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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 24, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number 1-13740
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BORDERS GROUP, INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-3196915
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
100 PHOENIX DRIVE, ANN ARBOR, MICHIGAN 48108
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(734) 477-1100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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COMMON STOCK NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [ ]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT WAS APPROXIMATELY $1,143,052,444 BASED UPON THE CLOSING MARKET PRICE
OF $15.00 PER SHARE OF COMMON STOCK ON THE NEW YORK STOCK EXCHANGE AS OF MARCH
22, 1999.
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF MARCH 22, 1999: 77,952,846
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE MAY 13, 1999 ANNUAL
MEETING OF STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III.
THE EXHIBIT INDEX IS LOCATED ON PAGE 40 HEREOF.
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BORDERS GROUP, INC.
INDEX
PAGE
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PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 7
Item 4. Submission of Matters to a Vote of Security Holders......... 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 8
Item 6. Selected Financial Data..................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 10
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 15
Item 8. Financial Statements and Supplementary Data................. 17
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 32
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 33
Item 11. Executive Compensation...................................... 36
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 36
Item 13. Certain Relationships and Related Party Transactions........ 36
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 37
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PART I
ITEM 1. BUSINESS
GENERAL
Borders Group, Inc. (the Company), through its subsidiaries, Borders, Inc.
(Borders), Walden Book Company, Inc. (Walden) and Books etc. is the second
largest operator of book superstores and the largest operator of mall-based
bookstores in the world based upon both sales and number of stores. At March 21,
1999, the Company operated 256 superstores under the Borders name, including one
in Singapore, one in Australia, and three in the United Kingdom, 885 mall-based
and other bookstores primarily under the Waldenbooks name and 26 bookstores
under the Books etc. name in the United Kingdom. The Company also operates an
Internet commerce site under the name Borders.com. Borders is one of the
nation's largest specialty coffee retailers with cafe operations in nearly all
of its superstores. The Company had consolidated net sales of approximately $2.6
billion in 1998 and $2.3 billion in 1997. References herein to years are to
fiscal years of the Company which currently end in January of the following
calendar year.
STORES
Borders is a premier operator of book and music superstores, offering
customers selection and service that the Company believes to be superior to
other book superstore operators. A key element of the Company's strategy is to
continue its growth and increase its profitability through the ongoing expansion
of its Borders book and music superstore operations. In 1998, the Company opened
47 new Borders book and music superstores. Borders superstore operations
achieved annual growth in net sales for the year ended January 24, 1999 of 23.7%
and attained comparable store sales growth in 1998 of 3.5%. Borders superstores
achieved average sales per square foot of $256 and average sales per superstore
of $6.9 million in 1998, each of which the Company believes to be higher than
the comparable figures of any publicly reporting book superstore operator.
Borders superstores achieved compound annual growth in net sales for the three
years ended January 24, 1999 of 31.8%.
Each Borders superstore offers customers a vast assortment of books,
superior customer service, value pricing and an inviting and comfortable
environment designed to encourage browsing. A Borders superstore typically
carries the broadest selection of book titles in its market. Borders superstores
carry an average of 128,000 book titles, ranging from 85,000 titles to 170,000
titles, across numerous categories, including many hard-to-find titles. As of
March 21, 1999, 240 of the 256 Borders superstores were in a book and music
format, which also features an extensive selection of pre-recorded music, with
an emphasis on hard-to-find recordings and categories such as jazz, classical
and foreign music, and a broad assortment of pre-recorded videotapes and digital
video discs, focusing primarily on classic movies and hard-to-find titles. Each
book and music superstore carries approximately 50,000 titles of music, 5,500
titles of videotapes and 1,400 titles of digital video discs. As of March 21,
1999, 252 of the 256 Borders superstores featured a cafe.
Over the past two decades, Borders has developed what it believes is the
most sophisticated inventory management system in the retail book industry. The
inventory management system includes a centrally controlled "expert" system that
uses artificial intelligence principles to forecast sales and recommend
inventory levels for each book in each store. Management believes that Borders'
inventory management system, which reflects both overall sales trends and local
buying patterns, results in higher in-stock positions, a broader selection of
book titles, and increased sales per store and sales per square foot, while
effectively managing inventory investment to provide Borders stores with a more
productive inventory assortment. As a result, management believes this
proprietary system has been a principal reason for Borders' superior
performance. The Company is adapting certain aspects of the system for use in
its mall-based business where appropriate, and believes that over the long term
it will enable the Company to offer a more productive assortment of inventory
throughout its operations.
Borders superstores average 27,000 square feet in size, including
approximately 5,300 square feet devoted to music, approximately 700 square feet
devoted to videos and digital video discs and approximately 1,400 square feet
devoted to the cafe. Stores opened in fiscal 1998 averaged 25,000 square feet.
Each store is distinctive in appearance and architecture and is designed to
complement its local surroundings, although Borders utilizes certain
standardized specifications to increase the speed and lower the cost of new
store openings.
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Walden is the leading operator of mall-based bookstores in terms of sales
and number of stores, offering customers a convenient source for new releases,
hardcover and paperback bestsellers, selected children's books and a standard
selection of business, cooking, reference and general interest books. Walden has
a well established name and reputation and generates cash flow that the Company
plans to use toward financing the Company's growth initiatives. Walden stores
average approximately 3,300 square feet in size and typically carry between
15,000 and 25,000 titles.
In addition to its traditional mall format described above, Walden operates
alternative mall-based bookstores utilizing a large format. This addresses the
desires of some developers to include a larger format bookstore in malls,
including, in many cases, where developers plan to include only one bookstore in
a mall, and is designed to take advantage of what management believes is the
desire by mall customers in some markets for greater selection and service. The
larger format consists of approximately 5,000 to 8,000 square feet and carries
between 30,000 and 40,000 titles. As of March 21, 1999, Walden operated 106 of
the larger format stores.
Walden is the largest operator of seasonal kiosks under the Day by Day,
Animal House and Turn of the Century trade names.
In March 1999, Walden acquired for cash the stock of All Wound Up (AWU).
AWU operates seasonal kiosks which sell interactive toys and other novelty
merchandise. The acquisition complements Walden's kiosk operations and will
allow for continued growth by combining the core competencies of each
organization. The acquisition will be accounted for under the purchase method
and is not material to the results of the Company.
Books etc. operated 26 stores in the United Kingdom as of March 21, 1999,
all of which are small-format stores located primarily in central London or in
various airports in the United Kingdom. These stores generally range from 2,000
to 5,000 square feet in size, with the largest being 13,000 square feet, and the
smallest being 650 square feet. The Books etc. philosophy is to offer customers
the widest range of quality reading at the best prices, coupled with
knowledgeable guidance from experienced store employees.
The Company has acquired a 19.9% strategic investment in Paperchase
Products Limited (Paperchase), the leading design-oriented retailer of
stationery and art materials in the United Kingdom. Paperchase operates 18
stores and concessions in three Books etc. stores and two Borders superstores
located in the United Kingdom. The Company plans to test a similar concept in
Borders superstores in the United States in the spring of 1999. The investment
is not material to the results of the Company and will be accounted for under
the cost method.
BORDERS.COM
The Company, through its subsidiary, Borders Online, Inc., operates an
Internet commerce site, Borders.com. This site offers customers over 650,000
titles and 10 million book, music and video items in stock and ready for
immediate shipping from the Company's state-of-the-art fulfillment and
distribution center. Since its public debut in May, 1998, Borders.com has
garnered high rankings from Internet and industry experts in several recent
surveys of the Internet's best websites.
The Company plans to leverage the Internet capability of Borders.com to
customers in both Borders and Walden stores. Currently, customers can place
special orders through employees in Borders stores and have product shipped to
the store. The Company plans to extend that capability to allow shipments
directly to customers' homes.
DISTRIBUTION
Borders. Borders believes that its centralized distribution system,
combined with Borders' use of its proprietary "expert" system to manage
inventory, significantly enhances its ability to manage inventory on a
store-by-store basis. Inventory is shipped from vendors to one of Borders'
distribution centers, located in Harrisburg, Pennsylvania; Ann Arbor, Michigan;
Columbus, Ohio and Indianapolis, Indiana. Walden's distribution centers,
discussed below, are also utilized by Borders. Approximately 95% of the books
carried by Borders are processed through its distribution facilities. Employees
at the distribution facilities label books with proprietary bar code stickers
identifying the book title, price and subject area. During the non-holiday
selling season, approximately 85% to 90% of the trade inventory that arrives
from publishers is processed within 48 hours for shipment to the stores. Newly
released titles and rush orders are processed within 24 hours. Borders purchases
substantially all of its music merchandise directly
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from certain manufacturers and utilizes Borders' own distribution centers to
ship a majority of its music inventory to its stores.
