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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(MARK ONE) |
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x
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended January 23, 2005 |
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OR |
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to .
Commission File Number 1-13740
BORDERS GROUP, INC.
(Exact name of registrant as specified in its charter)
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Michigan
(State or other jurisdiction of
incorporation or organization) |
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38-3294588
(I.R.S. Employer
Identification No.) |
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100 Phoenix Drive, Ann Arbor, Michigan
(Address of principal executive offices) |
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48108
(Zip code) |
(734) 477-1100
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(g) of the act:
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Title of Class |
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Name of Exchange on which registered |
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Common Stock |
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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
registrants 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. [X]
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the
Act). Yes [X] No [ ]
The aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately
$1,683,156,298 based upon the closing market price of
$22.09 per share of Common Stock on the New York Stock
Exchange as of July 23, 2004.
Number of shares of Common Stock outstanding as of
March 22, 2005: 72,994,379
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement for the
May 19, 2005 Annual Meeting of Stockholders are
incorporated by reference into Part III.
BORDERS GROUP, INC. INDEX
PART I
Item 1. Business
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
managements current expectations and are inherently
uncertain. The Companys actual results may differ
significantly from managements 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.
General
Borders Group, Inc., through its subsidiaries, Borders, Inc.
(Borders), Walden Book Company, Inc.
(Waldenbooks), Borders (UK) Limited, Borders
Australia Pty Limited and others (individually and collectively,
the Company), is the second largest operator of
book, music and movie superstores and the largest operator of
mall-based bookstores in the world based upon both sales and
number of stores. At January 23, 2005, the Company operated
504 superstores under the Borders name, including 462 in the
United States, 26 in the United Kingdom, 11 in Australia, three
in Puerto Rico, and one each in Singapore and New Zealand. The
Company also operated 705 mall-based and other bookstores
primarily under the Waldenbooks name in the United States and 35
bookstores under the Books etc. name in the United Kingdom. In
addition, as of January 23, 2005, the Company owned and
operated United Kingdom-based Paperchase Products Limited
(Paperchase), a designer and retailer of stationery,
cards and gifts, with 72 locations, including 28 located inside
Borders International superstores.
Segment Information
The Company is organized based upon the following operating
segments: domestic Borders stores, International stores
(including Borders, Books etc. and Paperchase stores),
Waldenbooks Specialty Retail stores (Waldenbooks),
and Corporate (consisting of the unallocated portion of interest
expense, certain corporate governance costs and corporate
incentive costs).
Borders Domestic Superstores
Borders is a premier operator of book, music and movie
superstores in the United States, offering customers selection
and service that the Company believes to be superior to other
such superstore operators. A key element of the Companys
strategy is to continue its growth and increase its
profitability through the ongoing expansion and refinement of
its Borders superstore operations. In 2004, the Company opened
19 new Borders superstores, achieved average sales per square
foot of $227 and average sales per superstore of
$5.7 million. Borders superstores also achieved compound
annual net sales growth of 5.0%, 5.4% and 8.0% for the three
years ended January 23, 2005, January 25, 2004 and
January 26, 2003, respectively.
Borders superstores offer customers a vast assortment of books,
music and movies, superior customer service, value pricing and
an inviting and comfortable environment designed to encourage
browsing. Borders superstores carry an average of 93,000 book
titles, with individual store selections ranging from 52,300
titles to 163,600 titles, across numerous categories, including
many hard-to-find titles. As of January 23, 2005, 449 of
the 462 domestic Borders superstores were in a book, music and
movie format, which also features an extensive selection of
pre-recorded music, with a broad assortment in categories such
as jazz, classical and world music, and a broad assortment of
DVDs, focusing on new release and catalog movies. A typical
Borders superstore carries approximately 25,300 titles of music
and over 9,900 titles of movies.
Borders superstores average 25,100 square feet in
size, including approximately 12,900 square feet devoted to
books, 4,000 square feet devoted to music, 800 square
feet devoted to newsstand and 600 square feet devoted to
movies. Through its remodeling efforts, Borders is realigning
space devoted to specific categories which, in general, results
in an increase in space for categories such as books, movies and
gifts and stationery (see below) and a reduction in music
2
space. The Company expects to remodel 80 to 100 Borders
superstores in 2005. Stores opened in 2004 averaged
22,600 square feet. Each store is distinctive in appearance
and architecture and is designed to complement its local
surroundings, although Borders utilizes certain standardized
specifications to increase the speed and lower the cost of new
store openings.
The typical Borders superstore also dedicates approximately
200 square feet to gifts and stationery. The Company plans
to install Paperchase shops in all new and most remodeled
domestic superstores in 2005 as part of a long-term plan to
enhance the variety and distinctiveness of the Companys
gifts and stationery offering. Paperchase shops are expected to
utilize approximately 750 square feet.
In addition, the Company devotes approximately 1,400 square
feet to a cafe within virtually all Borders superstores. In
August 2004, the Company entered into a licensing agreement with
Seattles Best Coffee LLC (Seattles
Best), a wholly-owned subsidiary of Starbucks Corporation,
through which the Company will operate Seattles
Best-branded cafes within substantially all of the
Companys existing Borders superstores in the continental
U.S. and Alaska and new stores as they are opened. Cafes
located within existing Borders superstores will be converted to
Seattles Best cafes beginning in early 2005, and continue
over the next few years. There is no change expected in the size
of the cafes as a result of the conversion to Seattles
Best Coffee.
The number of Borders domestic stores located in each state and
the District of Columbia as of January 23, 2005 are listed
below:
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Number of | |
State |
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Stores | |
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Alaska
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1 |
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Arizona
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10 |
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California
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74 |
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Colorado
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13 |
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Connecticut
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8 |
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Delaware
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2 |
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District of Columbia
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3 |
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Florida
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26 |
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Georgia
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14 |
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Hawaii
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6 |
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Idaho
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2 |
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Illinois
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35 |
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Indiana
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11 |
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Iowa
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4 |
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Kansas
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7 |
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Kentucky
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4 |
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Louisiana
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1 |
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Maine
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2 |
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Maryland
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12 |
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Massachusetts
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12 |
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Michigan
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17 |
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Minnesota
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8 |
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Mississippi
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1 |
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Missouri
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8 |
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Montana
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3 |
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Nebraska
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2 |
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Nevada
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6 |
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New Hampshire
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4 |
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New Jersey
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17 |
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New Mexico
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4 |
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New York
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25 |
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North Carolina
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8 |
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Ohio
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17 |
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Oklahoma
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4 |
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Oregon
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7 |
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Pennsylvania
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20 |
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Rhode Island
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2 |
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South Dakota
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1 |
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Tennessee
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6 |
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Texas
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20 |
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Utah
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4 |
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Vermont
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1 |
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Virginia
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12 |
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Washington
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11 |
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West Virginia
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1 |
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Wisconsin
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6 |
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Total
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462 |
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Waldenbooks
Waldenbooks is the nations 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. Waldenbooks operates stores under the Waldenbooks,
Borders Express and Borders Outlet names, as well as
Borders-branded airport stores. Waldenbooks generates cash flow
that the Company uses to finance
3
its growth initiatives. Average sales per square foot were $274
and average sales per store were $1.1 million for 2004.
Waldenbooks stores average approximately 3,900 square feet
in size, and carry an average of 19,100 titles, ranging from
4,500 in an airport store to 32,200 in a large format store.
In 2004, the Company piloted the conversion of
37 Waldenbooks stores to Borders Express stores, with an
expanded merchandise selection, including music, movies and
gifts and stationery. During 2005, an additional 75 to
100 Waldenbooks stores are expected to be converted to
Borders Express stores.
The number of Waldenbooks stores located in each state and the
District of Columbia as of January 23, 2005 are listed
below:
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Number of | |
State |
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Stores | |
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Alabama
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4 |
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Alaska
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5 |
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Arizona
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8 |
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Arkansas
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6 |
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California
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55 |
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Colorado
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9 |
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Connecticut
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13 |
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Delaware
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3 |
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District of Columbia
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2 |
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Florida
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41 |
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Georgia
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19 |
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Hawaii
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11 |
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Idaho
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3 |
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Illinois
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33 |
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Indiana
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15 |
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Iowa
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9 |
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Kansas
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6 |
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Kentucky
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9 |
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Louisiana
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6 |
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Maine
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2 |
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Maryland
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19 |
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Massachusetts
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23 |
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Michigan
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31 |
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Minnesota
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5 |
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Mississippi
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5 |
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Missouri
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14 |
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Montana
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4 |
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Nebraska
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5 |
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Nevada
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4 |
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New Hampshire
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5 |
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New Jersey
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23 |
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New Mexico
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2 |
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New York
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39 |
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North Carolina
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19 |
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North Dakota
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3 |
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Ohio
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38 |
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Oklahoma
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10 |
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Oregon
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8 |
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Pennsylvania
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50 |
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Rhode Island
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4 |
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South Carolina
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11 |
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South Dakota
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2 |
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Tennessee
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10 |
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Texas
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41 |
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Utah
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4 |
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Vermont
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3 |
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Virginia
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28 |
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Washington
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13 |
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West Virginia
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8 |
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Wisconsin
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13 |
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Wyoming
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2 |
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Total
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705 |
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International
The Companys International operations began in 1997 with
the acquisition of Books etc. in the United Kingdom and the
opening of a superstore in Singapore. Since then, the Company
has expanded its International operations to establish a
presence on four continents, and opened five International
superstores in 2004.
4
International superstores as of January 23, 2005 are listed
below:
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Number of | |
Country |
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Stores | |
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Australia
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11 |
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New Zealand
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1 |
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Puerto Rico
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3 |
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Singapore
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1 |
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United Kingdom
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26 |
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Total
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42 |
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International superstores, which operate under the Borders name,
achieved average sales per square foot of $371 and average sales
per store of $9.5 million for 2004. International
superstores range between 14,200 and 42,400 square feet in
size, and are located in both city center as well as suburban
locations. All International superstores offer book, music,
movie and gifts and stationery merchandise and feature cafes.
Those cafes located in the United Kingdom are licensed to and
operated by Starbucks Coffee Company (U.K.) Limited. The gifts
and stationery departments in its United Kingdom and select Asia
Pacific superstores are branded Paperchase. The Company owns
substantially all of Paperchase, as discussed below.
The Company also operated 35 stores under the Books etc. name in
the United Kingdom as of January 23, 2005, which are
small-format stores located primarily in central London or in
various airports in the United Kingdom. These stores primarily
offer books and average 4,500 square feet in size,
with the largest being 10,700 square feet and the smallest
being 600 square feet.
In July 2004, the Company increased its 15% equity stake in
Paperchase to 97%. Paperchase is the brand leader in design-led
and innovative stationery retailing in the United Kingdom. As of
January 23, 2005, the Company operated 72 Paperchase
locations, including stand-alone stores and concessions in
Borders, Books etc. and selected House of Fraser and Selfridges
stores. The vast majority of Paperchases merchandise is
developed specifically by and for Paperchase and, as such, can
only be found in Paperchase stores.
Internet
The Company, through its subsidiaries, has agreements with
Amazon.com, Inc. (Amazon) to operate Web sites
utilizing the Borders.com, Waldenbooks.com, Borders.co.uk and
Booksetc.co.uk URLs (the Mirror Sites). Under these
agreements, Amazon is the merchant of record for all sales made
through the Mirror Sites, and determines all prices and other
terms and conditions applicable to such sales. Amazon is
responsible for the fulfillment of all products sold through the
Mirror Sites and retains all payments from customers. The
Company receives referral fees for products purchased through
the Mirror Sites. The agreements contain mutual indemnification
provisions, including provisions that define between the parties
the responsibilities with respect to any liabilities for sales,
use and similar taxes, including penalties and interest,
associated with products sold on the Mirror Sites. Currently,
taxes are not collected with respect to products sold on the
Mirror Sites except in certain states.
In addition, Borders has an agreement with Amazon to allow
customers ordering certain book, music and movie products
through certain of Amazons Web sites to purchase and pick
up the merchandise at Borders stores in the United States
(Express In-Store Pick Up). Under this agreement,
the Company is the merchant of record for all sales made through
this service, and determines all prices and other terms and
conditions applicable to such sales. The Company fulfills all
products sold through Express In-Store Pick Up. In addition, the
Company assumes all risk, cost and responsibility related to the
sale and fulfillment of all products sold. The Company
recognizes revenue upon customers pick up of the
merchandise at the store. The Company also pays referral fees to
Amazon pursuant to this agreement.
5
Distribution
The Company believes that its centralized distribution system,
consisting of 14 distribution facilities worldwide,
significantly enhances its ability to manage inventory on a
store-by-store basis. Inventory is shipped from vendors
primarily to the Companys distribution centers.
Approximately 87% and 71% of the books carried by Borders and
Waldenbooks, respectively, are processed through the
Companys distribution facilities. Approximately 85% of the
inventory that arrives from publishers is processed within
48 hours for shipment to the stores, and new release titles
and rush orders are processed within 24 hours. Borders
purchases substantially all of its music and movie merchandise
directly from manufacturers and utilizes the Companys own
distribution center to ship approximately 95% of its music and
movie inventory to its stores.
In general, books can be returned to their publishers at cost.
Borders and Waldenbooks stores return books to the
Companys centralized returns center near Nashville,
Tennessee to be processed for return to the publishers. In
general, Borders can return music and movie merchandise to its
vendors at cost plus an additional fee to cover handling and
processing costs.
As of January 23, 2005, the Company utilized distribution
centers in the following localities:
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Locality, Country |
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Number | |
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Square Footage | |
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Auckland, New Zealand
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1 |
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500 |
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Bedfordshire, United Kingdom
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1 |
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67,000 |
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California, United States
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1 |
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414,000 |
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Cornwall, United Kingdom
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1 |
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47,000 |
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Indiana, United States
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1 |
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96,000 |
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Ohio, United States
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1 |
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172,000 |
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Pennsylvania, United States
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1 |
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115,000 |
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Puerto Rico
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1 |
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12,000 |
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Singapore
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1 |
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8,000 |
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St. Columb, United Kingdom
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1 |
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50,000 |
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Tennessee, United States
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3 |
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926,000 |
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Victoria, Australia
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1 |
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50,000 |
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Total
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14 |
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1,957,500 |
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The Company has undertaken a multi-year initiative to enhance
the efficiency of its nationwide distribution and logistics
network. A component of this strategy is the relocation of the
Companys Harrisburg, Pennsylvania distribution facility to
a new, larger, state-of-the-art facility near Carlisle,
Pennsylvania in early 2006. In addition, the operations of the
Companys Indiana facility, and those of a facility in
Tennessee, will be transferred to other facilities, also in
2006. These changes will optimize inventory and supply chain
management, and position the Company for continued future growth.
Employees
As of January 23, 2005, the Company had a total of
approximately 14,800 full-time employees and approximately
17,900 part-time employees. When hiring new employees, the
Company considers a number of factors, including education,
experience, diversity, personality and orientation toward
customer service. All new store employees participate in a
training program that provides up to two weeks of in-store
training in all aspects of customer service and selling,
including title searches for in-stock and in-print merchandise,
merchandising, sorting, operation of point of sale terminals and
store policies and procedures. The Company believes that its
relations with employees are generally excellent. In general,
the Companys employees are not represented by unions, with
the exception of the employees of two Borders stores. Employees
of both stores elected to be represented by the United Food and
Commercial Workers International Union (UFCW). The
employees of both of these stores have ratified contracts which
expire in 2006.
6
Trademarks and Service Marks
Borders®, Borders Book Shop®, Borders Books &
Music®, and Borders Books Music Cafe® among other
marks, are all registered trademarks and service marks used by
Borders. Brentanos®, Waldenbooks®, and
Waldenkids®, among other marks, are all registered
trademarks and service marks used by Waldenbooks. Books
etc.® is a registered trademark and service mark used by
Borders (UK) Limited. Borders.com® is a registered
trademark and service mark used by Borders Online, Inc. The
Borders, Waldenbooks, Books etc., Borders.com, Waldenbooks.com,
and Borders.co.uk service marks are used as trade names in
connection with their business operations.
Executive Officers of the Company
Set forth below is certain information regarding the executive
officers of the Company:
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Name |
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Age |
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Position |
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Gregory P. Josefowicz
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52 |
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Chairman, President and Chief Executive Officer |
Vincent E. Altruda
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55 |
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President, Borders Stores Worldwide |
Thomas D. Carney
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58 |
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Senior Vice President, General Counsel and Secretary |
Daniel T. Smith
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40 |
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Senior Vice President, Human Resources |
Michael G. Spinozzi
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45 |
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Executive Vice President, Chief Marketing Officer |
Cedric J. Vanzura
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41 |
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President, Waldenbooks Specialty Retail and Information
Technology |
Edward W. Wilhelm
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46 |
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Senior Vice President, Chief Financial Officer |
Gregory P. Josefowicz has served as President, Chief Executive
Officer and as a director of the Company since November 1999,
and as Chairman of the Board since January 2002. 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 Albertsons, Inc., most
recently as President. Mr. Josefowicz also serves as a
director of Ryerson Tull, Inc., a distributor and processor of
metals, Spartan Stores, Inc. (until its 2005 annual meeting of
shareholders scheduled for August 2005), a food retailer, and
Petsmart, Inc., a provider of products, services and solutions
for the lifetime needs of pets.
Vincent E. Altruda has served as President of the Companys
International operations since December 1997 and as President of
Borders Stores Worldwide since February 2004. From February 1997
through December 1997, Mr. Altruda served as Senior Vice
President of Borders Store 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 Senior Vice President, General Counsel
and Secretary of the Company since December 1994. For more than
five years prior to joining the Company, Mr. Carney was a
Partner at the law firm of Dickinson, Wright, Moon, Van
Dusen & Freeman in Detroit, Michigan.
Daniel T. Smith has served as Senior Vice President of Human
Resources of the Company since March 2000. From April 1998 to
March 2000, Mr. Smith served as Vice President of Human
Resources of Waldenbooks. Mr. Smith served as Director of
Human Resources for Waldenbooks from April 1996 to April 1998.
He also served as Director of Compensation and Benefits of the
Company from July 1995 to April 1996.
Michael G. Spinozzi has served as Executive Vice President and
Chief Marketing Officer of the Company since January 2002. He
also served as Senior Vice President of Sales and Marketing of
Borders Stores from March 2001 to January 2002. For more than
five years prior to joining the Company, he served in a variety
of executive positions with Jewel-Osco stores, a food and drug
retailer that is currently a division of Albertsons, Inc.,
and was most recently Senior Vice President of Marketing and
Merchandising.
Cedric J. Vanzura has served as President of Waldenbooks
Specialty Retail and Information Technology since March 2003.
Prior to rejoining the Company, Mr. Vanzura served as Chief
Strategy Officer, Information Systems and Services for General
Motors Corporation from 2000 to 2003. He was President and Chief
Operating Officer for
7
Lifemasters, a national disease management provider, from 1999
to 2000. From 1994 to 1999, Mr. Vanzura served in a variety
of management positions with the Company, most recently as
President of Borders Online.
Edward W. Wilhelm has served as Senior Vice President and Chief
Financial Officer of the Company since August 2000. From 1997
through August 2000, Mr. Wilhelm served as Vice President
of Planning, Reporting and Treasury for the Company. From 1994
through 1997, Mr. Wilhelm served as Vice President of
Finance.
Risk Factors
The following risk factors and other information included in
this Annual Report on Form 10-K should be carefully
considered. The risks and uncertainties described below are not
the only ones the Company faces. Additional risks and
uncertainties not presently known to the Company or that the
Company currently deems immaterial also may impair the
Companys business operations. If any of the following
risks occur, the Companys business, financial condition,
operating results and cash flows could be materially adversely
affected.
Expansion Strategy
The Companys growth strategy is dependent principally on
its ability to open new superstores and operate them profitably.
The Company has been engaged in an aggressive expansion and
remodel program, pursuant to which it has opened 19 domestic
superstores and completed major remodels of 33 existing domestic
superstores in 2004. In 2005, the Company expects to open 15 to
20 domestic superstores and complete major remodels of
approximately 80 to 100 existing domestic superstores. New
stores opened in 2005 and the majority of remodeled stores will
feature cafes offering Seattles Best Coffee and gifts and
stationery by Paperchase. The Company has also opened five
International superstores in 2004, and expects to open 10 to 12
International superstores in 2005, primarily in the United
Kingdom and Australia, including the first Borders franchise
store, which will open in Malaysia. In addition, the Company
plans to selectively update and convert 75 to 100 Waldenbooks
stores to Borders Express, an extension of a market test that
began in 2004 with the conversion of 37 existing Waldenbooks
stores.
In general, the rate of the Companys expansion depends,
among other things, on general economic and business conditions
affecting consumer confidence and spending, the availability of
qualified management personnel and the Companys ability to
manage the operational aspects of its growth. It also depends
upon the availability of adequate capital, which in turn depends
in a large part upon cash flow generated by Borders and
Waldenbooks.
The Companys expansion into international markets has
additional risks. It is costly to establish international
facilities and operations, and to promote the Companys
brands internationally. Sales from the Companys
International segment may not offset the expense of establishing
and maintaining the related operations and, therefore, these
operations may not be profitable on a sustained basis. The
Company is also subject to a number of risks inherent in selling
abroad, including, but not limited to, risks with respect to
foreign exchange rate fluctuations, local economic and political
conditions, restrictive governmental policies and laws (such as
trade protection measures, limitations on the repatriation of
funds, nationalization and consumer protection laws and
restrictions on pricing or discounts), difficulty in developing
and simultaneously managing a larger number of unique foreign
operations as a result of distance, language and cultural
differences, tax and other laws and policies of the U.S. and
other jurisdictions and geopolitical events, including war and
terrorism. In addition, local companies may have a substantial
competitive advantage because of their greater understanding of,
and focus on, the local customer, as well as their more
established local brand name recognition. Also, the Company may
not be able to hire, train, retain, motivate and manage required
personnel, which may limit the Companys growth
internationally.
The Companys future results will depend, among other
things, on its success in implementing its expansion strategy.
If stores are opened more slowly than expected, sales at new
stores reach targeted levels more slowly than expected (or fail
to reach targeted levels) or related overhead costs increase in
excess of expected levels, the Companys ability to
successfully implement its expansion strategy would be adversely
affected. In addition, the Company expects to open new
superstores in certain markets in which it is already operating
superstores, which could adversely affect sales at those
existing stores.
8
There can be no assurance that the Company will sustain its
accelerated rate of superstore growth or that it will achieve
and sustain acceptable levels of profitability, particularly as
other leading national and regional book, music and movie store
chains develop and open superstores.
Waldenbooks
Waldenbooks results are highly dependent upon conditions
in the mall retailing industry, including overall mall traffic.
Mall traffic has been sluggish over the past several years and
the Company expects it to remain sluggish for the foreseeable
future. In addition, increased competition from superstores has
adversely affected Waldenbooks sales and comparable store
sales. There can be no assurance that mall traffic will not
decline further or that superstore competition, or other
factors, will not further adversely affect Waldenbooks
sales.
Seasonality
The Companys business is highly seasonal, with sales
generally highest in the fourth quarter. During 2004, 35.3% of
the Companys sales and 90.3% of the Companys
operating income were generated in the fourth quarter. The
Companys 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 Companys 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 Companys 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.
Competition
The retail book business is highly competitive. Competition
within the retail book industry is fragmented, with Borders
facing direct competition from other national superstore
operators, as well as regional chains and superstores. In
addition, Borders and Waldenbooks compete with each other, as
well as other specialty retail stores that offer books in a
particular area of specialty, independent single store
operators, discount stores, drug stores, warehouse clubs, mail
order clubs and mass merchandisers. In the future, Borders and
Waldenbooks may face additional competition from other
categories of retailers entering the retail book market.
The music and movie businesses are also highly competitive and
Borders faces competition from large established music chains,
established movie chains, as well as specialty retail stores,
movie rental stores, discount stores, warehouse clubs and mass
merchandisers. In addition, consumers receive television and
mail order offers and have access to mail order clubs. The
largest mail order clubs are affiliated with major manufacturers
of pre-recorded music and may have advantageous marketing
relationships with their affiliates.
The Internet has emerged as a significant channel for retailing
in all media categories that the Company carries. In particular,
the retailing of books, music and movies over the Internet is
highly competitive. In addition, the Company faces competition
from companies engaged in the business of selling books, music
and movies via electronic means, including the downloading of
books, music and movie content.
Consumer Spending Patterns
Sales of books, music and movies have historically been
dependent upon discretionary consumer spending, which may be
affected by general economic conditions, consumer confidence and
other factors beyond the control of the Company. In addition,
sales are dependent in part on the strength of new release
products which are controlled by vendors. A decline in consumer
spending on books, music and movies, or in bestseller book,
music and movie buying could have a material adverse effect on
the Companys financial condition and results of operations
and its ability to fund its expansion strategy.
Foreign Exchange Risk
The results of operations of the International segment are
exposed to foreign exchange rate fluctuations as the financial
results of the applicable subsidiaries are translated from the
local currency into U.S. dollars upon
9
consolidation. As exchange rates vary, sales and other operating
results, when translated, may differ materially from
expectations. In addition, the Company is subject to gains and
losses on foreign currency transactions, which could vary based
on fluctuations in exchange rates and the timing of the
transactions and their settlement.
Potential for Uninsured Losses and/or Claims
The Company is subject to the possibility of uninsured losses
from risks such as terrorism, earthquakes, or floods, for which
no, or limited, insurance coverage is maintained. The Company
also is subject to risk of losses which may arise from adverse
litigation results or other claims.
Changes to Information Technology Systems May Disrupt the
Supply Chain
The Companys success depends, in large part, on its
ability to source and distribute merchandise efficiently. The
Company continues to evaluate and is currently implementing
modifications and upgrades to its information technology systems
supporting the supply chain, including merchandise planning and
forecasting, inventory and price management. Modifications
involve replacing legacy systems with successor systems or
making changes to legacy systems. The Company is aware of the
inherent risks associated with replacing and changing these core
systems, including accurately capturing data, changes in
inventory valuation and possibly encountering supply chain
disruptions, and believes it is taking appropriate action to
mitigate the risks through testing, training and staging
implementation as well as securing appropriate commercial
contracts with third-party vendors supplying such replacement
technologies. The Company anticipates that the launch of these
successor systems will take place in a phased approach over an
approximate three-year period that began in 2004. There can be
no assurances that the Company will successfully launch these
new systems as planned or that they will occur without supply
chain or other disruptions or without impacts on inventory
valuation. These disruptions or impacts, if not anticipated and
appropriately mitigated, could have a material adverse effect on
the Companys financial condition and results of operations.
Reliance on Key Personnel
Management believes that the Companys continued success
will depend to a significant extent upon the efforts and
abilities of Mr. Gregory P. Josefowicz, Chairman, President
and Chief Executive Officer, as well as certain other key
officers of the Company and each of its subsidiaries. The loss
of the services of Mr. Josefowicz or of such other key
officers could have a material adverse effect on the Company.
The Company does not maintain key man life insurance
on any of its key officers.
Additional Information
The Companys Web site is located at
www.bordersgroupinc.com. The Company makes available on
this Web site under Investors, annual reports on
Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports as soon
as reasonably practicable after having electronically filed or
furnished such materials to the U.S. Securities and
Exchange Commission. Also available on this Web site are the
Companys corporate governance documents, including its
committee charters and its Business Conduct Policy and a Code of
Ethics Relating to Financial Reporting. The Company will
disclose on its Web site any amendments to the Business Conduct
Policy or the Code of Ethics Relating to Financial Reporting and
any waiver of such policies applicable to any executive officer.
Printed copies of any of the documents available on the
Companys Web site will be provided to any shareholder
without charge upon written request to Anne Roman, Investor
Relations, Borders Group, Inc., 100 Phoenix Drive, Ann Arbor,
Michigan 48108-2202.
The Company has filed with the Securities and Exchange
Commission, as an exhibit to its Form 10-K annual reports
for fiscal 2003 and 2004, the Sarbanes-Oxley Act
Section 302 Certifications regarding the quality of the
Companys public disclosure. During 2004,
Mr. Josefowicz certified to the New York Stock Exchange
that he was not aware of any violation by the Company of any
NYSE Corporate Governance Listing Standards.
