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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 28, 2001
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
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BORDERS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MICHIGAN 38-3294588
(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
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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 $1,258,879,925 BASED UPON THE CLOSING MARKET PRICE
OF $16.50 PER SHARE OF COMMON STOCK ON THE NEW YORK STOCK EXCHANGE AS OF MARCH
22, 2001.
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF MARCH 22, 2001: 79,944,489
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE MAY 17, 2001 ANNUAL
MEETING OF STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III.
THE EXHIBIT INDEX IS LOCATED ON PAGE 50 HEREOF.
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BORDERS GROUP, INC.
INDEX
PAGE
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PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 8
Item 3. Legal Proceedings........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders......... 10
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 11
Item 6. Selected Financial Data..................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 13
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 19
Item 8. Financial Statements and Supplementary Data................. 20
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 41
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 42
Item 11. Executive Compensation...................................... 44
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 45
Item 13. Certain Relationships and Related Party Transactions........ 45
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 46
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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 28, 2001, the Company operated 349 superstores primarily under the
Borders name, including nine in the United Kingdom, two in Australia, and one
each in Singapore, New Zealand, and Puerto Rico. The Company also operated 869
mall-based and other bookstores primarily under the Waldenbooks name and 31
bookstores under the Books etc. name in the United Kingdom. The Company 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, both domestic and
international. In 2000, the Company opened 44 new Borders book and music
superstores. Borders superstore operations achieved annual growth in net sales
and net income for the year ended January 28, 2001 of 14.1% and 13.3%
respectively. Borders superstores achieved average sales per square foot of $255
and average sales per superstore of $6.7 million in 2000, 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 for the three years ended January 28, 2001, and January 23,
2000, of 18.0% and 23.0%, 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. Borders superstores carry an average
of 140,000 book titles, ranging from 85,000 titles to 170,000 titles, across
numerous categories, including many hard-to-find titles. As of January 28, 2001,
321 of the 335 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 40,000 titles of music, 5,500 titles
of videotapes and 1,400 titles of digital video discs.
Borders superstores average 24,500 square feet in size, including
approximately 5,000 square feet devoted to music, approximately 600 square feet
devoted to videos and digital video discs and approximately 1,400 square feet
devoted to a cafe. Stores opened in fiscal 2000 averaged 25,200 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.
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The number of Borders domestic stores located in each state and the
District of Columbia as of January 28, 2001 are listed below:
NUMBER OF
STATE STORES
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Alaska............................ 1
Arizona........................... 7
California........................ 50
Colorado.......................... 8
Connecticut....................... 5
District of Columbia.............. 3
Delaware.......................... 2
Florida........................... 22
Georgia........................... 13
Hawaii............................ 6
Iowa.............................. 2
Idaho............................. 1
Illinois.......................... 21
Indiana........................... 7
Kansas............................ 5
Louisiana......................... 1
Massachusetts..................... 11
Maryland.......................... 9
Maine............................. 2
Michigan.......................... 15
Minnesota......................... 5
Missouri.......................... 4
NUMBER OF
STATE STORES
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North Carolina.................... 6
Nebraska.......................... 2
New Hampshire..................... 3
New Jersey........................ 10
New Mexico........................ 2
Nevada............................ 4
New York.......................... 17
Ohio.............................. 16
Oklahoma.......................... 4
Oregon............................ 6
Pennsylvania...................... 18
Rhode Island...................... 2
South Dakota...................... 1
Tennessee......................... 4
Texas............................. 15
Utah.............................. 3
Virginia.......................... 10
Vermont........................... 1
Washington........................ 6
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 28, 2001 of $944.3 million, and generated net income of $40.2 million.
Walden achieved average sales per square foot of $269 and average sales per
store of $1.1 million for 2000, both of which are higher than its closest
competitor. Walden stores average approximately 3,500 square feet in size and
typically carry between 15,000 and 40,000 titles.
Walden operates one of the longest-running customer loyalty programs in the
nation, the Preferred Reader Program. The lessons learned via this program are
helping the Company to develop customer loyalty programs across its other
business channels.
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The number of Waldenbooks stores located in each state and the District of
Columbia as of January 28, 2001 are listed below:
NUMBER OF
STATE STORES
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Alaska............................ 6
Alabama........................... 6
Arkansas.......................... 8
Arizona........................... 11
California........................ 70
Colorado.......................... 14
Connecticut....................... 14
District of Columbia.............. 2
Delaware.......................... 3
Florida........................... 50
Georgia........................... 25
Hawaii............................ 12
Iowa.............................. 13
Idaho............................. 4
Illinois.......................... 40
Indiana........................... 20
Kansas............................ 8
Kentucky.......................... 12
Louisiana......................... 10
Massachusetts..................... 27
Maryland.......................... 23
Maine............................. 2
Michigan.......................... 27
Minnesota......................... 8
Missouri.......................... 19
Mississippi....................... 7
NUMBER OF
STATE STORES
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Montana........................... 4
North Carolina.................... 31
North Dakota...................... 3
Nebraska.......................... 5
New Hampshire..................... 5
New Jersey........................ 26
New Mexico........................ 5
Nevada............................ 4
New York.......................... 47
Ohio.............................. 42
Oklahoma.......................... 13
Oregon............................ 10
Pennsylvania...................... 54
Rhode Island...................... 5
South Carolina.................... 14
South Dakota...................... 2
Tennessee......................... 16
Texas............................. 59
Utah.............................. 4
Virginia.......................... 31
Vermont........................... 4
Washington........................ 17
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 of $19.7 million. AWU operates kiosks, most of which are
seasonal, which sell interactive toys and other novelty merchandise. The
acquisition has been accounted for under the purchase method.
In January 2001, the Company adopted a plan to discontinue operations of
AWU. Accordingly, the operating results of AWU have been segregated from
continuing operations.
INTERNATIONAL
Borders 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, Borders has expanded its international operations to establish a
presence on four continents. The Company opened five international superstores
in 2000, and as of January 28, 2001, operated nine superstores in the United
Kingdom, two in Australia, and one each in Singapore, New Zealand, and Puerto
Rico.
International superstores range between 16,000 and 40,000 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
2000, international sales increased 30% to $219.2 million. Currently, five of
the top ten highest volume Borders superstores are international stores.
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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 31 stores in the United Kingdom as of January 28, 2001,
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 8,000 square feet, and the
smallest being 650 square feet.
BORDERS.COM
The Company operates an Internet commerce site, Borders.com. This site
offers customers over 700,000 titles of book, music and video items in stock and
ready for immediate shipping.
Borders.com is a 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.
On April 11, 2001, the Company announced an agreement with Amazon.com, Inc.
to re-launch Borders.com as a co-branded Web site powered by Amazon.com's
e-commerce platform. Amazon.com will be the seller of record, providing
inventory, fulfillment, site content and customer service for the co-branded
site. Borders.com will continue operation in its current format until the launch
of the co-branded site planned in August 2001.
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 and one distribution center,
also in Nashville, that services Walden stores exclusively. The Company also
utilized a distribution center in Columbus that serviced the All Wound Up
seasonal kiosk operations in fiscal 2000. The distribution center in Columbus
closed in 2001 due to the discontinuance of operations of All Wound Up. In
addition, the Company has two distribution facilities 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 La Vergne, 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.
The Company announced an agreement on March 15, 2001, with Ingram Book
Group to make Ingram the primary provider of book fulfillment services for
Borders Group's special order sales. The transaction includes the sale to Ingram
of a large percentage of the book inventory housed in the Company's fulfillment
center in La Vergne, Tennessee, which currently handles the function to be
assumed by Ingram. Upon completion of the transition, Ingram will fulfill book
special orders for Borders and Walden stores. The Company plans to keep the La
Vergne facility open as the Company realigns its distribution assets. The
facility will use the additional processing capacity
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resulting from the Ingram agreement to support other products and retail store
growth. See Note 14 -- Subsequent Event in the Notes to Consolidated Financial
Statements.
Pursuant to the agreement with Amazon.com, Inc. as discussed above,
Amazon.com, Inc. will assume the fulfillment of online orders upon the
transition to a co-branded site planned in August 2001.
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.
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., 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, barnesandnoble.com, 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 28, 2001, 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 except that the
employees of two Borders stores have set dates in May 2001 to vote on whether or
not they will be 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.
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SEASONALITY
The Company's business is highly seasonal, with sales generally highest in
the fourth quarter and lowest in the first quarter. During 2000, 36.4% of the
Company's sales and 96% of the Company's operating income were generated in the
fourth quarter. The Company's results of operations depend significantly upon
the holiday selling season in the fourth quarter; less than satisfactory net
sales for such period could have a material adverse effect on the Company's
financial condition or results of operations for the year and may not be
sufficient to cover any losses which may be incurred in the first three quarters
of the year. 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".
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 30 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
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(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
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.
The Company and Borders have entered into an agreement with Kmart pursuant
to which (i) the Company and Borders have agreed to take certain actions in
order to secure the release of up to 30 Kmart lease guarantees (including by
providing substitute lease guarantees from the Company in certain cases and by
assigning certain Borders' leases to Walden), and (ii) Kmart has agreed that, if
the Company and Borders are successful in their efforts to obtain the release of
at least three out of a group of 10 designated Kmart lease guarantees and
certain other conditions are satisfied, then the Lease Guaranty Agreement will
be amended to eliminate most of the restrictions described above which are
imposed on the Company by the Lease Guaranty Agreement. There can be no
assurance that the Company and Borders will be successful in such efforts or
that the Lease Guaranty Agreement will be amended.
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 28, 2001, the average unexpired term under Borders' existing store
leases was 13 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. At present, the average unexpired term under Walden's
existing store leases is approximately 3.8 years. The expiration of Walden's
mall-based bookstore leases for its bookstores open as of January 28, 2001
expire as follows:
LEASE TERMS TO EXPIRE DURING 12 MONTHS NUMBER OF
ENDING ON OR ABOUT JANUARY 31 MALL STORES
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2001........................................................ 192
2002........................................................ 127
2003........................................................ 112
2004........................................................ 110
2005........................................................ 79
2006 and later.............................................. 249
Books etc. operated 31 stores in the United Kingdom as of January 28, 2001.
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
12.3 years.
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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 prejudgment interest on any amounts awarded in the
action, as well as attorney fees and costs. The plaintiffs have provided a
report estimating damages against the Company, exclusive of interest, as
follows: (i) between an aggregate of approximately $2.8 million and
approximately $3.3 million (before trebling) with respect to the Robinson-Patman
Act claims of the 26 independent bookseller plaintiffs, and (ii) between an
aggregate of approximately $5.5 million and approximately $6.4 million with
respect to the disgorgement claims under California law for the geographic areas
of the California plaintiffs. The Company's pleadings in the action deny any
liability to plaintiffs, and the Company disputes plaintiffs' claims of damages.