Walden. Approximately 65% of the number of books carried by Walden's stores
are shipped to one of Walden's two distribution centers, located in Mira Loma,
California and Nashville, Tennessee. Walden continues to use Ingram, a major
book wholesaler, to supplement its distribution centers. Walden also receives
some product in stores directly from publishers.
United Kingdom. Books etc. and Borders superstores in the United Kingdom
are served by a distribution center in Cornwall, England. Books etc. stores in
central London also receive a large percentage of their merchandise directly
from publishers and wholesalers.
Borders.com. In 1998, the Company, through its subsidiary, Borders
Fulfillment, Inc., opened its new, state-of-the-art fulfillment center in
Nashville, Tennessee. This facility has over 650,000 titles of books, music and
videos in stock and available for immediate shipping, and gives the Company a
significant competitive advantage in terms of delivery capabilities. In addition
to serving Borders.com customers, the fulfillment center also provides delivery
services for store-originated special orders, institutional orders, and call
center orders.
In general, books can be returned to their publishers at cost. Borders and
Walden stores return books to the Company's centralized returns center in
Nashville, Tennessee to be processed for return to the publishers. Due to the
sophistication of its inventory management system, the Company is able to reduce
its handling, carrying and freight expenses. In general, Borders can return
music and videos to its vendors at cost plus an additional fee to cover handling
and processing costs.
COMPETITION
The retail book business is highly competitive. Competition within the
retail book industry is fragmented with Borders facing direct competition from
other superstores, such as Barnes & Noble, Books-A-Million, Crown Books and
Media Play. Approximately 85% of Borders superstores currently face direct
competition from other large format book superstores. Walden faces direct
competition from the B. Dalton division of Barnes & Noble, Inc., as well as
regional chains and superstores. In addition, Borders and Walden compete with
each other, as well as specialty retail stores that offer books in a particular
area of specialty, independent single store operators, variety discounters, drug
stores, warehouse clubs, mail order clubs and mass merchandisers (such as Best
Buy). In the future, Borders and Walden may face additional competition from
other categories of retailers entering the retail book market.
The music and video businesses are also highly competitive and Borders
faces competition from large established music chains, such as Tower Records and
the Musicland and Media Play divisions of Musicland Stores Corporation (which
also sell videos), established video chains, such as Blockbuster and Suncoast
Motion Picture Company (a division of Musicland Stores Corporation), as well as
specialty retail stores, video rental stores, variety discounters, warehouse
clubs and mass merchandisers (such as Best Buy), some of which may have greater
financial or other resources than the Company. 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 avenue for retailing in all media
categories that the Company carries. In particular, the retailing of books and
music over the Internet is highly competitive. Competitors on the Internet
include Amazon.com, Inc., Barnes & Noble, Inc., CDnow, Inc. and others. The
Company believes that sales to date on the Internet have negatively affected the
Company's sales, but the impact cannot be quantified. Internet sales are
expected to continue to have a negative impact on the Company's sales. As
discussed above, the Company has its own vehicle for retailing over the Internet
and in 1999 will be working to integrate Borders.com with its stores.
EMPLOYEES
As of March 21, 1999, the Company had a total of approximately 15,600
full-time employees and approximately 11,600 part-time employees. When hiring
new employees, the Company considers a number of factors, including education
and experience, personality and orientation towards customer service. All new
store employees participate in a training program that provides up to two weeks
of in-store training in all aspects of customer
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service and selling, including title searches for in-stock and in-print
merchandise, merchandising, sorting, operation of point of sale terminals and
store policies and procedures. The Company believes that its relations with its
employees are generally good. The Company's employees are not represented by
unions except that the employees of two Borders stores have elected to be
represented by the United Food and Commercial Workers International Union
(UFCW). Agreements have been reached between the Company and the UFCW with
respect to these stores.
TRADEMARKS AND SERVICE MARKS
Borders(R), Borders Book Shop(R), and Borders Books & Music(R), among other
marks, are all registered trademarks and service marks used by Borders.
Brentano's(R), Coopersmith's(R), Longmeadow Press(R), Waldenbooks(R),
Waldenbooks Preferred Reader(R), Waldenkids(R) and Waldensoftware(R), among
other marks, are all registered trademarks and service marks used by Walden.
BOOKS etc(R) is a registered trademark and service mark used by Books etc.
Borders.com(R) is a registered trademark and service mark used by Borders
Online, Inc. The Borders, Walden, Books etc and Borders.com service marks are
used as trade names in connection with their business operations.
SEASONALITY
The Company's business is highly seasonal, with sales generally highest in
the fourth quarter and lowest in the first quarter. During 1998, 36.4% of the
Company's sales and 88.0% of the Company's operating income were generated in
the fourth quarter. The Company's results of operations depend significantly
upon the holiday selling season in the fourth quarter; less than satisfactory
net sales for such period could have a material adverse effect on the Company's
financial condition or results of operations for the year and may not be
sufficient to cover any losses which may be incurred in the first three quarters
of the year. The Company's expansion program generally is weighted with store
openings in the second half of the fiscal year. In the future, changes in the
number and timing of store openings, or other factors, may result in different
seasonality trends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Seasonality".
RELATIONSHIP WITH KMART
General. Prior to its initial public offering in May 1995, the Company was
a subsidiary of Kmart Corporation (Kmart); Kmart currently owns no shares of
Common Stock.
Kmart and the Company continue to have the following contractual
relationships.
Tax Allocation and Indemnification Agreement. Prior to the completion of
its initial public offering ("the IPO"), the Company was included in the
consolidated federal income tax returns of Kmart and filed on a combined basis
with Kmart in certain states. Pursuant to a tax allocation and indemnification
agreement between the Company and Kmart (the "Tax Allocation Agreement") the
Company will remain obligated to pay to Kmart any income taxes the Company would
have had to pay if it had filed separate tax returns for the tax period
beginning on January 26, 1995, and ending on June 1, 1995, the date of the
consummation of the IPO (to the extent that it has not previously paid such
amounts to Kmart). In addition, if the tax liability attributable to the Company
for any previous tax period during which the Company was included in a
consolidated federal income tax return filed by Kmart or a combined state return
is adjusted as a result of an action of a taxing authority or a court, then the
Company will pay to Kmart the amount of any increase in such liability and Kmart
will pay to the Company the amount of any decrease in such liability (in either
case together with interest and penalties). The Company's tax liability for
previous years will not be affected by any increase or decrease in Kmart's tax
liability if such increase or decrease is not directly attributable to the
Company. After completion of the IPO, the Company continued to be subject under
existing federal regulations to several liability for the consolidated federal
income taxes for any tax year in which it was a member of any consolidated group
of which Kmart was the common parent. Pursuant to the Tax Allocation Agreement,
however, Kmart agreed to indemnify the Company for any federal income tax
liability of Kmart or any of its subsidiaries (other than that which is
attributable to the Company) that the Company could be required to pay and the
Company agreed to indemnify Kmart for any of the Company's separate company
taxes.
Lease Guaranty Agreement. 32 of Borders' leases for its retail stores have
been guaranteed by Kmart, on either a full or limited basis. Limited guarantees
generally provide for the release of Kmart's guarantee upon satisfaction by
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Borders of certain financial requirements specified in the guarantee. Under the
terms of a lease guaranty, indemnification and reimbursement agreement entered
into upon completion of the IPO (the "Lease Guaranty Agreement"), until
termination of all of the lease guarantees, except during such time as the
Company achieves and maintains the investment grade status specified in the
Lease Guaranty Agreement, the Company will be subject to certain covenants and
restrictive covenants under the Lease Guaranty Agreement including restrictions
on indebtedness, dividends, mergers and certain liens.