10
Item 2. Properties
Borders leases all of its stores. Borders store leases
generally have an average initial term of 15 to 20 years
with multiple three- to five-year renewal options. At
January 23, 2005, the average unexpired term under
Borders existing store leases in the United States was
12.0 years prior to the exercise of any options. The
expiration of Borders leases for stores open at
January 23, 2005 are as follows:
|
|
|
|
|
|
|
Number of | |
Lease Terms to Expire During 12 Months Ending on or About January 31 |
|
Stores | |
| |
|
| |
2006
|
|
|
9 |
|
2007
|
|
|
7 |
|
2008
|
|
|
8 |
|
2009
|
|
|
11 |
|
2010
|
|
|
13 |
|
2011 and later
|
|
|
414 |
|
|
|
|
|
Total
|
|
|
462 |
|
|
|
|
|
Waldenbooks leases all of its stores. Waldenbooks store
leases generally have an initial term of five to 10 years,
and lease renewals generally have a term of one to three years.
At present, the average unexpired term under Waldenbooks
existing store leases is approximately 2.2 years. The
expiration of Waldenbooks leases for stores open at
January 23, 2005 are as follows:
|
|
|
|
|
|
|
Number of | |
Lease Terms to Expire During 12 Months Ending on or About January 31 |
|
Stores | |
| |
|
| |
2006
|
|
|
350 |
|
2007
|
|
|
83 |
|
2008
|
|
|
55 |
|
2009
|
|
|
80 |
|
2010
|
|
|
78 |
|
2011 and later
|
|
|
59 |
|
|
|
|
|
Total
|
|
|
705 |
|
|
|
|
|
The Company leases all of its International superstores.
International store leases generally have an initial term of 15
to 25 years. At present, the average unexpired term under
existing International store leases is approximately
13.6 years. The expiration of International superstore
leases for stores open at January 23, 2005 are as follows:
|
|
|
|
|
|
|
Number of | |
Lease Terms to Expire During 12 Months Ending on or About January 31 |
|
Stores | |
| |
|
| |
2006
|
|
|
|
|
2007
|
|
|
1 |
|
2008
|
|
|
1 |
|
2009
|
|
|
2 |
|
2010
|
|
|
1 |
|
2011 and later
|
|
|
37 |
|
|
|
|
|
Total
|
|
|
42 |
|
|
|
|
|
Books etc. operated 35 stores in the United Kingdom as of
January 23, 2005. 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 9.8 years. Paperchase operated 72 stores in the
United Kingdom and Singapore as of January 23, 2005.
Paperchase generally leases its stores under operating leases
with terms ranging from 6 to 25 years. The average
remaining lease term for Paperchase stores is 7.3 years.
11
The Company leases a portion of its corporate headquarters in
Ann Arbor, Michigan and owns the remaining building and
improvements. The Company leases all distribution centers.
Item 3. Legal Proceedings
Proceedings Terminated in the Fourth Quarter
Two former employees, individually and on behalf of a class
consisting of current and former employees who worked as
assistant managers in Borders stores in the state of California,
filed an action against the Company in the Superior Court of
California for the County of San Francisco. The action
alleged that the individual plaintiffs and the class members
worked hours for which they were entitled to receive, but did
not receive, overtime compensation under California law. On
December 2, 2004, the court granted final approval of a
settlement pursuant to which the Company agreed to pay
$3.5 million to resolve all claims asserted in the
litigation. The Company classified this charge as Legal
settlement expense in the consolidated statements of
operations in 2003.
On October 22, 2004, Ann Arbor Store No. 1 L.L.C., a
special purpose entity formed by Agree LP and Agree Realty
Corporation that leases to the Company the Borders store and
adjacent office space in downtown Ann Arbor, Michigan (the
Property), filed a Complaint for Declaratory Relief
against the Company. The Complaint sought a judgment ordering
the Company to execute a lease for the Property at a rental rate
that the Company disputed, as well as other relief. The matter
was settled on March 1, 2005. The settlement, pursuant to
which the Company executed a lease for the property at a
mutually agreed upon rental rate, did not have a material
adverse effect on the Company.
Pending Proceedings
On October 29, 2002, Gary Gerlinger, individually and on
behalf of all other similarly situated consumers in the United
States who, during the period from August 1, 2001 to the
present, purchased books online from either Amazon.com, Inc.
(Amazon) or the Company, instituted an action
against the Company and Amazon in the United States District
Court for the Northern District of California. The Complaint
alleges that the agreement pursuant to which an affiliate of
Amazon operates Borders.com as a co-branded site (the
Mirror Site) violates federal anti-trust laws,
California statutory law and the common law of unjust
enrichment. The Complaint seeks injunctive relief, damages,
including treble damages or statutory damages where applicable,
attorneys fees, costs and disbursements, disgorgement of all
sums obtained by allegedly wrongful acts, interest and
declaratory relief. The Company has filed an answer denying any
liability and also has filed a motion for summary judgment. The
Court has issued an order granting the motion as to certain of
plaintiffs claims, denying it as to others and requesting
additional briefing on certain issues. The order also denied
certain cross-motions filed by the plaintiff. The Company
intends to vigorously defend the action. The Company has not
included any liability in its consolidated financial statements
in connection with this matter and has expensed as incurred all
legal costs to date. Although an adverse resolution of this
matter could have a material adverse effect on the result of the
operations of the Company for the applicable period or periods,
the Company does not believe that this matter will have a
material effect on its liquidity or financial position.
Certain states and private litigants have sought to impose sales
or other tax collection efforts on out-of-jurisdiction companies
that engage in e-commerce. The Company currently is disputing a
claim by the state of California relating to sales taxes that
the state claims should have been collected on certain
Borders.com sales in California which took place from May 1998
to August 2001, during which time the Company operated an
Internet commerce site, Borders.com, and prior to implementation
of the Companys Mirror Site agreement with Amazon. Also,
the Company and Amazon have been named as defendants in actions
filed by a private litigant on behalf of the states of Nevada
and Illinois under the applicable states False Claims Act
relating to the failure to collect use taxes on Internet sales
in Nevada and Illinois for periods both before and after the
implementation of the Mirror Site Agreement. The Complaints seek
judgments, jointly and severally, against the defendants for,
among other things, injunctive relief, treble the amount of
damages suffered by the states of Nevada and Illinois as a
result of the alleged violations of the defendants, penalties,
costs and expenses, including legal fees. A similar action
previously filed against the Company in Tennessee has been
dismissed and the appeal period has expired. Various motions to
dismiss the Nevada and Illinois actions have been made by the
Company and other retailers and by the respective attorney
generals of those states. Certain of these motions have been
denied and others remain pending.
12
The Company is vigorously defending all claims against the
Company relating to any failure by it or Amazon to collect sales
or other taxes relating to Internet sales. Although an adverse
resolution of claims relating to the failure to collect sales or
other taxes on online sales could have a material effect on the
results of the operations of the Company for the applicable
period or periods, the Company does not believe that any such
claims will have a material adverse effect on its liquidity or
financial position.
In addition to the matters described above, the Company is, from
time to time, involved in or affected by other litigation
incidental to the conduct of its businesses. While some of such
matters may involve claims for large sums (including, from time
to time, actions which are asserted to be maintainable as class
action suits) the Company does not believe that any such other
litigation or claims pending at the current time will have a
material adverse effect on its liquidity, financial position, or
results of operations.
Item 4. Submission of Matters to a Vote of Security
Holders
Not applicable.
PART II
|
|
Item 5. |
Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities |
The following table sets forth, for the fiscal quarters
indicated, the high and low closing market prices for the
Companys Common Stock and the quarterly dividends declared.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends | |
|
|
High | |
|
Low | |
|
Declared | |
|
|
| |
|
| |
|
| |
Fiscal Quarter 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
25.21 |
|
|
$ |
21.27 |
|
|
$ |
0.08 |
|
|
Second Quarter
|
|
$ |
24.94 |
|
|
$ |
22.09 |
|
|
$ |
0.08 |
|
|
Third Quarter
|
|
$ |
25.22 |
|
|
$ |
21.42 |
|
|
$ |
0.08 |
|
|
Fourth Quarter
|
|
$ |
26.30 |
|
|
$ |
21.95 |
|
|
$ |
0.09 |
|
|
Fiscal Quarter 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
15.84 |
|
|
$ |
13.60 |
|
|
$ |
|
|
|
Second Quarter
|
|
$ |
18.60 |
|
|
$ |
15.50 |
|
|
$ |
|
|
|
Third Quarter
|
|
$ |
21.76 |
|
|
$ |
17.64 |
|
|
$ |
|
|
|
Fourth Quarter
|
|
$ |
22.98 |
|
|
$ |
21.20 |
|
|
$ |
0.08 |
|
The Companys Common Stock is traded on the New York Stock
Exchange under the symbol BGP.
As of March 22, 2005, there were 3,142 holders of
record of the Companys Common Stock.
In December 2004, the Board of Directors declared a quarterly
cash dividend of $0.09 per share, which equaled
$6.6 million in total, on the Companys common stock,
payable January 26, 2005 to stockholders of record at the
close of business January 5, 2005. The Company has declared
and paid quarterly cash dividends since November 2003, and
intends to pay regular quarterly cash dividends, subject to
Board approval, going forward. The declaration and payment of
dividends is subject to the discretion of the Board and to
certain limitations under the Michigan Business Corporation Act.
In addition, the Companys ability to pay dividends is
restricted by certain agreements to which the Company is a
party. See Managements Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources.
13
The following table provides information with respect to the
equity compensation plan under which equity securities of the
Company were authorized for issuance on January 23, 2005
(number of shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of | |
|
Weighted- | |
|
Number of | |
|
|
Awards | |
|
Average | |
|
Shares Available | |
Plan Category |
|
Outstanding(2) | |
|
Exercise Price(3) | |
|
for Issuance | |
|
|
| |
|
| |
|
| |
Plans approved by stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 Long-Term Incentive
Plan(1)
|
|
|
318 |
|
|
|
23.53 |
|
|
|
3,213 |
|
|
|
(1) |
The 2004 Long-Term Incentive Plan (the 2004 Plan)
was approved by shareholders in May 2004, and replaced all prior
equity compensation plans (the Prior Plans). At
January 23, 2005, there were approximately 9.0 million
stock options outstanding under the Prior Plans with a
weighted-average exercise price of $21.48, which, if forfeited
or cancelled, become available for issuance under the 2004 Plan. |
|
(2) |
Number of awards outstanding as of January 23, 2005
includes approximately 288,000 restricted share units and
approximately 29,862 stock options. |
|
(3) |
Reflects the weighted-average exercise price of stock options
outstanding as of January 23, 2005 only. |
The table below presents the total number of shares repurchased
during the fourth quarter of fiscal 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate | |
|
|
|
|
|
|
Total Number of | |
|
Dollar Value of | |
|
|
|
|
|
|
Shares Purchased | |
|
Shares that May | |
|
|
Total | |
|
Average | |
|
as Part of Publicly | |
|
Yet Be Purchased | |
|
|
Number of | |
|
Price Paid | |
|
Announced Plans | |
|
Under the Plans | |
Fiscal Period |
|
Shares | |
|
per Share(1) | |
|
or Programs(2) | |
|
or Programs | |
|
|
| |
|
| |
|
| |
|
| |
October 25, 2004 through November 21, 2004
|
|
|
1,168,000 |
|
|
$ |
22.83 |
|
|
|
1,168,000 |
|
|
$ |
60,189,187 |
|
November 22, 2004 through December 26, 2004
|
|
|
1,366,260 |
|
|
$ |
23.17 |
|
|
|
1,366,260 |
|
|
$ |
31,965,755 |
|
December 27, 2004 through January 23, 2005
|
|
|
560,100 |
|
|
$ |
25.65 |
|
|
|
560,100 |
|
|
$ |
26,806,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,094,360 |
|
|
$ |
23.49 |
|
|
|
3,094,360 |
|
|
$ |
26,806,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Average price paid per share includes commissions and is rounded
to the nearest two decimal places. |
|
(2) |
On May 20, 2003, the Company announced that the Board of
Directors authorized an increase in the amount of share
repurchases to $150.0 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). |
|
|
|
Note: In February 2005, the Board of Directors authorized an
increase in the amount of share repurchases to
$250.0 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). |
14
|
|
Item 6. |
Selected Financial Data |
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The information set forth below should be read in conjunction
with Managements Discussion and Analysis of
Financial Condition and Results of Operations and the
Companys consolidated financial statements and the notes
thereto.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
Jan. 23, | |
|
Jan. 25, | |
|
Jan. 26, | |
|
Jan. 27, | |
|
Jan. 28, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001(1) | |
(dollars in millions except per share data) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(restated) | |
|
(restated) | |
|
(restated) | |
|
(restated) | |
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borders sales
|
|
$ |
2,588.9 |
|
|
$ |
2,470.2 |
|
|
$ |
2,319.0 |
|
|
$ |
2,234.1 |
|
|
$ |
2,107.7 |
|
Waldenbooks sales
|
|
|
779.9 |
|
|
|
820.9 |
|
|
|
852.2 |
|
|
|
902.1 |
|
|
|
944.3 |
|
International sales
|
|
|
510.7 |
|
|
|
407.5 |
|
|
|
314.9 |
|
|
|
251.7 |
|
|
|
219.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$ |
3,879.5 |
|
|
$ |
3,698.6 |
|
|
$ |
3,486.1 |
|
|
$ |
3,387.9 |
|
|
$ |
3,271.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$ |
216.7 |
|
|
$ |
198.1 |
|
|
$ |
187.6 |
|
|
$ |
146.7 |
|
|
$ |
123.1 |
|
|
Income from continuing operations
|
|
$ |
131.9 |
|
|
$ |
117.3 |
|
|
$ |
107.6 |
|
|
$ |
80.9 |
|
|
$ |
66.4 |
|
Discontinued operations (net of tax)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30.2 |
|
Cumulative effect of accounting change (net of tax)
|
|
|
|
|
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
131.9 |
|
|
$ |
115.2 |
|
|
$ |
107.6 |
|
|
$ |
80.9 |
|
|
$ |
36.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share from continuing operations
|
|
$ |
1.69 |
|
|
$ |
1.48 |
|
|
$ |
1.31 |
|
|
$ |
0.98 |
|
|
$ |
0.83 |
|
Diluted loss per common share from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.38 |
) |
Diluted loss per common share from cumulative effect of
accounting change
|
|
|
|
|
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$ |
1.69 |
|
|
$ |
1.46 |
|
|
$ |
1.31 |
|
|
$ |
0.98 |
|
|
$ |
0.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share
|
|
$ |
0.33 |
|
|
$ |
0.08 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$ |
569.4 |
|
|
$ |
556.0 |
|
|
$ |
463.0 |
|
|
$ |
342.8 |
|
|
$ |
223.4 |
|
Total assets
|
|
$ |
2,628.8 |
|
|
$ |
2,584.6 |
|
|
$ |
2,378.0 |
|
|
$ |
2,285.6 |
|
|
$ |
2,138.4 |
|
Short-term borrowings
|
|
$ |
141.0 |
|
|
$ |
140.7 |
|
|
$ |
112.1 |
|
|
$ |
81.6 |
|
|
$ |
143.5 |
|
Long-term debt, including current portion
|
|
$ |
55.9 |
|
|
$ |
57.3 |
|
|
$ |
50.0 |
|
|
$ |
|
|
|
$ |
|
|
Long-term capital lease obligations, including current portion
|
|
$ |
0.1 |
|
|
$ |
0.4 |
|
|
$ |
19.6 |
|
|
$ |
51.4 |
|
|
$ |
15.8 |
|
Stockholders equity
|
|
$ |
1,088.9 |
|
|
$ |
1,100.6 |
|
|
$ |
984.0 |
|
|
$ |
908.2 |
|
|
$ |
811.2 |
|
|
|
(1) |
The Companys 2000 fiscal year consisted of 53 weeks. |
15
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
General
Borders Group, Inc., through its subsidiaries, Borders, Inc.
(Borders), Walden Book Company, Inc.
(Waldenbooks), Borders (UK) Limited, Borders
Australia Pty Limited and others (individually and collectively,
the Company), is the second largest operator of
book, music and movie superstores and the largest operator of
mall-based bookstores in the world based upon both sales and
number of stores. At January 23, 2005, the Company operated
504 superstores under the Borders name, including 462 in the
United States, 26 in the United Kingdom, 11 in Australia, three
in Puerto Rico, and one each in Singapore and New Zealand. The
Company also operated 705 mall-based and other bookstores
primarily under the Waldenbooks name in the United States and 35
bookstores under the Books etc. name in the United Kingdom. In
addition, as of January 23, 2005 the Company owned and
operated United Kingdom-based Paperchase Products Limited
(Paperchase), a designer and retailer of stationery,
cards and gifts, with 72 locations, including 28 located inside
Borders International superstores.
The Companys business strategy is to continue its growth
and increase its profitability through (i) expanding and
refining its core domestic superstore business,
(ii) driving International growth by expanding established
markets and leveraging infrastructure investments,
(iii) leveraging strategic alliances and in-store
technologies which enhance the customer experience, and
(iv) maximizing cash flow and profitability at Waldenbooks
through a combination of selective growth and profit
initiatives. Specifically, the Company has been engaged in an
aggressive expansion and remodel program, pursuant to which it
has opened 19 domestic Borders superstores and completed major
remodels of 33 existing domestic superstores in 2004. In 2005,
the Company expects to open 15 to 20 domestic superstores and
complete major remodels of approximately 80 to 100 existing
domestic superstores. New stores opened in 2005 and the majority
of remodeled stores will feature cafe offerings by
Seattles Best Coffee and gifts and stationery merchandise
by Paperchase. The Company also opened five International
superstores in 2004. International store growth over the next
several years will focus on existing markets, primarily in the
United Kingdom and Australia, with approximately 10 to 12
International store openings planned in 2005, including the
first Borders franchise store, which will open in Malaysia. The
International segment achieved full year profitability in 2004,
and continued profit growth is expected going forward. The
Waldenbooks segment has experienced negative comparable store
sales percentages for the past several years, primarily due to
the overall decrease in mall traffic and the impact of
superstore openings. The Company is continuing to implement its
plan for the optimization of the Waldenbooks store base in
order to improve sales, net income and free cash flow. This plan
could result in further store closing costs or asset impairments
over the next few years, but at a lesser rate going forward. In
addition, Waldenbooks manages the Companys seasonal
businesses and small format stores, including those in airports
and outlet malls, and selective growth in these areas is
expected in 2005. The Company also plans to selectively update
and re-brand 75 to 100 Waldenbooks stores as Borders Express, an
extension of a market test that began in 2004 with similar
conversions of 37 existing Waldenbooks stores. The
Companys objectives with respect to these initiatives are
to continue to grow consolidated sales and earnings in 2005 and
earn an acceptable return on its investment.
Subject to Board approval, the Company plans to provide returns
to stockholders through quarterly cash dividends and share
repurchases by utilizing free cash flow generated by the
business. In February 2005, the Board of Directors authorized an
increase in the amount of potential share repurchases to
$250.0 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).
In December 2004, the Board of Directors voted to increase the
quarterly cash dividend by 12.5% to $0.09 per share on the
Companys common stock.
The Company, through its subsidiaries, has agreements with
Amazon.com, Inc. (Amazon) to operate Web sites
utilizing the Borders.com, Waldenbooks.com, Borders.co.uk and
Booksetc.co.uk URLs (the Mirror Sites). Under these
agreements, Amazon is the merchant of record for all sales made
through the Mirror Sites, and determines all prices and other
terms and conditions applicable to such sales. Amazon is
responsible for the fulfillment of all products sold through the
Mirror Sites and retains all payments from customers. The
Company receives referral fees for products purchased through
the Mirror Sites. The agreements contain mutual indemnification
provisions, including provisions that define between the parties
the responsibilities with respect to any liabilities for sales,
use and similar taxes, including penalties and interest,
associated with products sold on the Mirror Sites. Currently,
taxes are not collected with respect to products sold on the
Mirror Sites except in certain states.
16
In addition, Borders has an agreement with Amazon to allow
customers ordering certain book, music and movie products
through certain of Amazons Web sites to purchase and pick
up the merchandise at Borders stores in the United States
(Express In-Store Pick Up). Under this agreement,
the Company is the merchant of record for all sales made through
this service, and determines all prices and other terms and
conditions applicable to such sales. The Company fulfills all
products sold through Express In-Store Pick Up. In addition, the
Company assumes all risk, cost and responsibility related to the
sale and fulfillment of all products sold. The Company
recognizes revenue upon customers pick up of the
merchandise at the store. The Company also pays referral fees to
Amazon pursuant to this agreement.
In July 2004, the Company invested cash of $24.1 million,
including debt repayment of $4.1 million, in connection
with an increase in its 15% equity stake in Paperchase Products,
Ltd. (Paperchase), a leading stationery retailer in the United
Kingdom, to 97%. At the time of the acquisition, Paperchase
operated 61 locations, including more than a third of which were
located inside Borders International superstores. The
acquisition has been accounted for as a purchase in the
Companys International segment.
In August 2004, the Company entered into a licensing agreement
with Seattles Best Coffee LLC (Seattles
Best), a wholly-owned subsidiary of Starbucks Corporation,
through which the Company will operate Seattles
Best-branded cafes within substantially all of the
Companys existing Borders superstores in the continental
U.S. and Alaska, and new stores as they are opened. Cafes
located within existing Borders superstores will be converted to
Seattles Best cafes beginning in early 2005, and continue
over the next few years. These cafes will continue to be managed
and staffed by Company employees, who will be trained on
Seattles Best brand standards and procedures.
Seattles Best will also provide brand direction, including
branded products and oversight, and will receive royalty
payments from the Company.
The Company has signed an agreement with Berjaya Group Berhad
(Berjaya), a publicly-listed diversified corporation
headquartered in Malaysia, to establish a franchise arrangement
under which Berjaya will operate Borders stores in Malaysia, the
first of which is expected to open in April 2005.
The Companys fiscal years have ended on the Sunday
immediately preceding the last Wednesday in January. Fiscal 2004
consisted of 52 weeks and ended January 23, 2005.
Fiscal 2003 consisted of 52 weeks and ended
January 25, 2004. Fiscal 2002 consisted of 52 weeks
and ended January 26, 2003. References herein to years are
to the Companys fiscal years.
On December 10, 2004, the Board of Directors of the Company
approved a change in the Companys fiscal year-end.
Effective with respect to fiscal 2005, the Company elected to
change its fiscal year to a 52/53-week fiscal year ending on the
Saturday closest to the last day of January. The Company
implemented this change in order to conform to industry
standards and for certain administrative purposes. As a result
of the change, the Companys 2005 fiscal year will consist
of 53 weeks, and will end on January 28, 2006. The
Companys first three quarters of fiscal 2005 will end on
April 23, 2005, July 23, 2005 and October 22,
2005, respectively.
Restatement of Prior Year Financial Statements
In light of announcements made by a number of public companies
regarding lease accounting and a recently issued SEC
clarification on the subject, the Company has reevaluated its
lease accounting practices. As a result, the Company has
corrected its computation of straight-line rent expense,
depreciation of leasehold improvements and the classification of
landlord allowances related to leasehold improvements (the
Restatement).
Since fiscal 2000, the Company has depreciated leasehold
improvements relating to leased properties over the shorter of
the assets estimated useful lives or the initial lease
terms, excluding any renewal options. This is consistent with
the Companys utilization of initial lease terms in its
calculation of straight-line rent expense, including periods
prior to fiscal 2000. For Borders stores opened in fiscal 1999
and earlier, however, the Company depreciated leasehold
improvements over a 20-year period while the straight-line rent
expense in those same years was computed over the initial lease
terms, which in some cases were less than 20 years.
Therefore, to ensure compliance with GAAP, the Company has
corrected its calculation of its depreciation of leasehold
improvements to utilize the shorter of their estimated useful
lives or the initial terms of the related leases.
17
In addition, the Company changed its classification of landlord
allowances on the consolidated balance sheets and statements of
cash flows. Historically, landlord allowances were classified on
the Companys consolidated balance sheets as reductions of
property and equipment, and were classified as a reduction in
capital expenditures, an investing activity, on the
Companys consolidated statements of cash flows. In order
to comply with the provisions of FASB Technical
Bulletin No. 88-1, Issues Relating to Accounting
for Leases (FTB 88-1), however, the Company
has classified landlord allowances primarily as deferred rent
liabilities, in Other long-term liabilities on the
Companys consolidated balance sheets, and as an operating
activity on the Companys consolidated statements of cash
flows.
Also, the Company had recognized the straight-line rent expense
for leases beginning on the commencement date of the lease,
which had the effect of excluding the construction build-out
period of its stores from the calculation of the period over
which it expenses rent. The accounting for straight-line rent
expense has been corrected to include the construction build-out
period.
We did not amend our previously filed Annual Reports on
Form 10-K or Quarterly Reports on Form 10-Q for the
Restatement, and the financial statements and related financial
information contained in such reports should no longer be relied
upon. See Note 2 Restatement of Prior
Year Financial Statements of the notes to consolidated
financial statements for further information with respect to the
Restatement.
Throughout Managements Discussion and Analysis of
Financial Condition and Results of Operations, all
referenced amounts for prior periods and prior period
comparisons reflect the balances and amounts on a restated basis.
Results of Operations
The following table presents the Companys consolidated
statements of operations data, as a percentage of sales, for the
three most recent fiscal years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan. 23, | |
|
Jan. 25, | |
|
Jan. 26, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Other revenue
|
|
|
0.6 |
|
|
|
0.9 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100.6 |
|
|
|
100.9 |
|
|
|
100.8 |
|
Cost of merchandise sold (includes occupancy)
|
|
|
72.3 |
|
|
|
72.7 |
|
|
|
72.2 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
28.3 |
|
|
|
28.2 |
|
|
|
28.6 |
|
Selling, general and administrative expenses
|
|
|
22.4 |
|
|
|
22.2 |
|
|
|
22.6 |
|
Legal settlement expense
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
Pre-opening expense
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.2 |
|
Asset impairments and other writedowns
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
5.6 |
|
|
|
5.4 |
|
|
|
5.4 |
|
Interest expense
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
|
5.4 |
|
|
|
5.2 |
|
|
|
5.0 |
|
Income tax
|
|
|
2.0 |
|
|
|
2.0 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of accounting change
|
|
|
3.4 |
|
|
|
3.2 |
|
|
|
3.1 |
|
Cumulative effect of accounting change (net of tax)
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
3.4 |
% |
|
|
3.1 |
% |
|
|
3.1 |
% |
|
|
|
|
|
|
|
|
|
|
18
Consolidated Results Comparison of 2004 to
2003
Sales
Consolidated sales increased $180.9 million, or 4.9%, to
$3,879.5 million in 2004 from $3,698.6 million in
2003. This resulted primarily from increased sales in the
Borders segment, due to the opening of new superstores, and the
International segment, due to the opening of new superstores,
the acquisition of Paperchase, positive comparable store sales
and favorable foreign currency exchange rates. A decrease in
sales of the Waldenbooks segment partially offset the increase
in consolidated sales, due primarily to store closures and
negative comparable store sales.
Comparable store sales for all Borders superstores increased
0.6% in 2004. Comparable store sales measures for all Borders
superstores, which are based upon a 52-week year, include all
stores open more than one year except those not offering music
(of which there are 13, representing approximately 2% of
total sales). New stores are included in the calculation of
comparable store sales measures upon the 13th month of
operation. The comparable store sales increase for 2004 was due
to primarily to strong comparable store sales of digital
videodiscs (DVDs), as well as positive comparable
store sales of books, especially in mystery/thrillers, political
books and adult fiction. Partially offsetting these increases in
comparable store sales were negative comparable store sales in
the music category. The impact of price changes on comparable
store sales was not significant.
Waldenbooks comparable store sales decreased 2.0% in 2004.
Waldenbooks comparable store sales measures, which are
based upon a 52-week year, include all stores open more than one
year. New stores are included in the calculation of comparable
store sales measures upon the 13th month of operation. The
Companys mall-based seasonal businesses are also included
in Waldenbooks comparable store sales measures. The
comparable store sales decrease for 2004 was primarily due to a
decline in store traffic due to the sluggish mall environment
and weaker book bestsellers which impacted Waldenbooks to a
greater degree than Borders superstores. These factors were
partially offset by sales within the seasonal business, which
increased 5.1% over the prior year, primarily due to an
increased number of locations and to improved execution of the
Companys seasonal business strategy. The impact of price
changes on comparable store sales was not significant.
Other Revenue
Other revenue consists primarily of membership income from
Waldenbooks Preferred Reader Program.