On November 16, 2000, the court granted the motion of the Company and Barnes &
Noble to dismiss the disgorgement claims brought by the ABA under California law
on behalf of independent booksellers in the state of California who are not
named in the litigation. On March 19, 2001, the court dismissed all of the
damage claims of the plaintiffs. The trial of the remaining claims began on
April 9, 2001, and on April 19, 2001, the parties settled the litigation.
Under the terms of the Settlement Agreement, the Company and Barnes &
Noble, Inc. will each pay $2.35 million to the ABA as partial reimbursement for
its legal fees. The Settlement Agreement does not impose any restrictions on the
Company's business practices. The plaintiffs have released all claims against
the Company up to the date of the settlement relating to matters asserted in the
litigation, and have agreed not to sue the Company for three years over any
practices that were the subject of the litigation.
In August 1998, the Intimate Bookshop, Inc. ("Intimate") instituted an
action against the Company and Barnes & Noble, Inc. in the United States
District Court for the Southern District of New York, and, in December, 2000 and
Lucky, Inc. instituted an action against Waldenbooks and Barnes & Noble, Inc. in
the United States District for the District of Montana, Great Falls Division.
Both of these actions contain allegations and claims similar to those contained
in the ABA litigation described above. The Intimate 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. The Lucky, Inc. Amended Complaint alleges that the
plaintiffs have suffered more than $75,000 in damages and requests treble
damages, injunctive and declaratory relief, interest, costs, attorneys' fees and
other specified relief. The Company intends to vigorously defend these actions.
In April 2000, two former employees, Marissa Everett and Terry Blagsvedt,
instituted an action against Borders in the Superior Court of California for the
County of San Francisco. The Amended Complaint in the action was filed by four
plaintiffs, individually and on behalf of a purported class consisting of all
current and former employees who worked as assistant managers in Borders stores
in the state of California at any time between April 10, 1996, and the present.
The Amended 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 Amended Complaint alleges
violations of the California Labor Code and the California Business and
Professions Code. 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 and attorneys fees and such other relief as the court deems
proper. The Company intends to vigorously defend the action, including
contesting the certification of the action as a class action.
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On May 31, 2000, Keith Markowitz instituted an action in the United States
District Court for the Eastern District of Pennsylvania as a purported class
action against Sony Music Entertainment Inc. ("Sony"), Warner-Elektra-Atlantic
Corporation ("WEA"), EMI Music Distribution ("EMI"), BMG Music ("BMG"),
Universal Music & Video Corp. ("UMVD"), WalMart Stores, Inc., ("WalMart") and
Borders, Inc., ("Borders", a subsidiary of the Company). The purported Plaintiff
Class is composed of all similarly situated purchasers who since May 31, 1996
(the "Class Period") purchased compact discs of prerecorded music distributed
and/or manufactured by defendants. WalMart and Borders are named as defendants
individually and as representatives of a purported Defendant Class consisting of
all retailers and other distributors of compact discs produced by defendants
Sony, WEA, EMI, BMG, and UMVD during the Class Period, and who conspired with
Sony, WEA, EMI, BMG, and/or UMVD to carry out the unlawful conduct alleged in
the complaint. The complaint alleges that Sony, WEA, EMI, BMG, and UMVD each had
agreements with retailers setting out minimum advertised price policies and the
benefits conferred on retailers for adhering to such policy, and that such
agreements amounted to vertical agreements in restraint of trade fixing a
minimum price for prerecorded music products, including CDs. The complaint
further alleges that the alleged agreements violated of the Sherman Anti-Trust
Act and caused the plaintiffs to pay supra-competitive prices for the CDs they
purchased. Plaintiffs seek a permanent injunction, treble damages, attorneys'
fees, costs and disbursements, pre- and post-judgment interest and such other
relief as the court may deem as appropriate.
Subsequent to the filing of the Markowitz case a number of other cases were
filed in other federal district courts. None of the other cases named Borders as
a defendant and all were transferred for pretrial purposes pursuant to the
Multi-District Litigation procedure to the United States District Court for the
District of Maine. Pursuant to that procedure the cases were consolidated under
the caption, "In re Compact Disc Minimum Advertised Price Antitrust Litigation,"
and a consolidated complaint was filed. This consolidated complaint did not name
Borders as a party to the suit. Thus, the Company's involvement in the case is
limited to that of a witness against whom no liability or damages can attach.
On October 10, 2000, Edward Michael O'Brien and Saviorg Corporation, as pro
se litigants, instituted an action in the United States District Court for the
Central District of California against Time Warner, Inc., Warner Music Group,
Warner-Electra-Atlantic Corporation, Warner Bros. Records, Inc, Atlantic
Recording Corp., Elektra Entertainment Group, Inc., Rhino Entertainment Company,
WalMart Stores, Inc., K-Mart Corporation, the Company and Morning Glory Music.
The Complaint contains allegations similar to those made in the Markowitz action
described above, and also alleges other violations of California and federal
laws. Plaintiffs seek treble damages, attorneys' fees, costs and disbursements
and such further relief as the court may deem just and proper. The complaint was
dismissed and the dismissal has been appealed to the United States Court of
Appeals for the Ninth Circuit. In the meantime, Mr. O'Brien, alone, filed
another suit, making essentially the same allegations. Efforts to dismiss the
complaint are underway. The Company denies the allegations of wrongdoing and
intends to vigorously defend this litigation.
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.
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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 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
FISCAL QUARTER 2000
First Quarter............................................. $17.25 $11.19
Second Quarter............................................ $18.50 $13.38
Third Quarter............................................. $14.44 $12.56
Fourth Quarter............................................ $13.94 $11.38
The Common Stock is traded on the New York Stock Exchange.
As of March 22, 2001, the Common Stock was held by 4,163 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 29, 2001, the Company issued to Robert DiRomualdo, Chairman and
Director of the Company, options to purchase 53,191 shares of common stock with
an exercise price of $12.44 in lieu of salary for fiscal 2001. This transaction
involved an offer to Mr. DiRomualdo 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.
On January 29, 2001, the Company issued to George R. Mrkonic, Vice Chairman
of the Company, options to purchase 53,191 shares of common stock with an
exercise price of $12.44 in lieu of salary for fiscal 2001. This transaction
involved an offer 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.
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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 28, JANUARY 23, JANUARY 24, JANUARY 25, JANUARY 26,
2001(1) 2000 1999 1998 1997
----------- ----------- ------------ ------------ -----------
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA
Borders Sales.............................. $2,080.3 $1,823.2 $1,521.0 $1,267.4 $ 979.1
Waldenbooks Sales.......................... 944.3 959.1 948.7 970.0 979.7
International Sales........................ 219.2 168.2 120.7 28.6 --
-------- -------- -------- -------- --------
Total Store Sales.......................... 3,243.8 2,950.5 2,590.4 2,266.0 1,958.8
Borders.com Sales.......................... 27.4 17.9 4.6 -- --
-------- -------- -------- -------- --------
Total Sales................................ $3,271.2 $2,968.4 $2,595.0 $2,266.0 $1,958.8
Operating Income Before Asset Impairments
and Other Writedowns..................... $ 171.3 $ 171.0 $ 167.3 $ 138.0 $ 103.1
Asset Impairments and Other Writedowns..... 36.2 -- -- -- --
-------- -------- -------- -------- --------
Operating Income from Continuing
Operations............................... $ 135.1 $ 171.0 $ 167.3 $ 138.0 $ 103.1
======== ======== ======== ======== ========
Income from Continuing Operations.......... $ 73.8 $ 94.0 $ 92.1 $ 80.2 $ 57.9
Discontinued Operations, Net of Tax
Loss from Operations of All Wound Up..... 10.8 3.7 -- -- --
Loss on Disposition of All Wound Up...... 19.4 -- -- -- --
-------- -------- -------- -------- --------
Net Income................................. $ 43.6 $ 90.3 $ 92.1 $ 80.2 $ 57.9
======== ======== ======== ======== ========
Diluted Earnings Per Common Share.......... $ 0.54 $ 1.13 $ 1.12 $ 0.98 $ 0.70
Diluted Earnings Per Common Share from
Continuing Operations.................... $ 0.92 $ 1.17 $ 1.12 $ 0.98 $ 0.70
Diluted Earnings Per Common Share Before
Asset Impairments and Other Writedowns
and Discontinued Operations.............. $ 1.21 $ 1.17 $ 1.12 $ 0.98 $ 0.70
BALANCE SHEET DATA
Working Capital............................ $ 217.2 $ 170.3 $ 144.5 $ 137.0 $ 225.1
Total Assets............................... $2,047.1 $1,914.8 $1,766.6 $1,534.9 $1,211.0
Short-Term Borrowings...................... $ 143.5 $ 133.4 $ 131.9 $ 122.5 $ 30.0
Long-Term Debt and Capital Lease
Obligations, Including Current Portion... $ 15.8 $ 18.8 $ 8.5 $ 10.0 $ 6.7
Shares Subject to Repurchase............... $ -- $ -- $ -- $ -- $ 34.1
Stockholders' Equity....................... $ 846.5 $ 802.6 $ 715.1 $ 598.1 $ 511.4
- -------------------------
(1) The Company's 2000 fiscal year consisted of 53 weeks.
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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 28, 2001, the Company operated 349 superstores primarily under the
Borders name, including nine in the United Kingdom, two in Australia, and one
each in Singapore, New Zealand, and Puerto Rico. The Company also operated 869
mall-based and other bookstores primarily under the Waldenbooks name, and 31
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 2000 consisted of 53 weeks and ended on January 28,
2001. Fiscal 1999 and 1998 consisted of 52 weeks and ended on January 23, 2000,
and January 24, 1999, respectively. References herein to years are to the
Company's fiscal years.
RESULTS OF OPERATIONS
The following table presents the Company's consolidated statement of
operations data, as a percentage of sales, for the three most recent fiscal
years.