Under the terms of the Lease Guaranty Agreement, the underlying leases will
be transferable by Borders, subject to a right of first refusal in favor of
Kmart with respect to sites within a three-mile radius of a Kmart store and,
with respect to all other sites, a right of first offer in favor of Kmart. The
Company and Borders are required to indemnify Kmart with respect to (i) any
liabilities Kmart may incur under the lease guarantees, except those liabilities
arising from the gross negligence or willful misconduct of Kmart, and (ii) any
losses incurred by Kmart after taking possession of any particular premises,
except to the extent such losses arise solely from the acts or omissions of
Kmart. Under the terms of the Lease Guaranty Agreement, in the event of (i) the
Company's or Borders' failure to provide any required indemnity, (ii) a knowing
and material violation of the limitations on transfers of guaranteed leases set
forth in the agreement, (iii) a breach of any of the financial covenants
described above or (iv) certain events of bankruptcy, Kmart will have the right
to assume any or all of the guaranteed leases and to take possession of all of
the premises underlying such guaranteed leases; provided, that in the event of a
failure or failures to provide required indemnities, the remedy of taking
possession of all of the premises underlying the guaranteed leases may be
exercised only if such failures relate to aggregate liability of $10.0 million
or more and only if Kmart has provided 100 days' prior written notice. In the
event of a failure to provide required indemnities resulting in losses of more
than the equivalent of two months rent under a particular lease but less than
$10.0 million, Kmart may exercise such remedy of possession as to the premises
underlying the guaranteed lease or leases to which the failure to provide the
indemnity relates and one additional premise for each such premises to which the
failure relates, up to a maximum, in any event, of five additional premises, and
thereafter, with respect to such additional premises, Kmart remedies and
indemnification rights shall terminate. In the event of a failure to provide
required indemnities resulting in liabilities of less than the equivalent of two
months rent under a particular lease, Kmart may exercise such remedy of
possession only as to the premises underlying the guaranteed lease or leases to
which the failure to provide the indemnity relates. The Lease Guaranty Agreement
will remain in effect until the expiration of all lease guarantees, which the
Company believes will be on or after November 2019.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements as
defined by the Private Securities Litigation Reform Act of 1995. Forward-looking
statements reflect management's current expectations and are inherently
uncertain. The Company's actual results may differ significantly from
management's expectations. Exhibit 99.1, "Cautionary Statement Under the Private
Securities Litigation Reform Act of 1995", filed with this Annual Report on Form
10-K identifies the forward-looking statements and describes some, but not all,
of the factors that could cause these differences.
ITEM 2. PROPERTIES
Borders. Borders operated 251 stores in 40 states and the District of
Columbia, three stores in the United Kingdom, one store in Singapore and one
store in Australia at March 21, 1999. Borders leases all of its stores. Borders'
store leases have an average initial term of 15 to 20 years with several
five-year renewal options. At March 21, 1999, the average unexpired term under
Borders' existing store leases was 11.5 years prior to the exercise of any
options.
The Company has leased a portion of its corporate headquarters in Ann
Arbor, Michigan and owns the remaining building and improvements. In 1998, the
headquarters was significantly expanded and all corporate office personnel were
consolidated into the expanded facility. The Company leases all distribution
centers.
Walden. Walden operated 885 stores in all 50 states and the District of
Columbia as of March 21, 1999. Walden leases all of its stores. Walden's store
leases generally have an initial term of 10 years. At present, the
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average unexpired term under Walden's existing store leases is approximately 4.5
years. The terms of Walden's mall-based bookstores leases for its leased
bookstores open as of March 21, 1999 expire as follows:
LEASE TERMS TO EXPIRE DURING 12 MONTHS NUMBER OF
ENDING ON OR ABOUT JANUARY 31 MALL STORES
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2000........................................................ 164
2001........................................................ 92
2002........................................................ 84
2003 and later.............................................. 545
Walden leases both of its distribution facilities.
Books etc. Books etc. operated 26 stores in the United Kingdom as of March
21, 1999. Books etc. generally leases its stores under operating leases with
terms ranging from 5 to 25 years. The average remaining lease term for Books
etc. stores is 12.2 years.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in or affected by litigation
incidental to the conduct of its respective businesses. The Company believes
that no currently pending litigation to which it is a party will have a material
adverse effect on its liquidity, financial position or results of operations.
In March 1998, the American Booksellers Association ("ABA") and twenty-six
independent bookstores filed a lawsuit in the United States District Court for
the Northern District of California against the Company and Barnes & Noble Inc.
alleging violations of the Robinson-Patman Act, the California Unfair Trade
Practice Act and the California Unfair Competition Law. The Complaint seeks
injunctive and declaratory relief; unspecified treble damages on behalf of each
of the bookstore plaintiffs, and, with respect to the California bookstore
plaintiffs, any other damages permitted by California law; disgorgement of
money, property and gains wrongfully obtained in connection with the purchase of
books for resale, or offered for resale, in California from March 18, 1994 until
the action is completed and pre-judgment interest on any amounts awarded in the
action, as well as attorney fees and costs. The Company intends to vigorously
defend the action.
In August 1998, The Intimate Bookshop, Inc. and its owner, Wallace Kuralt,
filed a lawsuit in the United States District Court for the Southern District of
New York against the Company, Barnes & Noble, Inc., Amazon.com, Inc., certain
publishers and others alleging violation of the Robinson-Patman Act and other
federal law, New York statutes governing trade practices and common law. An
Amended Complaint was subsequently filed eliminating the class action
allegations contained in the original Complaint. The Amended Complaint alleges
that the named plaintiffs have suffered damages of $11,250,000 or more and
requests treble damages on behalf of the named plaintiffs, as well as of
injunctive and declaratory relief (including an injunction requiring the closure
of all of the defendants' stores within 10 miles of any location where plaintiff
either has or had a retail bookstore during the four years preceding the filing
of the Complaint, and prohibiting the opening by defendants of any bookstore in
such areas for the next 10 years), disgorgement of alleged discriminatory
discounts, rebates, deductions and payments, punitive damages, interest, costs,
attorneys fees and other relief. Many of the allegations in the Amended
Complaint are similar to those contained in the action instituted by the ABA and
26 bookseller plaintiffs against the Company and Barnes & Noble in March of
1998. The Company intends to vigorously defend the action.
On November 20, 1998, six independent booksellers instituted an action
against the Company and Barnes & Noble in the United States District Court for
the Northern District of California asserting claims, and seeking relief,
similar to claims made and relief sought in the ABA litigation described above.
The Company intends to vigorously defend the action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth, for the fiscal quarters indicated, the high
and low closing market prices for the Common Stock on the New York Stock
Exchange (after the effect of the 2-for-1 stock split, effective, March 1,
1997).
HIGH LOW
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FISCAL QUARTER 1997
First Quarter............................................. $22.82 $18.32
Second Quarter............................................ $26.94 $19.25
Third Quarter............................................. $29.00 $22.31
Fourth Quarter............................................ $31.94 $24.50
FISCAL QUARTER 1998
First Quarter............................................. $34.38 $31.50
Second Quarter............................................ $39.94 $30.69
Third Quarter............................................. $33.00 $18.94
Fourth Quarter............................................ $28.88 $18.31
The Common Stock is traded on the New York Stock Exchange.
As of March 22, 1999, the Common Stock was held by 4,506 holders of record.
The Company currently intends to retain its earnings to finance future
growth and therefore does not anticipate paying any cash dividends in the
foreseeable future. The declaration and payment of dividends, if any, is subject
to the discretion of the Board and to certain limitations under the Michigan
Business Corporation Act. In addition, the Company's credit facility and the
lease facility agreements prohibit the Company from paying any dividends. The
Lease Guaranty Agreement between the Company, Borders and Kmart restricts the
Company's ability to pay dividends, unless no defaults exist under any
indebtedness of the Company and such payments do not exceed the sum of 50% of
cumulative consolidated net income since the Company's initial public offering
of common stock, which was completed on June 1, 1995, and certain proceeds
received from the sale of capital stock. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources".
On November 16, 1998 the Company sold 400,000 shares of Common Stock to
Philip M. Pfeffer, former Chief Executive Officer of the Company, for aggregate
consideration of $9,300,000, and Mr. Pfeffer received an option with an exercise
price of $23.25, the fair market value on the date of grant, for each share
purchased. On that date, the Company also issued to Mr. Pfeffer options to
purchase 15,610 shares with an exercise price of $23.25 in lieu of salary in the
amount of $134,246. These transactions involved an offer solely to Mr. Pfeffer
pursuant to the terms of his Employment Agreement with the Company. Reliance was
placed by the Company upon the exemption from registration under Section 4(2) of
the Securities Act of 1933, which exempts transactions by an issuer not
involving a public offering.
8
10
ITEM 6. SELECTED FINANCIAL DATA
BORDERS GROUP, INC.
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the Company's consolidated financial statements and the notes
thereto.