Until October 2004, Waldenbooks sold memberships in its
Preferred Reader Program, which offered members discounts on
purchases and other benefits. Waldenbooks has phased out its
Preferred Reader Program and is replacing it with other
promotional programs in order to maximize long-term sales and
earnings. The Company recognizes membership income on a
straight-line basis over the 12-month term of the membership,
and categorizes the income as Other revenue in the
Companys consolidated statements of operations. Discounts
on purchases are netted against Sales in the
Companys consolidated statements of operations.
Due primarily to the change in the Preferred Reader Program,
other revenue has decreased $8.9 million, or 27.5%, to
$23.5 million in 2004 from $32.4 million in 2003.
Gross Margin
Consolidated gross margin increased $57.4 million, or 5.5%,
to $1,099.4 million in 2004 from $1,042.0 million in
2003. As a percentage of sales, consolidated gross margin
increased by 0.1%, to 28.3% in 2004 from 28.2% in 2003. This
primarily resulted from an increase in gross margin as a
percentage of sales for the Borders and International segments,
partially offset by a decrease as a percentage of sales in the
Waldenbooks segment. The increase in the Borders segment was
primarily due to decreased bestseller discounts. The increase in
the International segment resulted from a decrease in
merchandise costs, primarily due to the higher product margins
generated by Paperchase and the weakness of the
U.S. dollar. The decrease in the Waldenbooks segment was
due to decreased other revenue as a percentage of sales due to
the change in the Preferred Reader Program, as previously
discussed.
The Company classifies the following items as Cost of
merchandise sold (includes occupancy) on its consolidated
statements of operations: product costs and related discounts,
markdowns, freight, shrinkage, capitalized inventory costs,
distribution center costs (including payroll, rent, supplies,
depreciation, and other operating expenses), and
19
store occupancy costs (including rent, common area maintenance,
depreciation, repairs and maintenance, taxes, insurance, and
others). The Companys gross margin may not be comparable
to that of other retailers, which may exclude the costs related
to their distribution network from cost of sales and include
them in other financial statement lines.
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses
(SG&A) increased $49.3 million, or 6.0%, to
$870.7 million in 2004 from $821.4 million in 2003. As
a percentage of sales, it increased 0.2% to 22.4% in 2004 from
22.2% in 2003. This increase primarily resulted from increases
in SG&A expenses as a percentage of sales for the Borders,
Waldenbooks and International segments. Borders SG&A
expenses as percentage of sales increased primarily due to
increased advertising and store payroll expense. The
International increase in SG&A expenses as a percentage of
sales was primarily the result of increased advertising,
administrative payroll expenses and store operating costs of
Paperchase. The Waldenbooks increase was primarily due to
increased store payroll expenses and store operating expenses as
a percentage of sales.
The Company classifies the following items as Selling,
general and administrative expenses on its consolidated
statements of operations: store and administrative payroll,
utilities, supplies and equipment costs, credit card and bank
processing fees, bad debt, legal and consulting fees, certain
advertising income and expenses and others.
Asset Impairments and Other Writedowns
In 2004, the Company recorded a $6.2 million writedown
related to the impairment of certain long-lived assets
(primarily leasehold improvements, furniture, and fixtures), at
certain underperforming Borders, Waldenbooks and Books etc.
stores. In addition, the Company recorded a $1.0 million
charge related to the closure costs of certain Waldenbooks
stores.
In 2003, the Company recorded a $6.9 million charge related
to the impairment of certain long-lived assets (primarily
leasehold improvements, furniture, and fixtures), of certain
Borders and Waldenbooks stores. In addition, the Company
recorded a $0.6 million charge related to the closure costs
of certain Waldenbooks stores. The Company also recorded a
$4.5 million charge related to the impairment of certain
capitalized technology initiatives, resulting from the
Companys reevaluation of its technology strategy.
Interest Expense
Consolidated interest expense increased $0.4 million, or
4.6%, to $9.1 million in 2004 from $8.7 million in
2003. This was primarily due to a higher weighted average
interest rate in 2004 as compared to 2003.
Taxes
The effective tax rate differed for the years presented from the
federal statutory rate primarily as a result of state income
taxes, partially offset by international operations. The
Companys effective tax rate used was 36.5% in 2004
compared to 38.0% in 2003. This decrease was primarily due to
lower taxes from international operations.
Cumulative Effect of Accounting Change
In 2003, Borders recorded a $2.1 million charge, comprised
of non-cash depreciation costs, resulting from the
implementation of Financial Accounting Standards Board
Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46).
Net Income
Due to the factors mentioned above, net income as a percentage
of sales increased 0.3%, to 3.4% from 3.1% in 2003, and net
income dollars increased to $131.9 million in 2004 from
$115.2 million in 2003.
20
Consolidated Results Comparison of 2003
to 2002
Sales
Consolidated sales increased $212.5 million, or 6.1%, to
$3,698.6 million in 2003 from $3,486.1 million in
2002. This resulted primarily from increased sales in the
Borders and International segments due to the opening of new
superstores and favorable foreign currency exchange rates. A
decrease in sales of the Waldenbooks segment partially offset
the increase in consolidated sales, due primarily to store
closures and negative comparable store sales.
Comparable store sales for all Borders superstores increased
0.5% in 2003. Comparable store sales measures for all Borders
superstores, which are based upon a 52-week year, include all
stores open more than one year except those not offering music
(of which there are 10, representing approximately 2% of
total sales). New stores are included in the calculation of
comparable store sales measures upon the 13th month of
operation. The comparable store sales increase for 2003 was due
primarily to the movie and gifts and stationery categories,
which experienced strong positive comparable store sales,
partially offset by negative comparable store sales in the music
category. Comparable store sales of books remained relatively
flat for the year. Sales of movies improved on a comparable
store basis primarily as the result of increased sales of DVDs.
Sales of the gifts and stationery category also increased,
principally the result of category management initiatives
resulting in product enhancements, improved placements, and a
slight increase in space allocation. Negative comparable store
sales in the music category were consistent with the overall
decline in music industry sales. The impact of price changes on
comparable store sales was not significant.
Waldenbooks comparable store sales decreased 0.6% in 2003.
Waldenbooks comparable store sales measures, which are
based upon a 52-week year, include all stores open more than one
year. New stores are included in the calculation of comparable
store sales measures upon the 13th month of operation. The
Companys mall-based seasonal businesses are also included
in Waldenbooks comparable store sales measures. The
comparable store sales decrease for 2003 was primarily due to
decreased mall traffic and the impact of superstore openings.
These factors were partially offset by sales within the seasonal
business, which increased 15.6% over the prior year, primarily
due to an increased number of locations and to improved
execution of the Companys seasonal business strategy. This
also slightly increased the calendar categorys percentage
of Waldenbooks overall merchandise mix relative to the
book and gifts and stationery categories. The impact of price
changes on comparable store sales was not significant.
Other Revenue
Other revenue consists primarily of membership income from
Waldenbooks Preferred Reader Program.
Waldenbooks sold memberships in its Preferred Reader Program,
which offered members discounts on purchases and other benefits.
The Company recognizes membership income on a straight-line
basis over the 12-month term of the membership, and categorizes
the income as Other revenue in the Companys
consolidated statements of operations. Discounts on purchases
are netted against Sales in the Companys
consolidated statements of operations.
Gross Margin
Consolidated gross margin increased $45.9 million, or 4.6%,
to $1,042.0 million in 2003 from $996.1 million in
2002. As a percentage of sales, however, consolidated gross
margin decreased by 0.4%, to 28.2% in 2003 from 28.6% in 2002.
This primarily resulted from a decrease in gross margin as a
percentage of sales for the Borders segment, partially offset by
an increase in the International and Waldenbooks segments. The
decline in the Borders segment was primarily due to increased
occupancy costs as a percentage of sales and increased
bestseller discounts. The increase in the International segment
resulted from a decrease in merchandise costs, due to improved
vendor terms in the United Kingdom and the weakness of the
U.S. dollar. The increase in the Waldenbooks segment was
due to decreased product costs.
The Company classifies the following items as Cost of
merchandise sold (includes occupancy) on its consolidated
statements of operations: product costs and related discounts,
markdowns, freight, shrinkage, capitalized inventory costs,
distribution center costs (including payroll, rent, supplies,
depreciation, and other operating expenses), and store occupancy
costs (including rent, common area maintenance, depreciation,
repairs and maintenance, taxes, insurance, and others). The
Companys gross margin may not be comparable to that of
other retailers, which may
21
exclude the costs related to their distribution network from
cost of sales and include them in other financial statement
lines.
Selling, General and Administrative Expenses
Consolidated SG&A increased $35.1 million, or 4.5%, to
$821.4 million in 2003 from $786.3 million in 2002. As
a percentage of sales, however, it decreased 0.4% to 22.2% in
2003 from 22.6% in 2002. This decrease primarily resulted from
decreases in SG&A expenses as a percentage of sales for the
International and Borders segments, partially offset by an
increase in Waldenbooks SG&A as a percentage of sales.
International SG&A expenses as a percentage of sales
improved as the result of store payroll expenses, store
operating expenses, administrative payroll, other administrative
expenses and advertising costs increasing at rates less than
sales growth. The Borders decrease was related to increased
income from the Companys gift certificate program,
resulting from favorable redemption trends, and a decrease in
store operating expenses due to disciplined cost controls at the
store level. The Waldenbooks increase was primarily due to
increased store payroll expenses, partially offset by a decrease
in store operating expenses, as a percentage of sales.
The Company classifies the following items as Selling,
general and administrative expenses on its consolidated
statements of operations: store and administrative payroll,
utilities, supplies and equipment costs, credit card and bank
processing fees, bad debt, legal and consulting fees, certain
advertising income and expenses and others.
Legal Settlement Expense
In January 2004, a settlement was reached pursuant to which the
Company agreed to pay $3.5 million, categorized as
Legal settlement expense in the consolidated
statements of operations during 2003, to resolve all claims
asserted in the California overtime litigation. This action was
brought by 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 in the state
of California at any time between April 10, 1996, and the
present. The court approved the settlement in December 2004.
Asset Impairments and Other Writedowns
In 2003, the Company recorded a $6.9 million charge related
to the impairment of certain long-lived assets (primarily
leasehold improvements, furniture, and fixtures), of certain
Borders and Waldenbooks stores. In addition, the Company
recorded a $0.6 million charge related to the closure costs
of certain Waldenbooks stores. The Company also recorded a
$4.5 million charge related to the impairment of certain
capitalized technology initiatives, resulting from the
Companys reevaluation of its technology strategy.
In 2002, the Company recorded a $14.4 million charge
related to the impairment of certain long-lived assets
(primarily leasehold improvements, furniture, and fixtures), of
certain Borders, Waldenbooks and Books etc. stores. In addition,
the Company adopted a plan to close certain underperforming
Waldenbooks stores and a Books etc. store and recorded a
$0.9 million charge for the closing costs of those stores.
Interest Expense
Consolidated interest expense decreased $3.9 million, or
31.0%, to $8.7 million in 2003 from $12.6 million in
2002. This was primarily due to lower average debt levels
resulting largely from increased cash flow generated by the
Borders segment.
Taxes
The effective tax rate for the years presented differed from the
federal statutory rate primarily as a result of state income
taxes. The Companys effective tax rate used was 38.0% in
2003 compared to 38.5% in 2002. This was primarily due to
increased profit in foreign jurisdictions which is taxed at a
lower rate than domestic profit.
22
Cumulative Effect of Accounting Change
In 2003, Borders recorded a $2.1 million charge, comprised
of non-cash depreciation costs, resulting from the
implementation of FIN 46.
Net Income
Due to the factors mentioned above, net income as a percentage
of sales remained flat at 3.1% in 2003 and 2002, and net income
dollars increased to $115.2 million in 2003 from
$107.6 million in 2002.
Segment Results
The Company is organized based upon the following operating
segments: domestic Borders stores, International stores
(including Borders, Books etc. and Paperchase stores),
Waldenbooks Specialty Retail stores (Waldenbooks),
and Corporate (consisting of the unallocated portion of interest
expense, certain corporate governance costs and corporate
incentive costs). See Note 18 Segment
Information in the notes to consolidated financial
statements for further information relating to these segments.
Segment data includes charges allocating all corporate support
costs to each segment. Interest income and expense are allocated
to segments based upon the cash flow generated or absorbed by
those segments. The Company utilizes fixed interest rates,
approximating the Companys medium-term borrowing and
investing rates, in calculating segment interest income and
expense.
Borders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
(dollar amounts in millions) |
|
|
|
|
|
|
Sales
|
|
$ |
2,588.9 |
|
|
$ |
2,470.2 |
|
|
$ |
2,319.0 |
|
Net income
|
|
$ |
112.0 |
|
|
$ |
97.3 |
|
|
$ |
100.2 |
|
Net income as % of sales
|
|
|
4.3 |
% |
|
|
3.9 |
% |
|
|
4.3 |
% |
Depreciation expense
|
|
$ |
80.4 |
|
|
$ |
79.5 |
|
|
$ |
76.3 |
|
Interest (income) expense
|
|
$ |
(5.4 |
) |
|
$ |
(1.9 |
) |
|
$ |
2.5 |
|
Store openings
|
|
|
19 |
|
|
|
41 |
|
|
|
41 |
|
Store closings
|
|
|
2 |
|
|
|
|
|
|
|
|
|
Store count
|
|
|
462 |
|
|
|
445 |
|
|
|
404 |
|
Borders Comparison of 2004 to 2003
Sales
Borders sales increased $118.7 million, or 4.8%, to
$2,588.9 million in 2004 from $2,470.2 million in
2003. This increase was comprised of non-comparable sales
primarily associated with 2004 and 2003 store openings.
Gross Margin
Gross margin as a percentage of sales increased approximately
0.3%, to 29.3% in 2004 from 29.0% in 2003, primarily due to
decreased markdowns of 0.4% as a percentage of sales, resulting
from higher bestseller discounts in 2003. Partially offsetting
the decrease in markdowns are increased distribution costs of
0.1% as a percentage of sales. The overall mix of merchandise
sold by Borders stores did not significantly change, or affect
margin rates significantly, in 2004 as compared to 2003.
Gross margin dollars increased $42.2 million, or 5.9%, to
$758.6 million in 2004 from $716.4 million in 2003,
primarily due to new store openings and the increase in gross
margin percentage noted above.
23
Selling, General and Administrative Expenses
SG&A as a percentage of sales increased 0.2%, to 22.1% in
2004 from 21.9% in 2003, primarily as a result of an increase in
advertising expenses of 0.3% as a percentage of sales and
increased store payroll expenses of 0.2% as a percentage of
sales. These factors were partially offset by a decrease in
corporate administrative expenses of 0.2% as a percentage of
sales due to disciplined cost controls at the corporate level.
In addition there was a decrease of 0.1% in administrative
payroll costs as a percentage of sales. Store operating costs
remained flat as a percentage of sales.
SG&A dollars increased $31.2 million, or 5.8%, to
$573.2 million in 2004 from $542.0 million in 2003,
primarily due to new store openings and the increased store
payroll and operating expenses required.
Asset Impairments and Other Writedowns
In 2004, the Company recorded a $4.5 million writedown
related to the impairment of assets at certain underperforming
Borders stores.
In 2003, the Company recorded a $6.6 million writedown
related to the impairment of assets at certain underperforming
Borders stores. Borders also incurred a $3.0 million
writedown related to the impairment of certain capitalized
technology initiatives.
Depreciation
Depreciation expense increased $0.9 million, or 1.1%, to
$80.4 million in 2004 from $79.5 million in 2003. This
was primarily the result of increased depreciation expense
recognized on new and remodeled stores capital
expenditures, as well as accelerated depreciation related to
store remodels.
Interest Income
Interest income increased $3.5 million, to
$5.4 million in 2004 from $1.9 million in 2003. This
was due to the generation of increased cash flow, which reduced
average borrowing levels at fixed internal interest rates.
Cumulative Effect of Accounting Change
In 2003, Borders recorded a $2.1 million charge, comprised
of non-cash depreciation costs, resulting from the
implementation of FIN 46.
Net income
Due to the factors mentioned above, net income as a percentage
of sales increased to 4.3% in 2004 from 3.9% in 2003, and net
income dollars increased $14.7 million, or 15.1%, to
$112.0 million in 2004 from $97.3 million in 2003.
Effect of Terrorist Attacks on September 11,
2001
As a result of the terrorist attacks on September 11, 2001,
a Borders store that operated in the World Trade Center in New
York City was destroyed. The loss of that stores sales and
net income was not material to the consolidated 2004, 2003 or
2002 results as a whole. The Company was insured for the
replacement value of the assets destroyed at the store and up to
24 months of lost income from business interruption
coverage and recognized a total recovery of $19.9 million.
The Company does not expect to recover additional insurance
amounts relating to this incident.
During 2004, the Company recognized as income its final
insurance reimbursement of $1.2 million related to the
September 11, 2001 loss. Of this, $0.9 million was
categorized as an offset to Selling, general and
administrative expenses. This amount primarily represented
the excess of lost assets replacement value over their net
book value. It is the Companys policy to record gains and
losses on asset disposals as a part of Selling, general
and administrative expenses. The remaining
$0.3 million was related to pre-opening expenses incurred
in the opening of replacement stores in New York City. This was
categorized as an offset to Pre-opening expense on
the consolidated statements of operations.
24
During 2003, the Company recognized a $2.8 million gain
from insurance proceeds related to the terrorist attacks. Of
this, $0.7 million represented business interruption
proceeds for 2003. In addition, $1.8 million primarily
represented the excess of lost assets replacement value
over their net book value. The remaining $0.3 million was
related to pre-opening expenses incurred in the opening of
replacement stores in New York City.
During 2002, the Company recognized a $2.9 million gain
from insurance proceeds related to the terrorist attacks. Of
this, $1.2 million represented business interruption
proceeds for 2002. The remaining $1.7 million primarily
represented the excess of lost assets replacement value
over their net book value.
Borders Comparison of 2003 to 2002
Sales
Borders sales increased $151.2 million, or 6.5%, to
$2,470.2 million in 2003 from $2,319.0 million in
2002. This increase was comprised of non-comparable sales
primarily associated with 2003 and 2002 store openings.
Gross Margin
Gross margin as a percentage of sales decreased approximately
0.8%, to 29.0% in 2003 from 29.8% in 2002. The largest
contributor to this decrease was a 0.7% increase in store
occupancy costs as a percentage of sales primarily as a result
of the stores rent, common area maintenance, property
taxes, and insurance expenses representing a higher percentage
of sales. This was primarily due to new stores rent costs
representing a higher percentage of sales than older stores and
the increased lease costs related to the permanent refinancing
of certain stores previously financed through the Original Lease
Facility. In addition, the gross margin percentage decreased
approximately 0.2% due to increased bestseller discounts.
Offsetting these items was a decrease in distribution costs of
0.1%. The overall mix of merchandise sold by Borders stores did
not significantly change, or affect margin rates significantly,
in 2003 as compared to 2002.
Gross margin dollars increased $26.3 million, or 3.8%, to
$716.4 million in 2003 from $690.1 in 2002, primarily due
to new store openings, partially offset by the decrease in gross
margin percentage noted above.
Selling, General and Administrative Expenses
SG&A as a percentage of sales improved 0.4%, to 21.9% in
2003 from 22.3% in 2002, primarily as a result of a decrease of
0.4% of administrative costs as a percentage of sales. The
decrease in administrative costs was due to increased income
from the Companys gift certificate program resulting from
favorable redemption trends. Store payroll, store operating
expenses, corporate administrative payroll and advertising costs
remained flat as a percentage of sales.
SG&A dollars increased $25.9 million, or 5.0%, to
$542.0 million in 2003 from $516.1 in 2002, primarily due
to new store openings and the increased store payroll and
operating expenses required.
Asset Impairments and Other Writedowns
In 2003, the Company recorded a $6.6 million writedown
related to the impairment of assets at certain underperforming
Borders stores. Borders also incurred a $3.0 million
writedown related to the impairment of certain capitalized
technology initiatives.
In 2002, the Company recorded a $3.3 million writedown
related to the impairment of assets at certain underperforming
Borders stores.
Depreciation
Depreciation expense increased $3.2 million, or 4.2%, to
$79.5 million in 2003 from $76.3 million in 2002. This
was primarily the result of increased depreciation expense
recognized on new stores capital expenditures.
25
Interest Income
Interest income increased $4.4 million to $1.9 million
in 2003 from an expense of $2.5 million in 2002. This was
due to the generation of increased cash flow, which reduced
average borrowing levels at fixed internal interest rates.
Cumulative Effect of Accounting Change
In 2003, Borders recorded a $2.1 million charge, comprised
of non-cash depreciation costs, resulting from the
implementation of FIN 46.
Net Income
Due to the factors mentioned above, net income as a percentage
of sales decreased to 3.9% in 2003 from 4.3% in 2002, and net
income dollars decreased $2.9 million, or 2.9%, to
$97.3 million in 2003 from $100.2 million in 2002.
Waldenbooks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
(dollar amounts in millions) | |
|
|
|
|
Sales
|
|
$ |
779.9 |
|
|
$ |
820.9 |
|
|
$ |
852.2 |
|
Other revenue
|
|
$ |
15.3 |
|
|
$ |
24.1 |
|
|
$ |
25.0 |
|
Net income
|
|
$ |
41.5 |
|
|
$ |
48.8 |
|
|
$ |
41.1 |
|
Net income as % of sales
|
|
|
5.3 |
% |
|
|
5.9 |
% |
|
|
4.8 |
% |
Depreciation expense
|
|
$ |
16.7 |
|
|
$ |
18.5 |
|
|
$ |
20.6 |
|
Interest income
|
|
$ |
42.2 |
|
|
$ |
38.8 |
|
|
$ |
33.5 |
|
Store openings
|
|
|
15 |
|
|
|
12 |
|
|
|
7 |
|
Store closings
|
|
|
43 |
|
|
|
74 |
|
|
|
55 |
|
Store count
|
|
|
705 |
|
|
|
733 |
|
|
|
795 |
|
Waldenbooks Comparison of 2004 to 2003
Sales
Waldenbooks sales decreased $41.0 million, or 5.0%,
to $779.9 million in 2004 from $820.9 million in 2003.
This decrease was comprised of decreased comparable store sales
of $12.8 million and decreased non-comparable sales
associated with 2004 and 2003 store closings of
$28.2 million.
Other Revenue
Waldenbooks other revenue, which consists primarily of
membership income from the Preferred Reader Program, decreased
$8.8 million, or 36.5%, to $15.3 million in 2003 from
$24.1 million in 2003. This was due to the change in the
Preferred Reader Program as previously discussed.
Gross Margin
Gross margin as a percentage of sales decreased 1.0%, to 27.4%
in 2004 from 28.4% in 2003. This was primarily due to a 1.0%
decrease in other revenue as a percentage of sales, due to the
change in the Preferred Reader Program previously discussed, as
well as an increase in freight costs of 0.1% as a percentage of
sales. These factors were partially offset by a decrease in
markdowns of 0.1%, due to higher bestseller discounts in 2003.
Gross margin dollars decreased $19.9 million, or 8.5%, to
$213.6 million in 2004 from $233.5 million in 2003,
primarily due to store closures and the decrease in gross margin
percentage noted above.
26
Selling, General and Administrative Expenses
SG&A as a percentage of sales increased 0.7%, to 23.9% in
2004 from 23.2% in 2003, primarily resulting from a 0.5%
increase in store payroll and other operating expenses as a
percentage of sales, due to sales decreasing at a faster rate
than payroll and other operating expenses, and a 0.2% increase
in corporate payroll and non-payroll costs as a percentage of
sales.
SG&A dollars decreased $4.3 million, or 2.3%, to
$186.1 million in 2004 from $190.4 million in 2003,
primarily due to store closings.
Asset Impairments and Other Writedowns
In 2004, Waldenbooks incurred $0.4 million of asset
impairment charges related to underperforming Waldenbooks
stores. In addition, the Company recorded a charge of
$1.0 million related to the closure costs of certain
Waldenbooks stores.
In 2003, Waldenbooks incurred $0.3 million of asset
impairment charges related to underperforming Waldenbooks
stores. In addition, the Company recorded a charge of
$0.6 million related to the closure costs of certain
Waldenbooks stores. Waldenbooks also incurred a
$1.4 million writedown related to the impairment of certain
capitalized technology initiatives.
Depreciation
Depreciation expense decreased $1.8 million, or 9.7%, to
$16.7 million in 2004 from $18.5 million in 2003. This
was primarily due to a lower fixed asset base resulting from
asset impairments and store closings.
Interest Income
Interest income increased $3.4 million, or 8.8%, to
$42.2 million in 2004 from $38.8 million in 2003. This
was the result of Waldenbooks continued positive cash flow
at fixed internal interest rates.
Net Income
Due to the factors mentioned above, net income as a percentage
of sales decreased to 5.3% in 2004 from 5.9% in 2003, while net
income dollars decreased $7.3 million, or 15.0%, to
$41.5 million in 2004 from $48.8 million in 2003.
Waldenbooks Comparison of 2003 to 2002
Sales
Waldenbooks sales decreased $31.3 million, or 3.7%,
to $820.9 million in 2003 from $852.2 million in 2002.
This decrease was comprised of decreased comparable store sales
of $4.9 million and decreased non-comparable sales
associated with 2003 and 2002 store closings of
$26.4 million.
Other Revenue
Waldenbooks other revenue, which consists primarily of
membership income from the Preferred Reader Program, decreased
3.6% to $24.1 million in 2003 from $25.0 million in
2002.
Gross Margin
Gross margin as a percentage of sales increased 0.5%, to 28.4%
in 2003 from 27.9% in 2002, primarily due to decreased product
costs of 0.4% as a percentage of sales resulting from the
increased sales of calendars, which offered higher gross margin
percentages than other categories, and a decrease in
distribution costs of 0.1% as a percentage of sales related to
Borders increased usage of Waldenbooks distribution
facilities (coupled with a corresponding decrease in
Waldenbooks usage).
27
Gross margin dollars decreased $4.4 million, or 1.8%, to
$233.5 million in 2003 from $237.9 million in 2003,
primarily due to store closings.
Selling, General and Administrative Expenses
SG&A as a percentage of sales increased 0.1%, to 23.2% in
2003 from 23.1% in 2002, primarily resulting from a 0.2%
increase in store payroll expenses as a percentage of sales, due
to sales decreasing at a faster rate than payroll. This was
partially offset by a 0.1% decrease in store operating expenses
as a percentage of sales.
SG&A dollars decreased $6.4 million, or 3.3%, to
$190.4 million in 2003 from $196.8 million in 2002,
primarily due to store closings.
Asset Impairments and Other Writedowns
In 2003, Waldenbooks incurred $0.3 million of asset
impairment charges related to underperforming Waldenbooks
stores. In addition, the Company recorded a charge of
$0.6 million related to the closure costs of certain
Waldenbooks stores. Waldenbooks also incurred a
$1.4 million writedown related to the impairment of certain
capitalized technology initiatives.
In 2002, the Company incurred approximately $8.2 million of
asset impairment charges related to underperforming Waldenbooks
stores. In addition, the Company adopted a plan in 2002 to close
certain Waldenbooks stores and recorded a $0.8 million
charge in 2002 for the related closing costs.
Depreciation
Depreciation expense decreased $2.1 million, or 10.2%, to
$18.5 million in 2003 from $20.6 million in 2002. This
was primarily due to a lower fixed asset base resulting from
asset impairments and store closings.
Interest Income
Interest income increased $5.3 million, or 15.8% to
$38.8 million in 2003 from $33.5 million in 2002. This
was the result of Waldenbooks continued positive cash flow
at fixed internal interest rates.
Net Income
Due to the factors mentioned above, net income as a percentage
of sales increased to 5.9% in 2003 from 4.8% in 2002, while net
income dollars increased $7.7 million, or 18.7%, to
$48.8 million in 2003 from $41.1 million in 2002.