JAN. 28, JAN. 23, JAN. 24,
2001 2000 1999
-------- -------- --------
RESULTS OF OPERATIONS
Sales....................................................... 100.0% 100.0% 100.0%
Cost of merchandise sold (includes occupancy)............... 72.0 71.7 71.7
----- ----- -----
Gross margin................................................ 28.0 28.3 28.3
Selling, general and administrative expenses................ 22.5 22.1 21.5
Pre-opening expense......................................... 0.2 0.3 0.3
Goodwill amortization....................................... 0.1 0.1 0.1
----- ----- -----
Operating income before asset impairments and other
writedowns................................................ 5.2 5.8 6.4
Asset impairments and other writedowns...................... 1.1 -- --
----- ----- -----
Operating income............................................ 4.1 5.8 6.4
Interest expense............................................ 0.4 0.6 0.6
----- ----- -----
Income before income tax.................................... 3.7 5.2 5.8
Income tax.................................................. 1.4 2.0 2.3
----- ----- -----
Income from continuing operations........................... 2.3 3.2 3.5
Discontinued operations, net of tax:
Loss from operations of All Wound Up........................ 0.4 0.2 --
Loss on disposition of All Wound Up......................... 0.6 -- --
----- ----- -----
Net Income.................................................. 1.3% 3.0% 3.5%
===== ===== =====
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CONSOLIDATED RESULTS
Consolidated sales increases in fiscal 2000 and 1999 resulted primarily
from the opening of new Borders superstores and increases in comparable store
sales for Borders superstores.
Consolidated gross margin decreased as a percentage of sales in 2000, but
was flat in 1999. The decrease in 2000 was driven by lower gross margin
percentages for both the Borders and Waldenbooks segments. Among the reasons for
the decrease in gross margin percentage of Borders was a change in sales mix to
lower-margin items. The decrease in gross margin percentage of Waldenbooks was
due to its fixed expenses (primarily store occupancy expenses) being spread over
a smaller store base and lower sales volume in 2000 compared to 1999.
Consolidated selling, general and administrative expenses increased in 2000
and 1999 primarily due to continued spending on the Company's strategic
initiatives, primarily international superstores and web-based convergence
initiatives. The 1999 increase also included a $5.5 million pre-tax charge
related to the resignation of the Company's former Chief Executive Officer.
In the fourth quarter of fiscal 2000, the Company took a pre-tax charge of
$36.2 million related to the impairment of certain long-lived assets and other
writedowns. The carrying value of long-lived assets are evaluated whenever
changes in circumstances indicate the carrying amount of such assets may not be
recoverable. In performing such reviews for recoverability, the Company compares
the expected cash flows to the carrying value of long-lived assets. If the
expected future cash flows are less than the carrying amount of such assets, the
Company recognizes an impairment loss for the difference between the carrying
amount and their estimated fair value. Fair value is estimated using expected
discounted future cash flows. The charge taken in 2000 primarily consisted of
$17.7 million for computer hardware and software of Borders.com and $12.5
million for leasehold improvements and furniture and fixtures primarily related
to 103 underperforming Walden stores. The remainder of the charge related to
employee severance, the costs of certain lease obligations for redundant
headquarter buildings, and the write-off of certain equity investments.
Interest expense decreased as a percentage of sales in 2000 as a result of
lower consolidated borrowing levels and was flat in 1999.
The effective tax rate for the years presented differed from the federal
statutory rate primarily as a result of state income taxes. The Company's
effective tax rate was 39.4% in 2000, as compared to 39.1% in 1999. The increase
is primarily due to changes in the mix of income subject to tax in the various
taxing jurisdictions. In 1998, the effective tax rate was 39.0%.
In January 2001, the Company adopted a plan to discontinue operations of
All Wound Up, a seasonal retailer of interactive toys and novelty merchandise
the Company had acquired in March 1999. The discontinuance and closure of All
Wound Up resulted in an after-tax charge of $19.4 million in the fourth quarter
of fiscal 2000, and is reflected in the Consolidated Statements of Operations as
a discontinued operation. The charge was substantially non-cash and related
primarily to the writeoff of goodwill, inventory and fixed assets.
The Company includes certain distribution and other expenses in its
inventory costs, particularly freight, distribution payroll, and certain
occupancy expenses. In addition, certain selling, general and administrative
expenses are included in inventory costs. These amounts approximate 2% of total
inventory.
SEGMENT RESULTS
The Company is organized based upon the following operating segments:
domestic Borders stores, Waldenbooks stores, international Borders and Books
etc. stores, online retailing through Borders.com, and other (consisting of
interest expense and certain corporate governance costs). See Note 13 of the
Notes to Consolidated Financial Statements for further information relating to
these segments.
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BORDERS 2000 1999 1998
- ------- ---- ---- ----
(DOLLAR AMOUNTS IN MILLIONS)
Sales....................................................... $2,080.3 $1,823.2 $1,521.0
Net income.................................................. $ 82.6 $ 72.9 $ 52.1
Net income as % of sales.................................... 4.0% 4.0% 3.4%
Depreciation and amortization expense....................... $ 52.9 $ 47.3 $ 42.3
Interest expense............................................ $ 12.8 $ 16.4 $ 16.5
Store openings.............................................. 44 46 43
Store count................................................. 335 291 245
The increases in Borders sales for 2000 and 1999 are primarily the result
of new store openings and comparable store sales increases. Borders opened 44
and 46 new stores in 2000 and 1999, respectively, and experienced comparable
store sales increases of 2.3% and 5.4% in 2000 and 1999, respectively.
Net income for 2000 and 1999 increased primarily due to store openings and
Borders' ability to leverage fixed costs over a larger sales base. As a
percentage of sales, net income for 2000 was flat with 1999 despite a decrease
in gross margin percentage and an increase in non-payroll store expenses as a
percentage of sales. The decrease in gross margin as a percentage of sales was
due to a change in sales mix to DVDs and new-release music, a slight increase in
promotional costs, and less leverage of store occupancy costs resulting from
lower comparable store sales. Non-payroll store expenses as a percentage of
sales increased due to lower comparable store sales increases. These items were
offset by lower store payroll costs as a percentage of sales. Net income as a
percentage of sales for 1999 was greater than 1998 primarily due to an increase
in gross margin percentage resulting from improved shrinkage control and
merchandise mix.
Depreciation and amortization expense increased in 2000 and 1999 as a
result of the depreciation expense recognized on new stores' capital
expenditures.
Interest expense decreased in 2000 and 1999 due to lower average borrowing
levels.
WALDENBOOKS 2000 1999 1998
- ----------- ---- ---- ----
Sales....................................................... $944.3 $959.1 $948.7
Net income.................................................. $ 40.2 $ 55.5 $ 61.0
Net income as % of sales.................................... 4.3% 5.8% 6.4%
Depreciation expense........................................ $ 25.8 $ 23.9 $ 18.8
Interest income............................................. $ 26.2 $ 22.3 $ 18.9
Store Openings.............................................. 11 39 16
Store Closings.............................................. 46 35 39
Store Count................................................. 869 904 900
The decrease in Waldenbooks sales in 2000 is primarily the result of the
decrease in store count during the year, coupled with a comparable store sales
decrease of 2.9%. The increase in sales in 1999 is primarily the result of an
increase in store count during the year, coupled with a comparable store sales
increase of 0.7%.
Net income decreased in 2000 primarily as a result of decreased sales and a
$7.8 million after-tax asset impairment charge primarily related to 103
underperforming stores. Net income in 1999 decreased due to a lower gross margin
resulting from increased store occupancy expenses. As a percentage of sales, net
income for 2000 decreased primarily due to the asset impairment charge and a
decrease in gross margin percentage. This was due to increased promotional costs
as a percentage of sales, and higher distribution and store occupancy costs as a
percentage of sales resulting from the smaller store base and lower sales
volume. Net income and net income as a percentage of sales decreased in 1999
primarily due to a lower gross margin percentage resulting from a change in
sales mix to lower-margin, best-seller merchandise and increased store occupancy
expenses.
Depreciation expense increased in 2000 and 1999 as a result of the
depreciation expense recognized on new stores' and refurbished stores' capital.
Interest income increased in 2000 and 1999 as a result of Waldenbooks'
continued positive cash flow in the years presented.
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INTERNATIONAL 2000 1999 1998
- ------------- ---- ---- ----
Sales....................................................... $219.2 $168.2 $120.7
Net loss.................................................... $ 10.2 $ 7.9 $ 3.2
Net loss as % of sales...................................... 4.7% 4.7% 2.7%
Depreciation expense........................................ $ 8.8 $ 6.5 $ 3.5
Interest expense............................................ $ 12.4 $ 8.9 $ 7.4
Superstore Store Openings................................... 5 4 4
Superstore Store Count...................................... 14 9 5
Books etc. Store Openings................................... 6 2 4
Books etc. Store Closings................................... 2 1 1
Books etc. Store Count...................................... 31 27 26
The increases in International sales for 2000 and 1999 are primarily the
result of new superstore openings and comparable store sales increases. In 2000,
the Company opened three additional stores in the United Kingdom, one additional
store in Australia, and the Company's first store in Puerto Rico. In 1999, three
stores were opened in the United Kingdom, as well as the Company's first store
in New Zealand.
Net loss for 2000 increased as a result of higher depreciation and interest
expense, partially offset by increased operating income generated from the
maturation of the prior years' store base. Net loss for 2000 as a percentage of
sales remained flat to the prior year. The addition of four new stores in 1999,
nearly doubling the superstore count, led to an increased net loss from the
prior year. Similar factors led to the change in net loss as a percentage of
sales for 1999.
Depreciation and amortization expense increased in 2000 and 1999 as a
result of the depreciation expense recognized on new stores' capital
expenditures.
Interest expense increased in 2000 and 1999 due to higher average borrowing
levels necessary to finance investments in new stores.
Foreign currency transaction gains (losses) were $(0.8) million, $0.2
million, and $0.3 million in 2000, 1999, and 1998, respectively.
BORDERS.COM 2000 1999 1998
- ----------- ---- ---- ----
Sales....................................................... $ 27.4 $17.9 $ 4.6
Net loss.................................................... $ 29.7 $17.2 $ 10.5
Net loss as % of sales...................................... 108.4% 96.1% 228.3%
Depreciation expense........................................ $ 7.8 $ 5.5 $ 1.9
Interest expense............................................ $ 5.8 $ 4.4 $ 2.7
Borders.com began operations in fiscal 1998. Sales increased 53.1% and
289.1% in 2000 and 1999 respectively.
Net loss for 2000 increased primarily as a result of an $11.3 million
after-tax asset impairment charge related to the computer hardware and software
at Borders.com. The increased loss in 1999 over 1998 was due to a full year of
the site's operating expense versus a partial year in 1998 due to the site's
start up in late 1998. The fluctuations in net loss as a percentage of sales are
driven by the same factors.
