founded
the company in 1981. Mr. Joseph has announced his intention to resign as an
executive officer of the Company.
Kenneth E. Scheve has served as Senior Vice President, Chief Financial
Officer and Treasurer of Borders Group Inc. since February 1997. From 1994
through February 1997, Mr. Scheve served as Vice President, Finance for Walden.
Ronald S. Staffieri has served as President of Waldenbooks Stores since
April 1999. Mr. Staffieri served as Chief Administrative Officer of the Company
from January 1998 to April 1999. From July 1997 to January 1998, Mr. Staffieri
served as President of Borders Outlet. Prior to joining the Company Mr.
Staffieri was President and Chief Executive Officer of Lil' Things, a chain of
children's superstores, from 1994 until January of 1997.
In June of 1997, Lil' Things filed a voluntary petition for reorganization
under Chapter 11 of the United States Bankruptcy Code and the business was
liquidated in December of 1997.
Kathryn L. Winkelhaus has served as President of Borders Group Stores since
April 1999. Ms. Winkelhaus served as President of Waldenbooks Stores from
February 1997 to April 1999. From 1992 through 1997, Ms. Winkelhaus served as
Sr. Vice President, Store Operations for Walden.
Peter R. Formanek has served as a director of the Company since August
1995. Mr. Formanek was co-founder of AutoZone Inc., a retailer of aftermarket
automotive parts, and served as President and Chief Operating Officer of
AutoZone, Inc. from 1986 until his retirement in May 1994. He currently is a
director of The Perrigo Company, a manufacturer of store brand over-the-counter
medicines and vitamins, and Gart Sports Company, a retailer of sporting goods.
Victor L. Lund has served as a director of the Company since July 1997. Mr.
Lund has served as Vice Chairman of Albertson's, Inc., a food and drug retailer,
since June 1999. Mr. Lund served as Chairman of the Board of American Stores
Company from June 1995 until its acquisition by Albertson's in June 1999, and as
its Chief Executive Officer since August 1992. Mr. Lund also serves as a
director of Service Corporation International, a provider of death care
services.
Dr. Edna Greene Medford became a director of the Company in September 1998.
Dr. Medford is an Associate Professor of History and a former Director of the
Undergraduate Program in History at Howard University.
Larry Pollock has served as a director of the Company since August 1995.
Since January 2000, Mr. Pollock has served as President and Chief Operating
Officer of Cole National Corporation, which operates retail vision and gift
stores. From September 1998 until June 1999, Mr. Pollock served as President and
Chief Executive Officer of HomePlace, Inc., a chain of home furnishings and
housewares superstores, which he joined in January of 1997 as
37
39
Executive Vice President and Chief Operating Officer. From 1994 until 1996, he
served as the President, Chief Operating Officer and a director of Zale
Corporation, a jewelry retailer. Mr. Pollock is a partner of Independent Group
L.P., a privately-held radio broadcasting company based in Cleveland, Ohio.
In January of 1998, HomePlace, Inc. filed a voluntary petition in the
United States Bankruptcy Court for the District of Delaware for reorganization
under Chapter 11 of the Bankruptcy Code.
Beth M. Pritchard has served as a director of the Company since March 2000.
Ms. Pritchard has served as President and Chief Executive Officer of Bath & Body
Works, a division of Intimate Brands, Inc. since 1993.
Officers of the Company are elected on an annual basis and serve at the
discretion of the Board of Directors.
COMMITTEES
The Audit Committee was established for the purpose of reviewing and making
recommendations regarding the Company's employment of independent accountants,
the annual audit of the Company's financial statements and the Company's
internal controls, accounting practices and policies. The current members of the
Audit Committee are Mr. Lund, Dr. Medford and Ms. Pritchard.
The Compensation Committee was established for the purpose of making
recommendations to the Board of Directors regarding the nature and amount of
compensation for executive officers of the Company. The Compensation Committee
also administers certain of the Company's employee benefit plans. The current
members of the Compensation Committee are Mr. Formanek and Mr. Pollock.