28
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
(dollar amounts in millions) | |
|
|
|
|
Sales
|
|
$ |
510.7 |
|
|
$ |
407.5 |
|
|
$ |
314.9 |
|
Net income (loss)
|
|
$ |
5.6 |
|
|
$ |
(1.3 |
) |
|
$ |
(13.8 |
) |
Net income (loss) as % of sales
|
|
|
1.1 |
% |
|
|
(0.3 |
)% |
|
|
(4.4 |
)% |
Depreciation expense
|
|
$ |
15.8 |
|
|
$ |
13.3 |
|
|
$ |
10.2 |
|
Interest expense
|
|
$ |
19.1 |
|
|
$ |
19.0 |
|
|
$ |
17.2 |
|
Superstores:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store openings
|
|
|
5 |
|
|
|
7 |
|
|
|
8 |
|
|
Store count
|
|
|
42 |
|
|
|
37 |
|
|
|
30 |
|
Books etc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store openings
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
Store closings
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
Store count
|
|
|
35 |
|
|
|
36 |
|
|
|
37 |
|
Paperchase stand-alone stores:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores acquired
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
Store openings
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
Store count
|
|
|
13 |
|
|
|
|
|
|
|
|
|
International Comparison of 2004 to 2003
Sales
International sales increased $103.2 million, or 25.3%, to
$510.7 million in 2004 from $407.5 million in 2003,
primarily resulting from new superstore openings, comparable
store sales increases and the acquisition of Paperchase. In
2004, the Company opened five International superstores and one
Books etc. store in the United Kingdom. In addition, 10.4% of
the sales growth percentage was related to favorable exchange
rates.
Gross Margin
Gross margin as a percentage of sales increased 2.3%, to 24.9%
in 2004 from 22.6% in 2003, primarily the result of a decrease
of 2.0% in merchandise costs as a percentage of sales. This was
primarily due to the acquisition of Paperchase, which offers
merchandise with higher margins than the International
superstores core products. The weakness of the
U.S. dollar also contributed to the improvement in product
costs, primarily benefiting the Companys operations in
countries with a relatively high percentage of U.S.-sourced
merchandise. Also contributing to the increase in the gross
margin percentage was an increase as a percentage of sales of
0.1% in third party cafe income and improvements of 0.5% in
product markdowns as a percentage of sales, resulting from
improved vendor terms, largely in the Companys Asia
Pacific stores. Partially offsetting these factors were
increased occupancy costs of 0.2% as a percentage of sales, due
to new store openings and landlord-imposed rent adjustments, and
increased distribution costs of 0.1% as a percentage of sales,
largely due to the higher supply chain costs of Paperchase. The
overall mix of book, music, movie, cafe, and gifts and
stationery merchandise of the International segment changed
slightly, due to the acquisition and consolidation of Paperchase.
Gross margin dollars increased $35.1 million, or 38.1%, to
$127.2 million in 2004 from $92.1 million in 2003. Of
this increase, $8.6 million is the result of translation of
foreign currencies to U.S. dollars. The remainder of the
increase is due to new superstore openings and the improved
gross margin rate.
29
Selling, General and Administrative Expenses
SG&A as a percentage of sales increased approximately 0.8%,
to 19.6% in 2004 from 18.8% in 2003. This was primarily the
result of increases as a percentage of sales in advertising
expenses of 0.3%, administrative payroll of 0.3%, store
operating expenses of 0.1% and administrative expenses of 0.1%,
all of which are due to the acquisition of Paperchase.
SG&A dollars increased $23.7 million, or 30.9%, to
$100.3 million in 2004 from $76.6 million in 2003. Of
this increase, $7.5 million is the result of translation of
foreign currencies to U.S. dollars. The remainder of the
increase is primarily due to store openings and the increased
store payroll and operating expenses required.
Asset Impairments and Other Writedowns
In 2004, the International segment incurred $1.3 million of
asset impairment charges related to underperforming Books etc.
stores.
In 2003, the International segment incurred a $0.1 million
writedown related to the impairment of certain capitalized
technology initiatives.
Depreciation
Depreciation expense increased $2.5 million, or 18.8%, to
$15.8 million in 2004 from $13.3 million in 2003. This
was primarily due to depreciation expense recognized on new
stores capital expenditures.
Interest Expense
Interest expense increased $0.1 million, or 0.5%, to
$19.1 million in 2004 from $19.0 million in 2003. This
was a result of comparable average borrowing levels at fixed
internal interest rates as a result of increased cash flow
generation in the United Kingdom.
Net Income
Due to the factors mentioned above, net income as a percentage
of sales was 1.1% in 2004 as compared to a loss of 0.3% in 2003,
and net income dollars increased $6.9 million to
$5.6 million in 2004 from a loss of $1.3 million in
2003.
Exchange rates positively impacted the comparison of
2004 net income to 2003 net loss by approximately
$0.5 million. Foreign currency transaction gains/(losses)
were $0.2 million in 2004 and $(0.4) million in 2003.
International Comparison of 2003 to 2002
Sales
International sales increased $92.6 million, or 29.4%, to
$407.5 million in 2003 from $314.9 million in 2002,
primarily resulting from new superstore openings. In 2003, the
Company opened seven International superstores and one Books
etc. store in the United Kingdom. In addition, 7.2% of the sales
growth percentage was related to favorable exchange rates.
Gross Margin
Gross margin as a percentage of sales increased 1.0%, to 22.6%
in 2003 from 21.6% in 2002, primarily the result of a decrease
of 0.6% in merchandise costs as a percentage of sales. The
decrease in merchandise cost as a percentage of sales was
primarily due to improved vendor terms in the Companys
U.K. operations. The weakness of the U.S. dollar also
contributed to the improvement in product costs, primarily
benefiting the Companys operations in countries with a
relatively high percentage of U.S.-sourced merchandise. Also
contributing to the increase in the gross margin percentage was
an increase of 0.4% in third party cafe income and a decrease of
0.2% in distribution costs as a percentage of sales, due to the
improved leverage and efficiency in servicing the additional
volume of new stores. Partially offsetting these factors were
increased occupancy costs of 0.2% as a percentage of sales due
to new store openings and landlord-imposed rent adjustments. The
overall mix of book, music, movie, cafe, and gifts and
30
stationery merchandise sold by International superstores, and
the mix of books and gifts and stationery offered by Books etc.
stores, did not change significantly, or affect margin rates
significantly, in 2003 as compared to 2002.
Gross margin dollars increased $24.0 million, or 35.2%, to
$92.1 million in 2003 from $68.1 million in 2002. Of
this increase, $6.5 million is the result of translation of
foreign currencies to U.S. dollars. The remainder of the
increase is due to new superstore openings and the improved
gross margin rate.
Selling, General and Administrative Expenses
SG&A as a percentage of sales decreased approximately 2.6%,
to 18.8% in 2003 from 21.4% in 2002. This improvement was
primarily the result of a decrease as a percentage of sales in
store payroll costs of 1.0%, resulting from a change in the
U.K. store management structure to allow more flexibility
in leveraging sales. In addition, store operating expenses as a
percentage of sales decreased 0.6%, due to leverage achieved in
security, supplies, and repair and maintenance costs.
Administrative payroll and expenses as a percentage of sales
decreased 0.8%, due to costs remaining flat to 2002 levels while
sales increased. Additionally, advertising expenses as a
percentage of sales decreased 0.2%, due to reduced spending.
SG&A dollars increased $9.4 million, or 14.0%, to
$76.6 million in 2003 from $67.2 million in 2002. Of
this increase, $6.5 million is the result of translation of
foreign currencies to U.S. dollars. The remainder of the
increase is primarily due to store openings and the increased
store payroll and operating expenses required.
Asset Impairments and Other Writedowns
In 2003, the International segment incurred a $0.1 million
writedown related to the impairment of certain capitalized
technology initiatives.
In 2002, the Company incurred approximately $2.9 million of
asset impairment charges related to underperforming Books etc.
stores. In addition, the Company adopted a plan in 2002 to close
a Books etc. store and recorded a $0.1 million charge for
the related closing costs.
Depreciation
Depreciation expense increased $3.1 million, or 30.4%, to
$13.3 million in 2003 from $10.2 million in 2002. This
was primarily due to depreciation expense recognized on new
stores capital expenditures.
Interest Expense
Interest expense increased $1.8 million, or 10.5%, to
$19.0 million in 2003 from $17.2 million in 2002. This
was a result of higher average borrowing levels at fixed
internal interest rates.
Net Income
Due to the factors mentioned above, net loss as a percentage of
sales was 0.3% in 2003 as compared to a loss of 4.4% in 2002,
and net loss dollars improved $12.5 million to a loss of
$1.3 million in 2003 from a loss of $13.8 million in
2002.
Exchange rates positively impacted the comparison of
2003 net loss to 2002 net loss by approximately
$1.5 million. Foreign currency transaction gains/(losses)
were $(0.4) million in 2003 and $0.1 million in 2002.
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
(dollar amounts in millions) | |
|
|
|
|
Interest expense
|
|
$ |
37.6 |
|
|
$ |
30.4 |
|
|
$ |
26.4 |
|
Net loss
|
|
$ |
27.2 |
|
|
$ |
29.6 |
|
|
$ |
19.9 |
|
The Corporate segment includes unallocated interest expense,
various corporate governance costs and corporate incentive costs.
31
Corporate Comparison of 2004 to 2003
Net loss dollars decreased $2.4 million, or 8.1%, to
$27.2 million in 2004 from $29.6 million in 2003. This
was primarily due to the settlement of the California overtime
litigation, a receivable writedown and higher corporate
incentive payments in 2003. Interest expense represents
corporate-level interest costs not charged to the Companys
operating segments resulting primarily from the Companys
share repurchase program.
Corporate Comparison of 2003 to 2002
Net loss dollars increased $9.7 million, or 48.7%, to
$29.6 million in 2003 from $19.9 million in 2002. This
was primarily due to the settlement of the California overtime
litigation, increased interest expense, increased corporate
incentive payments, increased legal defense costs and a
receivable writedown. Interest expense represents
corporate-level interest costs not charged to the Companys
operating segments.
Liquidity and Capital Resources
The Companys principal capital requirements are to fund
the opening of new stores, the refurbishment of existing stores,
continued investment in new corporate information technology
systems, and maintenance spending on stores, distribution
centers and corporate information technology.
Net cash provided by operations was $224.4 million,
$238.3 million, and $201.4 million in 2004, 2003, and
2002, respectively. The current year operating cash inflows
primarily reflect operating results net of non-cash charges for
depreciation and asset impairments and other writedowns, as well
as an increase in accounts payable, taxes payable, other
long-term liabilities and accrued payroll and other liabilities,
and a decrease in deferred income taxes. Operating cash outflows
for the period resulted from increases in inventories, other
long-term assets, prepaid expenses and accounts receivable. The
most significant cash outflow was related to the increase in
inventory, which was partially offset by an increase in accounts
payable. The increase in inventories primarily resulted from new
store growth, which was partially offset by continued
efficiencies in the existing store base.
Net cash used for investing in 2004 was $89.4 million,
which primarily funded capital expenditures for new stores, the
refurbishment of existing stores, new corporate information
technology systems and the acquisition of Paperchase. In
addition, the Company invested $95.4 million, and sold
$118.0 million, of auction rate securities. Net cash used
for investing in 2003 was $231.8 million, which primarily
funded capital expenditures for new stores and the refurbishment
of existing stores, as well as investments of
$118.0 million in auction rate securities. In fiscal 2002,
net cash used for investing was $134.0 million, which
primarily funded capital spending on new stores and the
refurbishment of existing stores.
Capital expenditures in 2004 were $115.5 million, which
reflects the opening of 24 new superstores and 15 new
Waldenbooks stores, including two new airport stores and ten new
outlet stores, as well as the remodeling of 33 domestic
superstores and the conversion of 37 Waldenbooks stores to
Borders Express. Additional 2004 capital spending reflected
continued investment in new buying and merchandising systems.
Capital expenditures in 2003 were $110.9 million, and
reflect the opening of 48 new superstores and five new
Waldenbooks stores, including four new airport stores. Capital
expenditures in 2002 were $134.0 million, and reflect the
opening of 49 new superstores and four new Waldenbooks stores.
Additional capital spending in 2003 and 2002 reflected the
development and installation of in-store Web-based technology
and spending on corporate information technology streamlining.
Net cash used for investing in 2004 was partially offset by the
proceeds received from the sale-leaseback of a Company-owned
store and office building in the United Kingdom. The proceeds
from the sale totaled $32.3 million, and a deferred gain of
$3.5 million was recorded on the consolidated balance
sheets in Other long-term liabilities. The gain is
being amortized over the 20 year term of the operating
lease.
In 2003, the Company acquired substantially all assets used in
or related to the operations of two stores in Louisville,
Kentucky from Hawley-Cooke Booksellers, Inc. The acquisition was
not material to the consolidated statements of operations, the
consolidated balance sheets, or the consolidated statements of
cash flows of the Company.
Net cash used for financing was $150.8 million in 2004,
resulting primarily from the Companys repurchase of common
stock of $177.3 million and the payment of cash dividends
on shares of the Companys common stock of
32
$25.1 million, partially offset by proceeds of
$44.8 million from the exercise of employee stock options.
Net cash used for financing was $15.8 million in 2003,
resulting primarily from the Companys repurchase of common
stock of $44.0 million, which was partially offset by
proceeds of $27.4 million from the exercise of employee
stock options. Net cash provided by financing in 2002 was
$8.4 million, resulting primarily from the issuance of
$50.0 million senior guaranteed notes and the issuance of
common stock under the Companys employee benefit plans of
$18.8 million, partially offset by the repurchase of common
stock of $74.8 million.
The Company expects capital expenditures to range from
$145.0 million to $155.0 million in 2005, resulting
primarily from new superstore openings and a store remodel
program, through which the Company plans to complete major
remodels of approximately 80 to 100 domestic Borders superstore
locations and convert approximately 75 to 100 Waldenbooks stores
to Borders Express. In addition, capital expenditures will
result from International store openings and continued
investment in new buying and merchandising systems. The Company
currently plans to open approximately 15 to 20 domestic Borders
superstores and 10 to 12 International stores in 2005. Average
cash requirements for the opening of a prototype Borders Books
and Music superstore are $2.4 million, representing capital
expenditures of $1.2 million, inventory requirements (net
of related accounts payable) of $1.0 million, and
$0.2 million of pre-opening costs. Average cash
requirements to open a new airport or outlet mall store range
from $0.2 million to $0.7 million, depending on the
size and format of the store. Average cash requirements for a
major remodel of a Borders superstore are between
$0.1 million to $0.4 million, and average cash
requirements for a Borders Express conversion are less than
$0.1 million. The Company plans to lease new store
locations predominantly under operating leases.
The Company plans to execute its expansion plans for Borders
superstores and other strategic initiatives principally with
funds generated from operations and financing if necessary
through the Credit Agreement, discussed below. The Company
believes funds generated from operations and borrowings under
the Credit Agreement will be sufficient to fund its anticipated
capital requirements for the next several years.
In February 2005, the Board of Directors authorized an increase
in the Companys share repurchase program to
$250.0 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).
The Company currently has remaining authorization to repurchase
approximately $206.9 million. During 2004, 2003, and 2002,
$177.3 million, $44.0 million, and $74.8 million
of common stock was repurchased, respectively. The Company plans
to continue the repurchase of its common stock throughout fiscal
2005, subject to the Companys share price and capital
needs.
In November 2003, the Board of Directors declared the
Companys first-ever quarterly cash dividend of
$0.08 per share on the Companys common stock. During
2004, the Company paid a regular quarterly dividend, and intends
to pay regular quarterly cash dividends, subject to Board
approval, going forward. In December 2004, the Board of
Directors increased the quarterly dividend by 12.5% to
$0.09 per share. The declaration and payment of dividends,
if any, is subject to the discretion of the Board and to certain
limitations under the Michigan Business Corporation Act. In
addition, the Companys ability to pay dividends is
restricted by certain agreements to which the Company is a party.
The Company has a Multicurrency Revolving Credit Agreement (the
Credit Agreement), which was amended in July 2004
and will expire in July 2009. The Credit Agreement provides for
borrowings of up to $500.0 million (which may be increased
to $700.0 million under certain circumstances) secured by
eligible inventory and accounts receivable and related assets.
Borrowings under the Credit Agreement are limited to a specified
percentage of eligible inventories and accounts receivable and
bear interest at a variable base rate plus an increment or LIBOR
plus an increment at the Companys option. The Credit
Agreement (i) includes a fixed charge coverage ratio
requirement of 1.1 to 1 that is applicable only if outstanding
borrowings under the facility exceed 90% of permitted borrowings
thereunder, (ii) contains covenants that limit, among other
things, the Companys ability to incur indebtedness, grant
liens, make investments, consolidate or merge or dispose of
assets, (iii) prohibits dividend payments and share
repurchases that would result in borrowings under the facility
exceeding 90% of permitted borrowings thereunder, and
(iv) contains default provisions that are typical for this
type of financing, including a cross default provision relating
to other indebtedness of more than $25.0 million. As of
January 23, 2005 the Company was in compliance with all
covenants contained within this agreement. The Company had
borrowings outstanding under the Credit Agreement (or a prior
agreement) of $131.7 million at January 23, 2005 and
$126.9 million at January 25, 2004.
33
The Company currently has in place two interest rate swaps which
effectively convert a portion of the Credit Agreements
variable rate exposure to fixed interest rates. In accordance
with Statement of Financial Accounting Standards No. 133,
Accounting For Derivative Instruments and Hedging
Activities (FAS 133), the Company has
designated these swap agreements as cash flow hedges. The
notional amounts of these agreements total $75.2 million
and the agreements expire in June 2005.
On July 30, 2002, the Company issued $50.0 million of
senior guaranteed notes (the Notes) due
July 30, 2006 and bearing interest at 6.31% (payable
semi-annually). The proceeds of the sale of the Notes have been
used to refinance existing indebtedness of the Company and its
subsidiaries and for general corporate purposes. The note
purchase agreement relating to the Notes contains covenants
which limit, among other things, the Companys ability to
incur indebtedness, grant liens, make investments, engage in any
merger or consolidation, dispose of assets or change the nature
of its business, and requires the Company to meet certain
financial measures regarding net worth, total debt coverage and
fixed charge coverage. In July 2004, the note purchase agreement
was amended to permit the amendment to the Credit Agreement
described above and to provide for a parity lien to secure the
Notes on the same collateral as secures borrowings under the
Credit Agreement. As of January 23, 2005 the Company was in
compliance with all covenants contained within this agreement.
In August 2003, the Company entered into an interest rate swap
agreement which effectively converted the fixed interest rate on
the Companys Notes to a variable rate based on LIBOR. In
accordance with the provisions of FAS 133, the Company
designated this swap agreement as a fair market value hedge. The
notional amount of the swap agreement is $50.0 million, and
the agreement is set to expire concurrently with the due date of
the Notes.
The Company had two lease financing facilities (the
Original Lease Facility and the New Lease
Facility, collectively, the Lease Financing
Facilities) to finance new stores and other property owned
by unaffiliated entities and leased to the Company or its
subsidiaries. At January 25, 2004, borrowings associated
with two properties were outstanding. Pursuant to the
requirements of FIN 46, the Company was the primary
beneficiary of the two variable interest entities
(VIEs) that owned the two properties. As a result,
the Company began consolidating these VIEs in the quarter ending
January 25, 2004. Amounts relating to the consolidation of
these VIEs were treated as non-cash items on the consolidated
statements of cash flows.
In July 2004, the Company repaid all amounts outstanding under
the Lease Financing Facilities (totaling $13.8 million) on
behalf of the two borrowing VIEs. In conjunction with this
transaction, the Lease Financing Facilities were terminated. The
Company has recorded this debt repayment as a prepayment of a
portion of the rent expense for occupancy through 2024, and has
classified the current portion as a component of Accounts
receivable and other current assets, and the non-current
portion as a component of Other assets on the
consolidated balance sheets at January 23, 2005.
Additionally, the Company deconsolidated these VIEs in July 2004
pursuant to the provisions of FIN 46. The deconsolidation
of the two VIEs resulted in a reduction of land, property and
equipment, net of accumulated depreciation, of
$12.5 million, short-term borrowings of $13.8 million,
and minority interest of $1.3 million. The Company also
recorded an after-tax gain of $1.7 as a result of the
deconsolidation of these VIEs. These amounts have been treated
as non-cash items on the consolidated statements of cash flows.
Separately, the Company is the primary beneficiary of two VIEs
due to the Companys guarantee of the debt of these
entities. As a result, the Company began consolidating these
VIEs in the quarter ending January 25, 2004, and has
recorded property and equipment, net of accumulated
depreciation, of $5.3 million, long-term debt of
$5.7 million, and minority interest of $0.4 million at
January 23, 2005, and has recorded property and equipment,
net of accumulated depreciation, of $5.5 million, long-term
debt of $5.9 million, and minority interest of
$0.4 million at January 25, 2004. These amounts have
been treated as non-cash items on the consolidated statements of
cash flows.
During 1994, the Company entered into agreements in which leases
with respect to four Borders locations served as collateral for
certain mortgage pass-through certificates. These mortgage
pass-through certificates included a provision requiring the
Company to repurchase the underlying mortgage notes in certain
events. In the fourth quarter of fiscal 2001, the Company was
obligated to purchase the notes for $33.5 million and cash
payment to retain these notes was made in the first quarter of
2002. As a result, the Company has categorized this prepaid rent
amount as part of
34
Other assets in the consolidated balance sheets, and
is amortizing the balance over each propertys remaining
lease term.
The following table summarizes the Companys significant
contractual obligations, excluding interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year | |
|
|
|
|
2010 and | |
|
|
|
|
2005 | |
|
2006-2007 | |
|
2008-2009 | |
|
Thereafter | |
|
Total | |
(dollars in millions) |
|
| |
|
| |
|
| |
|
| |
|
| |
Credit Agreement borrowings
|
|
$ |
131.7 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
131.7 |
|
Capital lease obligations
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
Operating lease obligations
|
|
|
344.7 |
|
|
|
656.5 |
|
|
|
602.4 |
|
|
|
2,229.5 |
|
|
|
3,833.1 |
|
Senior guaranteed notes
|
|
|
|
|
|
|
50.0 |
|
|
|
|
|
|
|
|
|
|
|
50.0 |
|
Debt of consolidated VIEs
|
|
|
0.1 |
|
|
|
0.4 |
|
|
|
0.4 |
|
|
|
4.8 |
|
|
|
5.7 |
|
Other borrowings
|
|
|
9.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
485.9 |
|
|
$ |
706.9 |
|
|
$ |
602.8 |
|
|
$ |
2,234.3 |
|
|
$ |
4,029.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seasonality
The Companys business is highly seasonal, with sales
significantly higher and substantially all operating income
realized during the fourth quarter, which includes the holiday
selling season.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2004 Quarter Ended | |
|
|
April | |
|
July | |
|
October | |
|
January | |
(dollars in millions) |
|
| |
|
| |
|
| |
|
| |
Sales
|
|
$ |
830.3 |
|
|
$ |
847.1 |
|
|
$ |
833.3 |
|
|
$ |
1,368.3 |
|
Operating income (loss)
|
|
|
5.6 |
|
|
|
15.0 |
|
|
|
0.4 |
|
|
|
195.7 |
|
% of full year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
21.4 |
% |
|
|
21.8 |
% |
|
|
21.5 |
% |
|
|
35.3 |
% |
|
Operating income (loss)
|
|
|
2.6 |
|
|
|
6.9 |
|
|
|
0.2 |
|
|
|
90.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2003 Quarter Ended | |
|
|
April | |
|
July | |
|
October | |
|
January | |
(dollars in millions) |
|
| |
|
| |
|
| |
|
| |
Sales
|
|
$ |
751.4 |
|
|
$ |
826.9 |
|
|
$ |
807.9 |
|
|
$ |
1,312.4 |
|
Operating income (loss)
|
|
|
(8.0 |
) |
|
|
8.2 |
|
|
|
0.9 |
|
|
|
197.0 |
|
% of full year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
20.3 |
% |
|
|
22.4 |
% |
|
|
21.8 |
% |
|
|
35.5 |
% |
|
Operating income (loss)
|
|
|
(4.0 |
) |
|
|
4.1 |
|
|
|
0.5 |
|
|
|
99.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2002 Quarter Ended | |
|
|
April | |
|
July | |
|
October | |
|
January | |
(dollars in millions) |
|
| |
|
| |
|
| |
|
| |
Sales
|
|
$ |
751.7 |
|
|
$ |
763.6 |
|
|
$ |
749.8 |
|
|
$ |
1,221.0 |
|
Operating income (loss)
|
|
|
8.5 |
|
|
|
5.8 |
|
|
|
(1.1 |
) |
|
|
174.4 |
|
% of full year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
21.6 |
% |
|
|
21.9 |
% |
|
|
21.5 |
% |
|
|
35.0 |
% |
|
Operating income (loss)
|
|
|
4.5 |
|
|
|
3.1 |
|
|
|
(0.6 |
) |
|
|
93.0 |
|
35
Critical Accounting Policies and Estimates
In the ordinary course of business, the Company has made a
number of estimates and assumptions relating to the reporting of
results of operations and financial condition in the preparation
of its financial statements in conformity with accounting
principles generally accepted in the United States. Actual
results could differ from those estimates under different
assumptions and conditions. The Company believes that the
following discussion addresses the Companys most critical
accounting policies and estimates.
Asset Impairments
The carrying value of long-lived assets is evaluated whenever
changes in circumstances indicate the carrying amount of such
assets may not be recoverable. In performing such reviews for
recoverability, the Company compares the expected cash flows to
the carrying value of long-lived assets for the applicable
stores. If the expected future cash flows are less than the
carrying amount of such assets, the Company recognizes an
impairment loss for the difference between the carrying amount
and the estimated fair value. Expected future cash flows, which
are estimated over each stores remaining lease term,
contain estimates of sales and the impact those future sales
will have upon cash flows. Future sales are estimated based, in
part, upon a projection of each stores sales trend based
on the actual sales of the past several years. Additionally,
each stores future cash contribution is based upon the
most recent years actual cash contribution, but is
adjusted based upon projected trends in sales and store
operating costs. Fair value is estimated using expected
discounted future cash flows, with the discount rate
approximating the Companys borrowing rate. Significant
deterioration in the performance of the Companys stores
compared to projections could result in significant additional
asset impairments.
Goodwill Impairment
Pursuant to the provisions of Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible
Assets (FAS 142), the Companys
goodwill is tested for impairment annually (or more frequently
if impairment indicators arise). Pursuant to FAS 142, a
reporting unit is defined as an operating segment or one level
below an operating segment (a component), for which discrete
financial information is available and reviewed by management.
The Companys reporting units were identified as the
operating segments Borders, Waldenbooks and Corporate, and the
country components of the International operating segment. The
carrying amounts of the net assets of the applicable reporting
units (including goodwill) are compared to the estimated fair
values of those reporting units. Fair value is estimated using a
discounted cash flow model which depends on, among other
factors, estimates of future sales and expense trends, liquidity
and capitalization. The discount rate used approximates the
weighted average cost of capital of a hypothetical third party
buyer. Changes in any of the assumptions underlying these
estimates may result in the future impairment of goodwill. As of
January 23, 2005, no impairment of goodwill existed.
Inventory
The carrying value of the Companys inventory is affected
by reserves for shrinkage and non-returnable inventory.
Projections of shrinkage are based upon the results of regular,
periodic physical counts of the Companys inventory. The
Companys shrinkage reserve is adjusted as warranted based
upon the trends yielded by the physical counts. Reserves for
non-returnable inventory are based upon the Companys
history of liquidating non-returnable inventory. The markdown
percentages utilized in developing the reserve are evaluated
against actual, ongoing markdowns of non-returnable inventory to
ensure that they remain consistent. Significant differences
between future experience and that which was projected (for
either the shrinkage or non-returnable inventory reserves) could
affect the recorded amounts of inventory and cost of sales.
The Company includes certain distribution and other expenses in
its inventory costs, particularly freight, distribution payroll,
and certain occupancy expenses. In addition, certain selling,
general and administrative expenses are included in inventory
costs. These amounts totaled approximately $91.4 million
and $86.9 million as of January 23, 2005 and
January 25, 2004, respectively. The extent to which these
costs are included in inventory is based on certain estimates of
space and labor allocation.
36
Leases
All leases are reviewed for capital or operating classification
at their inception under the guidance of Statement of Financial
Accounting Standards No. 13, Accounting for
Leases (FAS 13), as amended. The Company
uses its incremental borrowing rate in the assessment of lease
classification.
Gift Certificates
The Company sells gift certificates to its customers and records
a liability for the face value of all certificates issued within
the last 12 months. For certificates older than
12 months, the Company records a liability for a portion of
the certificates face value based upon historical
redemption trends. To the extent that future redemption patterns
differ from those historically experienced, significant
variations in the recorded reserves may result.
Advertising and Vendor Incentive Programs
The Company receives payments and credits from vendors pursuant
to co-operative advertising programs, shared markdown programs,
purchase volume incentive programs and magazine slotting
programs. These programs continue to be beneficial for both the
Company and vendors, and the Company expects continued
participation in these types of programs. Changes in vendor
participation levels, as well as changes in the volume of
merchandise purchased, among other factors, could adversely
impact the Companys results of operations and liquidity.