Depreciation expense increased in 2000 and 1999 as a result of the
depreciation expense recognized on the capital expenditures required to develop
and operate the site and to fulfill customer orders.
Interest expense increased in 2000 and 1999 due to higher average borrowing
levels necessary to finance the site's development and operation.
OTHER 2000 1999 1998
- ----- ---- ---- ----
Net loss.................................................... $9.1 $9.3 $7.3
Interest expense............................................ $8.3 $9.2 $8.5
Net loss consists of various corporate governance costs and income. The
2000 net loss remained essentially flat with the prior year due to a $3.5
million after-tax charge related to employee severance and the costs of writing
off
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redundant headquarters buildings and certain equity investments. The change in
1999 was primarily due to a $3.4 million after-tax charge related to the
resignation of the Company's former Chief Executive Officer. Interest expense
represents corporate-level interest costs not charged to the Company's operating
segments.
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 web-based commerce technologies.
Net cash provided by continuing operations in 2000 was $152.8 million, as
compared to $181.3 million in 1999. 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 49 new Borders stores.
Net cash used by discontinued operations represents the cash needed for the
operations of All Wound Up in fiscal 2000 and 1999.
Net cash used for investing was primarily for capital expenditures for new
stores and the refurbishment of existing stores. Capital expenditures in 2000
primarily reflect the opening of 49 new superstores and 11 new Waldenbooks
stores. Additional capital spending in 2000 reflected the development and
installation of in-store web-based technology and spending on corporate
information technology infrastructure. Capital expenditures in 1999 reflect the
opening of 50 new superstores 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.
Net cash provided by financing in 2000 was $19.5 million, resulting
primarily from net borrowings under the Credit Facility and the issuance of
common stock under the Company's employee benefit plans. Net cash used for
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.
The Company expects capital expenditures will decrease to approximately
$110.0 to $120.0 million in 2001, resulting primarily from fewer domestic store
openings. In addition, capital expenditures will result from international store
openings, refurbishment of a number of existing stores, and investment in
information systems streamlining. The Company currently plans to open
approximately 25 to 30 domestic Borders superstores, five to seven international
stores, and ten new Waldenbooks mall stores in 2001. 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.
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 and Credit Facilities. 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. As
discussed below, the Credit and Lease Facilities expire in October 2002, but the
Company expects to be able to successfully renew the Facilities. The Company
believes that its borrowing costs may increase beginning in November 2002, if
financial market conditions are unchanged.
The Company currently has a share repurchase program in place with
remaining authorization to repurchase approximately $66.8 million. During 2000
and 1999, $9.2 million and $25.4 million of common stock was repurchased,
respectively.
The Company has a $472.8 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, issue or repurchase its
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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.
The Company has a $175.0 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.
There were 40 properties financed through the Lease Facility, with a
financed value of $163.1 million, at January 28, 2001. 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 October 2000, the Company
transferred four properties previously financed under the Lease Facility, with a
total financed value of $13.8 million, to a new temporary facility with terms
similar to those of the Lease Facility. In February 2001, two of these
properties were transferred back to the Lease Facility, and two were permanently
financed through operating leases. Also in February 2001, ten additional
properties previously financed through the Lease Facility with a total financed
value of $44.6 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 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 through its line of credit.
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 2001 as compared to the end of 2000, the
Company's after-tax earnings, after considering the effects of its interest rate
swap agreements, would decrease $0.7 million based on the Company's expected
average outstanding debt, including its indirect borrowings under the Lease
Facility, as of January 28, 2001.
A portion of the Company's operations takes place in foreign jurisdictions,
primarily the United Kingdom, Australia, New Zealand and Singapore. As a result,
the Company's financial results could be affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in the foreign
markets in which the Company operates. The Company has generally not used
derivative instruments to manage this risk.
18
20
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. The information below excludes
discontinued operations and asset impairments and other writedowns.
FISCAL 2000 QUARTER ENDED
---------------------------------------------
APRIL JULY OCTOBER JANUARY
(DOLLARS IN MILLIONS) ----- ---- ------- -------
SALES................................................... $679.7 $698.4 $701.0 $1,192.1
Operating income (loss)................................. 3.4 3.4 (0.1) 164.6
% of full year:
Sales................................................. 20.8% 21.4% 21.4% 36.4%
Operating income...................................... 2.0 2.0 0.0 96.0
FISCAL 1999 QUARTER ENDED
---------------------------------------------
APRIL JULY OCTOBER JANUARY
(DOLLARS IN MILLIONS) ----- ---- ------- -------
SALES................................................... $617.9 $628.6 $651.1 $1,070.8
Operating income (loss)................................. (2.4) 1.8 5.8 165.8
% of full year:
Sales................................................. 20.8% 21.2% 21.9% 36.1%
Operating income...................................... (1.4) 1.1 3.4 96.9
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
OTHER MATTERS
Subsequent Event
Subsequent to the Company's fiscal year-end, the Company entered into an
agreement with Ingram Book Group ("Ingram"), a wholesaler of books, spoken audio
and magazines, pursuant to which Ingram will provide book fulfillment services
for the Company's special order and online sales. The transaction includes the
sale of approximately $12.0 million of the Company's book inventory to Ingram,
and will result in an after-tax charge of approximately $15.0 to $20.0 million
to be taken in the first quarter of fiscal 2001. This charge is substantially
non-cash and is primarily related to the writedown of assets used by the current
Company-owned facility to fulfill special order and online sales, including
warehouse equipment, hardware and software, and a reduction of recorded
inventory.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
19
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Consolidated Statements of Operations for the fiscal years
ended January 28, 2001, January 23, 2000 and January 24,
1999...................................................... 21
Consolidated Balance Sheets as of January 28, 2001 and
January 23, 2000.......................................... 22
Consolidated Statements of Cash Flows for the fiscal years
ended January 28, 2001, January 23, 2000 and January 24,
1999...................................................... 23
Consolidated Statements of Stockholders' Equity for the
fiscal years ended January 28, 2001, January 23, 2000 and
January 24, 1999.......................................... 24
Notes to Consolidated Financial Statements.................. 25
Report of Independent Auditors.............................. 39
20
22
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 28, JANUARY 23, JANUARY 24,
2001 2000 1999
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA) ----------- ----------- -----------
Sales...................................................... $3,271.2 $2,968.4 $2,595.0
Cost of merchandise sold (includes occupancy).............. 2,354.5 2,127.6 1,859.4
-------- -------- --------
Gross margin............................................... 916.7 840.8 735.6
Selling, general and administrative expenses............... 736.2 659.2 557.6
Pre-opening expense........................................ 6.4 7.8 7.8
Asset impairments and other writedowns..................... 36.2 -- --
Goodwill amortization...................................... 2.8 2.8 2.9
-------- -------- --------
Operating income........................................... 135.1 171.0 167.3
Interest expense........................................... 13.1 16.6 16.2
-------- -------- --------
Income from continuing operations before income tax........ 122.0 154.4 151.1
Income tax provision....................................... 48.2 60.4 59.0
-------- -------- --------
Income from continuing operations.......................... 73.8 94.0 92.1
Discontinued operations (Note 3)
Loss from operations of All Wound Up, net of income tax
credits of $7.0 and $2.4.............................. 10.8 3.7 --
Loss on disposition of All Wound Up, net of deferred
income tax credit of $8.9............................. 19.4 -- --
-------- -------- --------
Net income................................................. $ 43.6 $ 90.3 $ 92.1
======== ======== ========
Earnings (loss) per common share data (Note 2)
Diluted earnings (loss) per common share:
Continuing operations................................. $ 0.92 $ 1.17 $ 1.12
Discontinued operations............................... (0.38) (0.04) --
-------- -------- --------
Net diluted earnings per common share................. $ 0.54 $ 1.13 $ 1.12
======== ======== ========
Basic earnings (loss) per common share:
Continuing operations................................. $ 0.94 $ 1.21 $ 1.20
Discontinued operations............................... (0.38) (0.05) --
-------- -------- --------
Net basic earnings per common share................... $ 0.56 $ 1.16 $ 1.20
======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
21
23
CONSOLIDATED BALANCE SHEETS
FISCAL YEAR ENDED
--------------------------
JANUARY 28, JANUARY 23,
2001 2000
(DOLLARS IN MILLIONS EXCEPT SHARE AMOUNTS) ----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 59.1 $ 41.6
Merchandise inventories................................... 1,201.2 1,077.7
Accounts receivable and other current assets.............. 73.7 68.9
Deferred income taxes..................................... 1.1 10.0
-------- --------
Total Current Assets................................... 1,335.1 1,198.2
Property and equipment, net................................. 562.3 558.2
Other assets................................................ 34.2 36.5
Deferred income taxes....................................... 22.3 0.1
Goodwill, net of accumulated amortization of $53.1 and
$49.5, respectively....................................... 93.2 121.8
-------- --------
$2,047.1 $1,914.8
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings and current portion of long-term
debt................................................... $ 144.4 $ 136.1
Trade accounts payable.................................... 623.6 580.4
Accrued payroll and other liabilities..................... 256.6 232.2
Taxes, including income taxes............................. 93.3 79.2
-------- --------
Total Current Liabilities.............................. 1,117.9 1,027.9
Long-term debt and capital lease obligations................ 15.0 16.2
Other long-term liabilities................................. 67.7 68.1
Commitments and contingencies (Note 7)...................... -- --
-------- --------
Total Liabilities...................................... 1,200.6 1,112.2
-------- --------
Stockholders' Equity:
Common stock, 200,000,000 shares authorized; 78,649,501
and 77,687,829 shares issued and outstanding at January
28, 2001 and January 23, 2000, respectively............ 685.2 679.6
Deferred compensation and officer receivables............. (1.0) (3.9)
Accumulated other comprehensive income (loss)............. (8.0) 0.2
Retained earnings......................................... 170.3 126.7
-------- --------
Total Stockholders' Equity........................... 846.5 802.6
-------- --------
$2,047.1 $1,914.8
======== ========
See accompanying Notes to Consolidated Financial Statements.