FISCAL YEAR ENDED
-------------------------------------------------------------------
JANUARY 24, JANUARY 25, JANUARY 26, JANUARY 28, JANUARY 22,
1999 1998 1997 1996(1) 1995
----------- ----------- ----------- ----------- -----------
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA
Borders Sales.............................. $1,563.5 $1,264.1 $ 958.1 $ 683.5 $ 404.0
Waldenbooks Sales.......................... 941.6 968.2 979.7 1,031.5 1,085.5
Other Sales................................ 85.3 33.7 21.0 34.0 21.5
-------- -------- -------- -------- --------
Total Store Sales.......................... 2,590.4 2,266.0 1,958.8 1,749.0 1,511.0
Borders.com Sales.......................... 4.6 -- -- -- --
-------- -------- -------- -------- --------
Total Sales.............................. $2,595.0 $2,266.0 $1,958.8 $1,749.0 $1,511.0
Operating Income Before Restructuring
Provision, Goodwill Writedowns and FAS
121...................................... $ 167.3 $ 138.0 $ 103.1 $ 64.5 $ 50.2
Restructuring Provision.................... -- -- -- -- 6.4
Goodwill Writedowns........................ -- -- -- 201.8 --
FAS 121 Impairment......................... -- -- -- 63.1 --
-------- -------- -------- -------- --------
Operating Income (Loss).................... $ 167.3 $ 138.0 $ 103.1 $ (200.4) $ 43.8
Net Income (Loss).......................... $ 92.1 $ 80.2 $ 57.9 $ (211.1) $ 20.9
Diluted Earnings (Loss) Per Common
Share(2)................................. $ 1.12 $ 0.98 $ 0.70 $ (2.94) $ 0.35
Pro Forma Diluted Earnings Per Common Share
Before Restructuring Provision, Goodwill
Writedowns and FAS 121(2)................ $ 1.12 $ 0.98 $ 0.70 $ 0.43 $ 0.32
BALANCE SHEET DATA
Working Capital............................ $ 144.5 $ 137.0 $ 225.1 $ 204.3 $ 258.0
Total Assets............................... $1,766.6 $1,534.9 $1,211.0 $1,052.3 $1,355.9
Short-Term Borrowings...................... $ 131.9 $ 122.5 $ 30.0 $ 60.0 $ --
Long-Term Debt and Capital Lease
Obligations, Including Current Portion,
and Redeemable Preferred Stock........... $ 8.5 $ 10.0 $ 6.7 $ 8.6 $ 21.1
Shares Subject to Repurchase............... $ -- $ -- $ 34.1 $ -- $ --
Stockholders' Equity....................... $ 715.1 $ 598.1 $ 511.4 $ 472.0 $ 726.3
- -------------------------
(1) The Company's 1995 fiscal year consisted of 53 weeks.
(2) Earnings (loss) per common share for the fiscal years ended January 28, 1996
and January 22, 1995 are pro forma and are based on actual common shares
outstanding after the Company's initial public offering.
9
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Borders Group, Inc. (the Company), through its subsidiaries, is the second
largest operator of book and music superstores and the largest operator of
mall-based bookstores in the world based upon both sales and number of stores.
At January 24, 1999, the Company operated 250 superstores primarily under the
Borders name, including 3 in the United Kingdom, 1 in Singapore, and 1 in
Australia. The Company also operated 900 mall-based and other bookstores
primarily under the Waldenbooks name, and 26 bookstores under the Books etc.
name in the United Kingdom. The Company, through its subsidiary Borders Online,
Inc., is also an online retailer of books, music, and video through the
operation of its Internet commerce site, Borders.com.
The Company's business strategy is to continue its growth and increase its
profitability through (i) the continued expansion and refinement of its Borders
superstore operation in the United States and internationally, (ii) the
continued focus on opportunistic store openings in its mall-based bookstore
operations and expansion of its kiosk operations, (iii) the development of
web-based commerce technologies which enhance the customer experience both
in-store and online, and (iv) realization of synergies and economies of scale
through a combination of certain of its books and music operations.
The Company's fiscal year ends on the Sunday immediately preceding the last
Wednesday in January. Fiscal 1998, 1997, and 1996 consisted of 52 weeks and
ended on January 24, 1999, January 25, 1998, and January 26, 1997, respectively.
References herein to years are to the Company's fiscal years.
RESULTS OF OPERATIONS
The following table presents the Company's statement of operations data, as
a percentage of sales, for the three most recent fiscal years.
JANUARY 24, JANUARY 25, JANUARY 26,
1999 1998 1997
----------- ----------- -----------
RESULTS OF OPERATIONS
Sales....................................................... 100.0% 100.0% 100.0%
Cost of merchandise sold (includes occupancy)............... 71.7 72.1 73.4
----- ----- -----
Gross margin................................................ 28.3 27.9 26.6
Selling, general and administrative expenses................ 21.5 21.4 20.9
Pre-opening expense......................................... 0.3 0.4 0.4
Goodwill amortization....................................... 0.1 -- --
----- ----- -----
Operating income............................................ 6.4 6.1 5.3
Interest expense............................................ 0.6 0.3 0.4
----- ----- -----
Income before income tax.................................... 5.8 5.8 4.9
Income tax provision........................................ 2.3 2.3 1.9
----- ----- -----
Net income.................................................. 3.5% 3.5% 3.0%
----- ----- -----
Store Activity
Borders Superstores
Beginning number of stores................................ 203 157 116
Openings.................................................. 47 46 41
----- ----- -----
Ending number of stores................................... 250 203 157
----- ----- -----
Walden Mall Bookstores
Beginning number of stores................................ 923 961 992
Openings.................................................. 16 8 9
Closings.................................................. (39) (46) (40)
----- ----- -----
Ending number of stores................................... 900 923 961
===== ===== =====
10
12
FISCAL YEARS ENDED JANUARY 24, 1999 AND JANUARY 25, 1998
Store sales for the year ended January 24, 1999 were $2,590.4 million,
reflecting a 14.3% increase over the $2,266.0 million in sales achieved in 1997.
Both the higher number of Borders superstores and Borders' 3.5% comparable store
sales increase contributed to the growth, which was partially offset by a lower
number of Waldenbooks stores and a 1.0% comparable store sales decrease.
Comparable store sales at Borders and Waldenbooks were impacted by increased
superstore and Internet competition. Sales for Borders.com were $4.6 million in
1998.
Gross margin as a percent of sales rose from 27.9% in 1997 to 28.3% in
1998. The increase in gross margin percentage primarily reflects improved
inventory shrinkage control and merchandise mix.
As a percentage of sales, SG&A for 1998 was 21.5%, or 0.1% higher than the
21.4% of sales in the corresponding period of 1997. The increase is due to
increased spending on strategic initiatives, including Borders.com and
international, which offset operating leverage in the Company's core business.
Pre-opening expense in 1998 was $7.8 million, an increase of $0.6 over the
1997 expense of $7.2 million. Pre-opening expense per store varies primarily as
a result of differing levels of grand opening advertising, depending on the
presence of the Company in the market, and differing levels of labor costs
associated with opening the store. The Company opened 47 Borders superstores and
16 Waldenbooks mall-based stores in 1998 as compared to 46 Borders superstores
and 8 Waldenbooks mall-based stores in 1997.
Goodwill amortization was $2.9 million in 1998, as compared to $1.6 million
in 1997. The increase in goodwill amortization of $1.3 million is a result of a
full year of amortization relating to the acquisition of Books etc. in October
1997.
Operating income improved to $167.3 million or 6.4% of sales in 1998, as
compared to $138.0 million or 6.1% of sales in 1997.
Interest expense was $16.2 million in 1998, as compared to $7.2 million in
1997. The increase represents interest on borrowings for the repurchase of
common stock and the acquisition of Books etc.
Income tax expense in 1998 was $59.0 million as compared to $50.6 million
in 1997. The effective tax rate for both periods differed from the federal
statutory rate primarily as a result of non-deductible goodwill amortization and
state income taxes. The Company's effective tax rate was 39.0% in 1998, as
compared to 38.7% in 1997. The increase in the effective rate is primarily due
to the mix of Borders store openings in higher taxed states.
As a result of the foregoing, store net income for the year ended January
24, 1999 was $102.6 million as compared to $86.2 million for the year ended
January 25, 1998. Borders.com had a net loss of $10.5 million in 1998, as
compared to a net loss of $6.0 million in 1997. On a consolidated basis, net
income in 1998 was $92.1 million, as compared to $80.2 million in 1997.
FISCAL YEARS ENDED JANUARY 25, 1998 AND JANUARY 26, 1997
Sales for the year ended January 25, 1998 were $2,266.0 million, reflecting
a 15.7% increase over the $1,958.8 million in sales achieved in 1996. Both the
higher number of Borders superstores and Borders' 8.0% comparable store sales
increase contributed to the growth, which was partially offset by store closings
at Waldenbooks. The Waldenbooks 0.0% comparable store sales reflects flat mall
traffic levels and the impact of increased superstore competition offset by the
benefit of new merchandising initiatives. Waldenbooks also experienced a benefit
from a larger number of seasonal calendar kiosks introduced in malls with
existing Waldenbooks stores.