Pursuant to co-operative advertising programs offered by
vendors, the Company contracts with vendors to promote
merchandise for specified time periods. Pursuant to the
provisions of Emerging Issues Task Force Issue No. 02-16,
Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor
(EITF 02-16), which the Company adopted
effective January 1, 2003, vendor consideration which
represents a reimbursement of specific, incremental,
identifiable costs is included in the Selling, general and
administrative line on the consolidated statements of
operations, along with the related costs, in the period the
promotion takes place. Consideration which exceeds such costs is
classified as a reduction of the Cost of merchandise
sold line on the consolidated statements of operations.
Additionally, the Company has recorded $0.8 million and
$0.9 million of vendor consideration as a reduction to its
inventory balance at January 23, 2005 and January 25,
2004, respectively.
The Company also receives credits from vendors pursuant to
shared markdown programs, purchase volume programs, and magazine
slotting programs. Credits received pursuant to these programs
are classified in the Cost of merchandise sold line
on the consolidated statements of operations, and are recognized
upon certain product volume thresholds being met or product
placements occurring.
Income Taxes
The Company must make certain estimates and judgments in
determining income tax expense for financial statement purposes.
These estimates and judgments occur in the calculation of
certain tax assets and liabilities, which arise from differences
in the timing of recognition of revenue and expense for tax and
financial statement purposes. In addition, the calculation of
the Companys tax liabilities involves dealing with
uncertainties in the application of complex tax regulations. The
Company recognizes liabilities for anticipated tax issues in the
United States and other tax jurisdictions based on an estimate
of whether, and to the extent which, additional taxes will be
due.
The Company also records a valuation allowance against deferred
tax assets arising from certain net operating losses when it is
more likely than not that some portion of all of such net
operating losses will not be realized. The Companys
effective tax rate in a given financial statement period may be
materially impacted by changes in the mix and level of earnings,
changes in the expected outcome of audit controversies or
changes in the deferred tax valuation allowance.
New Accounting Guidance
In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based
Payment (FAS 123(R)), which is a revision
of FAS 123. FAS 123(R) supersedes APB No. 25, and
amends FAS No. 95, Statement of Cash
Flows. Generally, the approach in FAS 123(R) is
similar to the approach described in FAS 123. However,
FAS 123(R) requires all share-based
37
payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their
fair values. The Company expects to adopt FAS 123(R) in the
third quarter of 2005 using the modified-prospective method in
which compensation cost is recognized beginning with the
adoption date based on (a) the requirements of
FAS 123(R) for all share-based payments granted after the
effective date and (b) based on the requirements of
Statement 123 for all awards granted to employees prior to
the effective date of Statement 123(R) that remain unvested
on the effective date. As of January 23, 2005, there were
2.0 million stock option awards granted to employees that
remain unvested.
The Company currently recognizes no compensation cost for
employee stock options. Based on the adoption of FAS 123(R)
in the third quarter of 2005, the Company estimates the impact
to not exceed an after-tax charge of approximately
$1.7 million. FAS 123(R) also requires the benefits of
tax deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating
cash flow as required under current literature. This requirement
will reduce net operating cash flows and increase net financing
cash flows in periods after adoption. While the Company cannot
estimate what those amounts will be in the future (because they
depend on, among other things, when employees exercise stock
options), the amount of operating cash flows recognized in prior
periods for such excess tax deductions were $11.3 million,
$5.9 million and $5.1 million in 2004, 2003 and 2002,
respectively.
In November 2004, the FASB issued FAS 151, Inventory
Costs, an amendment of Accounting Research Bulletin No. 43,
Chapter 4 (FAS 151). The amendments
made by FAS 151 clarify that abnormal amounts of idle
facility expense, freight, handling costs, and wasted materials
(spoilage) should be recognized as current-period charges
and require the allocation of fixed production overheads to
inventory based on the normal capacity of the production
facilities. The guidance is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005.
The adoption of FAS 151 is not expected to have a material
effect on the Companys consolidated financial position or
results of operations.
Related Party Transactions
The Company has not engaged in any related party transactions
which would have had a material effect on the Companys
financial position, cash flows, or results of operations.
|
|
Item 7A. |
Quantitative and Qualitative Disclosures About Market Risk |
The Company is exposed to market risk during the normal course
of business from changes in interest rates and foreign currency
exchange rates. The exposure to these risks is managed though a
combination of normal operating and financing activities, which
include the use of derivative financial instruments in the form
of interest rate swaps and forward foreign currency exchange
contracts.
Interest Rate Risk
The Company is subject to risk resulting from interest rate
fluctuations, as interest on certain of the Companys
borrowings is based on variable rates. The Companys
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
is currently utilizing interest rate swaps to achieve this
objective, effectively converting a portion of its variable rate
exposure to fixed interest rates.
The Company is also subject to risk associated with the fair
value of its $50.0 million of Notes which are fixed-rate
debt. To eliminate this risk, the Company is currently utilizing
an interest rate swap, effectively converting the Notes
fixed interest rate to a variable rate.
LIBOR is the rate upon which the Companys variable rate
debt and its payments under the Lease Financing Facilities are
principally based. If LIBOR were to increase 1% for the full
year of 2004 as compared to 2003, the Companys after-tax
earnings, after considering the effects of its existing interest
rate swap agreements, would decrease approximately
$0.9 million based on the Companys expected average
outstanding debt as of January 23, 2005.
38
Foreign Currency Exchange Risk
The Company is subject to foreign currency exchange exposure for
operations with assets and liabilities that are denominated in
currencies other than U.S. Dollars. On a normal basis, the
Company does not attempt to hedge the foreign currency
translation fluctuations in the net investments in its foreign
subsidiaries. The Company does, from time to time, enter into
short-term forward exchange contracts to sell or purchase
foreign currencies at specified rates based on estimated foreign
currency cash flows. It is the policy of the Company not to
purchase financial and/or derivative instruments for speculative
purposes. At January 23, 2005, the Company had no foreign
currency forward contracts outstanding.
39
|
|
Item 8. |
Financial Statements and Supplementary Data |
INDEX TO FINANCIAL STATEMENTS
40
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in millions except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
Jan. 23, | |
|
Jan. 25, | |
|
Jan. 26, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
|
|
(restated) | |
|
(restated) | |
Sales
|
|
$ |
3,879.5 |
|
|
$ |
3,698.6 |
|
|
$ |
3,486.1 |
|
Other revenue
|
|
|
23.5 |
|
|
|
32.4 |
|
|
|
28.6 |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$ |
3,903.0 |
|
|
$ |
3,731.0 |
|
|
$ |
3,514.7 |
|
Cost of merchandise sold (includes occupancy)
|
|
|
2,803.6 |
|
|
|
2,689.0 |
|
|
|
2,518.6 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
1,099.4 |
|
|
|
1,042.0 |
|
|
|
996.1 |
|
Selling, general and administrative expenses
|
|
|
870.7 |
|
|
|
821.4 |
|
|
|
786.3 |
|
Legal settlement expense
|
|
|
|
|
|
|
3.5 |
|
|
|
|
|
Pre-opening expense
|
|
|
4.8 |
|
|
|
7.0 |
|
|
|
6.9 |
|
Asset impairments and other writedowns
|
|
|
7.2 |
|
|
|
12.0 |
|
|
|
15.3 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
216.7 |
|
|
|
198.1 |
|
|
|
187.6 |
|
Interest expense
|
|
|
9.1 |
|
|
|
8.7 |
|
|
|
12.6 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
|
207.6 |
|
|
|
189.4 |
|
|
|
175.0 |
|
Income tax provision
|
|
|
75.7 |
|
|
|
72.1 |
|
|
|
67.4 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of accounting change
|
|
|
131.9 |
|
|
|
117.3 |
|
|
|
107.6 |
|
Cumulative effect of accounting change (net of tax)
|
|
|
|
|
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
131.9 |
|
|
$ |
115.2 |
|
|
$ |
107.6 |
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share data (Note 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of accounting change
|
|
$ |
1.69 |
|
|
$ |
1.48 |
|
|
$ |
1.31 |
|
|
|
Cumulative effect of accounting change (net of tax)
|
|
|
|
|
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1.69 |
|
|
$ |
1.46 |
|
|
$ |
1.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
77.9 |
|
|
|
79.1 |
|
|
|
82.0 |
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of accounting change
|
|
$ |
1.72 |
|
|
$ |
1.51 |
|
|
$ |
1.34 |
|
|
|
Cumulative effect of accounting change (net of tax)
|
|
|
|
|
|
|
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1.72 |
|
|
$ |
1.48 |
|
|
$ |
1.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
76.6 |
|
|
|
77.9 |
|
|
|
80.3 |
|
See accompanying notes to consolidated financial statements.
41
CONSOLIDATED BALANCE SHEETS
(dollars in millions except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
Jan. 23, | |
|
Jan. 25, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
|
|
(restated) | |
Assets |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
244.8 |
|
|
$ |
260.8 |
|
|
Investments
|
|
|
95.4 |
|
|
|
118.0 |
|
|
Merchandise inventories
|
|
|
1,306.9 |
|
|
|
1,235.6 |
|
|
Accounts receivable and other current assets
|
|
|
118.3 |
|
|
|
98.3 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,765.4 |
|
|
|
1,712.7 |
|
Property and equipment, net
|
|
|
635.6 |
|
|
|
671.8 |
|
Other assets
|
|
|
84.8 |
|
|
|
70.2 |
|
Deferred income taxes
|
|
|
14.4 |
|
|
|
25.6 |
|
Goodwill
|
|
|
128.6 |
|
|
|
104.3 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
2,628.8 |
|
|
$ |
2,584.6 |
|
|
|
|
|
|
|
|
Liabilities, Minority Interest and Stockholders
Equity |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Short-term borrowings and current portion of long-term debt
|
|
$ |
141.2 |
|
|
$ |
141.2 |
|
|
Trade accounts payable
|
|
|
615.1 |
|
|
|
595.9 |
|
|
Accrued payroll and other liabilities
|
|
|
306.4 |
|
|
|
281.8 |
|
|
Taxes, including income taxes
|
|
|
118.3 |
|
|
|
125.7 |
|
|
Deferred income taxes
|
|
|
15.0 |
|
|
|
12.1 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,196.0 |
|
|
|
1,156.7 |
|
Long-term debt
|
|
|
55.8 |
|
|
|
57.2 |
|
Other long-term liabilities
|
|
|
286.7 |
|
|
|
268.4 |
|
Commitments and contingencies (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,538.5 |
|
|
|
1,482.3 |
|
Minority interest
|
|
|
1.4 |
|
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and minority interest
|
|
|
1,539.9 |
|
|
|
1,484.0 |
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
Common stock, 200,000,000 shares authorized; 73,875,627 and
78,273,341 shares issued and outstanding at
January 23, 2005 and January 25, 2004, respectively
|
|
|
525.1 |
|
|
|
646.3 |
|
|
Deferred compensation
|
|
|
(0.5 |
) |
|
|
(0.6 |
) |
|
Accumulated other comprehensive income
|
|
|
25.3 |
|
|
|
22.7 |
|
|
Retained earnings
|
|
|
539.0 |
|
|
|
432.2 |
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,088.9 |
|
|
|
1,100.6 |
|
|
|
|
|
|
|
|
|
|
Total liabilities, minority interest and stockholders
equity
|
|
$ |
2,628.8 |
|
|
$ |
2,584.6 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
42
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
Jan. 23, | |
|
Jan. 25, | |
|
Jan. 26, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
|
|
(restated) | |
|
(restated) | |
Cash provided by (used for):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
131.9 |
|
|
$ |
115.2 |
|
|
$ |
107.6 |
|
|
Adjustments to reconcile net income to operating cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
112.9 |
|
|
|
111.3 |
|
|
|
107.1 |
|
|
|
Gain on deconsolidation of variable interest entities
|
|
|
(2.9 |
) |
|
|
|
|
|
|
|
|
|
|
Decrease in deferred income taxes
|
|
|
12.6 |
|
|
|
0.8 |
|
|
|
13.4 |
|
|
|
(Increase) decrease in other long-term assets
|
|
|
(6.7 |
) |
|
|
(14.0 |
) |
|
|
7.7 |
|
|
|
Increase in other long-term liabilities
|
|
|
13.3 |
|
|
|
17.8 |
|
|
|
15.1 |
|
|
|
Asset impairments and other writedowns
|
|
|
6.2 |
|
|
|
11.3 |
|
|
|
13.8 |
|
|
Cash provided by (used for) current assets and current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in inventories
|
|
|
(63.8 |
) |
|
|
(37.9 |
) |
|
|
6.2 |
|
|
|
Increase in accounts receivable
|
|
|
(5.7 |
) |
|
|
(3.1 |
) |
|
|
(9.3 |
) |
|
|
Increase in prepaid expenses
|
|
|
(9.9 |
) |
|
|
(3.3 |
) |
|
|
(4.6 |
) |
|
|
Increase (decrease) in accounts payable
|
|
|
13.8 |
|
|
|
25.2 |
|
|
|
(77.3 |
) |
|
|
Increase in taxes payable
|
|
|
3.4 |
|
|
|
20.2 |
|
|
|
28.9 |
|
|
|
Increase (decrease) in accrued payroll and other liabilities
|
|
|
19.3 |
|
|
|
(5.2 |
) |
|
|
(7.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operations
|
|
|
224.4 |
|
|
|
238.3 |
|
|
|
201.4 |
|
|
|
|
|
|
|
|
|
|
|
Investing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(115.5 |
) |
|
|
(110.9 |
) |
|
|
(134.0 |
) |
|
Loss on disposal of assets
|
|
|
2.4 |
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of investments
|
|
|
118.0 |
|
|
|
|
|
|
|
|
|
|
Purchase of investments
|
|
|
(95.4 |
) |
|
|
(118.0 |
) |
|
|
|
|
|
Proceeds from sale-leaseback of assets
|
|
|
32.3 |
|
|
|
|
|
|
|
|
|
|
Acquisition
|
|
|
(31.2 |
) |
|
|
(2.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing
|
|
|
(89.4 |
) |
|
|
(231.8 |
) |
|
|
(134.0 |
) |
|
|
|
|
|
|
|
|
|
|
Financing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net funding from long-term debt
|
|
|
|
|
|
|
|
|
|
|
50.0 |
|
|
Net repayment of long-term capital lease obligations
|
|
|
(0.4 |
) |
|
|
(0.3 |
) |
|
|
(1.0 |
) |
|
Net funding from credit facility
|
|
|
7.2 |
|
|
|
1.1 |
|
|
|
15.4 |
|
|
Cash dividends paid
|
|
|
(25.1 |
) |
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
44.8 |
|
|
|
27.4 |
|
|
|
18.8 |
|
|
Repurchase of common stock
|
|
|
(177.3 |
) |
|
|
(44.0 |
) |
|
|
(74.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing
|
|
|
(150.8 |
) |
|
|
(15.8 |
) |
|
|
8.4 |
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash and equivalents
|
|
|
(0.2 |
) |
|
|
1.0 |
|
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and equivalents
|
|
|
(16.0 |
) |
|
|
(8.3 |
) |
|
|
78.9 |
|
Cash and equivalents at beginning of year
|
|
|
260.8 |
|
|
|
269.1 |
|
|
|
190.2 |
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents at end of year
|
|
$ |
244.8 |
|
|
$ |
260.8 |
|
|
$ |
269.1 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$ |
8.5 |
|
|
$ |
9.2 |
|
|
$ |
11.0 |
|
|
Income taxes paid
|
|
$ |
64.6 |
|
|
$ |
56.3 |
|
|
$ |
26.9 |
|
See accompanying notes to consolidated financial statements.
43
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(dollars in millions except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
|
|
|
|
Other | |
|
|
|
|
|
|
Common Stock | |
|
Deferred | |
|
Comprehensive | |
|
Retained | |
|
|
|
|
Shares | |
|
Amount | |
|
Compensation | |
|
Income (Loss) | |
|
Earnings | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance at January 27, 2002 (restated)
|
|
|
81,202,967 |
|
|
$ |
707.9 |
|
|
$ |
(0.2 |
) |
|
$ |
(15.1 |
) |
|
$ |
215.6 |
|
|
$ |
908.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107.6 |
|
|
|
107.6 |
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.9 |
|
|
|
|
|
|
|
16.9 |
|
Change in fair value of derivatives, net of tax provision of $1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.2 |
|
|
|
|
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126.7 |
|
Issuance of common stock
|
|
|
1,515,955 |
|
|
|
18.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.8 |
|
Repurchase and retirement of common stock
|
|
|
(3,987,000 |
) |
|
|
(74.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74.8 |
) |
Tax benefit of equity compensation
|
|
|
|
|
|
|
5.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 26, 2003 (restated)
|
|
|
78,731,922 |
|
|
$ |
657.0 |
|
|
$ |
(0.2 |
) |
|
$ |
4.0 |
|
|
$ |
323.2 |
|
|
$ |
984.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115.2 |
|
|
|
115.2 |
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.0 |
|
|
|
|
|
|
|
18.0 |
|
Change in fair value of derivatives, net of tax provision of $0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.7 |
|
|
|
|
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133.9 |
|
Cash dividends declared ($0.08 per common share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6.2 |
) |
|
|
(6.2 |
) |
Issuance of common stock
|
|
|
2,094,005 |
|
|
|
27.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27.4 |
|
Repurchase and retirement of common stock
|
|
|
(2,552,586 |
) |
|
|
(44.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44.0 |
) |
Tax benefit of equity compensation
|
|
|
|
|
|
|
5.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.9 |
|
Change in deferred compensation
|
|
|
|
|
|
|
|
|
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 25, 2004 (restated)
|
|
|
78,273,341 |
|
|
$ |
646.3 |
|
|
$ |
(0.6 |
) |
|
$ |
22.7 |
|
|
$ |
432.2 |
|
|
$ |
1,100.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131.9 |
|
|
|
131.9 |
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.3 |
|
|
|
|
|
|
|
2.3 |
|
Change in fair value of derivatives, net of tax provision of $0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134.5 |
|
Cash dividends declared ($0.08 and $0.09 per common share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25.1 |
) |
|
|
(25.1 |
) |
Issuance of common stock
|
|
|
3,222,058 |
|
|
|
44.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44.8 |
|
Repurchase and retirement of common stock
|
|
|
(7,619,772 |
) |
|
|
(177.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(177.3 |
) |
Tax benefit of equity compensation
|
|
|
|
|
|
|
11.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.3 |
|
Change in deferred compensation
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 23, 2005
|
|
|
73,875,627 |
|
|
$ |
525.1 |
|
|
$ |
(0.5 |
) |
|
$ |
25.3 |
|
|
$ |
539.0 |
|
|
$ |
1,088.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions except per share data)
|
|
NOTE 1 |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Nature of Business: Borders
Group, Inc., through its subsidiaries, Borders, Inc.
(Borders), Walden Book Company, Inc.
(Waldenbooks), Borders (UK) Limited,
Borders Australia Pty Limited and others (individually and
collectively, the Company), is the second largest
operator of book, music and movie superstores and the largest
operator of mall-based bookstores in the world based upon both
sales and number of stores. At January 23, 2005, the
Company operated 504 superstores under the Borders name,
including 462 in the United States, 26 in the United
Kingdom, 11 in Australia, three in Puerto Rico, and one
each in Singapore and New Zealand. The Company also operated
705 mall-based and other bookstores primarily under the
Waldenbooks name in the United States and 35 bookstores
under the Books etc. name in the United Kingdom. In addition,
the Company owns and operates United Kingdom-based Paperchase
Products Limited (Paperchase), a designer and
retailer of stationery, cards and gifts, with 72 locations,
including 28 located inside Borders International
superstores.
Principles of
Consolidation: The
consolidated financial statements include the accounts of the
Company and all majority-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.
Use of Estimates: The
preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Fiscal Year: The
Companys fiscal years have ended on the Sunday immediately
preceding the last Wednesday in January. Fiscal 2004 consisted
of 52 weeks and ended January 23, 2005. Fiscal 2003
consisted of 52 weeks and ended January 25, 2004.
Fiscal 2002 consisted of 52 weeks and ended
January 26, 2003. References herein to years are to the
Companys fiscal years.
On December 10, 2004, the Board of Directors of the Company
approved a change in the Companys fiscal year-end.
Effective with respect to fiscal 2005, the Company elected to
change its fiscal year to a 52/53-week fiscal year ending on the
Saturday closest to the last day of January. The Company
implemented this change in order to conform to industry
standards and for certain administrative purposes. As a result
of the change, the Companys 2005 fiscal year will consist
of 53 weeks, and will end on January 28, 2006. The
Companys first three quarters of fiscal 2005 will end on
April 23, 2005, July 23, 2005 and October 22,
2005, respectively.
Foreign Currency and Translation of Foreign
Subsidiaries: The functional
currencies of the Companys foreign operations are the
respective local currencies. All assets and liabilities of the
Companys 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. Foreign currency
transaction gains/ (losses) were $(0.2), $(0.4), and $0.1 in
2004, 2003, and 2002, respectively.
Cash and Equivalents: Cash
and equivalents include short-term investments with original
maturities of 90 days or less.
Investments: Investments
include primarily short-term investments in auction rate
securities.
The Company had previously categorized its short-term
investments in auction rate securities as a component of
Cash and cash equivalents in the Companys
consolidated balance sheets, but has determined that
categorization as Investments is more appropriate.
Accordingly, the short-term investments in auction rate
securities have been reclassified for all periods presented.
Subsequent to each year-end, the Company liquidated its auction
rate securities within approximately 100 days of the fiscal
year end date.
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
$91.4 and $86.9 as of January 23, 2005, and
January 25, 2004, respectively.
45
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
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 shorter of their estimated useful lives or the initial
term of the related lease, generally over three to
20 years. Other annual rates used in computing depreciation
for financial statement purposes approximate 3% for buildings
and 10% to 33% for other fixtures and equipment. Amortization of
assets under capital leases is included in depreciation expense.
The carrying values of long-lived assets are evaluated whenever
changes in circumstances indicate the carrying amounts of such
assets may not be recoverable, in accordance with Statement of
Financial Accounting Standards No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. In
performing such reviews for recoverability, the Company compares
the expected cash flows to the carrying values of long-lived
assets. If the expected future cash flows are less than the
carrying amounts of such assets, the Company recognizes an
impairment loss for the difference between the carrying amount
and its estimated fair value. Fair value is estimated using
expected discounted future cash flows.
Goodwill: Pursuant to the
provisions of Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets
(FAS 142), the Companys goodwill is
tested for impairment annually (or more frequently if impairment
indicators arise). Pursuant to FAS 142, a reporting unit is
defined as an operating segment or one level below an operating
segment (a component), for which discrete financial information
is available and reviewed by management. The Companys
reporting units were identified as the operating segments
Borders, Waldenbooks and Corporate, and the country components
of the International operating segment. The carrying amounts of
the net assets of the applicable reporting units (including
goodwill) are compared to the estimated fair values of those
reporting units. Fair value is estimated using a discounted cash
flow model which depends on, among other factors, estimates of
future sales and expense trends, liquidity and capitalization.
The discount rate used approximates the weighted average cost of
capital of a hypothetical third party buyer.
Leases: All leases are
reviewed for capital or operating classification at their
inception under the guidance of Statement of Financial
Accounting Standards No. 13, Accounting for
Leases (FAS 13), as amended. The Company
uses its incremental borrowing rate in the assessment of lease
classification, and defines initial lease term to include the
construction build-out period, but to exclude lease extension
period(s). The Company conducts operations primarily under
operating leases. For leases that contain rent escalations, the
Company records the total rent payable during the lease term, as
defined above, on a straight-line basis over the term of the
lease and records the difference between the rents paid and the
straight-line rent as a deferred rent liability, under
Other long-term liabilities on the Companys
consolidated balance sheets, totaling $144.9 and $134.3 as of
January 23, 2005 and January 25, 2004, respectively.
Landlord Allowances: The
Company classifies landlord allowances as deferred rent
liabilities, under Other long-term liabilities on
the Companys consolidated balance sheets, totaling $116.3
and $113.1 as of January 23, 2005 and January 25,
2004, respectively, in accordance with the provisions of FASB
Technical Bulletin No. 88-1, Issues Relating to
Accounting for Leases (FTB 88-1), and as an
operating activity on the Companys consolidated statements
of cash flows. Also in accordance with the provisions of
FTB 88-1, the Company classifies the amortization of
landlord allowances as a reduction of occupancy expense,
included as a component of Cost of merchandise sold
(includes occupancy) in the Companys consolidated
statements of operations.
Financial Instruments: The
recorded values of the Companys financial instruments,
which include accounts receivable, accounts payable and
indebtedness, approximate their fair values.
Pursuant to the provisions of Statement of Financial Accounting
Standards No. 133, Accounting For Derivative
Instruments and Hedging Activities
(FAS 133), as amended, the Company recognizes
the fair value of its derivatives on the consolidated balance
sheets. Changes in derivative fair values are either recognized
in earnings as offsets to the changes in fair value of related
hedged assets, liabilities and firm commitments, or, for
forecasted transactions, deferred and recorded as a component of
other stockholders equity until the hedged transactions
occur and are recognized in earnings. The ineffective portion of
a hedging derivatives change in fair value is immediately
recognized in earnings.
46
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
Accumulated Other Comprehensive Income
(Loss): Accumulated other
comprehensive income (loss) for the Company includes fair value
changes of derivatives (net of tax) and exchange rate
fluctuations. Disclosure of comprehensive income (loss) is
incorporated into the consolidated statements of
stockholders equity for all years presented. Accumulated
other comprehensive income (loss) includes $0.1 and $(0.2) for
derivatives and $25.2 and $22.9 for exchange rate fluctuations
as of January 23, 2005 and January 25, 2004,
respectively.
Revenue: Revenue is
recognized, net of estimated returns, at the point of sale for
all of the Companys segments.
The Company, through its subsidiaries, has agreements with
Amazon.com, Inc. (Amazon) to operate Web sites
utilizing the Borders.com, Waldenbooks.com, Borders.co.uk and
Booksetc.co.uk URLs (the Mirror Sites). Under these
agreements, Amazon is the merchant of record for all sales made
through the Mirror Sites, and determines all prices and other
terms and conditions applicable to such sales. Amazon is
responsible for the fulfillment of all products sold through the
Mirror Sites and retains all payments from customers. The
Company receives referral fees for products purchased through
the Mirror Sites, and includes this income as a component of
Other revenue in the Companys consolidated
statements of operations. The agreements contain mutual
indemnification provisions, including provisions that define
between the parties the responsibilities with respect to any
liabilities for sales, use and similar taxes, including
penalties and interest, associated with products sold on the
Mirror Sites. Currently, taxes are not collected with respect to
products sold on the Mirror Sites except in certain states.
In addition, Borders has an agreement with Amazon to allow
customers ordering certain book, music and movie products
through certain of Amazons Web sites to purchase and pick
up the merchandise at Borders stores in the United States
(Express In-Store Pick Up). Under this agreement,
the Company is the merchant of record for all sales made through
this service, and determines all prices and other terms and
conditions applicable to such sales. The Company fulfills all
products sold through Express In-Store Pick Up. In addition, the
Company assumes all risk, cost and responsibility related to the
sale and fulfillment of all products sold. The Company
recognizes revenue upon customers pick up of the
merchandise at the store, and classifies this revenue as a
component of Sales in the Companys
consolidated statements of operations. The Company also pays
referral fees to Amazon pursuant to this agreement.
Pre-Opening Costs: The
Company expenses pre-opening costs as incurred in accordance
with SOP 98-5, Reporting on the Costs of Start-Up
Activities.
Closing Costs: Pursuant to
the provisions of Statement of Financial Accounting Standards
No. 146, Accounting for Costs Associated with Exit or
Disposal Activities (FAS 146), which the
Company adopted effective January 1, 2003, the Company
expenses when incurred all amounts related to the discontinuance
of operations of stores identified for closure subsequent to
December 31, 2002.
Prior to the adoption of FAS 146, the Company applied the
provisions of Emerging Issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring) for all stores it had
identified for closure as of December 31, 2002, and
provided for expenses directly related to the discontinuance of
operations of the stores identified.
Preferred Reader Program:
Until October 2004, Waldenbooks sold memberships in its
Preferred Reader Program, which offers members discounts on
purchases and other benefits. The Company recognizes membership
income on a straight-line basis over the 12-month term of the
membership, and categorizes the income as Other
revenue in the Companys consolidated statements of
operations. Discounts on purchases are netted against
Sales in the Companys consolidated statements
of operations.