COMPENSATION OF DIRECTORS
For service as a director during 1999, each director who is not an employee
of the Company received 2,000 restricted shares of Common Stock (the "Restricted
Shares") paid at the beginning of the relevant calendar year, subject to a
maximum value of $75,000. The restrictions on such Restricted Shares will
generally lapse one year from the date of grant.
On the date of each of the Company's Annual Meetings, each eligible
director receives an option to purchase 5,000 shares of common stock of the
Company. The exercise price of options granted under the Plan is the fair market
value on the date of grant. To be eligible to receive option grants at the
Annual Meetings to be held in 2000 and thereafter, a director generally must
have held at least 20,000 shares of common stock, for the one-year period prior
to the date of the meeting.
Each option vests and becomes exercisable on the third anniversary of the
date of grant except that (i) an option is forfeited in its entirety if the
director ceases, at any time prior to his or her exercise of the option, to hold
the minimum number of shares that he or she was required to hold for the one
year period prior to the grant to be eligible therefor; (ii) all outstanding
options vest and become immediately exercisable in the event of a change in
control of the Company, and (iii) all options held by a director who has served
as a director for six years or more vest and become immediately exercisable as
of the date upon which he or she ceases to serve as a director.
An option may be exercised only during the period that the optionee serves
as a director of the Company or within three months after termination of such
service and only if it is vested and has not expired at the time of termination.
However, if the director ceases to serve as such as a result of death or if the
individual has served as a director of the Company for more than 10 years, such
three month period is extended to three years.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by
reference to the information under the caption "Executive Compensation" in the
Proxy Statement for the Company's May 24, 2000 Annual Meeting of Stockholders.
38
40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 for the Company's May 24, 2000 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The information required by this Item 13 is incorporated herein by
reference to the information under the headings "Settlement Agreement" and
"Certain Transactions and Indebtedness of Management" in the Proxy Statement for
the Company's May 24, 2000 Annual Meeting of Stockholders.
39
41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith unless otherwise indicated:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1(6) Agreement and plan of Merger dated as of April 8, 1997
between Michigan Borders Group, Inc. and Borders Group, Inc.
3.1(11) Restated Articles of Incorporation of Borders Group, Inc.
3.2(12) Bylaws of Borders Group, Inc., including the First, Second
and Third Amendments thereto
10.1(1) Stockholder Agreement dated as of February 17, 1995, between
Borders Group, Inc. and Kmart Corporation
10.2(5) Form of Severance Agreement
10.3(6) Borders Group, Inc. Stock Option Plan
10.4(8) First Amendment to the Borders Group, Inc. Stock Option Plan
10.5(11) Second Amendment to the Borders Group, Inc. Stock Option
Plan
10.6(11) Third Amendment to the Borders Group, Inc. Stock Option Plan
10.7(3) Tax Allocation Agreement dated May 24, 1995 between Borders
Group, Inc. and Kmart Corporation
10.8(3) Lease Guaranty Agreement dated May 24, 1995 between Borders
Group, Inc. and Kmart Corporation
10.9(2) Borders Group, Inc. Management Stock Purchase Plan
10.10(8) First Amendment to the Borders Group, Inc. Management Stock
Purchase Plan
10.11(9) Second Amendment to the Borders Group, Inc. Management Stock
Purchase Plan
10.12(11) Third Amendment to the Borders Group, Inc. Management Stock
Purchase Plan
10.13(2) Borders Group, Inc. Employee Stock Purchase Plan
10.14(4) First Amendment to the Borders Group, Inc. Employee Stock
Purchase Plan
10.15(11) Second Amendment to the Borders Group, Inc. Employee Stock