22
24
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 28, JANUARY 23, JANUARY 24,
2001 2000 1999
(DOLLARS IN MILLIONS) ----------- ----------- -----------
Cash Provided by (used for):
Operations
Income from continuing operations......................... $ 73.8 $ 94.0 $ 92.1
Adjustments to reconcile net income to operating cash
flows:
Depreciation and amortization.......................... 95.3 83.5 66.7
(Increase) decrease in deferred income taxes........... (4.6) 7.4 10.2
Increase (decrease) in other long-term assets and
liabilities.......................................... 6.0 8.2 1.9
Asset impairments and other writedowns................. 23.0 -- --
Cash provided by (used for) current assets and current
liabilities:
Increase in inventories................................ (136.5) (50.4) (140.5)
Increase (decrease) in accounts payable................ 45.0 (29.2) 126.5
Increase in taxes payable.............................. 35.2 60.8 2.9
Other -- net........................................... 15.6 7.0 6.4
------- ------- -------
Net cash provided by continuing operations............. 152.8 181.3 166.2
Net cash used for discontinued operations.............. (14.2) (8.3) --
------- ------- -------
Net cash provided by operations........................ 138.6 173.0 166.2
------- ------- -------
Investing
Capital expenditures...................................... (138.7) (143.5) (179.8)
Net investing activities of discontinued operations....... (2.4) (15.7) --
------- ------- -------
Net cash used for investing............................ (141.1) (159.2) (179.8)
------- ------- -------
Financing
Repayment of long-term debt and capital lease
obligations............................................ (4.2) (1.2) (4.6)
Increase in capital lease obligations..................... -- 0.5 3.0
Repayment of debt assumed in acquisition.................. -- (2.0) --
Proceeds from construction funding........................ -- -- 1.3
Net funding from credit facility.......................... 21.4 1.5 9.4
Issuance of common stock.................................. 11.5 11.6 33.9
Repurchase of common stock................................ (9.2) (25.4) (51.7)
------- ------- -------
Net cash provided by (used for) financing.............. 19.5 (15.0) (8.7)
------- ------- -------
Effect of exchange rates on cash and equivalents............ 0.5 -- --
Net increase (decrease) in cash and equivalents............. 17.5 (1.2) (22.3)
Cash and equivalents at beginning of year................... 41.6 42.8 65.1
------- ------- -------
Cash and equivalents at end of year......................... $ 59.1 $ 41.6 $ 42.8
======= ======= =======
Supplemental Cash Flow Disclosures:
Interest paid............................................. $ 15.8 $ 18.0 $ 16.2
Income taxes paid......................................... $ 38.6 $ 6.4 $ 42.1
Debt and liabilities assumed in business acquisition...... $ -- $ 6.5 $ --
See accompanying Notes to Consolidated Financial Statements.
23
25
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
DEFERRED ACCUMULATED RETAINED
COMMON STOCK COMPENSATION OTHER EARNINGS
------------------- AND OFFICER COMPREHENSIVE (ACCUMULATED
SHARES AMOUNT RECEIVABLES INCOME (LOSS) DEFICIT) TOTAL
------ ------ ------------ ------------- ------------ -----
(DOLLARS IN MILLIONS EXCEPT SHARE AMOUNTS)
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
---------- ------ ----- ----- ------ ------
Net income.......................... -- -- -- -- 43.6 43.6
Foreign currency translation
adjustments....................... -- -- -- (8.2) -- (8.2)
------
Comprehensive income................ 35.4
Issuance of common stock............ 1,596,475 11.5 -- -- -- 11.5
Repurchase and retirement of common
stock............................. (634,803) (9.2) -- -- -- (9.2)
Tax benefit of equity
compensation...................... -- 3.3 -- -- -- 3.3
Change in receivables and deferred
compensation...................... -- -- 2.9 -- -- 2.9
---------- ------ ----- ----- ------ ------
Balance at January 28, 2001......... 78,649,501 $685.2 $(1.0) $(8.0) $170.3 $846.5
========== ====== ===== ===== ====== ======
See accompanying Notes to Consolidated Financial Statements.
24
26
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, Australia, Singapore, New
Zealand and Puerto Rico. 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 subsidiaries
include 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 accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements 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 2000 consisted of 53 weeks and
ended on January 28, 2001. Fiscal 1999 and 1998 consisted of 52 weeks and ended
on January 23, 2000, and January 24, 1999, respectively.
Foreign Currency and Translation of Foreign Subsidiaries: All assets and
liabilities of the Company's foreign operations are translated into U.S. dollars
at fiscal period-end exchange rates. Income and expense items are translated at
average exchange rates prevailing during the year. The resulting translation
adjustments are recorded as a component of stockholders' equity and other
comprehensive income. The functional currencies of the Companies' foreign
operations are the respective local currencies. Foreign currency translation
gains/(losses) were $(0.8), $0.2, and $0.3 in 2000, 1999, and 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, totaling $87.7 and $79.8 as of January 28, 2001, and January 23, 2000,
respectively.
Property and Equipment: Property and equipment are recorded at cost,
including capitalized interest, and depreciated over their estimated useful
lives on a straight-line basis for financial statement purposes and on
accelerated methods for income tax purposes. 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 2000 or 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 to 40 years on a straight-line
basis. The Company evaluates the recoverability of goodwill using a fair value
methodology whenever events or changes in circumstances indicate that the
carrying amount of goodwill may not be recoverable. This methodology is applied
separately to each of the
25
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
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.
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.
Revenue: Revenue is recognized, net of estimated returns, at the point of
sale for all of the Company's segments except Borders.com, which recognizes
revenue upon the shipment of merchandise to customers.
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 2000
or 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 of the store.
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 11 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), as amended by Statement Nos. 137 and 138, which
the Company adopted 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 effect of adopting FAS 133 was
not material to the Company's financial position or results of operations.
Reclassifications: Certain prior year amounts have been reclassified to
conform to fiscal 2000 presentation.
26
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
NOTE 2 -- WEIGHTED-AVERAGE SHARES OUTSTANDING
Weighted-average shares outstanding are calculated as follows (thousands):
2000 1999 1998
---- ---- ----
Weighted-average common shares outstanding -- basic
earnings per share................................. 78,374 77,577 76,631
Dilutive effect of employee stock options............ 1,914 2,641 5,872
------ ------ ------
Weighted-average common shares outstanding--diluted
earnings per share................................. 80,288 80,218 82,503
====== ====== ======
Unexercised employee stock options to purchase 14.3 million, 10.2 million
and 9.1 million common shares as of January 28, 2001, January 23, 2000, and
January 24, 1999, respectively, were not included in the weighted-average shares
outstanding calculation because to do so would have been antidilutive.
NOTE 3 -- DISCONTINUED OPERATIONS
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. The acquisition has been accounted for as a purchase.
In January 2001, the Company adopted a plan to discontinue operations of
All Wound Up. Accordingly, the operating results of the All Wound Up operations,
including a writeoff of leasehold improvements, equipment and deferred charges
of approximately $19.4, have been segregated from continuing operations and
reported as a separate line item on the statement of operations. The Company has
restated its prior financial statements to present the operating results of All
Wound Up as a discontinued operation.
Operating results (exclusive of the aforementioned provisions) from
discontinued operations are as follows:
2000 1999
---- ----
Net sales................................................... $ 23.2 $30.8
Costs and expenses:
Cost of sales............................................. 25.4 20.5
Selling, general and administrative expenses.............. 12.0 14.4
Goodwill.................................................. 0.9 0.7
------ -----
Operating loss.............................................. (15.1) (4.8)
Other deductions............................................ 2.7 1.3
------ -----
Loss before income tax...................................... (17.8) (6.1)
Income tax credit........................................... (7.0) (2.4)
------ -----
Net loss from operations.................................... $(10.8) $(3.7)
====== =====
The components of net assets of discontinued operations included in the
Company's consolidated balance sheets at January 28, 2001, and January 23, 2000,
are as follows:
2000 1999
---- ----
Net assets.................................................. $14.6 $31.6
Net liabilities............................................. 2.7 8.3
----- -----
$11.9 $23.3
===== =====
27
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
NOTE 4 -- ASSET IMPAIRMENTS AND OTHER WRITEDOWNS
In the fourth quarter of fiscal 2000, the Company took a pre-tax charge of
$36.2 related to the impairment of certain long-lived assets and other
writedowns. The carrying value of long-lived assets are evaluated whenever
changes in circumstances indicate the carrying amount of such assets may not be
recoverable. In performing such reviews for recoverability, the Company compares
the expected cash flows to the carrying value of long-lived assets. If the
expected future cash flows are less than the carrying amount of such assets, the
Company recognizes an impairment loss for the difference between the carrying
amount and their estimated fair value. Fair value is estimated using expected
discounted future cash flows. The charge taken in 2000 primarily consisted of
$17.7 for computer hardware and software of Borders.com and $12.5 for leasehold
improvements and furniture and fixtures of underperforming Walden stores. The
remainder of the charge was related to employee severance, the costs of certain
lease obligations for redundant headquarter buildings, and the writeoff of
certain equity investments.
NOTE 5 -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
2000 1999
---- ----
Property and equipment:
Land...................................................... $ 10.2 $ 10.2
Buildings................................................. 3.5 5.3
Leasehold improvements.................................... 339.6 307.8
Furniture and fixtures.................................... 712.1 593.9
Construction in progress.................................. 12.8 36.4
-------- -------
1,078.2 953.6
Less -- accumulated depreciation and amortization........... (515.9) (395.4)
-------- -------
Property and equipment, net................................. $ 562.3 $ 558.2
======== =======
NOTE 6 -- INCOME TAXES
The income tax provision from continuing operations consists of the
following:
2000 1999 1998
---- ---- ----
Current:
Federal................................................... $46.0 $45.4 $40.9
State and local........................................... 5.3 7.4 7.9
Foreign................................................... 0.3 0.2 --
Deferred:
Federal................................................... (0.6) 10.2 11.7
State and local........................................... 1.0 0.7 --
Foreign................................................... (3.8) (3.5) (1.5)
----- ----- -----
Total income tax provision.................................. $48.2 $60.4 $59.0
===== ===== =====
28
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
A reconciliation of the federal statutory rate to the Company's effective
tax rate follows:
2000 1999 1998
---- ---- ----
Federal statutory rate...................................... $42.8 $54.0 $52.9
State and local taxes, net of federal tax benefit........... 4.1 5.3 5.2
Other....................................................... 1.3 1.1 0.9
----- ----- -----
Total income tax provision.................................. $48.2 $60.4 $59.0
===== ===== =====
Deferred tax assets and liabilities resulted from the following:
2000 1999
---- ----
Deferred tax assets:
Federal benefit for state deferred taxes.................. $ 1.7 $ 0.9
Accruals and other current liabilities.................... 3.9 8.6
Deferred revenue.......................................... 6.1 7.0
Other long-term liabilities............................... 3.1 2.6
Deferred compensation..................................... 7.2 8.1
Deferred rent............................................. 21.2 19.4
Net operating losses...................................... 8.2 5.0
Asset impairments and other writedowns.................... 25.2 6.3
----- -----
Total deferred tax assets................................. 76.6 57.9
----- -----
Deferred tax liabilities:
Inventory................................................. 12.2 9.1
Property and equipment.................................... 37.9 35.3
Other..................................................... 3.1 3.4
----- -----
Total deferred tax liabilities............................ 53.2 47.8
----- -----
Net deferred tax assets..................................... $23.4 $10.1
===== =====
The Company has tax net operating loss carryforwards in foreign
jurisdictions totaling $28.4 as of January 28, 2001, $16.3 as of January 23,
2000, and $5.7 as of January 24, 1999. These losses have an indefinite
carryforward period.