Gift Certificates: The
Company sells gift certificates to its customers and records a
liability for the face value of all certificates issued and
unredeemed within the last 12 months. For certificates
older than 12 months, the Company records a liability for a
portion of the certificates face value based upon
historical redemption trends. The Company has included the
liability for gift certificates as a component of Accrued
payroll and other liabilities on its consolidated balance
sheets, totaling $140.5 and $129.3 as of January 23, 2005
and January 25, 2004, respectively.
Advertising Costs: The
Company expenses advertising costs as incurred, and recorded
approximately $44.7, $35.9 and $36.1 of gross advertising
expenses in 2004, 2003 and 2002, respectively.
47
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
The Company receives payments and credits from vendors pursuant
to co-operative advertising programs, shared markdown programs,
purchase volume incentive programs and magazine slotting
programs.
Pursuant to co-operative advertising programs offered by
vendors, the Company contracts with vendors to promote
merchandise for specified time periods. Pursuant to the
provisions of Emerging Issues Task Force Issue No. 02-16,
Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor
(EITF 02-16), which the Company adopted
effective January 1, 2003, vendor consideration which
represents a reimbursement of specific, incremental,
identifiable costs is included in the Selling, general and
administrative line on the consolidated statements of
operations, along with the related costs, in the period the
promotion takes place. Consideration which exceeds such costs is
classified as a reduction of the Cost of merchandise
sold line on the consolidated statements of operations.
Additionally, the Company recorded $0.8 and $0.9 of vendor
consideration as a reduction to its inventory balance at
January 23, 2005 and January 25, 2004, respectively.
The Company also receives credits from vendors pursuant to
shared markdown programs, purchase volume programs, and magazine
slotting programs. Credits received pursuant to these programs
are classified in the Cost of merchandise sold line
on the consolidated statements of operations, and are recognized
upon certain product volume thresholds being met or product
placements occurring.
Advertising costs not part of the programs listed above are
included in the Selling, general and administrative
line of the consolidated statements of operations.
Income Taxes: Income taxes
are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income
Taxes (FAS 109). FAS 109 requires
recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences
between the book carrying amounts and the tax basis of assets
and liabilities. FAS 109 also requires that deferred tax
assets be reduced by a valuation allowance if it is more likely
than not that some portion of or all of the deferred tax asset
will not be realized.
The Company and its subsidiaries file separate foreign, state
and local income tax returns and, accordingly, provide for such
income taxes on a separate company basis.
Equity-Based Compensation:
The Company accounts for equity-based compensation under the
guidance of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB
No. 25). As permitted, the Company has adopted the
disclosure-only option of Statement of Financial Accounting
Standards No. 123, Accounting for Stock Based
Compensation (FAS 123), as amended by
Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based Compensation
Transition and Disclosure. The following table illustrates
the effect on net income and earnings per share if the Company
had applied the fair value recognition provisions of
FAS 123 to stock-based employee compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
|
|
(restated) | |
|
(restated) | |
Net income, as reported
|
|
$ |
131.9 |
|
|
$ |
115.2 |
|
|
$ |
107.6 |
|
Add: Stock-based employee expense included in reported net
income, net of related tax effects
|
|
|
0.7 |
|
|
|
0.1 |
|
|
|
0.1 |
|
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards, net of tax
|
|
|
4.1 |
|
|
|
7.4 |
|
|
|
11.5 |
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$ |
128.5 |
|
|
$ |
107.9 |
|
|
$ |
96.2 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported
|
|
$ |
1.69 |
|
|
$ |
1.46 |
|
|
$ |
1.31 |
|
|
Diluted pro forma
|
|
$ |
1.65 |
|
|
$ |
1.36 |
|
|
$ |
1.17 |
|
|
Basic as reported
|
|
$ |
1.72 |
|
|
$ |
1.48 |
|
|
$ |
1.34 |
|
|
Basic pro forma
|
|
$ |
1.68 |
|
|
$ |
1.39 |
|
|
$ |
1.20 |
|
See Note 16 Stock-Based Benefit
Plans for further discussion of the Companys
equity-based compensation plans.
48
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
New Accounting Guidance: In
December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based
Payment (FAS 123(R)), which is a revision
of FAS 123. FAS 123(R) supersedes APB No. 25, and
amends FAS No. 95, Statement of Cash
Flows. Generally, the approach in FAS 123(R) is
similar to the approach described in FAS 123. However,
FAS 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in
the income statement based on their fair values. The Company
expects to adopt FAS 123(R) in the third quarter of 2005
using the modified-prospective method in which compensation cost
is recognized beginning with the adoption date based on
(a) the requirements of FAS 123(R) for all share-based
payments granted after the effective date and (b) based on
the requirements of Statement 123 for all awards granted to
employees prior to the effective date of Statement 123(R)
that remain unvested on the effective date. As of
January 23, 2005, there were 2.0 million stock option
awards granted to employees that remain unvested.
The Company currently recognizes no compensation cost for
employee stock options. Based on the adoption of FAS 123(R)
in the third quarter of 2005, the Company estimates the impact
to not exceed an after-tax charge of approximately $1.7.
FAS 123(R) also requires the benefits of tax deductions in
excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as
required under current literature. This requirement will reduce
net operating cash flows and increase net financing cash flows
in periods after adoption. While the Company cannot estimate
what those amounts will be in the future (because they depend
on, among other things, when employees exercise stock options),
the amount of operating cash flows recognized in prior periods
for such excess tax deductions were $11.3, $5.9 and $5.1 in
2004, 2003 and 2002, respectively.
In November 2004, the FASB issued FAS 151, Inventory
Costs, an amendment of Accounting Research
Bulletin No. 43, Chapter 4
(FAS 151). The amendments made by FAS 151
clarify that abnormal amounts of idle facility expense, freight,
handling costs, and wasted materials (spoilage) should be
recognized as current-period charges and require the allocation
of fixed production overheads to inventory based on the normal
capacity of the production facilities. The guidance is effective
for inventory costs incurred during fiscal years beginning after
June 15, 2005. The adoption of FAS 151 is not expected
to have a material effect on the Companys consolidated
financial position or results of operations.
Reclassifications: Certain
prior year amounts have been reclassified to conform to current
year presentation.
|
|
NOTE 2 |
RESTATEMENT OF PRIOR YEAR FINANCIAL STATEMENTS |
In light of announcements made by a number of public companies
regarding lease accounting and a recently issued SEC
clarification on the subject, the Company has reevaluated its
lease accounting practices. As a result, the Company has
corrected its computation of straight-line rent expense,
depreciation of leasehold improvements and the classification of
landlord allowances related to leasehold improvements (the
Restatement).
Since fiscal 2000, the Company has depreciated leasehold
improvements relating to leased properties over the shorter of
the assets estimated useful lives or the initial lease
terms, excluding any renewal options. This is consistent with
the Companys utilization of initial lease terms in its
calculation of straight-line rent expense, including periods
prior to fiscal 2000. For Borders stores opened in fiscal 1999
and earlier, however, the Company depreciated leasehold
improvements over a 20-year period while the straight-line rent
expense in those same years was computed over the initial lease
terms, which in some cases were less than 20 years.
Therefore, to ensure compliance with GAAP, the Company has
corrected its calculation of its depreciation of leasehold
improvements to utilize the shorter of their estimated useful
lives or the initial terms of the related leases.
In addition, the Company changed its classification of landlord
allowances on the consolidated balance sheets and statements of
cash flows. Historically, landlord allowances were classified on
the Companys consolidated balance sheets as reductions of
property and equipment, and were classified as a reduction in
capital expenditures, an investing activity, on the
Companys consolidated statements of cash flows. In order
to comply with the provisions of FASB Technical
Bulletin No. 88-1, Issues Relating to Accounting
for Leases (FTB 88-1), however, the Company
has classified landlord allowances primarily as deferred rent
liabilities, in Other long-term liabilities on the
Companys consolidated balance sheets, and as an operating
activity on the Companys consolidated statements of cash
flows.
49
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
Also, the Company had recognized the straight-line rent expense
for leases beginning on the commencement date of the lease,
which had the effect of excluding the construction build-out
period of its stores from the calculation of the period over
which it expenses rent. The accounting for straight-line rent
expense has been corrected to include the construction build-out
period.
The following is a summary of the impact of the Restatement on
the Companys consolidated statements of operations for the
years ended January 25, 2004 and January 26, 2003, the
consolidated balance sheet at January 25, 2004 and the
consolidated statements of cash flows for the years ended
January 25, 2004 and January 26, 2003 (in millions,
except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan. 25, 2004 | |
|
|
As Previously | |
|
|
|
|
Reported | |
|
Adjustments | |
|
As Restated | |
|
|
| |
|
| |
|
| |
Consolidated Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of merchandise sold (includes occupancy)
|
|
$ |
2,683.4 |
|
|
$ |
5.6 |
|
|
$ |
2,689.0 |
|
|
|
Gross margin
|
|
|
1,047.6 |
|
|
|
(5.6 |
) |
|
|
1,042.0 |
|
|
Selling, general and administrative expenses
|
|
|
820.0 |
|
|
|
1.4 |
|
|
|
821.4 |
|
|
Asset impairments and other writedowns
|
|
|
11.5 |
|
|
|
0.5 |
|
|
|
12.0 |
|
|
|
Operating income
|
|
|
205.6 |
|
|
|
(7.5 |
) |
|
|
198.1 |
|
|
|
Income before income tax
|
|
|
196.9 |
|
|
|
(7.5 |
) |
|
|
189.4 |
|
|
Income tax provision
|
|
|
74.8 |
|
|
|
(2.7 |
) |
|
|
72.1 |
|
|
|
Income before cumulative effect of accounting change
|
|
|
122.1 |
|
|
|
(4.8 |
) |
|
|
117.3 |
|
|
|
Net income
|
|
$ |
120.0 |
|
|
$ |
(4.8 |
) |
|
$ |
115.2 |
|
|
Earnings (loss) per common share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of accounting change
|
|
$ |
1.54 |
|
|
$ |
(0.06 |
) |
|
$ |
1.48 |
|
|
|
|
Net income
|
|
$ |
1.52 |
|
|
$ |
(0.06 |
) |
|
$ |
1.46 |
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of accounting change
|
|
$ |
1.57 |
|
|
$ |
(0.06 |
) |
|
$ |
1.51 |
|
|
|
|
Net income
|
|
$ |
1.54 |
|
|
$ |
(0.06 |
) |
|
$ |
1.48 |
|
Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$ |
577.7 |
|
|
$ |
94.1 |
|
|
$ |
671.8 |
|
|
Deferred income taxes
|
|
|
1.3 |
|
|
|
24.3 |
|
|
|
25.6 |
|
|
|
Total assets
|
|
|
2,466.2 |
|
|
|
118.4 |
|
|
|
2,584.6 |
|
|
Taxes, including income taxes
|
|
|
133.1 |
|
|
|
(7.4 |
) |
|
|
125.7 |
|
|
|
Total current liabilities
|
|
|
1,164.1 |
|
|
|
(7.4 |
) |
|
|
1,156.7 |
|
|
Other long-term liabilities
|
|
|
90.2 |
|
|
|
178.2 |
|
|
|
268.4 |
|
|
|
Total liabilities
|
|
|
1,311.5 |
|
|
|
170.8 |
|
|
|
1,482.3 |
|
|
|
Total liabilities and minority interest
|
|
|
1,313.2 |
|
|
|
170.8 |
|
|
|
1,484.0 |
|
|
Accumulated other comprehensive income
|
|
|
24.1 |
|
|
|
(1.4 |
) |
|
|
22.7 |
|
|
Retained earnings
|
|
|
483.2 |
|
|
|
(51.0 |
) |
|
|
432.2 |
|
|
|
Total stockholders equity
|
|
|
1,153.0 |
|
|
|
(52.4 |
) |
|
|
1,100.6 |
|
|
|
Total liabilities, minority interest and stockholders
equity
|
|
$ |
2,466.2 |
|
|
$ |
118.4 |
|
|
$ |
2,584.6 |
|
50
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan. 25, 2004 | |
|
|
As Previously | |
|
|
|
|
Reported | |
|
Adjustments | |
|
As Restated | |
|
|
| |
|
| |
|
| |
Consolidated Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operations
|
|
$ |
228.1 |
|
|
$ |
10.2 |
|
|
$ |
238.3 |
|
|
Net cash used for
investing(1)
|
|
|
(103.4 |
) |
|
|
(128.4 |
) |
|
|
(231.8 |
) |
|
Effect of exchange rates on cash and equivalents
|
|
|
0.8 |
|
|
|
0.2 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan. 26, 2003 | |
|
|
As Previously | |
|
|
|
|
Reported | |
|
Adjustments | |
|
As Restated | |
|
|
| |
|
| |
|
| |
Consolidated Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of merchandise sold (includes occupancy)
|
|
$ |
2,513.1 |
|
|
$ |
5.5 |
|
|
$ |
2,518.6 |
|
|
|
Gross margin
|
|
|
1,001.6 |
|
|
|
(5.5 |
) |
|
|
996.1 |
|
|
Selling, general and administrative expenses
|
|
|
785.9 |
|
|
|
0.4 |
|
|
|
786.3 |
|
|
Asset impairments and other writedowns
|
|
|
14.9 |
|
|
|
0.4 |
|
|
|
15.3 |
|
|
|
Operating income
|
|
|
193.9 |
|
|
|
(6.3 |
) |
|
|
187.6 |
|
|
|
Income before income tax
|
|
|
181.3 |
|
|
|
(6.3 |
) |
|
|
175.0 |
|
|
Income tax provision
|
|
|
69.6 |
|
|
|
(2.2 |
) |
|
|
67.4 |
|
|
|
Net income
|
|
$ |
111.7 |
|
|
$ |
(4.1 |
) |
|
$ |
107.6 |
|
|
Earnings (loss) per common share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of accounting change
|
|
$ |
1.36 |
|
|
$ |
(0.05 |
) |
|
$ |
1.31 |
|
|
|
|
Net income
|
|
$ |
1.36 |
|
|
$ |
(0.05 |
) |
|
$ |
1.31 |
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of accounting change
|
|
$ |
1.39 |
|
|
$ |
(0.05 |
) |
|
$ |
1.34 |
|
|
|
|
Net income
|
|
$ |
1.39 |
|
|
$ |
(0.05 |
) |
|
$ |
1.34 |
|
Consolidated Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operations
|
|
$ |
189.2 |
|
|
$ |
12.2 |
|
|
$ |
201.4 |
|
|
Net cash used for investing
|
|
|
(121.5 |
) |
|
|
(12.5 |
) |
|
|
(134.0 |
) |
|
Effect of exchange rates on cash and equivalents
|
|
|
2.8 |
|
|
|
0.3 |
|
|
|
3.1 |
|
|
|
(1) |
The change in net cash used for investing includes a
reclassification of $118.0 of auction rate securities, unrelated
to the Restatement and further discussed in
Note 1 Summary of Significant Accounting
Policies. |
NOTE 3 WEIGHTED-AVERAGE SHARES
OUTSTANDING
Weighted-average shares outstanding are calculated as follows
(thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Weighted-average common shares outstanding basic
|
|
|
76,553 |
|
|
|
77,905 |
|
|
|
80,280 |
|
Dilutive effect of employee stock options
|
|
|
1,387 |
|
|
|
1,206 |
|
|
|
1,753 |
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding diluted
|
|
|
77,940 |
|
|
|
79,111 |
|
|
|
82,033 |
|
|
|
|
|
|
|
|
|
|
|
51
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
Unexercised employee stock options to
purchase 3.1 million, 4.2 million, and
7.5 million, common shares as of January 23, 2005,
January 25, 2004, and January 26, 2003, respectively,
were not included in the weighted-average shares outstanding
calculation because to do so would have been antidilutive.
|
|
NOTE 4 |
ASSET IMPAIRMENTS AND OTHER WRITEDOWNS |
Asset Impairments: In
accordance with the provisions of FAS 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, the
Company evaluates the carrying values of long-lived assets
whenever changes in circumstances indicate the carrying amounts
of such assets may not be recoverable. In the fourth quarter of
2004, the Company recorded a charge of $6.2 related to the
impairment of certain long-lived assets (primarily leasehold
improvements, furniture, and fixtures), consisting of the
following: $4.5 related to underperforming domestic Borders
superstores, $0.4 related to underperforming Waldenbooks stores
and $1.3 related to underperforming Books etc. stores.
In the fourth quarter of 2003, the Company recorded a charge of
$6.9 related to the impairment of certain long-lived assets
(primarily leasehold improvements, furniture, and fixtures),
consisting of the following: $6.6 related to underperforming
domestic Borders superstores and $0.3 related to underperforming
Waldenbooks stores. Also in the fourth quarter of 2003, the
Company incurred a $4.5 charge related to the impairment of
certain capitalized technology initiatives, with $3.0, $1.4, and
$0.1 allocated to the Borders, Waldenbooks and International
segments, respectively.
In the fourth quarter of 2002, the Company recorded a charge of
$14.4 related to the impairment of certain long-lived assets
(primarily leasehold improvements, furniture, and fixtures),
consisting of the following: $3.3 related to underperforming
domestic Borders superstores, $8.2 related to underperforming
Waldenbooks stores and $2.9 related to underperforming Books
etc. stores.
The charges taken for these impairments are categorized as
Asset impairments and other writedowns on the
consolidated statements of operations.
Store Closings: In
accordance with the provisions of FAS 146, Accounting
for Costs Associated with Exit or Disposal Activities, the
Company expenses when incurred all amounts related to the
discontinuance of operations of stores identified for closure.
These expenses typically pertain to inventory markdowns, asset
impairments, and store payroll and other costs. When the Company
closes any of its stores, the inventory of the closed stores is
either returned to vendors or marked down and sold. Stores
leasehold improvements, furniture, fixtures and equipment are
generally discarded or sold for nominal amounts.
Waldenbooks stores average between five to seven employees per
store, who have been or will be displaced by the closures, with
the majority being transferred to other Waldenbooks or Borders
store locations. Those employees not transferred are eligible
for involuntary termination benefits, but the total amount of
these benefits for the stores affected by the closing plans is
not significant.
During 2004, the Company recorded a $2.2 charge for the closing
costs relating to the closure of 43 underperforming Waldenbooks
stores (net of a $0.2 adjustment of the prior year reserve
resulting from actual costs differing from estimates). The
charge included $0.1 of asset impairments and $0.9 of store
payroll and other costs. These costs are categorized as
Asset impairments and other writedowns on the
consolidated statements of operations. Also included in the $2.2
charge is a $1.2 charge for inventory markdowns of the stores to
be closed, categorized as Cost of merchandise sold
(includes occupancy) on the consolidated statements of
operations.
During 2003, the Company recorded a $1.4 charge for the closing
costs relating to the closure of 74 underperforming Waldenbooks
stores (net of a $0.9 adjustment of the prior year reserve
resulting from actual costs differing from estimates). The
charge included $0.1 of asset impairments and $0.5 of store
payroll and other costs. These costs are categorized as
Asset impairments and other writedowns on the
consolidated statements of operations. Also included in the $1.4
charge is a $0.8 charge for inventory markdowns of the stores to
be closed, categorized as Cost of merchandise sold
(includes occupancy) on the consolidated statements of
operations.
52
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
During the fourth quarter of 2002, the Company adopted a plan to
close 65 underperforming Waldenbooks stores. As a result of this
plan, the Company recorded a $2.2 charge for the closing costs
of the stores (net of a $0.6 adjustment of the prior year
reserve resulting from actual costs differing from estimates).
The charge included $0.5 of asset impairments, and $0.3 of store
payroll and other costs which were incurred subsequent to the
stores scheduled closure in 2002. These costs are
categorized as Asset impairments and other
writedowns on the consolidated statements of operations.
Also included in the $2.2 charge is a $1.4 charge for inventory
markdowns of the stores to be closed, categorized as Cost
of merchandise sold (includes occupancy) on the
consolidated statements of operations.
Pursuant to Waldenbooks store closing plans,
43 stores were closed during 2004, 74 stores were
closed during 2003 and 55 stores were closed during 2002.
The following table summarizes Waldenbooks store closing
reserve:
|
|
|
|
|
|
Reserve balance at January 27, 2002
|
|
$ |
3.4 |
|
|
|
|
|
|
2002 Charge
|
|
|
2.8 |
|
|
2002 Reserve adjustment
|
|
|
(0.6 |
) |
|
2002 Cash payments
|
|
|
(3.0 |
) |
|
|
|
|
Reserve balance at January 26, 2003
|
|
$ |
2.6 |
|
|
|
|
|
|
2003 Charge
|
|
|
2.3 |
|
|
2003 Reserve adjustment
|
|
|
(0.9 |
) |
|
2003 Cash payments
|
|
|
(2.9 |
) |
|
|
|
|
Reserve balance at January 25, 2004
|
|
$ |
1.1 |
|
|
|
|
|
|
2004 Charge
|
|
|
2.4 |
|
|
2004 Reserve adjustment
|
|
|
(0.2 |
) |
|
2004 Cash payments
|
|
|
(2.7 |
) |
|
|
|
|
Reserve balance at January 23, 2005
|
|
$ |
0.6 |
|
|
|
|
|
The following table summarizes the sales and operating loss for
the stores closed in each of the following fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Sales
|
|
$ |
19.2 |
|
|
$ |
30.3 |
|
|
$ |
22.8 |
|
Operating loss
|
|
|
(0.6 |
) |
|
|
(0.9 |
) |
|
|
(0.1 |
) |
During the fourth quarter of 2004, the Company recorded a $1.1
charge for the estimated future lease obligations of a Books
etc. store closed in 2004, categorized as Cost of
merchandise sold (includes occupancy) on the consolidated
statements of operations.
During the fourth quarter of 2003, the Company recorded a $0.1
charge for the estimated future lease obligations of a Books
etc. store closed in 2003, categorized as Cost of
merchandise sold (includes occupancy) on the consolidated
statements of operations.
During the fourth quarter of 2002, the Company adopted a plan to
close one underperforming Books etc. store. As a result of this
plan, the Company recorded a $0.1 charge for the closing costs
of the store, categorized as Asset impairments and other
writedowns on the consolidated statements of operations.
The Company also recorded a $0.4 charge for the estimated future
lease obligations of the store, categorized as Cost of
merchandise sold (includes occupancy) on the consolidated
statements of operations.
53
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
|
|
NOTE 5 |
EFFECT OF TERRORIST ATTACKS ON SEPTEMBER 11, 2001 |
As a result of the terrorist attacks on September 11, 2001,
a Borders store that operated in the World Trade Center in New
York City was destroyed. The loss of that stores sales and
net income was not material to the consolidated 2004, 2003 or
2002 results as a whole. The Company was insured for the
replacement value of the assets destroyed at the store and up to
24 months of lost income from business interruption
coverage and recognized a total recovery of $19.9. The Company
does not expect to recover additional insurance amounts related
to this incident.
During 2004, the Company recognized as income its final
insurance reimbursement of $1.2 related to the
September 11, 2001 loss. Of this, $0.9 was categorized as
an offset to Selling, general and administrative
expenses. This amount primarily represented the excess of
lost assets replacement value over their net book value.
It is the Companys policy to record gains and losses on
asset disposals as a part of Selling, general and
administrative expenses. The remaining $0.3 was related to
pre-opening expenses incurred in the opening of replacement
stores in New York City. This was categorized as an offset to
Pre-opening expense on the consolidated statements
of operations.
During 2003, the Company recognized a $2.8 gain from insurance
proceeds related to the terrorist attacks. Of this, $0.7
represented business interruption proceeds for 2003. In
addition, $1.8 primarily represented the excess of lost
assets replacement value over their net book value. The
remaining $0.3 was related to pre-opening expenses incurred in
the opening of replacement stores in New York City.
During 2002, the Company recognized a $2.9 gain from insurance
proceeds related to the terrorist attacks. Of this, $1.2
represented business interruption proceeds for 2002. The
remaining $1.7 primarily represented the excess of lost
assets replacement value over their net book value.
|
|
NOTE 6 |
LEGAL SETTLEMENT |
In January 2004, a settlement was reached pursuant to which the
Company agreed to pay $3.5, categorized as Legal
settlement expense in the consolidated statements of
operations during 2003, to resolve all claims asserted in the
California overtime litigation. This action was brought by two
former employees, individually and on behalf of a class
consisting of all current and former employees who worked as
assistant managers in Borders stores in the state of California.
The court approved the settlement in December 2004.
|
|
NOTE 7 |
SALE-LEASEBACK TRANSACTION |
In March 2004, the Company entered into an agreement with GE
Pension Limited to sell and subsequently leaseback a
Company-owned property owned by its Books etc. subsidiary. There
were no future commitments, obligations, provisions, or
circumstances included in either the sale contract or the lease
contract that would result in the Companys continuing
involvement; therefore, the assets associated with the property
were removed from the Companys consolidated balance sheets.
The transaction was recorded in the International segment. The
sale proceeds were $32.3 and the net book value of the property
upon the completion date of the sale was $28.4, and direct costs
associated with the transaction were $0.4. A deferred gain of
$3.5 was recorded on the consolidated balance sheets in
Other long-term liabilities and is being amortized
over the 20-year term of the operating lease.
NOTE 8 ACQUISITION OF PAPERCHASE PRODUCTS,
LTD.
In July 2004, the Company invested cash of $24.1, including debt
repayment of $4.1, in connection with an increase in its 15%
equity stake in Paperchase Products, Ltd.
(Paperchase), a leading stationery retailer in the
United Kingdom, to 97%, which was allocated primarily to fixed
assets, inventory and $22.4 of goodwill. The Company also
recorded minority interest of $1.0. The acquisition has been
accounted for as a purchase in the Companys International
segment. The acquisition was not material to the consolidated
statements of operations, the consolidated balance sheets, or
the consolidated statements of cash flows of the Company.
54
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
|
|
NOTE 9 |
SEATTLES BEST COFFEE LICENSING AGREEMENT |
In August 2004, the Company entered into a licensing agreement
with Seattles Best Coffee LLC (Seattles
Best), a wholly-owned subsidiary of Starbucks Corporation,
through which the Company will operate Seattles
Best-branded cafes within substantially all of the
Companys existing Borders superstores in the continental
U.S. and Alaska and new stores as they are opened. Cafes located
within existing Borders superstores will be converted to
Seattles Best cafes beginning in early 2005, and
continue over the next few years. These cafes will continue to
be managed and staffed by Company employees, who will be trained
on Seattles Best brand standards and procedures.