Gross margin as a percent of sales rose from 26.6% in 1996 to 27.9% in
1997. The increase in gross margin percentage primarily reflects improved buying
and sales mix resulting in higher initial product margin and tighter control of
inventory shrinkage.
As a percentage of sales, SG&A for 1997 was 21.4%, or 0.5% higher than the
20.9% of sales in the corresponding period of 1996. The increase is due largely
to expenditures on strategic initiatives offset in part by the leveraging of
corporate overhead over the Company's expanding sales base.
11
13
Pre-opening expense in 1997 was $7.2 million consistent with 1996 expense
of $7.2 million. Pre-opening expense per store varies primarily as a result of
differing levels of grand opening advertising, depending on the presence of the
Company in the market, and differing levels of labor costs associated with
opening the store. The Company opened 46 Borders superstores and 8 Waldenbooks
mall-based stores in 1997 as compared to 41 Borders superstores and 9
Waldenbooks mall-based stores in 1996.
Goodwill amortization was $1.6 million in 1997, as compared to $1.1 million
in 1996. The increase in goodwill amortization of $0.5 million is a result of
the higher goodwill balance due to the acquisition of Books etc. in October
1997.
Operating income was $138.0 million or 6.1% of sales in 1997, as compared
to $103.1 million or 5.3% of sales in 1996.
Interest expense was $7.2 million in 1997, as compared to $7.0 million in
1996. The increase represents interest on borrowings for the repurchase of
common stock, and the acquisition of Books etc.
Income tax expense in 1997 was $50.6 million as compared to $38.2 million
in 1996. The effective tax rate for both periods differed from the federal
statutory rate primarily as a result of non-deductible goodwill amortization.
The Company's effective tax rate was 38.7% in 1997, as compared to 39.8% in
1996. The decrease in effective rate is due primarily to the realization of
certain state tax benefits.
As a result of the foregoing, net income for the year ended January 25,
1998 was $80.2 million, as compared to $57.9 million for the year ended January
26, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund working capital
needs, the opening of new stores, the refurbishment and expansion of existing
stores, and continued development of Borders.com.
Net cash provided by operations in 1998 was $166.2 million, as compared to
$147.0 million in 1997. The current year activity primarily reflects income
before non-cash charges for depreciation and amortization offset by cash used
for inventories as a result of store expansion at Borders. Inventory net of
accounts payable increased primarily due to 47 new Borders stores.
Net cash used for investing was primarily for capital expenditures for new
stores, including the opening of three superstores in the United Kingdom and one
superstore in Australia, Borders.com and the fulfillment center, a new
distribution center in Mira Loma, California, and expansion of the home office
facility. Capital expenditures in 1998 reflect the opening of 47 new superstores
and 16 new Waldenbooks stores. Capital expenditures in 1997 and 1996 reflected
the opening of 46 and 41 new Borders superstores, respectively, and 8 and 9 new
Waldenbooks stores, respectively.
Net cash used for financing in 1998 was $8.7 million, resulting primarily
from the repurchase of common stock of $51.7 million offset by net borrowings
under the credit facility and the issuance of Company stock under the Company's
employee benefit plans. Net cash provided by financing in 1997 was $50.5
million, which resulted from net borrowings under the credit facility, cash
received from construction funding, and issuance of stock under employee benefit
plans offset by the repurchase of common stock.
The Company expects capital expenditures to be approximately $170.0 million
in 1999, resulting primarily from domestic and international store openings,
refurbishment of a number of existing stores, and continued investment in
web-based technology. The Company currently plans to open approximately 50
Borders superstores, including 5 international stores, and 15 new Waldenbooks
mall stores in 1999. Average cash requirements for the opening of a domestic
prototype Borders books and music superstore are $2.2 million, representing
capital expenditures of $1.2 million, inventory requirements, net of related
accounts payable, of $0.9 million and $0.1 million of pre-opening costs. Average
cash requirements to open a new or expanded Waldenbooks store range from $0.4
million to $0.7 million, depending on the size and format of the store. The
Company plans to lease new store locations predominantly under operating leases.
12
14
The Company plans to execute its expansion plans for its Borders
superstores principally with funds generated from operations and financing
through the lease facility in 1999 and beyond. In the event that working capital
requirements are in excess of operating cash flows and lease financing, the
Company may fund such excess with borrowings under the credit facility. The
Company believes funds generated from operations, borrowings under the credit
facility and financing through the lease facility will be sufficient to fund its
anticipated capital requirements for at least the next two to three years.
The Company currently has a share repurchase program in place with
remaining authorization to repurchase approximately $64.5 million. During 1998
and 1997, $51.7 million and $61.8 million of common stock was repurchased,
respectively.
The Company has a $425.0 million multicurrency credit agreement (the Credit
Facility) which expires in October, 2002. Borrowings under the Credit Facility
bear interest at a base rate or an increment over LIBOR at the Company's option.
The Credit Facility contains operating covenants which limit the Company's
ability to incur indebtedness, make acquisitions, dispose of assets, issue or
repurchase its common stock in excess of $100.0 million (plus any proceeds and
tax benefits resulting from stock option exercises and tax benefits resulting
from restricted shares purchased by employees from the Company), pay dividends
on its common stock, and require the Company to meet certain financial measures
regarding fixed charge coverage, leverage and tangible net worth.
The Company has a $250.0 million lease financing facility (the Lease
Facility) to finance new stores and other property through operating leases
which expires in October, 2002. The Lease Facility provides financing to lessors
through loans from a third party lender for up to 95% of a project cost. It is
expected that lessors will make equity contributions approximating 5% of each
project. Independent of its obligations as lessee, the Company guarantees
payment when due of all amounts required to be paid to the third party lender.
The principal amount guaranteed will be limited to approximately 89% of the
original cost of a project, so long as the Company is not in default under the
lease relating to such project.
There were 31 properties financed through the Lease Facility, with a
financed value of $123.9 million at January 24, 1999. Management believes that
the rental payments for properties financed through the Lease Facility may be
lower than those which the Company could obtain elsewhere due to, among other
factors, (i) the lower borrowing rates available to the Company's landlords
under the facility, and (ii) the fact that rental payments for properties
financed through the facility do not include amortization of the principal
amounts of the landlords' indebtedness related to the properties. Rental
payments relating to such properties will be adjusted when permanent financing
is obtained to reflect the interest rates available at the time of the
refinancing and the amortization of principal. In December, 1998, 17 properties
previously financed through the Lease Facility with a total financed value of
$70.9 million were permanently financed through operating leases.
During 1994, the Company entered into agreements in which leases with
respect to four Borders' locations serve as collateral for certain mortgage
pass-through certificates. These mortgage pass-through certificates include a
provision requiring the Company to repurchase the underlying mortgage notes in
certain events, including the failure by the Company to make payments of rent
under the related leases, the failure by Kmart Corporation (the former parent of
the Company) to maintain required investment grade ratings or the termination of
the guarantee by Kmart of the Company's obligations under the related leases
(which would require mutual consent of Kmart and Borders). In the event the
Company is required to repurchase all of the underlying mortgage notes, the
Company would be obligated to pay approximately $36.6 million. The Company would
expect to fund this obligation through its line of credit. Since February 1995,
Kmart has failed to maintain investment grade ratings and, therefore, these
notes are now subject to put by the holder. To date, the holder has not
exercised its right to put the notes.
13
15
SEASONALITY
The Company's business is highly seasonal, with sales significantly higher
and substantially all operating income realized during the fourth quarter, which
includes the Christmas selling season.
FISCAL 1998 QUARTER ENDED
--------------------------------------------
APRIL JULY OCTOBER JANUARY
(DOLLARS IN MILLIONS) ----- ---- ------- -------
SALES.................................................... $545.3 $546.0 $558.3 $945.4
Operating income......................................... 9.0 7.9 3.2 147.2
% of full year:
Sales.................................................. 21.0% 21.1% 21.5% 36.4%
Operating income....................................... 5.4 4.7 1.9 88.0
FISCAL 1997 QUARTER ENDED
--------------------------------------------
APRIL JULY OCTOBER JANUARY
(DOLLARS IN MILLIONS) ----- ---- ------- -------
SALES.................................................... $463.6 $466.3 $477.3 $858.8
Operating income......................................... 1.8 2.3 2.2 131.7
% of full year:
Sales.................................................. 20.5% 20.6% 21.0% 37.9%
Operating income....................................... 1.3 1.7 1.6 95.4
FISCAL 1996 QUARTER ENDED
--------------------------------------------
APRIL JULY OCTOBER JANUARY
(DOLLARS IN MILLIONS) ----- ---- ------- -------
SALES.................................................... $404.0 $414.3 $413.5 $727.0
Operating income (loss).................................. (3.7) (2.0) (2.9) 111.7
% of full year:
Sales.................................................. 20.6% 21.2% 21.1% 37.1%
Operating income (loss)................................ (3.6) (1.9) (2.8) 108.3
OTHER MATTERS
YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define a specific year. Absent corrective
actions, a computer program that has date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
system failures or miscalculations causing disruptions to various activities and
operations.