Purchase Plan
10.16(11) Third Amendment to the Borders Group, Inc. Employee Stock
Purchase Plan
10.17(6) Borders Group, Inc. Annual Incentive Bonus Plan
10.18(11) First Amendment to the Borders Group, Inc. Annual Incentive
Plan
10.19(2) Borders Group, Inc. Director Stock Plan
10.20(9) First Amendment to the Borders Group, Inc. Director Stock
Plan
10.21(9) Second Amendment to the Borders Group, Inc. Director Stock
Plan
10.22(7) Amended and Restated Multicurrency Credit Agreement among
Borders Group, Inc., its subsidiaries and Parties thereto
10.23(7) Amended and Restated Participation Agreement among Borders
Group, Inc., its subsidiaries and Parties thereto
10.24(7) Appendix A to Participation Agreement among Borders Group,
Inc., its subsidiaries and Parties thereto
10.25(7) Amended and Restated Credit Agreement among Borders Group,
Inc., its subsidiaries and Parties thereto
10.26(7) Amended and Restated Guarantee Credit Agreement among
Borders Group, Inc., its subsidiaries and Parties thereto
10.27(13) Omnibus Amendment No. 1 to Amended and Restated Guarantee
Credit Agreement among Borders Group, Inc., its subsidiaries
and Parties thereto
10.28(5) Agreement dated April 19, 1996, between Borders Group, Inc.
and Bruce A. Quinnell
10.29(10) Borders Group, Inc. Stock Option Plan for International
Employees
10.30(11) 1998 Borders Group, Inc. Stock Option Plan
10.31 Agreement dated January 24, 2000, between Borders Group,
Inc. and Robert F. DiRomualdo
10.32 Agreement dated January 24, 2000, between Borders Group,
Inc. and George R. Mrkonic
40
42
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.33 Agreement dated November 15, 1999, between Borders Group,
Inc. and Gregory P. Josefowicz
10.34(11) Participation Agreement dated as of December 1, 1998 by and
among Borders Group, Inc., Borders, Inc. and Parties thereto
10.35(11) Agreement dated April 20, 1999, between Borders Group, Inc.
and Philip M. Pfeffer
10.36(13) Multicurrency Revolving Credit Facility Credit Agreement
dated July 9, 1999 among Borders Group, Inc., its
subsidiaries and Parties thereto
10.37(14) Amendment No. 1 to 1998 Borders Group, Inc. Stock Option
Plan
10.38 Amended Schedule 1.01(B) to the Amended and Restated
Multicurrency Credit Agreement among Borders Group, Inc.,
its subsidiaries and Parties thereto
10.39 Amended Schedule II to the Amended and Restated Credit
Agreement among Borders Group, Inc., its subsidiaries and
Parties thereto
18.1(3) Letter of PricewaterhouseCoopers LLP dated July 17, 1995.
21.1 Subsidiaries of Registrant
23.1 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
99.1 Cautionary Statement under the Private Securities Litigation
Reform Act of 1995 -- "Safe Harbor" for Forward-Looking
Statements
- -------------------------
(1) Incorporated by reference from the Company's Registration Statement on Form
S-4 (File No. 33-90016).
(2) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-90918).
(3) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended April 23, 1995 (File No. 1-13740).
(4) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-80643).
(5) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended January 28, 1996 (File No. 1-13740).
(6) Incorporated by reference from the Company's Proxy Statement dated April 9,
1997 of Borders Group, Inc. (File No. 1-13740).
(7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended October 26, 1997 (File No. 1-13740).
(8) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended October 22, 1995 (File No. 1-13740).
(9) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended January 25, 1998 (File No. 1-13740).
(10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended July 26, 1998 (File No. 1-13740).
(11) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended January 24, 1999 (File No. 1-13740).
(12) Incorporated by reference from the Company's Registration Statement on Form
S-3 (File No. 333-80669).
(13) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended July 25, 1999 (File No. 1-13740).
(14) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended October 24, 1999 (File No. 1-13740).