Seattles Best will also provide brand direction and
oversight, as well as in-store promotional support, and will
receive royalty payments from the Company.
|
|
NOTE 10 |
PROPERTY AND EQUIPMENT |
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
|
|
(restated) | |
Property and equipment
|
|
|
|
|
|
|
|
|
|
Land
|
|
$ |
0.2 |
|
|
$ |
11.8 |
|
|
Buildings
|
|
|
6.7 |
|
|
|
26.9 |
|
|
Leasehold improvements
|
|
|
600.6 |
|
|
|
580.4 |
|
|
Furniture and fixtures
|
|
|
914.7 |
|
|
|
848.5 |
|
|
Construction in progress
|
|
|
25.6 |
|
|
|
24.4 |
|
|
|
|
|
|
|
|
|
|
|
1,547.8 |
|
|
|
1,492.0 |
|
Less accumulated depreciation and amortization
|
|
|
(912.2 |
) |
|
|
(820.2 |
) |
|
|
|
|
|
|
|
Property and equipment, net
|
|
$ |
635.6 |
|
|
$ |
671.8 |
|
|
|
|
|
|
|
|
The income tax provision from operations consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
|
|
(restated) | |
|
(restated) | |
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
52.6 |
|
|
$ |
61.6 |
|
|
$ |
45.2 |
|
|
State and local
|
|
|
10.7 |
|
|
|
9.1 |
|
|
|
8.0 |
|
|
Foreign
|
|
|
1.1 |
|
|
|
0.4 |
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
8.0 |
|
|
|
(2.1 |
) |
|
|
15.4 |
|
|
State and local
|
|
|
0.7 |
|
|
|
|
|
|
|
(0.1 |
) |
|
Foreign
|
|
|
2.6 |
|
|
|
3.1 |
|
|
|
(1.1 |
) |
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
$ |
75.7 |
|
|
$ |
72.1 |
|
|
$ |
67.4 |
|
|
|
|
|
|
|
|
|
|
|
55
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
A reconciliation of the federal statutory rate to the
Companys effective tax rate follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
|
|
(restated) | |
|
(restated) | |
Federal statutory rate
|
|
$ |
72.7 |
|
|
$ |
66.3 |
|
|
$ |
61.2 |
|
State and local taxes, net of federal tax benefit
|
|
|
7.4 |
|
|
|
5.9 |
|
|
|
5.1 |
|
Impact of foreign operations
|
|
|
(2.8 |
) |
|
|
(1.3 |
) |
|
|
|
|
Other
|
|
|
(1.6 |
) |
|
|
1.2 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
$ |
75.7 |
|
|
$ |
72.1 |
|
|
$ |
67.4 |
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities resulted from the following:
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
|
|
(restated) | |
Deferred tax assets
|
|
|
|
|
|
|
|
|
|
Accruals and other current liabilities
|
|
$ |
2.7 |
|
|
$ |
4.3 |
|
|
Deferred revenue
|
|
|
0.6 |
|
|
|
4.6 |
|
|
Other long-term liabilities
|
|
|
3.1 |
|
|
|
1.4 |
|
|
Deferred compensation
|
|
|
2.2 |
|
|
|
2.3 |
|
|
Deferred rent
|
|
|
73.4 |
|
|
|
73.2 |
|
|
Foreign deferred tax assets
|
|
|
22.6 |
|
|
|
17.4 |
|
|
Asset impairments and other writedowns
|
|
|
10.2 |
|
|
|
13.9 |
|
|
Valuation allowance
|
|
|
(8.5 |
) |
|
|
(7.3 |
) |
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
106.3 |
|
|
|
109.8 |
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
17.6 |
|
|
|
18.3 |
|
|
Property and equipment
|
|
|
74.6 |
|
|
|
72.6 |
|
|
Net state deferred tax liability
|
|
|
0.4 |
|
|
|
(1.0 |
) |
|
Foreign deferred tax liabilities
|
|
|
14.3 |
|
|
|
6.4 |
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
106.9 |
|
|
|
96.3 |
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$ |
(0.6 |
) |
|
$ |
13.5 |
|
|
|
|
|
|
|
|
The Company has tax net operating loss carryforwards in foreign
jurisdictions totaling $28.0 as of January 23, 2005, $34.6
as of January 25, 2004, and $45.2 as of January 26,
2003. These losses have an indefinite carryforward period. The
Company has established a valuation allowance to reflect the
uncertainty of realizing the benefits of these net operating
losses in foreign jurisdictions.
Consolidated domestic income (loss) before taxes was $200.6 in
2004, $189.7 in 2003, and $190.6 in 2002. The corresponding
amounts for foreign operations were $7.0 in 2004, $(0.3) in 2003
and $(15.6) in 2002.
Deferred income taxes are not provided on undistributed earnings
of foreign subsidiaries that are considered to be permanently
reinvested outside the United States. Cumulative foreign
earnings considered permanently reinvested totaled $7.9 as of
January 23, 2005 and $3.7 as of January 25, 2004.
56
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
|
|
NOTE 12 |
COMMITMENTS AND CONTINGENCIES |
Litigation: On
October 29, 2002, Gary Gerlinger, individually and on
behalf of all other similarly situated consumers in the United
States who, during the period from August 1, 2001 to the
present, purchased books online from either Amazon.com, Inc.
(Amazon) or the Company, instituted an action
against the Company and Amazon in the United States District
Court for the Northern District of California. The Complaint
alleges that the agreement pursuant to which an affiliate of
Amazon operates Borders.com as a co-branded site (the
Mirror Site) violates federal anti-trust laws,
California statutory law and the common law of unjust
enrichment. The Complaint seeks injunctive relief, damages,
including treble damages or statutory damages where applicable,
attorneys fees, costs and disbursements, disgorgement of all
sums obtained by allegedly wrongful acts, interest and
declaratory relief. The Company has filed an answer denying any
liability and also has filed a motion for summary judgment. The
Court has issued an order granting the motion as to certain of
plaintiffs claims, denying it as to others and requesting
additional briefing on certain issues. The order also denied
certain cross-motions filed by the plaintiff. The Company
intends to vigorously defend the action. The Company has not
included any liability in its consolidated financial statements
in connection with this matter and has expensed as incurred all
legal costs to date. Although an adverse resolution of this
matter could have a material adverse effect on the result of the
operations of the Company for the applicable period or periods,
the Company does not believe that this matter will have a
material effect on its liquidity or financial position.
Certain states and private litigants have sought to impose sales
or other tax collection efforts on out-of-jurisdiction companies
that engage in e-commerce. The Company currently is disputing a
claim by the state of California relating to sales taxes that
the state claims should have been collected on certain
Borders.com sales in California prior to implementation of the
Companys Mirror Site agreement with Amazon. Also, the
Company and Amazon have been named as defendants in actions
filed by a private litigant on behalf of the states of Nevada
and Illinois under the applicable states False Claims Act
relating to the failure to collect use taxes on Internet sales
in Nevada and Illinois for periods both before and after the
implementation of the Mirror Site Agreement. The Complaints seek
judgments, jointly and severally, against the defendants for,
among other things, injunctive relief, treble the amount of
damages suffered by the states of Nevada and Illinois as a
result of the alleged violations of the defendants, penalties,
costs and expenses, including legal fees. A similar action
previously filed against the Company in Tennessee has been
dismissed and the appeal period has expired. Various motions to
dismiss the Nevada and Illinois actions have been made by the
Company and other retailers and by the respective attorney
generals of those states. Certain of these motions have been
denied and others remain pending.
The Company is vigorously defending all claims against the
Company relating to any failure by it or Amazon to collect sales
or other taxes relating to Internet sales. Although an adverse
resolution of claims relating to the failure to collect sales or
other taxes on online sales could have a material effect on the
results of the operations of the Company for the applicable
period or periods, the Company does not believe that any such
claims will have a material adverse effect on its liquidity or
financial position.
In addition to the matters described above, the Company is, from
time to time, involved in or affected by other litigation
incidental to the conduct of its businesses.
Credit Facility: The
Company has a Multicurrency Revolving Credit Agreement (the
Credit Agreement), which was amended in July 2004
and will expire in July 2009. The Credit Agreement provides for
borrowings of up to $500.0 (which may be increased to $700.0
under certain circumstances) secured by eligible inventory and
accounts receivable and related assets. Borrowings under the
Credit Agreement are limited to a specified percentage of
eligible inventories and accounts receivable and bear interest
at a variable base rate plus an increment or LIBOR plus an
increment at the Companys option. The Credit Agreement
(i) includes a fixed charge coverage ratio requirement of
1.1 to 1 that is applicable only if outstanding borrowings under
the facility exceed 90% of permitted borrowings thereunder,
(ii) contains covenants that limit, among other things, the
Companys ability to incur indebtedness, grant liens, make
investments, consolidate or merge or dispose of assets,
(iii) prohibits dividend payments and share repurchases
that would result in borrowings under the facility exceeding 90%
of permitted borrowings thereunder, and (iv) contains
57
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
default provisions that are typical for this type of financing,
including a cross default provision relating to other
indebtedness of more than $25.0. The Company had borrowings
outstanding under the Credit Agreement (or a prior agreement) of
$131.7 million at January 23, 2005 and $126.9 at
January 25, 2004. The weighted average interest rate in
2004 and 2003 was approximately 5.9% and 5.4%, respectively.
Term Loan: On July 30,
2002, the Company issued $50.0 of senior guaranteed notes (the
Notes) due July 30, 2006 and bearing interest
at 6.31% (payable semi-annually). The proceeds of the sale of
the Notes are being used to refinance existing indebtedness of
the Company and its subsidiaries and for general corporate
purposes. The note purchase agreement relating to the Notes
contains covenants which limit, among other things, the
Companys ability to incur indebtedness, grant liens, make
investments, engage in any merger or consolidation, dispose of
assets or change the nature of its business, and requires the
Company to meet certain financial measures regarding net worth,
total debt coverage and fixed charge coverage. In July 2004, the
note purchase agreement was amended to permit the amendment to
the Credit Agreement described above and to provide for a parity
lien to secure the Notes on the same collateral as secures
borrowings under the Credit Agreement.
Debt of Consolidated VIEs:
The Company includes the debt of two variable interest entities
(VIEs), consolidated pursuant to Financial
Accounting Standards Board Interpretation No. 46,
Consolidation of Variable Interest Entities
(FIN 46), in its consolidated balance sheets.
Scheduled principal payments of this debt as of January 23,
2005 total $0.1 in 2005, $0.2 in 2006, $0.2 in 2007, $0.2 in
2008, $0.2 in 2009, $4.8 in all later years, and in the
aggregate, total $5.7. See Note 14
Leases for further discussion of the Companys
consolidation of these VIEs.
As of January 23, 2005 the Company was in compliance with
its debt covenants.
Operating Leases: The
Company conducts operations primarily in leased facilities.
Store leases are generally for terms of three to 20 years.
Borders leases generally contain multiple three- to
five-year renewal options which allow Borders the option to
extend the life of the leases up to 25 years beyond the
initial noncancellable term. Waldenbooks leases generally
do not contain renewal options. Certain leases provide for
additional rental payments based on a percentage of sales in
excess of a specified base. Also, certain leases provide for the
payment by the Company of executory costs (taxes, maintenance,
and insurance).
Lease Commitments: Future
minimum lease payments under operating leases at
January 23, 2005 total $344.7 in 2005, $331.9 in 2006,
$324.6 in 2007, $308.9 in 2008, $293.5 in 2009, $2,229.5 in all
later years, and in the aggregate, total $3,833.1.
Rental Expenses: A summary
of operating lease minimum and percentage rental expense follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Minimum rentals
|
|
$ |
370.2 |
|
|
$ |
352.6 |
|
|
$ |
322.1 |
|
Percentage rentals
|
|
|
8.0 |
|
|
|
2.0 |
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
378.2 |
|
|
$ |
354.6 |
|
|
$ |
323.7 |
|
|
|
|
|
|
|
|
|
|
|
Capitalized Leases: The
Company accounts for certain items under capital leases.
Scheduled principal payments of capitalized leases as of
January 23, 2005 total $0.1, due in 2005.
Lease Financing Facilities:
The Company had two lease financing facilities (the
Original Lease Facility and the New Lease
Facility, collectively, the Lease Financing
Facilities) to finance new stores and other property owned
by unaffiliated entities and leased to the Company or its
subsidiaries. In July 2004, the Company repaid all amounts
outstanding under the Lease Financing Facilities (totaling
$13.8) on behalf of the two borrowing VIEs. The Company has
recorded this debt repayment as a prepayment of a portion of the
rent expense for occupancy through 2024, and has classified the
current portion as a component of Accounts receivable and
other current assets, and the
58
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
non-current portion as a component of Other assets
on the consolidated balance sheets at January 23, 2005. In
conjunction with this transaction, the Lease Financing
Facilities were terminated.
Consolidated VIEs:
The Company adopted FIN 46 as of January 25, 2004,
which resulted in the consolidation of four VIEs and an
after-tax charge of $2.1, comprised of non-cash depreciation
costs in 2003. This charge is included as a Cumulative
effect of accounting change (net of tax) in the
Companys consolidated statements of operations in 2003. Of
the four VIEs initially consolidated, only two such entities
remain consolidated at January 23, 2005, as discussed below.
As a result of the repayment and termination of the Lease
Financing Facilities in July 2004, the Company deconsolidated
the two VIEs which had participated in the Lease Financing
Facilities as of July 2004, pursuant to the provisions of
FIN 46. The deconsolidation of the two VIEs resulted in a
reduction of land, property and equipment, net of accumulated
depreciation, of $12.5, short-term borrowings of $13.8, and
minority interest of $1.3. The Company also recorded an
after-tax gain of $1.7 as a result of the deconsolidation of
these VIEs. These amounts have been treated as non-cash items on
the consolidated statements of cash flows.
Separately, the Company is the primary beneficiary of two VIEs
due to the Companys guarantee of the debt of these
entities. As a result, the Company consolidates these VIEs and
has recorded property and equipment, net of accumulated
depreciation, of $5.3, long-term debt of $5.7, and minority
interest of $0.4 at January 23, 2005.
Mortgage Notes: During
1994, the Company entered into agreements in which leases with
respect to four Borders locations served as collateral for
certain mortgage pass-through certificates. These mortgage
pass-through certificates included a provision requiring the
Company to repurchase the underlying mortgage notes in certain
events. In the fourth quarter of 2001, the Company was obligated
to purchase the notes for $33.5, due to Kmart Corporations
(the former guarantor of the leases) failure to maintain
investment grade credit ratings. As a result, the Company has
categorized this prepaid rent amount as part of Other
assets in the consolidated balance sheets and is
amortizing the balance over each propertys remaining lease
term. The remaining balance at January 23, 2005 was
approximately $26.8.
|
|
NOTE 15 |
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 Companys
Savings Plan. The Companys expense related to this plan
was $4.7, $4.3, and $4.2 for 2004, 2003 and 2002, respectively.
|
|
NOTE 16 |
STOCK-BASED BENEFIT PLANS |
2004 Long-Term Incentive
Plan: The Company maintains
the 2004 Long-Term Incentive Plan (the 2004 Plan),
pursuant to which the Company may grant stock-based awards to
employees and non-employee directors of the Company, including
restricted shares and share units of its common stock and
options to purchase its common stock. The 2004 Plan was approved
by shareholders in May 2004, and replaced all prior stock-based
benefit plans. At January 23, 2005, the Company has
3.0 million shares authorized for the grant of stock-based
awards under the 2004 Plan (plus any shares forfeited or
cancelled under the 2004 Plan or any prior plan).
Under the 2004 Plan, the exercise price of options granted will
generally not be less than the fair value per share of the
Companys common stock at the date of grant. The plan
provides for vesting periods as determined by the Compensation
Committee of the Companys Board of Directors.
Under the 2004 Plan, the Companys 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 Companys common stock, at a 20% to 40% discount from
the fair value of the same number of unrestricted shares of
common stock. In addition, the Companys senior management
personnel may elect to make a one-time purchase of restricted
shares. Restricted
59
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
shares of common stock purchased under the 2004 Plan will
generally be restricted from sale or transfer for two to four
years from date of purchase.
The Company recognizes compensation expense for the discount on
restricted shares of common stock purchased under the 2004 Plan
(or prior plan). Such discounts are recognized as expense on a
straight-line basis over the period during which the shares are
restricted from sale or transfer.
The Company may grant performance-based share units of its
common stock (RSUs) to its senior management
personnel. RSUs vest based on various performance goals,
including net income, earnings per share and other business
criteria. RSUs have vesting periods as determined by the
Compensation Committee of the Companys Board of Directors.
The Company recognizes compensation expense for the
performance-based share units of common stock granted under the
2004 Plan using variable accounting, in accordance with the
provisions of APB 25 Accounting for Stock Issued to
Employees. Under variable accounting, estimates of
compensation costs are recorded and updated each period until
the measurement date, based on changes in the Companys
share price and the estimated vesting period of the RSUs.
Employee Stock Purchase
Plan: The Company also
maintains an employee stock purchase plan (the Employee
Plan), which allows the Companys associates not
eligible under the 2004 Plan to purchase shares of the
Companys common stock at a 15% discount from their fair
market value. At January 23, 2005, the Company has
0.6 million shares authorized for issuance under the
Employee Plan.
The Company is not required to record compensation expense with
respect to shares purchased under the Employee Plan.
A summary of the information relative to the Companys
stock option plans follows (number of shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- | |
|
|
Number | |
|
Average | |
All Plans |
|
of Shares | |
|
Exercise Price | |
|
|
| |
|
| |
Outstanding at January 27, 2002
|
|
|
15,415 |
|
|
$ |
18.11 |
|
|
Granted
|
|
|
3,232 |
|
|
|
20.02 |
|
|
Exercised
|
|
|
1,305 |
|
|
|
12.42 |
|
|
Forfeited
|
|
|
2,273 |
|
|
|
20.52 |
|
Outstanding at January 26, 2003
|
|
|
15,069 |
|
|
|
18.76 |
|
|
Granted
|
|
|
1,455 |
|
|
|
21.24 |
|
|
Exercised
|
|
|
1,907 |
|
|
|
12.90 |
|
|
Forfeited
|
|
|
1,574 |
|
|
|
20.63 |
|
Outstanding at January 25, 2004
|
|
|
13,043 |
|
|
|
19.67 |
|
|
Granted
|
|
|
69 |
|
|
|
23.52 |
|
|
Exercised
|
|
|
3,121 |
|
|
|
13.85 |
|
|
Forfeited
|
|
|
995 |
|
|
|
21.81 |
|
Outstanding at January 23, 2005
|
|
|
8,996 |
|
|
|
21.48 |
|
Balance exercisable at
|
|
|
|
|
|
|
|
|
|
January 26, 2003
|
|
|
8,832 |
|
|
|
18.59 |
|
|
January 25, 2004
|
|
|
8,750 |
|
|
|
19.86 |
|
|
January 23, 2005
|
|
|
6,985 |
|
|
|
21.95 |
|
The weighted-average fair values of options at their grant date
where the exercise price equals the market price on the grant
date were $7.30, $5.93, and $6.94 in 2004, 2003 and 2002,
respectively.
60
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
The Black-Scholes option valuation model was used to calculate
the fair market value of the options at the grant date for the
purpose of disclosures required by FAS 123. The following
assumptions were used in the calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Risk-free interest rate
|
|
|
2.8-4.7 |
% |
|
|
1.5-3.4 |
% |
|
|
2.2-5.3 |
% |
Expected life
|
|
|
3-5 years |
|
|
|
3-5 years |
|
|
|
3-10 years |
|
Expected volatility
|
|
|
29.9-35.2 |
% |
|
|
35.2- 41.6 |
% |
|
|
46.3 |
% |
Expected dividends
|
|
|
1.3-1.6 |
% |
|
|
0.0-1.5 |
% |
|
|
0.0 |
% |
The following table summarizes the information regarding stock
options outstanding at January 23, 2005 (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
|
|
|
215 |
|
|
|
0.8 |
|
|
$ |
8.69 |
|
|
|
215 |
|
|
$ |
8.69 |
|
$10.23-$13.63
|
|
|
1,010 |
|
|
|
2.2 |
|
|
|
12.91 |
|
|
|
1,010 |
|
|
|
12.91 |
|
$13.64-$17.03
|
|
|
1,321 |
|
|
|
3.0 |
|
|
|
14.75 |
|
|
|
1,160 |
|
|
|
14.74 |
|
$17.04-$20.44
|
|
|
1,460 |
|
|
|
4.1 |
|
|
|
17.55 |
|
|
|
752 |
|
|
|
17.76 |
|
$20.45-$27.25
|
|
|
2,302 |
|
|
|
3.7 |
|
|
|
22.69 |
|
|
|
1,160 |
|
|
|
23.25 |
|
$27.26-$30.66
|
|
|
2,199 |
|
|
|
2.4 |
|
|
|
29.79 |
|
|
|
2,199 |
|
|
|
29.79 |
|
$30.67-$34.06
|
|
|
489 |
|
|
|
2.9 |
|
|
|
31.68 |
|
|
|
489 |
|
|
|
31.68 |
|
A summary of the information relative to the Companys
granting of stock-based awards other than options follows
(number of shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of | |
|
Weighted-Average | |
|
Weighted-Average | |
|
|
Shares | |
|
Purchase Price | |
|
at Grant Date FMV | |
|
|
| |
|
| |
|
| |
Stock issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 Plan (or prior plan)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
28 |
|
|
$ |
18.26 |
|
|
|
23.91 |
|
|
|
2003
|
|
|
82 |
|
|
|
13.56 |
|
|
|
17.29 |
|
|
|
2004
|
|
|
45 |
|
|
|
17.74 |
|
|
|
23.59 |
|
|
Employee plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
35 |
|
|
|
15.29 |
|
|
|
17.99 |
|
|
|
2003
|
|
|
34 |
|
|
|
15.24 |
|
|
|
17.92 |
|
|
|
2004
|
|
|
28 |
|
|
|
20.64 |
|
|
|
24.29 |
|
Performance-based stock units issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
288 |
|
|
|
|
|
|
|
23.50 |
|
61
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
|
|
NOTE 17 |
FINANCIAL INSTRUMENTS |
The Company is subject to risk resulting from interest rate
fluctuations, as interest on certain of the Companys
borrowings is based on variable rates. The Companys
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
is currently utilizing two interest rate swaps to achieve this
objective, effectively converting a portion of its variable rate
exposure to fixed interest rates. In accordance with the
provisions of FAS 133, the Company designated these
interest rate swap agreements as cash flow hedges.
The Company recognizes the fair value of its derivatives on the
consolidated balance sheets. Changes in the fair value of a
derivative that is designated as, and meets all the required
criteria for, a cash flow hedge are recorded in accumulated
other comprehensive income and reclassified into earnings as the
underlying hedged item affects earnings. Amounts reclassified
into earnings related to cash flow hedges are included in
interest expense. For the year ended January 23, 2005,
unrealized after-tax net gains of $0.3 related to cash flow
hedges were recorded in other comprehensive income. As of
January 23, 2005, $0.1 net unrealized gains related to
interest rate swaps were included in accumulated other
comprehensive income, none of which is expected to be
reclassified into earnings during the next 12 months. The
hedge ineffectiveness for the year ending January 23, 2005
was not material.
A portion of the Companys borrowings is based on a fixed
interest rate. In August 2003, the Company entered into an
interest rate swap to convert the fixed rate, upon which the
$50.0 of Notes are based, to a variable rate based on LIBOR. In
accordance with the provisions of FAS 133, the Company has
designated this swap agreement as a fair market value hedge.
Changes in the fair value of a derivative that is designated as,
and meets all the required criteria for, a fair market value
hedge are recorded in the Companys consolidated statements
of operations, as are changes in the fair value of the hedged
debt.
As of January 23, 2005, and January 25, 2004, the
Company had the following interest rate swaps in effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 23, 2005 | |
|
|
Notional Amount | |
|
Strike Rate | |
|
Period | |
|
Fair Market Value | |
|
|
| |
|
| |
|
| |
|
| |
|
|
$ |
37.6 |
(a) |
|
|
4.9% |
|
|
|
10/98-6/05 |
|
|
$ |
|
|
|
|
$ |
37.6 |
(a) |
|
|
4.7% |
|
|
|
9/98-6/05 |
|
|
$ |
|
|
|
|
$ |
50.0 |
|
|
|
variable |
|
|
|
8/03-7/06 |
|
|
$ |
0.1 |
|
|
|
|
|
(a) |
Notional amount is the U.S. dollar equivalent of 20.0
British pounds. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 25, 2004 | |
|
|
Notional Amount | |
|
Strike Rate | |
|
Period | |
|
Fair Market Value | |
|
|
| |
|
| |
|
| |
|
| |
|
|
$ |
36.5 |
(a) |
|
|
4.9% |
|
|
|
10/98-6/05 |
|
|
$ |
(0.4 |
) |
|
|
$ |
36.5 |
(a) |
|
|
4.7% |
|
|
|
9/98-6/05 |
|
|
$ |
(0.1 |
) |
|
|
$ |
50.0 |
|
|
|
variable |
|
|
|
8/03-7/06 |
|
|
$ |
1.4 |
|
|
|
|
|
(a) |
Notional amount is the U.S. dollar equivalent of 20.0
British pounds. |
62
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
NOTE 18 SEGMENT INFORMATION
The Company is organized based upon the following operating
segments: domestic Borders stores, International stores
(including Borders, Books etc. and Paperchase stores),
Waldenbooks Specialty Retail stores (Waldenbooks),
and Corporate (consisting of the unallocated portion of interest
expense, certain corporate governance costs and corporate
incentive 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. Interest
income and expense are allocated to segments based upon the cash
flow generated or absorbed by those segments. The Company
utilizes fixed interest rates, approximating the Companys
medium-term borrowing and investing rates, in calculating
segment interest income and expense. The Company evaluates the
performance of its segments and allocates resources to them
based on anticipated future contribution.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
|
|
(restated) | |
|
(restated) | |
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borders
|
|
$ |
2,588.9 |
|
|
$ |
2,470.2 |
|
|
$ |
2,319.0 |
|
|
Waldenbooks
|
|
|
779.9 |
|
|
|
820.9 |
|
|
|
852.2 |
|
|
International
|
|
|
510.7 |
|
|
|
407.5 |
|
|
|
314.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$ |
3,879.5 |
|
|
$ |
3,698.6 |
|
|
$ |
3,486.1 |
|
|
|
|
|
|
|
|
|
|
|
Interest expense (income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borders
|
|
$ |
(5.4 |
) |
|
$ |
(1.9 |
) |
|
$ |
2.5 |
|
|
Waldenbooks
|
|
|
(42.2 |
) |
|
|
(38.8 |
) |
|
|
(33.5 |
) |
|
International
|
|
|
19.1 |
|
|
|
19.0 |
|
|
|
17.2 |
|
|
Corporate
|
|
|
37.6 |
|
|
|
30.4 |
|
|
|
26.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$ |
9.1 |
|
|
$ |
8.7 |
|
|
$ |
12.6 |
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borders
|
|
$ |
70.9 |
|
|
$ |
61.8 |
|
|
$ |
62.8 |
|
|
Waldenbooks
|
|
|
26.6 |
|
|
|
30.5 |
|
|
|
24.3 |
|
|
International
|
|
|
(0.3 |
) |
|
|
(3.6 |
) |
|
|
(6.7 |
) |
|
Corporate
|
|
|
(21.5 |
) |
|
|
(16.6 |
) |
|
|
(13.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$ |
75.7 |
|
|
$ |
72.1 |
|
|
$ |
67.4 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borders
|
|
$ |
80.4 |
|
|
$ |
79.5 |
|
|
$ |
76.3 |
|
|
Waldenbooks
|
|
|
16.7 |
|
|
|
18.5 |
|
|
|
20.6 |
|
|
International
|
|
|
15.8 |
|
|
|
13.3 |
|
|
|
10.2 |
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation expense
|
|
$ |
112.9 |
|
|
$ |
111.3 |
|
|
$ |
107.1 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borders
|
|
$ |
112.0 |
|
|
$ |
97.3 |
|
|
$ |
100.2 |
|
|
Waldenbooks
|
|
|
41.5 |
|
|
|
48.8 |
|
|
|
41.1 |
|
|
International
|
|
|
5.6 |
|
|
|
(1.3 |
) |
|
|
(13.8 |
) |
|
Corporate
|
|
|
(27.2 |
) |
|
|
(29.6 |
) |
|
|
(19.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total net income
|
|
$ |
131.9 |
|
|
$ |
115.2 |
|
|
$ |
107.6 |
|
|
|
|
|
|
|
|
|
|
|
63
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
|
|
(restated) | |
|
(restated) | |
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borders
|
|
$ |
1,484.7 |
|
|
$ |
1,469.7 |
|
|
$ |
1,418.5 |
|
|
Waldenbooks
|
|
|
328.3 |
|
|
|
321.7 |
|
|
|
335.2 |
|
|
International
|
|
|
452.8 |
|
|
|
374.6 |
|
|
|
321.5 |
|
|
Corporate
|
|
|
363.0 |
|
|
|
418.6 |
|
|
|
302.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
2,628.8 |
|
|
$ |
2,584.6 |
|
|
$ |
2,378.0 |
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borders
|
|
$ |
64.5 |
|
|
$ |
69.8 |
|
|
$ |
72.6 |
|
|
Waldenbooks
|
|
|
12.2 |
|
|
|
6.5 |
|
|
|
6.7 |
|
|
International
|
|
|
20.6 |
|
|
|
20.7 |
|
|
|
26.5 |
|
|
Corporate
|
|
|
18.2 |
|
|
|
13.9 |
|
|
|
28.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$ |
115.5 |
|
|
$ |
110.9 |
|
|
$ |
134.0 |
|
|
|
|
|
|
|
|
|
|
|
Total assets for the Corporate segment include certain corporate
headquarters asset balances, which have not been allocated to
the other segments; however, depreciation expense associated
with such assets has been allocated to the other segments as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
|
|
(restated) | |
|
(restated) | |
Borders
|
|
$ |
10.2 |
|
|
$ |
11.6 |
|
|
$ |
10.4 |
|
Walden
|
|
|
4.8 |
|
|
|
6.0 |
|
|
|
5.3 |
|
International
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
15.2 |
|
|
$ |
17.6 |
|
|
$ |
15.7 |
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets by geographic area are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
|
|
(restated) | |
|
(restated) | |
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$ |
628.0 |
|
|
$ |
644.4 |
|
|
$ |
641.5 |
|
|
International
|
|
|
235.4 |
|
|
|
227.5 |
|
|
|
195.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$ |
863.4 |
|
|
$ |
871.9 |
|
|
$ |
836.7 |
|
|
|
|
|
|
|
|
|
|
|
64
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
NOTE 19 UNAUDITED QUARTERLY FINANCIAL
DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2004 Quarter Ended | |
|
|
April | |
|
July | |
|
October | |
|
January | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(restated) | |
|
(restated) | |
|
(restated) | |
|
|
Total revenue
|
|
$ |
838.1 |
|
|
$ |
853.4 |
|
|
$ |
838.6 |
|
|
$ |
1,372.9 |
|
Gross margin
|
|
|
210.3 |
|
|
|
223.3 |
|
|
|
213.1 |
|
|
|
452.7 |
|
Net income (loss)
|
|
|
2.3 |
|
|
|
7.9 |
|
|
|
(1.1 |
) |
|
|
122.8 |
|
|
Diluted earnings (loss) per common share
|
|
|
0.03 |
|
|
|
0.10 |
|
|
|
(0.01 |
) |
|
|
1.62 |
|
|
Basic earnings (loss) per common share
|
|
|
0.03 |
|
|
|
0.10 |
|
|
|
(0.01 |
) |
|
|
1.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2003 Quarter Ended | |
|
|
April | |
|
July | |
|
October | |
|
January | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(restated) | |
|
(restated) | |
|
(restated) | |
|
(restated) | |
Total revenue
|
|
$ |
758.7 |
|
|
$ |
834.3 |
|
|
$ |
817.1 |
|
|
$ |
1,320.9 |
|
Gross margin
|
|
|
187.0 |
|
|
|
210.9 |
|
|
|
204.1 |
|
|
|
440.0 |
|
Income (loss) before cumulative effect of accounting change
|
|
|
(6.4 |
) |
|
|
3.5 |
|
|
|
(0.9 |
) |
|
|
121.1 |
|
|
Diluted earnings (loss) per common share
|
|
|
(0.08 |
) |
|
|
0.04 |
|
|
|
(0.01 |
) |
|
|
1.52 |
|
|
Basic earnings (loss) per common share
|
|
|
(0.08 |
) |
|
|
0.05 |
|
|
|
(0.01 |
) |
|
|
1.55 |
|
Net income (loss)
|
|
|
(6.4 |
) |
|
|
3.5 |
|
|
|
(0.9 |
) |
|
|
119.0 |
|
|
Diluted earnings (loss) per common share
|
|
|
(0.08 |
) |
|
|
0.04 |
|
|
|
(0.01 |
) |
|
|
1.49 |
|
|
Basic earnings (loss) per common share
|
|
|
(0.08 |
) |
|
|
0.05 |
|
|
|
(0.01 |
) |
|
|
1.52 |
|
Earnings per share amounts for each quarter are required to be
computed independently and may not equal the amount computed for
the total year.