The Company initiated assessments in prior years to identify the work
efforts required to assure that systems supporting the business successfully
operate beyond the turn of the century. The scope of this work effort
encompasses information technology systems, systems utilizing embedded
technology, such as microcontrollers, and the readiness of external third
parties, such as suppliers and service providers.
FINANCIAL AND NON-FINANCIAL INFORMATION TECHNOLOGY SYSTEMS
These systems encompass both application software and operating system
software. The Company has completed its assessment, renovation, and
validation of potential problem areas concerning application software.
Implementation (the final stage) of application software based in the
Company's distribution centers and headquarters is substantially complete
other than application programs required for operation of the sorter in the
Company's Nashville distribution center. These programs are expected to be
completed by the end of the second quarter unless significant unanticipated
remedial action is required, in which case completion is expected in the
fourth quarter. Implementation of application software based in the
Company's stores is currently more than 80% complete, with 100% completion
expected by the end of the second quarter of 1999.
14
16
The assessment of operating system software has been completed. Necessary
upgrades of operating system software are expected to be completed by the
end of the second quarter of fiscal 1999.
EMBEDDED TECHNOLOGY SYSTEMS
The Company has completed its assessment of the potential risks associated
with embedded technology systems, such as HVAC, elevators and security
systems at the Company's stores, distribution centers, and headquarters.
This involved inventorying all equipment utilizing embedded technology by
vendor and model, and contacting the necessary vendors with regards to the
compliance status of each item. Services or equipment provided by
non-compliant vendors identified through the assessment process will be
upgraded to compliant versions to the extent that the Company cannot
correct identified problem areas internally. This step is expected to be
completed by the end of the second quarter of fiscal 1999.
SUPPLIERS AND SERVICE PROVIDERS
The Company relies on numerous third parties to provide merchandise and
services. As such, attention has been focused on compliance attainment
efforts of vendors. Key parties have been contacted for clarification of
their year 2000 plans and their compliance status. Merchandise or services
provided by non-compliant vendors identified through the assessment process
will be evaluated for potential alternative arrangements. Such arrangements
may include less reliance on electronic ordering or sourcing through
alternative distribution channels to the extent that merchandise is
available through such channels.
Notwithstanding the substantive work efforts described above, the Company
could potentially experience disruptions to some aspects of its various
activities and operations, including those resulting from non-compliant systems
utilized by unrelated third party business entities. The Company is in the
process of developing business contingency plans in order to attempt to mitigate
the extent of potential disruption to business operations. The Company
anticipates that development of such contingency plans will be completed by the
end of the second quarter of fiscal 1999. The Company will continuously monitor
the adequacy of its contingency plans throughout the remainder of fiscal 1999.
Costs of addressing the Year 2000 Issue have not been material to date and,
based on preliminary information gathered to date from the Company and its
vendors, are not currently expected to have a material adverse impact on the
Company's financial position, results of operations or cash flows in future
periods. However, if the Company or its vendors are unable to resolve such
processing issues in a timely manner, it could result in a material financial
risk, including loss of revenue, substantial unanticipated costs and service
interruptions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to risk resulting from interest rate fluctuations,
as interest on the Company's borrowings is principally based on variable rates.
The Company's objective in managing its exposure to interest rate fluctuations
is to limit the impact of interest rate changes on earnings and cash flows and
to lower its overall borrowing costs. The Company primarily utilizes interest
rate swaps and collars to achieve this objective, effectively converting a
portion of its variable-rate borrowings to fixed-rate borrowings.
LIBOR is the rate upon which the Company's variable rate debt is
principally based. If LIBOR were to increase 1% in 1999 as compared to the end
of 1998, the company's interest expense, after considering the effects of its
interest rate swap and collar agreements, would increase $0.1 million based on
the Company's outstanding debt as of January 24, 1999.
15
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Consolidated Statements of Operations for the fiscal years
ended January 24, 1999, January 25, 1998 and January 26,
1997...................................................... 17
Consolidated Balance Sheets as of January 24, 1999 and
January 25, 1998.......................................... 18
Consolidated Statements of Cash Flows for the fiscal years
ended January 24, 1999, January 25, 1998 and January 26,
1997...................................................... 19
Consolidated Statements of Stockholders' Equity for the
fiscal years ended January 24, 1999, January 25, 1998,
January 26, 1997 and January 28, 1996..................... 20
Notes to Consolidated Financial Statements.................. 21
Report of Independent Accountants........................... 31
16
18
BORDERS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 24, JANUARY 25, JANUARY 26,
1999 1998 1997
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) ----------- ----------- -----------
Sales....................................................... $2,595.0 $2,266.0 $1,958.8
Cost of merchandise sold (includes occupancy)............... 1,859.4 1,634.3 1,437.8
-------- -------- --------
Gross margin................................................ 735.6 631.7 521.0
Selling, general and administrative expenses................ 557.6 484.9 409.6
Pre-opening expense......................................... 7.8 7.2 7.2
Goodwill amortization....................................... 2.9 1.6 1.1
Operating income............................................ 167.3 138.0 103.1
Interest expense............................................ 16.2 7.2 7.0
-------- -------- --------
Income before income tax.................................... 151.1 130.8 96.1
Income tax provision........................................ 59.0 50.6 38.2
-------- -------- --------
Net income.................................................. $ 92.1 $ 80.2 $ 57.9
======== ======== ========
Earnings per common share data (Note 2)
Diluted earnings per common share......................... $1.12 $.98 $.70
======== ======== ========
Diluted weighted average common shares outstanding (in
thousands)............................................. 82,503 82,241 82,554
======== ======== ========
Basic earnings per common share........................... $1.20 $1.06 $.77
======== ======== ========
Basic weighted average common shares outstanding (in
thousands)............................................. 76,631 75,825 75,575
======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
17
19
BORDERS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
FISCAL YEAR ENDED
--------------------------
JANUARY 24, JANUARY 25,
1999 1998
(DOLLARS IN MILLIONS EXCEPT SHARE AMOUNTS) ----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 42.8 $ 65.1
Merchandise inventories................................... 1,019.6 879.1
Accounts receivable and other current assets.............. 62.9 60.8
Deferred income taxes..................................... 8.0 13.4
-------- --------
Total Current Assets................................... 1,133.3 1,018.4
Property and equipment, net................................. 493.8 373.7
Other assets................................................ 25.1 20.1
Deferred income taxes....................................... 8.4 13.2
Goodwill, net of accumulated amortization of $46.0 and
$43.1, respectively....................................... 106.0 109.5
-------- --------
$1,766.6 $1,534.9
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings and current portion of long-term
debt................................................... $ 134.1 $ 127.3
Trade accounts payable.................................... 607.2 480.7
Accrued payroll and other liabilities..................... 221.7 210.8
Taxes, including income taxes............................. 25.8 62.6
-------- --------
Total Current Liabilities.............................. 988.8 881.4
Long-term debt and capital lease obligations................ 6.3 5.2
Other long-term liabilities................................. 56.4 50.2
-------- --------
Total Liabilities...................................... 1,051.5 936.8
-------- --------
Stockholders' Equity:
Common stock, 200,000,000 shares authorized; 77,695,124
and 75,395,998 shares issued and outstanding at January
24, 1999 and January 25, 1998, respectively............ 687.3 661.0
Deferred compensation and officer receivables............... (7.7) (6.3)
Accumulated other comprehensive income...................... (0.9) (0.9)
Retained earnings (accumulated deficit)..................... 36.4 (55.7)
-------- --------
Total Stockholders' Equity........................... 715.1 598.1
-------- --------
$1,766.6 $1,534.9
======== ========
See accompanying Notes to Consolidated Financial Statements.