NOTE 7 -- 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.
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
29
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
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 plaintiffs have provided a report estimating damages against the
Company, exclusive of interest, as follows: (i) between an aggregate of
approximately $2.8 and approximately $3.3 (before trebling) with respect to the
Robinson-Patman Act claims of the 26 independent bookseller plaintiffs, and (ii)
between an aggregate of approximately $5.5 and approximately $6.4 with respect
to the disgorgement claims under California law for the geographic areas of the
California plaintiffs. The Company's pleadings in the action deny any liability
to plaintiffs, and the Company disputes plaintiffs' claims of damages. On
November 16, 2000, the court granted the motion of the Company and Barnes &
Noble to dismiss the disgorgement claims brought by the ABA under California law
on behalf of independent booksellers in the state of California who are not
named in the litigation. On March 19, 2001, the court dismissed all of the
damage claims of the plaintiffs. The trial of the remaining claims is scheduled
for April 9, 2001. The Company intends to vigorously defend the action.
The Intimate Bookshop, Inc. ("Intimate") and Lucky, Inc. have instituted
actions against the Company and Waldenbooks, respectfully, containing
allegations and claims similar to those contained in the ABA litigation
described above. The Intimate Amended Complaint alleges that Intimate has
suffered $11.3 or more in damages and requests treble damages, injunctive and
declaratory relief, interest, costs, attorneys' fees and other unspecified
relief. The Lucky, Inc. Amended Complaint alleges that the plaintiffs have
suffered more than $75,000 in damages and requests treble damages, injunctive
and declaratory relief, interest, costs, attorneys' fees and other unspecified
relief. The Company intends to vigorously defend these actions.
Two former employees, individually and on behalf of a purported class,
consisting of all current and former employees who worked as assistant managers
in Borders stores at any time between April 10, 1996, and the present, have
filed an action against Borders in the Superior Court of California for the
County of San Francisco. The action 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 Amended Complaint
alleges violations of the California Labor Code and the California Business and
Professions Code. 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 and attorneys fees and such other relief as the court deems
proper. The Company intends to vigorously defend the action, including
contesting the certification of the action as a class 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 8 -- DEBT
The Company has a $472.8 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, 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. The Company had borrowings
30
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
outstanding under the Credit Facility of $143.5 at January 28, 2001, and $133.4
at January 23, 2000. The weighted average interest rate in 2000 and 1999 was
approximately 6.8% and 5.7%, respectively.
The Company's long-term debt obligations consist of capital lease
liabilities at January 28, 2001. Scheduled principal payments and capitalized
lease obligations as of January 28, 2001 are as follows: 2001 -- $0.9; 2002 --
$0.8; 2003 -- $0.8; 2004 -- $0.8; 2005 -- $0.8; 2006 and, thereafter, -- $11.7.
NOTE 9 -- 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 28, 2001, total $260.4 in 2001, $247.9 in 2002, $228.4 in 2003, $208.1
in 2004, $193.1 in 2005, $1,793.0 in all later years and, in the aggregate,
total $2,930.9.
Rental Expenses: A summary of operating lease rental expense and short-term
rentals follows:
2000 1999 1998
---- ---- ----
Rental Expenses:
Minimum rentals................................... $277.7 $252.6 $222.3
Percentage rentals................................ 2.0 2.0 2.3
------ ------ ------
Total..................................... $279.7 $254.6 $224.6
====== ====== ======
Capitalized Leases: The Company accounts for three stores and certain
computer equipment under capital leases. At January 28, 2001, the Company's
commitments under leases accounted for as capital leases aggregated $15.8.
Lease Financing Facility: The Company has a $175.0 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. There was $163.1 and $162.9 outstanding under the Lease Facility at
January 28, 2001, and January 23, 2000, respectively. In October 2000, the
Company transferred four properties previously financed under the Lease Facility
with a total financed value of $13.8 to a new temporary facility with terms
similar to those of the Lease Facility. In February 2001, two of these
properties were transferred back to the Lease Facility, and two were permanently
financed through operating leases. Also in February 2001, ten additional
properties previously financed through the Lease Facility with a total financed
value of $44.6 were permanently financed through operating leases.
31
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
NOTE 10 -- EMPLOYEE BENEFIT PLANS
Employee Savings Plan: Employees of the Company who meet certain
requirements as to age and service are eligible to participate in the Company's
Savings Plan. The Company's expense related to this plan was $3.2, $2.9 and $2.5
for 2000, 1999 and 1998, respectively.
NOTE 11 -- 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. 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. At January 28, 2001, the Company has 34.5 million shares authorized for
the grant of stock options under these plans.
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 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 associates 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.
32
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
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)
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
Granted................................................... 4,811 13.25
Exercised................................................. 1,397 7.52
Forfeited................................................. 4,324 20.80
Outstanding at January 28, 2001............................. 17,654 17.82
Balance exercisable at:
January 24, 1999.......................................... 5,365 11.87
January 23, 2000.......................................... 4,639 14.26
January 28, 2001.......................................... 6,803 16.80
The weighted-average fair values of options at their grant date where the
exercise price equals the market price on the grant date were $5.17, $5.84 and
$11.52 in 2000, 1999 and 1998, 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 $31.6, $68.3 and
$72.6 in 2000, 1999, and 1998, respectively. Pro forma diluted and basic
earnings per share would have been $0.39, $0.85 and $0.88 and $0.40, $0.88, and
$0.95 in 2000, 1999 and 1998, respectively.
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:
2000 1999 1998
---- ---- ----
Risk-Free Interest Rate................................. 4.8-6.8% 4.9-6.7% 4.2-6.8%
Expected Life........................................... 2.5-10 years 3-10 years 3-10 years
Expected Volatility..................................... 33.3-40.9% 33.3-40.3% 33.3-40.7%
Expected Dividends...................................... 0% 0% 0%
33
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
The following table summarizes the information regarding stock options
outstanding at January 28, 2001 (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
- --------------- --------- ---------------- ---------------- --------- ----------------
$ 6.81-$10.22 2,993 4.4 $ 8.69 2,231 $ 8.69
$10.23-$13.63 4,154 5.5 12.78 137 12.31
$13.64-$17.03 3,809 7.4 14.54 1,704 14.53
$17.04-$20.44 1,226 5.0 17.60 750 17.55
$20.45-$27.25 1,081 5.5 24.11 731 24.11
$27.26-$30.66 3,456 6.7 29.79 926 29.75
$30.67-$34.06 935 6.9 31.64 324 31.36
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
1998.......................................... 68 19.52 24.40
1999.......................................... 106 10.91 13.64
2000.......................................... 13 10.56 13.21
Employee Plan
1998.......................................... 115 24.78 29.15
1999.......................................... 118 12.79 15.05
2000.......................................... 65 12.38 14.56
NOTE 12 -- 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.
34
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
As of January 28, 2001, and January 23, 2000, the Company had the following
interest rate instruments in effect:
JANUARY 28, 2001
----------------------------------------------------
FAIR
NOTIONAL STRIKE MARKET
AMOUNT RATE PERIOD VALUE
-------- ------ ------ ------
Interest Rate Swaps............... $50.0 6.0% 1/00-1/01 $0.0
$75.0 5.7% 1/00-1/03 $0.7
$33.0(a) 6.6% 10/98-10/03 $0.7
$33.0(a) 6.9% 9/98-9/03 $1.3
---------------------------------------
(a) Notional amount is the U.S. Dollar equivalent of 20.0 British
Pounds.
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% 10/98-10/03 $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.
During fiscal 2001, the Company entered into interest rate swaps with
notional amounts of $50.0 and $100.0, which effectively converted variable rate
U.S. dollar-denominated borrowings to fixed rates of 5.1% and 5.2%,
respectively. These swap agreements expire one year from the date the Company
entered into the agreements.
NOTE 13 -- 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).
The accounting policies of the segments are the same as those described in
the "Summary of Significant Accounting Policies." Segment data includes charges
allocating all corporate headquarters costs to each segment. Transactions
between segments, consisting principally of inventory transfers, are recorded
primarily at cost. The Company evaluates the performance of its segments and
allocates resources to them based on anticipated future contribution. Amounts
relating to All Wound Up have been reclassified from the Waldenbooks segment to
discontinued operations.