The following tables contain selected quarterly consolidated
financial data for 2003 and the first three quarters of 2004, as
previously reported in the Companys filed Quarterly
Reports on Form 10-Q:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2004 Quarter Ended | |
|
|
April | |
|
July | |
|
October | |
|
|
| |
|
| |
|
| |
Total revenue
|
|
$ |
838.1 |
|
|
$ |
853.4 |
|
|
$ |
838.6 |
|
Gross margin
|
|
|
210.8 |
|
|
|
223.6 |
|
|
|
212.4 |
|
Net income (loss)
|
|
|
3.0 |
|
|
|
8.5 |
|
|
|
(1.5 |
) |
|
Diluted earnings (loss) per common share
|
|
|
0.04 |
|
|
|
0.11 |
|
|
|
(0.02 |
) |
|
Basic earnings (loss) per common share
|
|
|
0.04 |
|
|
|
0.11 |
|
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2003 Quarter Ended | |
|
|
April | |
|
July | |
|
October | |
|
January | |
|
|
| |
|
| |
|
| |
|
| |
Total revenue
|
|
$ |
758.7 |
|
|
$ |
834.3 |
|
|
$ |
817.1 |
|
|
$ |
1,320.9 |
|
Gross margin
|
|
|
189.0 |
|
|
|
212.6 |
|
|
|
206.1 |
|
|
|
439.9 |
|
Income (loss) before cumulative effect of accounting change
|
|
|
(4.8 |
) |
|
|
4.5 |
|
|
|
0.5 |
|
|
|
121.9 |
|
|
Diluted earnings (loss) per common share
|
|
|
(0.06 |
) |
|
|
0.06 |
|
|
|
0.01 |
|
|
|
1.53 |
|
|
Basic earnings (loss) per common share
|
|
|
(0.06 |
) |
|
|
0.06 |
|
|
|
0.01 |
|
|
|
1.56 |
|
Net income (loss)
|
|
|
(4.8 |
) |
|
|
4.5 |
|
|
|
0.5 |
|
|
|
119.8 |
|
|
Diluted earnings (loss) per common share
|
|
|
(0.06 |
) |
|
|
0.06 |
|
|
|
0.01 |
|
|
|
1.50 |
|
|
Basic earnings (loss) per common share
|
|
|
(0.06 |
) |
|
|
0.06 |
|
|
|
0.01 |
|
|
|
1.53 |
|
65
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Borders Group, Inc.
We have audited the accompanying consolidated balance sheets of
Borders Group, Inc. (the Company) as of January 23, 2005
and January 25, 2004, and the related consolidated
statements of income, stockholders equity, and cash flows
for each of the three years in the period ended January 23,
2005. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of the Company at
January 23, 2005 and January 25, 2004, and the
consolidated results of its operations and its cash flows for
each of the three years in the period ended January 23,
2005, in conformity with U.S. generally accepted accounting
principles.
As described in Note 2 to the consolidated financial
statements, the accompanying consolidated balance sheet as of
January 25, 2004 and the related consolidated statements of
income, stockholders equity, and cash flows for each of
the two years in the period ended January 25, 2004 have
been restated.
As discussed in Note 14 to the consolidated financial
statements, the Company adopted the provisions of Financial
Accounting Standards Board Interpretation No. 46,
Consolidation of Variable Interest Entities effective
January 25, 2004.
We have also audited, in accordance with standards of the Public
Company Accounting Oversight Board (United States),
managements assessment of the effectiveness of the
Companys internal control over financial reporting as of
January 23, 2005 and the effectiveness of the
Companys internal control over financial reporting as of
January 23, 2005 based on criteria established in Internal
Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Our
report dated April 5, 2005 expressed an unqualified opinion
on managements assessment of the effectiveness of the
Companys internal control over financial reporting and an
adverse opinion on the effectiveness of the Companys
internal controls over financial reporting because of the
existence of a material weakness.
Detroit, Michigan
April 5, 2005
66
|
|
Item 9. |
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure |
Not applicable.
Item 9A. Controls and Procedures
Controls and Procedures:
The Companys Chief Executive Officer and Chief Financial
Officer have evaluated the effectiveness of the Companys
disclosure controls and procedures, as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the Exchange Act), as of
January 23, 2005 (the Evaluation Date). In
performing this evaluation, management reviewed the
Companys lease accounting practices in light of
announcements made by a number of public companies and a
recently issued SEC clarification on the subject. As a result of
this review, the Company concluded that its previously
established lease accounting practices were not appropriate.
Accordingly, as described below, the Company determined to
restate certain of its previously issued financial statements to
reflect the correction of the Companys lease accounting
practices. Based on such evaluation, such officers have
concluded that, as of the Evaluation Date, the Companys
disclosure controls and procedures were not effective in
alerting them on a timely basis to material information relating
to the Company (including its consolidated subsidiaries)
required to be included in the Companys periodic filings
under the Exchange Act. In coming to the conclusion that the
Companys internal control over financial reporting was not
effective as of January 23, 2005, management considered,
among other things, the control deficiency related to periodic
review of the application of generally accepted accounting
principles, which resulted in the need to restate the
Companys previously issued financial statements as
disclosed in Note 2 to the accompanying consolidated
financial statements included in this Form 10-K.
Changes in Internal
Control: There were no changes
in the Companys internal control over financial reporting
during the quarter ended January 23, 2005 that have
materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial
reporting.
Managements Annual Report on Internal Control over
Financial Reporting:
Management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined
in Rule 13a-15(f) under the Securities Exchange Act of
1934, as amended). Management assessed the effectiveness of the
Companys internal control over financial reporting as of
January 23, 2005. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in
Internal Control Integrated Framework. In
performing this assessment, management reviewed the
Companys lease accounting practices in light of
announcements made by a number of public companies and a
recently issued SEC clarification on the subject. As a result of
this review, the Company concluded that its previously
established lease accounting practices were not appropriate.
Accordingly, the Audit Committee of the Companys Board of
Directors adopted a recommendation of the Companys
management to restate certain of its previously issued financial
statements to reflect the correction in the Companys lease
accounting practices.
Management evaluated the impact of this restatement on the
Companys assessment of its system of internal control and
has concluded that the control deficiency that resulted in the
incorrect lease accounting practices represented a material
weakness. As a result of the material weakness in the
Companys internal control over financial reporting,
management has concluded that, as of January 23, 2005, the
Companys internal control over financial reporting was not
effective to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. The Companys
independent registered public accounting firm, Ernst & Young
LLP, has issued an audit report on the Companys assessment
of the effectiveness of internal control over financial
reporting as of January 23, 2005, which is included herein.
Remediation Steps to Address Material
Weakness: To remediate the
material weakness in the Companys internal control over
financial reporting, subsequent to January 23, 2005 the
Company has implemented additional review procedures over the
selection and monitoring of appropriate assumptions and factors
affecting lease accounting practices.
67
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and Stockholders of
Borders Group, Inc.
We have audited managements assessment, included in the
accompanying Managements Annual Report on Internal Control
Over Financial Reporting, included in Item 9A, that Borders
Group, Inc. (the Company) did not maintain effective
internal control over financial reporting as of January 23,
2005, because of the effect of the Companys insufficient
controls over the selection and monitoring of appropriate
assumptions and factors affecting lease accounting, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of
control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The
following material weakness has been identified and included in
managements assessment: In its assessment as of
January 23, 2005, management identified as a material
weakness the Companys insufficient controls over the
selection and monitoring of appropriate assumptions and factors
affecting lease accounting practices. As a result of this
material weakness in internal control, Borders Group, Inc.
concluded the Companys previously issued financial
statements should be restated. This material weakness was
considered in determining the nature, timing, and extent of
audit tests applied in our audit of the 2004 financial
statements, and this report does not affect our report dated
April 5, 2005 on those financial statements.
68
In our opinion, managements assessment that Borders Group,
Inc. did not maintain effective internal control over financial
reporting as of January 23, 2005, is fairly stated, in all
material respects, based on the COSO control criteria. Also, in
our opinion, because of the effect of the material weakness
described above on the achievement of the objectives of the
control criteria, Borders Group, Inc. has not maintained
effective internal control over financial reporting as of
January 23, 2005, based on the COSO control criteria.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of the Company as of
January 23, 2005 and January 25, 2004, and the related
consolidated statements of income, stockholders equity,
and cash flows for each of the three years in the period ended
January 23, 2005, and our report dated April 5, 2005
expressed an unqualified opinion thereon.
Detroit, Michigan
April 5, 2005
69
|
|
Item 9B. |
Other Information |
None.
PART III
|
|
Item 10. |
Directors and Executive Officers of the Registrant |
Information regarding the executive officers of the Company
required by this Item 10 is set forth in Item 1 of
Part I herein under the caption Executive Officers of
the Company. Information pertaining to directors of the
Company required by Item 10 is included under the caption
Election of Directors in the Companys Proxy
Statement dated April 18, 2005 for the Companys
May 19, 2005 Annual Meeting of Stockholders, and is
incorporated herein by reference. Information relating to
compliance with Section 16(a) of the Securities Exchange
Act of 1934, as amended, is set forth in the Proxy Statement and
incorporated herein by reference.
Section 16(a) Beneficial Ownership Reporting
Compliance
The information required by this section is incorporated herein
by reference to the information under the caption
Section 16(a) Beneficial Ownership Reporting
Compliance in the Proxy Statement dated April 18,
2005 for the Companys May 19, 2005 Annual Meeting of
Stockholders.
Code of Ethics and Other Corporate Governance
Information
Information regarding the Companys Business Conduct Policy
and its Code of Ethics Relating to Financial Reporting, as well
the names of the individuals determined by the Board of
Directors to be audit committee financial experts,
is included in the Election of Directors Board
of Directors Meetings and Committees and Election of
Directors Corporate Governance sections of the
Companys Proxy Statement dated April 18, 2005 for the
Companys May 19, 2005 Annual Meeting of Stockholders,
and is incorporated herein by reference.
|
|
Item 11. |
Executive Compensation |
The information required by this Item 11 is incorporated
herein by reference to the information under the captions
Executive Compensation and Compensation of
Directors in the Proxy Statement dated April 18, 2005
for the Companys May 19, 2005 Annual Meeting of
Stockholders.
|
|
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 dated April 18, 2005 for the Companys
May 19, 2005 Annual Meeting of Stockholders.
|
|
Item 13. |
Certain Relationships and Related Party Transactions |
Not applicable.
|
|
Item 14: |
Principal Accounting Fees and Services |
The information required by this Item 14 is incorporated
herein by reference to the information under the heading
Fees Paid to Independent Auditors in the Proxy
Statement dated April 18, 2005 for the Companys
May 19, 2005 Annual Meeting of Stockholders.
70
PART IV
|
|
Item 15. |
Exhibits, Financial Statement Schedules |
(a) 1. Our Consolidated Financial Statements are
included in Part II, Item 8:
|
|
|
|
|
|
|
Page | |
|
|
| |
Consolidated Statements of Operations for the fiscal years ended
January 23, 2005, January 25, 2004 and
January 26, 2003
|
|
|
41 |
|
Consolidated Balance Sheets as of January 23, 2005 and
January 25, 2004
|
|
|
42 |
|
Consolidated Statements of Cash Flows for the fiscal years ended
January 23, 2005, January 25, 2004 and
January 26, 2003
|
|
|
43 |
|
Consolidated Statements of Stockholders Equity for the
fiscal years ended January 23, 2005, January 25, 2004
and January 26, 2003
|
|
|
44 |
|
Notes to Consolidated Financial Statements
|
|
|
45 |
|
Report of Independent Registered Public Accounting Firm
|
|
|
66 |
|
2. Financial Statement Schedules
All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable and therefore have been omitted.
3. The following exhibits are filed herewith unless
otherwise indicated:
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
2 |
.1(3) |
|
Agreement and plan of Merger dated as of April 8, 1997
between Michigan Borders Group, Inc. and Borders Group, Inc. |
|
3 |
.1(5) |
|
Restated Articles of Incorporation of Borders Group, Inc. |
|
3 |
.2(8) |
|
Restated bylaws of Borders Group, Inc. |
|
10 |
.1(8) |
|
Form of Severance Agreement |
|
10 |
.2(3) |
|
Borders Group, Inc. Stock Option Plan |
|
10 |
.3(8) |
|
Amendment to the Borders Group, Inc. Stock Option Plan |
|
10 |
.4(1) |
|
Borders Group, Inc. Employee Stock Purchase Plan |
|
10 |
.5(2) |
|
First Amendment to the Borders Group, Inc. Employee Stock
Purchase Plan |
|
10 |
.6(5) |
|
Second Amendment to the Borders Group, Inc. Employee Stock
Purchase Plan |
|
10 |
.7(5) |
|
Third Amendment to the Borders Group, Inc. Employee Stock
Purchase Plan |
|
10 |
.8(15) |
|
Restated Borders Group, Inc. Annual Incentive Bonus Plan |
|
10 |
.9(4) |
|
Borders Group, Inc. Stock Option Plan for International Employees |
|
10 |
.10(5) |
|
1998 Borders Group, Inc. Stock Option Plan |
|
10 |
.11(7) |
|
Agreement dated November 15, 1999, between Borders Group,
Inc. and Gregory P. Josefowicz |
|
10 |
.12(5) |
|
Participation Agreement dated as of December 1, 1998 by and
among Borders Group, Inc., Borders, Inc. and Parties thereto |
|
10 |
.13(6) |
|
Amendment No. 1 to 1998 Borders Group, Inc. Stock Option
Plan |
|
10 |
.14(8) |
|
Participation Agreement dated as of January 22, 2001 by and
among Borders Group, Inc., Borders, Inc. and Parties thereto |
|
10 |
.15(9) |
|
Note Purchase Agreement dated as of July 30, 2002 relating
to the 6.31% Senior Guaranteed Notes of Borders Group, Inc. |
|
10 |
.16(10) |
|
Borders Group, Inc. Long Term Incentive Plan |
71
|
|
|
|
|
Exhibit | |
|
|
Number | |
|
Description |
| |
|
|
|
10 |
.17(11) |
|
Participation Agreement dated as of November 15, 2002 by
and among Borders Group, Inc., Borders, Inc. and Parties thereto |
|
10 |
.18(12) |
|
Borders Group, Inc. 2004 Long-Term Incentive Plan |
|
10 |
.19(13) |
|
First Amendment to the Borders Group, Inc. 2004 Long Term
Incentive Plan dated as of May 20, 2004 |
|
10 |
.20(13) |
|
Amended and Restated Multicurrency Revolving Credit Agreement
dated as of July 30, 2004 among Borders Group, Inc., its
subsidiaries and Parties thereto |
|
10 |
.21(13) |
|
Security Agreement dated as of July 30, 2004 among Borders
Group, Inc., its subsidiaries and Parties thereto |
|
10 |
.22(13) |
|
Amendment No. 1 to the Note Purchase Agreement dated as of
July 30, 2004 among Borders Group, Inc., its subsidiaries
and Parties thereto |
|
10 |
.23(14) |
|
Restricted Share Unit Grant Agreement |
|
14 |
.1(11) |
|
Code of Ethics Relating to Financial Reporting |
|
14 |
.2(11) |
|
Business Conduct Policy |
|
21 |
.1 |
|
Subsidiaries of Registrant |
|
23 |
.1 |
|
Consent of Ernst & Young LLP |
|
31 |
.1 |
|
Statement of Gregory P. Josefowicz, Chairman, President and
Chief Executive Officer of Borders Group, Inc. pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|
31 |
.2 |
|
Statement of Edward W. Wilhelm, Senior Vice President and Chief
Financial Officer of Borders Group, Inc. pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|
32 |
.1 |
|
Statement of Gregory P. Josefowicz, Chairman, President and
Chief Executive Officer of Borders Group, Inc. pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
32 |
.2 |
|
Statement of Edward W. Wilhelm, Senior Vice President and Chief
Financial Officer of Borders Group, Inc. pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
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 Companys Registration
Statement on Form S-1 (File No. 333-90918). |
|
(2) |
Incorporated by reference from the Companys Registration
Statement on Form S-1 (File No. 333-80643). |
|
(3) |
Incorporated by reference from the Companys Proxy
Statement dated April 9, 1997 of Borders Group, Inc. (File
No. 1-13740). |
|
(4) |
Incorporated by reference from the Companys Quarterly
Report on Form 10-Q for the quarter ended July 26,
1998 (File No. 1-13740). |
|
(5) |
Incorporated by reference from the Companys Annual Report
on Form 10-K for the year ended January 24, 1999 (File
No. 1-13740). |
|
(6) |
Incorporated by reference from the Companys Quarterly
Report on Form 10-Q for the quarter ended October 24,
1999 (File No. 1-13740). |
|
(7) |
Incorporated by reference from the Companys Annual Report
on Form 10-K for the year ended January 23, 2000 (File
No. 1-13740). |
|
(8) |
Incorporated by reference from the Companys Annual Report
on Form 10-K for the year ended January 27, 2002 (File
No. 1-13740). |
|
(9) |
Incorporated by reference from the Companys Quarterly
Report on Form 10-Q for the quarter ended July 28,
2002 (File No. 1-13740). |
|
(10) |
Incorporated by reference from the Companys Quarterly
Report on Form 10-Q for the quarter ended July 27,
2003 (Filed No. 1-13740). |
|
(11) |
Incorporated by reference from the Companys Annual Report
on Form 10-K for the year ended January 25, 2004
(Filed No. 1-13740). |
72
|
|
(12) |
Incorporated by reference from the Companys Proxy
Statement dated April 18, 2004 (File No. 1-13740). |
|
(13) |
Incorporated by reference from the Companys Quarterly
Report on Form 10-Q for the quarter ended July 25,
2004 (Filed No. 1-13740). |
|
(14) |
Incorporated by reference from the Companys Current Report
on Form 8-K dated March 16, 2005 (Filed
No. 1-13740). |
|
(15) |
Incorporated by reference from the Companys Proxy
Statement dated April 18, 2005 (File No. 1-13740). |
(b) Financial Statement Exhibits:
See attached Exhibit Index.
(c) Financial Statement Schedules:
All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable and therefore have been omitted.
73
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 |
|
Chairman, Chief Executive Officer and President |
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
|
|
Title |
|
Date |
Name |
|
|
|
|
|
|
|
|
|
|
/s/ Gregory P.
Josefowicz
Gregory
P. Josefowicz |
|
Chairman, Chief Executive Officer, and President |
|
April 8, 2005 |
|
/s/ Edward W. Wilhelm
Edward
W. Wilhelm |
|
Senior Vice President and Chief Financial Officer (Principal
Financial and Accounting Officer) |
|
April 8, 2005 |
|
/s/ Joel J. Cohen
Joel
J. Cohen |
|
Director |
|
April 8, 2005 |
|
/s/ Amy B. Lane
Amy
B. Lane |
|
Director |
|
April 8, 2005 |
|
/s/ Victor L. Lund
Victor
L. Lund |
|
Director |
|
April 8, 2005 |
|
/s/ Dr. Edna Greene
Medford
Dr.
Edna Greene Medford |
|
Director |
|
April 8, 2005 |
|
/s/ Lawrence I. Pollock
Lawrence
I. Pollock |
|
Director |
|
April 8, 2005 |
|
/s/ Beth M. Pritchard
Beth
M. Pritchard |
|
Director |
|
April 8, 2005 |
74
EXHIBIT INDEX
|
|
|
|
|
Exhibit | |
|
|
Number | |
|
Description |
| |
|
|
|
2 |
.1(3) |
|
Agreement and plan of Merger dated as of April 8, 1997
between Michigan Borders Group, Inc. and Borders Group, Inc. |
|
3 |
.1(5) |
|
Restated Articles of Incorporation of Borders Group, Inc. |
|
3 |
.2(8) |
|
Restated bylaws of Borders Group, Inc. |
|
10 |
.1(8) |
|
Form of Severance Agreement |
|
10 |
.2(3) |
|
Borders Group, Inc. Stock Option Plan |
|
10 |
.3(8) |
|
Amendment to the Borders Group, Inc. Stock Option Plan |
|
10 |
.4(1) |
|
Borders Group, Inc. Employee Stock Purchase Plan |
|
10 |
.5(2) |
|
First Amendment to the Borders Group, Inc. Employee Stock
Purchase Plan |
|
10 |
.6(5) |
|
Second Amendment to the Borders Group, Inc. Employee Stock
Purchase Plan |
|
10 |
.7(5) |
|
Third Amendment to the Borders Group, Inc. Employee Stock
Purchase Plan |
|
10 |
.8(15) |
|
Restated Borders Group, Inc. Annual Incentive Bonus Plan |
|
10 |
.9(4) |
|
Borders Group, Inc. Stock Option Plan for International Employees |
|
10 |
.10(5) |
|
1998 Borders Group, Inc. Stock Option Plan |
|
10 |
.11(7) |
|
Agreement dated November 15, 1999, between Borders Group,
Inc. and Gregory P. Josefowicz |
|
10 |
.12(5) |
|
Participation Agreement dated as of December 1, 1998 by and
among Borders Group, Inc., Borders, Inc. and Parties thereto |
|
10 |
.13(6) |
|
Amendment No. 1 to 1998 Borders Group, Inc. Stock Option
Plan |
|
10 |
.14(8) |
|
Participation Agreement dated as of January 22, 2001 by and
among Borders Group, Inc., Borders, Inc. and Parties thereto |
|
10 |
.15(9) |
|
Note Purchase Agreement dated as of July 30, 2002 relating
to the 6.31% Senior Guaranteed Notes of Borders Group, Inc. |
|
10 |
.16(10) |
|
Borders Group, Inc. Long Term Incentive Plan |
|
10 |
.17(11) |
|
Participation Agreement dated as of November 15, 2002 by
and among Borders Group, Inc., Borders, Inc. and Parties thereto |
|
10 |
.18(12) |
|
Borders Group, Inc. 2004 Long-Term Incentive Plan |
|
10 |
.19(13) |
|
First Amendment to the Borders Group, Inc. 2004 Long Term
Incentive Plan dated as of May 20, 2004 |
|
10 |
.20(13) |
|
Amended and Restated Multicurrency Revolving Credit Agreement
dated as of July 30, 2004 among Borders Group, Inc., its
subsidiaries and Parties thereto |
|
10 |
.21(13) |
|
Security Agreement dated as of July 30, 2004 among Borders
Group, Inc., its subsidiaries and Parties thereto |
|
10 |
.22(13) |
|
Amendment No. 1 to the Note Purchase Agreement dated as of
July 30, 2004 among Borders Group, Inc., its subsidiaries
and Parties thereto |
|
10 |
.23(14) |
|
Restricted Share Unit Grant Agreement |
|
14 |
.1(11) |
|
Code of Ethics Relating to Financial Reporting |
|
14 |
.2(11) |
|
Business Conduct Policy |
|
21 |
.1 |
|
Subsidiaries of Registrant |
|
23 |
.1 |
|
Consent of Ernst & Young LLP |
|
31 |
.1 |
|
Statement of Gregory P. Josefowicz, Chairman, President and
Chief Executive Officer of Borders Group, Inc. pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|
31 |
.2 |
|
Statement of Edward W. Wilhelm, Senior Vice President and Chief
Financial Officer of Borders Group, Inc. pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|
32 |
.1 |
|
Statement of Gregory P. Josefowicz, Chairman, President and
Chief Executive Officer of Borders Group, Inc. pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
Exhibit | |
|
|
Number | |
|
Description |
| |
|
|
|
32 |
.2 |
|
Statement of Edward W. Wilhelm, Senior Vice President and Chief
Financial Officer of Borders Group, Inc. pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
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 Companys Registration
Statement on Form S-1 (File No. 333-90918). |
|
(2) |
Incorporated by reference from the Companys Registration
Statement on Form S-1 (File No. 333-80643). |
|
(3) |
Incorporated by reference from the Companys Proxy
Statement dated April 9, 1997 of Borders Group, Inc. (File
No. 1-13740). |
|
(4) |
Incorporated by reference from the Companys Quarterly
Report on Form 10-Q for the quarter ended July 26,
1998 (File No. 1-13740). |
|
(5) |
Incorporated by reference from the Companys Annual Report
on Form 10-K for the year ended January 24, 1999 (File
No. 1-13740). |
|
(6) |
Incorporated by reference from the Companys Quarterly
Report on Form 10-Q for the quarter ended October 24,
1999 (File No. 1-13740). |
|
(7) |
Incorporated by reference from the Companys Annual Report
on Form 10-K for the year ended January 23, 2000 (File
No. 1-13740). |
|
(8) |
Incorporated by reference from the Companys Annual Report
on Form 10-K for the year ended January 27, 2002 (File
No. 1-13740). |
|
(16) |
Incorporated by reference from the Companys Quarterly
Report on Form 10-Q for the quarter ended July 28,
2002 (File No. 1-13740). |
|
(17) |
Incorporated by reference from the Companys Quarterly
Report on Form 10-Q for the quarter ended July 27,
2003 (Filed No. 1-13740). |
|
(18) |
Incorporated by reference from the Companys Annual Report
on Form 10-K for the year ended January 25, 2004
(Filed No. 1-13740). |
|
(19) |
Incorporated by reference from the Companys Proxy
Statement dated April 14, 2004 (File No. 1-13740). |
|
(20) |
Incorporated by reference from the Companys Quarterly
Report on Form 10-Q for the quarter ended July 25,
2004 (Filed No. 1-13740). |
|
(21) |
Incorporated by reference from the Companys Current Report
on Form 8-K dated March 16, 2005 (Filed
No. 1-13740). |
|
(22) |
Incorporated by reference from the Companys Proxy
Statement dated April 18, 2005 (File No. 1-13740). |