(b) Financial Statement Schedules:
All financial statement schedules are omitted as they are not applicable or
the required information is included in the consolidated financial statements of
the Registrant.
(c) Reports on Form 8-K:
One report was filed on Form 8-K under Item 5 -- Other Events which stated
the time and place of the Company's Annual Meeting of Stockholders. This report
was dated and filed on March 5, 1999 (File No. 1-13740).
41
43
SIGNATURES
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/ GREGORY P. JOSEFOWICZ
------------------------------------
Gregory P. Josefowicz
President and Chief Executive
Officer
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.
NAME TITLE DATE
---- ----- ----
/s/ ROBERT F. DIROMUALDO Chairman and Director April 24, 1999
- ---------------------------------------------
Robert F. DiRomualdo
/s/ GEORGE R. MRKONIC Vice Chairman and Director April 24, 1999
- ---------------------------------------------
George R. Mrkonic
/s/ GREGORY P. JOSEFOWICZ President and Chief Executive April 24, 1999
- --------------------------------------------- Officer
Gregory P. Josefowicz
/s/ KENNETH E. SCHEVE Senior Vice President, Chief April 24, 1999
- --------------------------------------------- Financial Officer and Treasurer
Kenneth E. Scheve (Principal Financial and Accounting
Officer)
/s/ PETER R. FORMANEK Director April 24, 1999
- ---------------------------------------------
Peter R. Formanek
/s/ VICTOR L. LUND Director April 24, 1999
- ---------------------------------------------
Victor L. Lund
/s/ DR. EDNA GREENE MEDFORD Director April 24, 1999
- ---------------------------------------------
Dr. Edna Greene Medford
/s/ LARRY POLLOCK Director April 24, 1999
- ---------------------------------------------
Larry Pollock
/s/ BETH M. PRITCHARD Director April 24, 1999
- ---------------------------------------------
Beth M. Pritchard
42
44
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1(6) Agreement and plan of Merger dated as of April 8, 1997
between Michigan Borders Group, Inc. and Borders Group, Inc.
3.1(11) Restated Articles of Incorporation of Borders Group, Inc.
3.2(12) Bylaws of Borders Group, Inc., including the First, Second
and Third Amendments thereto.
10.1(1) Stockholder Agreement dated as of February 17, 1995, between
Borders Group, Inc. and Kmart Corporation.
10.2(5) Form of Severance Agreement.
10.3(6) Borders Group, Inc. Stock Option Plan.
10.4(8) First Amendment to the Borders Group, Inc. Stock Option
Plan.
10.5(11) Second Amendment to the Borders Group, Inc. Stock Option
Plan.
10.6(11) Third Amendment to the Borders Group, Inc. Stock Option
Plan.
10.7(3) Tax Allocation Agreement dated May 24, 1995 between Borders
Group, Inc. and Kmart Corporation.
10.8(3) Lease Guaranty Agreement dated May 24, 1995 between Borders
Group, Inc. and Kmart Corporation.
10.9(2) Borders Group, Inc. Management Stock Purchase Plan.
10.10(8) First Amendment to the Borders Group, Inc. Management Stock
Purchase Plan.
10.11(9) Second Amendment to the Borders Group, Inc. Management Stock
Purchase Plan.
10.12(11) Third Amendment to the Borders Group, Inc. Management Stock
Purchase Plan.
10.13(2) Borders Group, Inc. Employee Stock Purchase Plan.
10.14(4) First Amendment to the Borders Group, Inc. Employee Stock
Purchase Plan.
10.15(11) Second Amendment to the Borders Group, Inc. Employee Stock
Purchase Plan.
10.16(11) Third Amendment to the Borders Group, Inc. Employee Stock
Purchase Plan.
10.17(6) Borders Group, Inc. Annual Incentive Bonus Plan.
10.18(11) First Amendment to the Borders Group, Inc. Annual Incentive
Plan.
10.19(2) Borders Group, Inc. Director Stock Plan.