35
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
2000 1999 1998
---- ---- ----
Sales:
Borders................................................... $2,080.3 $1,823.2 $1,521.0
Waldenbooks............................................... 944.3 959.1 948.7
International............................................. 219.2 168.2 120.7
-------- -------- --------
Total stores................................................ 3,243.8 2,950.5 2,590.4
Borders.com............................................... 27.4 17.9 4.6
-------- -------- --------
Total continuing operations................................. $3,271.2 $2,968.4 $2,595.0
======== ======== ========
Interest expense (income):
Borders................................................... $ 12.8 $ 16.4 $ 16.5
Waldenbooks............................................... (26.2) (22.3) (18.9)
International............................................. 12.4 8.9 7.4
Other..................................................... 8.3 9.2 8.5
-------- -------- --------
Total stores................................................ 7.3 12.2 13.5
Borders.com............................................... 5.8 4.4 2.7
-------- -------- --------
Total continuing operations................................. $ 13.1 $ 16.6 $ 16.2
======== ======== ========
Income tax expense (benefit):
Borders................................................... $ 52.8 $ 48.4 $ 34.6
Waldenbooks............................................... 24.2 34.7 36.8
International............................................. (6.8) (5.8) (3.8)
Other..................................................... (5.2) (6.7) (2.4)
-------- -------- --------
Total stores................................................ 65.0 70.6 65.2
Borders.com............................................... (16.8) (10.2) (6.2)
-------- -------- --------
Total continuing operations................................. $ 48.2 $ 60.4 $ 59.0
======== ======== ========
Depreciation and amortization expense:
Borders................................................... $ 52.9 $ 47.3 $ 42.3
Waldenbooks............................................... 25.8 23.9 18.8
International............................................. 8.8 6.5 3.5
Other..................................................... -- 0.3 0.2
-------- -------- --------
Total stores................................................ 87.5 78.0 64.8
Borders.com............................................... 7.8 5.5 1.9
-------- -------- --------
Total continuing operations................................. $ 95.3 $ 83.5 $ 66.7
======== ======== ========
Net income (loss):
Borders................................................... $ 82.6 $ 72.9 $ 52.1
Waldenbooks............................................... 40.2 55.5 61.0
International............................................. (10.2) (7.9) (3.2)
Other..................................................... (9.1) (9.3) (7.3)
-------- -------- --------
Total stores................................................ 103.5 111.2 102.6
Borders.com............................................... (29.7) (17.2) (10.5)
-------- -------- --------
Total continuing operations................................. 73.8 94.0 92.1
Discontinued operations................................... (30.2) (3.7) --
-------- -------- --------
Total net income (loss)..................................... $ 43.6 $ 90.3 $ 92.1
======== ======== ========
36
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
2000 1999
---- ----
Total assets:
Borders................................................... $1,264.7 $1,136.7
Waldenbooks............................................... 432.0 416.0
International............................................. 216.1 200.9
Other..................................................... 75.4.... 72.6
-------- --------
Total stores................................................ 1,988.2 1,826.2
Borders.com............................................... 44.3 57.0
-------- --------
Total continuing operations................................. 2,032.5 1,883.2
Discontinued operations................................... 14.6 31.6
-------- --------
Total assets................................................ $2,047.1 $1,914.8
======== ========
Capital expenditures:
Borders................................................... $ 81.2 $ 64.1
Waldenbooks............................................... 19.3 26.5
International............................................. 16.0 24.4
Other..................................................... 15.8 17.1
-------- --------
Total stores................................................ 132.3 132.1
Borders.com............................................... 6.4 11.4
-------- --------
Total continuing operations................................. 138.7 143.5
Discontinued operations................................... 2.4 1.2
-------- --------
Total capital expenditures.................................. $ 141.1 $ 144.7
======== ========
Total assets for the "Other" operating segment include certain corporate
headquarters asset balances which have not been allocated to the other segments;
however, depreciation expense associated with such assets has been allocated to
the other segments.
Long-lived assets by geographic area are as follows:
2000 1999 1998
---- ---- ----
Long-lived assets:
Domestic.................................................. $566.8 $567.9 $510.8
International............................................. 145.2 148.7 122.5
------ ------ ------
$712.0 $716.6 $633.3
====== ====== ======
NOTE 14 -- SUBSEQUENT EVENT
Subsequent to the Company's fiscal year-end, the Company entered into an
agreement with Ingram Book Group ("Ingram"), a wholesaler of books, spoken audio
and magazines, pursuant to which Ingram will provide book fulfillment services
for the Company's special order and online sales. The transaction includes the
sale of approximately $12.0 of the Company's book inventory to Ingram, and will
result in an after-tax charge of approximately $15.0 to $20.0 to be taken in the
first quarter of fiscal 2001. This charge is substantially non-cash and is
primarily related to the writedown of assets used by the current Company-owned
facility to fulfill special order and online sales, including warehouse
equipment, hardware and software, and a reduction of recorded inventory.
37
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
NOTE 15 -- UNAUDITED QUARTERLY FINANCIAL DATA
FISCAL 2000 QUARTER ENDED
---------------------------------------
APRIL JULY OCTOBER JANUARY
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) ----- ---- ------- -------
Sales...................................................... $679.7 $698.4 $701.0 $1,192.1
Cost of merchandise sold (includes occupancy).............. 503.9 518.0 523.7 808.9
Operating income (loss).................................... 3.5 3.4 (0.1) 128.3
Income (loss) from continuing operations................... 0.7 -- (2.6) 75.7
Net income (loss).......................................... (0.9) (1.6) (5.0) 51.1
Diluted earnings (loss) per common share from continuing
operations............................................... 0.01 -- (0.03) 0.95
Basic earnings (loss) per common share from continuing
operations............................................... 0.01 -- (0.03) 0.96
FISCAL 1999 QUARTER ENDED
---------------------------------------
APRIL JULY OCTOBER JANUARY
----- ---- ------- -------
Sales...................................................... $617.9 $628.6 $651.1 $1,070.8
Cost of merchandise sold (includes occupancy).............. 456.7 467.2 479.5 724.2
Operating income (loss).................................... (2.4) 1.8 5.8 165.8
Income (loss) from continuing operations................... (4.0) (1.6) 0.7 98.9
Net income (loss).......................................... (4.1) (2.6) (1.5) 98.5
Diluted earnings (loss) per common share from continuing
operations............................................... (0.05) (0.02) 0.01 1.23
Basic earnings (loss) per common share from continuing
operations............................................... (0.05) (0.02) 0.01 1.28
Earnings per share amounts for each quarter are required to be computed
independently and may not equal the amount computed for the total year.
38
40
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of Borders Group, Inc.
We have audited the accompanying consolidated balance sheet of Borders
Group, Inc. as of January 28, 2001, and the related consolidated statement of
operations, stockholders' equity, and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the January 28, 2001 financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Borders Group, Inc. at January 28, 2001, and the consolidated results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
[/s/ ERNST & YOUNG LLP ]
Detroit, Michigan
March 15, 2001
39
41
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Borders Group, Inc.
In our opinion, the accompanying consolidated balance sheet as of January
23, 2000, and the related consolidated statements of operations, of cash flows
and of stockholders' equity for each of the two years in the period then ended,
present fairly, in all material respects, the financial position, results of
operations and cash flows of Borders Group, Inc. and its subsidiaries at January
23, 2000 and for each of the two years in the period then ended, in conformity
with accounting principles generally accepted in the United States of America.
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 of America, 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 our opinion. We have not audited the consolidated financial
statements of Borders Group, Inc. for any period subsequent to January 23, 2000.
[/s/ PRICEWATERHOUSECOOPERS LLP]
Bloomfield Hills, Michigan
March 6, 2000
40
42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On October 20, 2000, the Company's Board of Directors, acting upon the
recommendation of the Audit Committee of the Board, voted to dismiss its
independent auditor, PricewaterhouseCoopers LLP ("PwC"). The reports of PwC on
the Company's financial statements for 1999 and 1998 fiscal years did not
contain any adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles. During the
1999 or 1998 fiscal years and the period through October 20, 2000, there were no
disagreements between the Company and PwC on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of PwC, would have
caused it to make reference to the subject matter of the disagreements in
connection with its reports on financial statements. In addition, during the
1998 and 1999 fiscal years and the period through October 20, 2000, there were
no "reportable events" within the meaning of Item 304 of the Securities and
Exchange Commission's regulation S-K. The Company retained the accounting firm
of Ernst & Young LLP on October 20, 2000, to make an examination of the
financial statements of the Company for the 2000 fiscal year.
41
43
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................. 56 Chairman and Director
George R. Mrkonic.................... 48 Vice Chairman and Director
Gregory P. Josefowicz................ 48 President, Chief Executive Officer and Director
Bruce A. Quinnell.................... 52 Vice Chairman
Vincent E. Altruda................... 51 President, International
Thomas D. Carney..................... 54 Vice President, General Counsel and Secretary
Tamara L. Heim....................... 43 President, Borders Stores and Borders Online, Inc.
Ronald S. Staffieri.................. 51 President, Waldenbooks Stores
Edward W. Wilhelm.................... 42 Senior Vice President and Chief Financial Officer
Kathryn L. Winkelhaus................ 44 President, Merchandising and Distribution
Joel J. Cohen........................ 63 Director
Peter R. Formanek.................... 57 Director
Victor L. Lund....................... 53 Director
Dr. Edna Greene Medford.............. 49 Director
Larry Pollock........................ 53 Director
Beth M. Pritchard.................... 53 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, Cheap Tickets, Inc., a retail seller of discount tickets for domestic
leisure air travel, and Nashua Corporation, a manufacturer of specialty imaging
products and services to industrial and commercial customers.
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
42
44
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. Ms. Heim served as Senior Vice President, Sales
and Marketing, of the Company from February 1999 to January 2000. From December
1996 to February 1999, Ms. Heim served as Territorial Vice President of Borders
stores.
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. Mr. Staffieri serves as
a director of Natural Wonders, Inc., a retailer of science and nature products,
which is in the process of liquidating.
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.
Edward W. Wilhelm has served as Senior Vice President and Chief Financial
Officer of the Company since August 2000. From 1997 through August 2000, Mr.
Wilhelm served as Vice President, Planning, Reporting, and Treasury for the
Company. From 1994 through 1997, Mr. Wilhelm served as Vice President, Finance.
Kathryn L. Winkelhaus has been named President, Merchandising and
Distribution, effective March 2001. Ms. Winkelhaus has served as President of
Borders Group Stores from April 1999 to March 2001. 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.
Joel J. Cohen became a director of the Company on March 30, 2001. Mr. Cohen
was Managing Director and co-head of Mergers and Acquisitions at Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ"), a leading investment and
merchant bank that was acquired by Credit Suisse First Boston, until his
retirement in November 2000. He had been associated with DLJ since October 1989.
He had previously served as General Counsel to the Presidential Task Force on
Market Mechanisms and as a partner of Davis Polk and Wardwell, attorneys. Mr.
Cohen also serves as a director of the Chubb Corporation, a major property and
casualty insurance company, and Maersk, Inc., an owner and operator of container
ships involved in the worldwide trade.
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
43
45
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 2000, 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, except that the
number of shares is adjusted, if necessary, to provide a minimum value of
$40,000 and 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 except that the minimum share requirement is waived
in the year in which a director is initially elected.
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 17, 2001 Annual Meeting of Stockholders.
44
46
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 17, 2001 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 17, 2001 Annual Meeting of Stockholders.
45
47
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 Restated bylaws of Borders Group, Inc.
10.1(1) Stockholder Agreement dated as of February 17, 1995, between
Borders Group, Inc. and Kmart Corporation
10.2 Form of Severance Agreement
10.3(6) Borders Group, Inc. Stock Option Plan
10.4 Amendment to the Borders Group, Inc. Stock Option Plan
10.5(3) Tax Allocation Agreement dated May 24, 1995 between Borders
Group, Inc. and Kmart Corporation
10.6(3) Lease Guaranty Agreement dated May 24, 1995 between Borders
Group, Inc. and Kmart Corporation
10.7 Agreement dated January 25, 2001, among Borders Group, Inc.,
Borders, Inc. and Kmart Corporation
10.8(2) Borders Group, Inc. Management Stock Purchase Plan.