18
20
BORDERS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 24, JANUARY 25, JANUARY 26,
1999 1998 1997
(DOLLARS IN MILLIONS) ----------- ----------- -----------
Cash Provided by (used for):
Operations
Net income................................................ $ 92.1 $ 80.2 $ 57.9
Adjustments to reconcile net income to operating cash
flows:
Depreciation and amortization.......................... 66.7 54.8 42.9
(Increase) decrease in deferred income taxes........... 10.2 3.9 (6.4)
Increase (decrease) in other long-term assets and
liabilities.......................................... 1.9 2.3 (2.8)
Cash provided by (used for) current assets and current
liabilities:
Increase in inventories................................ (140.5) (130.4) (100.0)
Increase in accounts payable........................... 126.5 121.9 45.3
Increase in taxes payable.............................. 2.9 12.0 44.2
Other -- net........................................... 6.4 2.3 19.9
------- ------- -------
Net cash provided by operations........................ 166.2 147.0 101.0
------- ------- -------
Investing
Capital expenditures...................................... (179.8) (113.6) (97.2)
Proceeds from sale of property and equipment.............. -- -- 4.7
Acquisitions.............................................. -- (61.4) --
Other..................................................... -- -- (0.4)
------- ------- -------
Net cash used for investing............................ (179.8) (175.0) (92.9)
------- ------- -------
Financing
Repayment of long-term debt and capital lease
obligations............................................ (4.6) (0.9) (2.0)
Increase in capital lease obligations..................... 3.0 -- --
Proceeds from sale of put options......................... -- -- 4.5
Repurchase of put option.................................. -- (0.8) --
Proceeds from construction funding........................ 1.3 6.8 19.8
Net funding from (to) credit facility..................... 9.4 85.8 (30.0)
Issuance of common stock.................................. 33.9 21.4 5.7
Repurchase of common stock................................ (51.7) (61.8) --
------- ------- -------
Net cash provided by (used for) financing.............. (8.7) 50.5 (2.0)
------- ------- -------
Net increase (decrease) in cash and equivalents............. (22.3) 22.5 6.1
Cash and equivalents at beginning of year................... 65.1 42.6 36.5
------- ------- -------
Cash and equivalents at end of year......................... $ 42.8 $ 65.1 $ 42.6
======= ======= =======
Supplemental Cash Flow Disclosures:
Interest paid............................................. $ 16.2 $ 9.8 $ 9.8
Income taxes paid......................................... $ 42.1 $ 40.0 $ 5.9
Common stock issued for business acquisition.............. -- $ 6.5 --
Debt and liabilities assumed in business acquisition...... -- $ 26.9 --
See accompanying Notes to Consolidated Financial Statements.
19
21
BORDERS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
DEFERRED ACCUMULATED RETAINED
COMMON STOCK COMPENSATION OTHER EARNINGS
-------------------- AND OFFICER COMPREHENSIVE (ACCUMULATED
SHARES AMOUNT RECEIVABLES INCOME DEFICIT) TOTAL
------ ------ ------------ ------------- ------------ -----
(DOLLARS IN MILLIONS EXCEPT SHARE AMOUNTS)
Balance at January 28, 1996....... 75,317,984 $ 669.2 $(3.4) $ -- $(193.8) $472.0
---------- ------- ----- ----- ------- ------
Net income........................ -- -- -- -- 57.9 57.9
Issuance of Common Stock.......... 540,032 5.8 -- -- -- 5.8
Tax benefit of equity
compensation.................... -- 2.7 -- -- -- 2.7
Issuance of put options:
Receipt of premium.............. -- 4.5 -- -- -- 4.5
Shares subject to repurchase.... -- (34.1) -- -- -- (34.1)
Change in receivables and deferred
Compensation.................... -- -- 2.6 -- -- 2.6
---------- ------- ----- ----- ------- ------
Balance at January 26, 1997....... 75,858,016 $ 648.1 $(0.8) $ -- $(135.9) $511.4
---------- ------- ----- ----- ------- ------
Net income........................ -- -- -- -- 80.2 80.2
Foreign currency translation
adjustments..................... -- -- -- (1.4) -- (1.4)
Related tax effect................ -- -- -- 0.5 -- 0.5
Comprehensive income 79.3
Issuance of common stock.......... 1,916,844 29.4 (5.5) -- -- 23.9
Repurchase and retirement of
Common Stock.................... (2,518,800) (61.8) -- -- -- (61.8)
Tax benefit of equity
compensation.................... -- 5.5 -- -- -- 5.5
Cancellation of put options:
Payment of premium.............. -- (0.8) -- -- -- (0.8)
Shares subject to repurchase.... -- 34.1 -- -- -- 34.1
Acquisition....................... 139,938 6.5 -- -- -- 6.5
---------- ------- ----- ----- ------- ------
Balance at January 25, 1998....... 75,395,998 $ 661.0 $(6.3) $(0.9) $ (55.7) $598.1
---------- ------- ----- ----- ------- ------
Net income........................ -- -- -- -- 92.1 92.1
Issuance of Common Stock.......... 4,171,059 38.3 (6.6) -- -- 31.7
Repurchase and retirement of
Common Stock.................... (1,871,933) (51.7) -- -- -- (51.7)
Tax benefit of equity
compensation.................... -- 39.7 -- -- -- 39.7
Change in receivables and deferred
Compensation.................... -- -- 5.2 -- -- 5.2
---------- ------- ----- ----- ------- ------
Balance at January 24, 1999....... 77,695,124 $ 687.3 $(7.7) $(0.9) $ 36.4 $715.1
========== ======= ===== ===== ======= ======
See accompanying Notes to Consolidated Financial Statements.
20
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: Borders Group, Inc. (the Company), through its
subsidiaries, operates book and music superstores, mall-based bookstores and
other bookstores in the United States, United Kingdom, Singapore and Australia.
The Company, through its subsidiary Borders Online, Inc., is also an online
retailer of books, music, and video through the operation of its Internet
commerce site, Borders.com. The Company owns all of the outstanding stock of
Borders, Inc. (Borders), Walden Book Company, Inc. (Walden), Books etc. and
Borders Online, Inc.
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and all majority-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Fiscal Year: The Company's fiscal year ends on the Sunday immediately
preceding the last Wednesday in January. Fiscal 1998, 1997, and 1996 consisted
of 52 weeks and ended on January 24, 1999, January 25, 1998, and January 26,
1997, respectively.
Cash and Equivalents: Cash and equivalents include short-term investments
with original maturities of 90 days or less.
Inventories: Merchandise inventories are valued on a first-in, first-out
(FIFO) basis at the lower of cost or market using the retail inventory method.
The Company includes certain distribution and other expenses in its inventory
costs.
Property and Equipment: Property and equipment are recorded at cost,
including capitalized interest, and depreciated over their estimated useful
lives on a straight-line basis for financial statement purposes and on
accelerated methods for income tax purposes. Most store properties are leased
and improvements are amortized over the term of the lease, generally over 5 to
20 years. Other annual rates used in computing depreciation for financial
statement purposes are 2% to 3% for buildings and 10% to 20% for other fixtures
and equipment. Amortization of assets under capital lease is included in
depreciation expense.
Goodwill: Goodwill is amortized over 40 years on a straight-line basis. The
Company evaluates the recoverability of goodwill using a fair value methodology
on a quarterly basis. This methodology is applied to Borders and Books etc.
separately (the businesses for which the Company has recorded goodwill). In
determining the fair value, the median price/earnings (P/E) multiple for similar
growth retail companies is calculated based upon actual quoted market prices per
share and analysts' consensus earnings estimates for these growth companies.
This P/E multiple is applied to the earnings for Borders and Books etc. to
arrive at an overall fair value of the respective companies. The Company
evaluates any indicated impairment as temporary or permanent, and records
appropriate charges (if any) to operations for permanent impairments in fair
value.
Financial Instruments: The recorded values of the Company's financial
instruments, which include accounts receivable and accounts payable, approximate
their fair values.
The Company has entered into interest rate swap and collar agreements to
reduce the impact of changes in interest rates on its variable-rate debt. The
net cash amounts paid or received by the Company resulting from these agreements
are recognized as an adjustment to interest expense in the period to which the
amounts paid or received relate.
Pre-Opening and Closing Costs: Costs associated with the opening of a new
store are expensed during the first full fiscal month of the store's operations.
When the decision to close a store is made, the Company provides for the future
net lease obligation, nonrecoverable investment in fixed assets and other
expenses directly related to discontinuance of operations.
21
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
Preferred Reader Program: Walden sells memberships in its Preferred Reader
Program, which offers members discounts on purchases and other benefits.
Membership fees are deferred and recognized over the 12-month membership period.