10.20(9) First Amendment to the Borders Group, Inc. Director Stock
Plan.
10.21(9) Second Amendment to the Borders Group, Inc. Director Stock
Plan.
10.22(7) Amended and Restated Multicurrency Credit Agreement among
Borders Group, Inc., its subsidiaries and Parties thereto.
10.23(7) Amended and Restated Participation Agreement among Borders
Group, Inc., its subsidiaries and Parties thereto.
10.24(7) Appendix A to Participation Agreement among Borders Group,
Inc., its subsidiaries and Parties thereto.
10.25(7) Amended and Restated Credit Agreement among Borders Group,
Inc., its subsidiaries and Parties thereto.
10.26(7) Amended and Restated Guarantee Credit Agreement among
Borders Group, Inc., its subsidiaries and Parties thereto.
10.27(13) Omnibus Amendment No. 1 to Amended and Restated Guarantee
Credit Agreement among Borders Group, Inc., its subsidiaries
and Parties thereto.
10.28(5) Agreement dated April 19, 1996, between Borders Group, Inc.
and Bruce A. Quinnell.
10.29(10) Borders Group, Inc. Stock Option Plan for International
Employees.
10.30(11) 1998 Borders Group, Inc. Stock Option Plan.
10.31 Agreement dated January 24, 2000, between Borders Group,
Inc. and Robert F. DiRomualdo.
10.32 Agreement dated January 24, 2000, between Borders Group,
Inc. and George R. Mrkonic.
10.33 Agreement dated November 15, 1999, between Borders Group,
Inc. and Gregory P. Josefowicz.
43
45
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.34(11) Participation Agreement dated as of December 1, 1998 by and
among Borders Group, Inc., Borders, Inc. and Parties
thereto.
10.35(11) Agreement dated April 20, 1999, between Borders Group, Inc.
and Philip M. Pfeffer.
10.36(13) Multicurrency Revolving Credit Facility Credit Agreement
dated July 9, 1999 among Borders Group, Inc., its
subsidiaries and Parties thereto.
10.37(14) Amendment No. 1 to 1998 Borders Group, Inc. Stock Option
Plan.
10.38 Amended Schedule 1.01(B) to the Amended and Restated
Multicurrency Credit Agreement among Borders Group, Inc.,
its subsidiaries and Parties thereto.
10.39 Amended Schedule II to the Amended and Restated Credit
Agreement among Borders Group, Inc., its subsidiaries and
Parties thereto.
18.1(3) Letter of PricewaterhouseCoopers LLP dated July 17, 1995.
21.1 Subsidiaries of Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule.
99.1 Cautionary Statement under the Private Securities Litigation
Reform Act of 1995 -- 'Safe Harbor' for Forward-Looking
Statements.
- -------------------------
(1) Incorporated by reference from the Company's Registration Statement on Form
S-4 (File No. 33-90016).
(2) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-90918).
(3) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended April 23, 1995 (File No. 1-13740).
(4) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-80643).
(5) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended January 28, 1996 (File No. 1-13740).
(6) Incorporated by reference from the Company's Proxy Statement dated April 9,
1997 of Borders Group, Inc. (File No. 1-13740).
(7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended October 26, 1997 (File No. 1-13740).
(8) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended October 22, 1995 (File No. 1-13740).
(9) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended January 25, 1998 (File No. 1-13740).
(10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended July 26, 1998 (File No. 1-13740).
(11) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended January 24, 1999 (File No. 1-13740).
(12) Incorporated by reference from the Company's Registration Statement on Form
S-3 (File No. 333-80669).
(13) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended July 25, 1999 (File No. 1-13740).
(14) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended October 24, 1999 (File No. 1-13740).
(b) Financial Statement Schedules:
All financial statement schedules are omitted as they are not applicable or
the required information is included in the consolidated financial statements of
the Registrant.
(c) Reports on Form 8-K:
None
44