10.9(8) First Amendment to the Borders Group, Inc. Management Stock
Purchase Plan
10.10(9) Second Amendment to the Borders Group, Inc. Management Stock
Purchase Plan
10.11(11) Third Amendment to the Borders Group, Inc. Management Stock
Purchase Plan
10.12 Fourth Amendment to 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(15) Borders Group, Inc. Annual Incentive Bonus Plan
10.18(2) Borders Group, Inc. Director Stock Plan
10.19(9) First Amendment to the Borders Group, Inc. Director Stock
Plan
10.20(9) Second Amendment to the Borders Group, Inc. Director Stock
Plan
10.21 Third Amendment to Borders Group, Inc. Director Stock Plan
10.22 Fourth Amendment to Borders Group, Inc. Director Stock Plan
10.23(7) Amended and Restated Multicurrency Credit Agreement among
Borders Group, Inc., its subsidiaries and Parties thereto
10.24(7) Amended and Restated Participation Agreement among Borders
Group, Inc., its subsidiaries and Parties thereto
10.25(7) Appendix A to Participation Agreement among Borders Group,
Inc., its subsidiaries and Parties thereto
10.26(7) Amended and Restated Credit Agreement among Borders Group,
Inc., its subsidiaries and Parties thereto
10.27(7) Amended and Restated Guarantee Credit Agreement among
Borders Group, Inc., its subsidiaries and Parties thereto
10.28(12) Omnibus Amendment No. 1 to Amended and Restated Guarantee
Credit Agreement among Borders Group, Inc., its subsidiaries
and Parties thereto
10.29(5) Agreement dated April 19, 1996, between Borders Group, Inc.
and Bruce A. Quinnell
10.30(10) Borders Group, Inc. Stock Option Plan for International
Employees
10.31(11) 1998 Borders Group, Inc. Stock Option Plan
10.32 Agreement dated January 29, 2001, between Borders Group,
Inc. and Robert F. DiRomualdo
10.33 Agreement dated January 29, 2001, between Borders Group,
Inc. and George R. Mrkonic
10.34(14) Agreement dated November 15, 1999, between Borders Group,
Inc. and Gregory P. Josefowicz
46
48
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.35(11) Participation Agreement dated as of December 1, 1998 by and
among Borders Group, Inc., Borders, Inc. and Parties thereto
10.36(11) Agreement dated April 20, 1999, between Borders Group, Inc.
and Philip M. Pfeffer
10.37(12) Multicurrency Revolving Credit Facility Credit Agreement
dated July 9, 1999 among Borders Group, Inc., its
subsidiaries, and Parties thereto
10.38(13) Amendment No. 1 to 1998 Borders Group, Inc. Stock Option
Plan
10.39(14) Amended Schedule 1.01(B) to the Amended and Restated
Multicurrency Credit Agreement among Borders Group, Inc.,
its Subsidiaries and Parties thereto
10.40(14) Amended Schedule II to the Amended and Restated Credit
Agreement among Borders Group, Inc., its subsidiaries and
Parties thereto
10.41 Participation Agreement dated as of January 22, 2001 by and
among Borders Group, Inc., Borders, Inc. and Parties thereto
10.42 Form of Lease Guaranty Related to Lease Facility Agreement
10.43 Form of Environmental Indemnity Related to Lease Facility
Agreement
18.1(3) Letter of PricewaterhouseCoopers LLP dated July 17, 1995
21.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of PricewaterhouseCoopers LLP
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. 333-90016).
(2) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 333-90918).
(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. 333-80643).
(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 Quarterly Report on Form 10-Q
for the quarter ended July 25, 1999 (File No. 1-13740).
(13) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended October 24, 1999 (File No. 1-13740).
(14) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended January 23, 2000 (File No. 1-13740).
(15) Incorporated by reference from the Company's Proxy Statement dated May 24,
2000 (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.
47
49
(c) Reports on Form 8-K:
Two reports were filed on Form 8-K. One report was filed under Item
4 -- Changes in Certifying Accountants. This report was dated and filed on
October 25, 2000 (File No. 1-13740). The second report was filed under Item 7 --
Financial Statements and Exhibits. This report was dated and filed on April 13,
2001 (File No. 1-13740).
48
50
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 23, 2001
- ---------------------------------------------
Robert F. DiRomualdo
/s/ GEORGE R. MRKONIC Vice Chairman and Director April 23, 2001
- ---------------------------------------------
George R. Mrkonic
/s/ GREGORY P. JOSEFOWICZ President and Chief Executive April 23, 2001
- --------------------------------------------- Officer
Gregory P. Josefowicz
/s/ EDWARD W. WILHELM Senior Vice President and Chief April 23, 2001
- --------------------------------------------- Financial Officer (Principal
Edward W. Wilhelm Financial and Accounting Officer)
/s/ JOEL J. COHEN Director April 23, 2001
- ---------------------------------------------
Joel J. Cohen
/s/ PETER R. FORMANEK Director April 23, 2001
- ---------------------------------------------
Peter R. Formanek
/s/ VICTOR L. LUND Director April 23, 2001
- ---------------------------------------------
Victor L. Lund
/s/ DR. EDNA GREENE MEDFORD Director April 23, 2001
- ---------------------------------------------
Dr. Edna Greene Medford
/s/ LARRY POLLOCK Director April 23, 2001
- ---------------------------------------------
Larry Pollock
/s/ BETH M. PRITCHARD Director April 23, 2001
- ---------------------------------------------
Beth M. Pritchard
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51
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 Restated bylaws of Borders Group, Inc.
10.1(1) Stockholder Agreement dated as of February 17, 1995, between
Borders Group, Inc. and Kmart Corporation
10.2 Form of Severance Agreement
10.3(6) Borders Group, Inc. Stock Option Plan
10.4 Amendment to the Borders Group, Inc. Stock Option Plan
10.5(3) Tax Allocation Agreement dated May 24, 1995 between Borders
Group, Inc. and Kmart Corporation
10.6(3) Lease Guaranty Agreement dated May 24, 1995 between Borders
Group, Inc. and Kmart Corporation
10.7 Agreement dated January 25, 2001, among Borders Group, Inc.,
Borders, Inc. and Kmart Corporation
10.8(2) Borders Group, Inc. Management Stock Purchase Plan
10.9(8) First Amendment to the Borders Group, Inc. Management Stock
Purchase Plan
10.10(9) Second Amendment to the Borders Group, Inc. Management Stock
Purchase Plan
10.11(11) Third Amendment to the Borders Group, Inc. Management Stock
Purchase Plan
10.12 Fourth Amendment to 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(15) Borders Group, Inc. Annual Incentive Bonus Plan
10.18(2) Borders Group, Inc. Director Stock Plan
10.19(9) First Amendment to the Borders Group, Inc. Director Stock
Plan
10.20(9) Second Amendment to the Borders Group, Inc. Director Stock
Plan
10.21 Third Amendment to Borders Group, Inc. Director Stock Plan
10.22 Fourth Amendment to Borders Group, Inc. Director Stock Plan
10.23(7) Amended and Restated Multicurrency Credit Agreement among
Borders Group, Inc., its subsidiaries and Parties thereto
10.24(7) Amended and Restated Participation Agreement among Borders
Group, Inc., its subsidiaries and Parties thereto
10.25(7) Appendix A to Participation Agreement among Borders Group,
Inc., its subsidiaries and Parties thereto
10.26(7) Amended and Restated Credit Agreement among Borders Group,
Inc., its subsidiaries and Parties thereto
10.27(7) Amended and Restated Guarantee Credit Agreement among
Borders Group, Inc., its subsidiaries and Parties thereto
10.28(12) Omnibus Amendment No. 1 to Amended and Restated Guarantee
Credit Agreement among Borders Group Inc., its subsidiaries
and Parties thereto
10.29(5) Agreement dated April 19, 1996, between Borders Group, Inc.
and Bruce A. Quinnell
10.30(10) Borders Group, Inc. Stock Option Plan for International
Employees
10.31(11) 1998 Borders Group, Inc. Stock Option Plan
10.32 Agreement dated January 29, 2001, between Borders Group,
Inc. and Robert F. DiRomualdo
10.33 Agreement dated January 29, 2001, between Borders Group,
Inc. and George R. Mrkonic
10.34(14) Agreement dated November 15, 1999, between Borders Group,
Inc. and Gregory P. Josefowicz
10.35(11) Participation Agreement dated as of December 1, 1998 by and
among Borders Group, Inc., Borders, Inc. and Parties thereto
10.36(11) Agreement dated April 20, 1999, between Borders Group, Inc.
and Philip M. Pfeffer
50
52
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.37(12) Multicurrency Revolving Credit Facility Credit Agreement
dated July 9, 1999 among Borders Group, Inc., its
subsidiaries, and Parties thereto
10.38(13) Amendment No. 1 to 1998 Borders Group, Inc. Stock Option
Plan
10.39(14) Amended Schedule 1.01(B) to the Amended and Restated
Multicurrency Credit Agreement among Borders Group, Inc.,
its Subsidiaries and Parties thereto
10.40(14) Amended Schedule II to the Amended and Restated Credit
Agreement among Borders Group, Inc., its subsidiaries and
Parties thereto
10.41 Participation Agreement dated as of January 22, 2001 by and
among Borders Group, Inc., Borders, Inc. and Parties thereto
10.42 Form of Lease Guaranty Related to Lease Facility Agreement
10.43 Form of Environmental Indemnity Related to Lease Facility
Agreement
18.1(3) Letter of PricewaterhouseCoopers LLP dated July 17, 1995
21.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of PricewaterhouseCoopers LLP
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. 333-90016).
(2) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 333-90918).
(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. 333-80643).
(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 Quarterly Report on Form 10-Q
for the quarter ended July 25, 1999 (File No. 1-13740).
(13) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended October 24, 1999 (File No. 1-13740).
(14) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended January 23, 2000 (File No. 1-13740).
(15) Incorporated by reference from the Company's Proxy Statement dated May 24,
2000 (File No. 1-13740).
51
53
(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:
Two reports were filed on Form 8-K. One report was filed under Item
4 -- Changes in Certifying Accountants. This report was dated and filed on
October 25, 2000 (File No. 1-13740). The second report was filed under Item 7 --
Financial Statements and Exhibits. This report was dated and filed on April 13,
2001 (File No. 1-13740).
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