Equity-Based Compensation: The Company accounts for equity-based
compensation under the guidance of APB No. 25. See Note 10 for discussion of the
pro forma net income calculated under FAS 123.
New Accounting Guidance: In June 1998, the Financial Accounting Standards
Board issued Statement No. 133, "Accounting For Derivative Instruments and
Hedging Activities (FAS 133), which the Company is required to adopt effective
January 24, 2000. Changes in derivative fair values will either be recognized in
earnings as offsets to the changes in fair value of related hedged assets,
liabilities and firm commitments or, for forecasted transactions, deferred and
recorded as a component of other stockholders' equity until the hedged
transactions occur and are recognized in earnings. The ineffective portion of a
hedging derivative's change in fair value will be immediately recognized in
earnings. The Company does not believe the effect of adopting FAS 133 will be
material to its financial position.
Reclassifications: Certain prior year amounts have been reclassified to
conform to fiscal 1998 presentation.
NOTE 2 -- WEIGHTED AVERAGE SHARES OUTSTANDING
Weighted average shares outstanding are calculated as follows (thousands):
1998 1997 1996
---- ---- ----
Weighted-average common shares outstanding -- basic
earnings per share................................. 76,631 75,825 75,575
Dilutive effect of employee stock options............ 5,872 6,416 6,979
------ ------ ------
Weighted-average common shares outstanding -- diluted
earnings per share................................. 82,503 82,241 82,554
====== ====== ======
NOTE 3 -- ACQUISITION
Effective October 20, 1997, the Company purchased 100% of the outstanding
stock of Books etc., a London-based retailer of books and associated products
for a purchase price of $71.1, allocated primarily to fixed assets, inventory
and goodwill of $64.1. At the time of acquisition, Books etc. operated 23 stores
in the United Kingdom. The acquisition has been accounted for as a purchase.
This transaction did not have a material impact on earnings in 1997.
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
1998 1997
---- ----
Property and equipment:
Land...................................................... $ 10.2 $ 10.2
Buildings................................................. 5.7 5.7
Leasehold improvements.................................... 251.9 214.4
Furniture and fixtures.................................... 507.6 404.3
Construction in progress.................................. 50.0 20.6
------- -------
825.4 655.2
Less -- accumulated depreciation and amortization........... (331.6) (281.5)
------- -------
Property and equipment, net................................. $ 493.8 $ 373.7
======= =======
22
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
NOTE 5 -- INCOME TAXES
The income tax provision consists of:
1998 1997 1996
---- ---- ----
Current:
Federal................................................... $40.9 $42.7 $39.5
State and local........................................... 7.9 4.3 4.9
Foreign................................................... -- 0.4 --
Deferred:
Restructuring reserve..................................... 0.8 0.6 2.1
FAS 121 impairment........................................ 2.0 2.7 4.4
Deferred compensation..................................... 1.5 (2.5) (1.0)
Differences in book and tax depreciation.................. 7.1 5.1 1.9
Inventory valuation differences........................... (0.6) (2.3) (4.1)
Other..................................................... (0.6) (0.4) (9.5)
----- ----- -----
Total income tax provision................................ $59.0 $50.6 $38.2
===== ===== =====
A reconciliation of the federal statutory rate to the Company's effective
tax rate follows:
1998 1997 1996
---- ---- ----
Federal statutory rate...................................... $52.9 $45.8 $33.3
State and local taxes, net of federal tax benefit........... 5.2 3.5 3.0
Goodwill amortization....................................... 0.4 0.4 0.4
Other....................................................... 0.5 0.9 1.5
----- ----- -----
Total income tax provision.................................. $59.0 $50.6 $38.2
===== ===== =====
Deferred tax assets and liabilities resulted from the following:
1998 1997
---- ----
Deferred tax assets:
Federal benefit for state deferred taxes.................. $ 1.6 $ 2.0
Accruals and other current liabilities.................... 11.2 13.9
Restructuring reserve..................................... 0.3 1.1
Deferred revenue.......................................... 7.0 7.0
Other long-term liabilities............................... 2.7 2.0
Deferred compensation..................................... 7.4 8.9
Deferred rent............................................. 16.8 14.2
FAS 121 impairment........................................ 7.9 9.9
----- -----
Total deferred tax assets................................. 54.9 59.0
----- -----
Deferred tax liabilities:
Inventory................................................. 8.6 9.2
Property and equipment.................................... 26.5 19.4
Other..................................................... 3.4 3.8
----- -----
Total deferred tax liabilities............................ 38.5 32.4
----- -----
Net deferred tax assets..................................... $16.4 $26.6
===== =====
23
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
NOTE 6 -- COMMITMENTS AND CONTINGENCIES
There are various claims, lawsuits and actions pending against the Company
and its subsidiaries that are incident to their operations. It is the opinion of
management that the ultimate resolution of these matters will not have a
material effect on the Company's liquidity, financial position or results of
operations.
During 1994, the Company entered into agreements in which leases with
respect to four Borders' locations serve as collateral for certain mortgage
pass-through certificates. These mortgage pass-through certificates include a
provision requiring the Company to repurchase the underlying mortgage notes in
certain events, including the failure by the Company to make payments of rent
under the related leases, the failure by Kmart Corporation to maintain required
investment grade ratings or the termination of the guarantee by Kmart
Corporation of the Company's obligations under the related leases (which would
require the mutual consent of Kmart Corporation and Borders). In the event the
Company is required to repurchase all of the underlying mortgage notes, the
Company would be obligated to pay approximately $36.6. Since February 1995,
Kmart Corporation has failed to maintain investment grade ratings and,
therefore, these notes are now subject to put by the holder. To date, the holder
has not exercised its rights to put the notes.
During December 1996, the Company sold two million put options on the
Company's common stock which had exercise prices of $16.75-$17.25 per share and
expired on various dates between March 16, 1998 and April 15, 1998. The Company
received proceeds of $4.5 upon sale of the puts. During 1997, all two million
put options were repurchased from the holders for $0.8.
In March 1998, the American Booksellers Association ("ABA") and twenty-six
independent bookstores filed a lawsuit in the United States District Court for
the Northern District of California against the Company and Barnes & Noble Inc.
alleging violations of the Robinson-Patman Act, the California Unfair Trade
Practice Act and the California Unfair Competition Law. The Complaint seeks
injunctive and declaratory relief; unspecified treble damages on behalf of each
of the bookstore plaintiffs, and with respect to the California bookstore
plaintiffs, any other damages permitted by California law; disgorgement of
money, property and gains wrongfully obtained in connection with the purchase of
books for resale, or offered for resale, in California from March 18, 1994 until
the action is completed and prejudgment interest on any amounts awarded in the
action, as well as attorney fees and costs. The Company intends to vigorously
defend the action.
In August 1998, The Intimate Bookshop, Inc. and its owner, Wallace Kuralt,
filed a lawsuit in the United States District Court for the Southern District of
New York against the Company, Barnes & Noble, Inc., Amazon, Inc., certain
publishers and others alleging violation of the Robinson-Patman Act and other
federal law, New York statutes governing trade practices and common law. An
Amended Complaint was subsequently filed eliminating the class action
allegations contained in the original Complaint. The Amended Complaint alleges
that the named plaintiffs have suffered damages of $11.3 or more and requests
treble damages on behalf of the named plaintiffs, as well as of injunctive and
declaratory relief (including an injunction requiring the closure of all of
defendants' stores within 10 miles of any location where plaintiff either has or
had a retail bookstore during the four years preceding the filing of the
Complaint, and prohibiting the opening by defendants of any bookstore in such
areas for the next 10 years), disgorgement of alleged discriminatory discounts,
rebates, deductions and payments, punitive damages, interest, costs, attorneys
fees and other relief. Many of the allegations in the Amended Complaint are
similar to those contained in the action instituted by the ABA and 26 bookseller
plaintiffs against the Company and Barnes & Noble, Inc. in March of 1998. The
Company intends to vigorously defend the action.
On November 20, 1998, six independent booksellers instituted an action
against the Company and Barnes & Noble, Inc., in the United States District
Court for the Northern District of California asserting claims, and seeking
relief, similar to claims made and relief sought in the ABA litigation described
above. The Company intends to vigorously defend the action.
The Company has not included any liability in its financial statements in
connection with the lawsuits described above.
24
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
NOTE 7 -- DEBT
The Company has a $425.0 multicurrency credit agreement (the Credit
Facility) which expires in October, 2002. Borrowings under the Credit Facility
bear interest at a base rate or an increment over LIBOR at the Company's option.
The Credit Facility contains operating covenants which limit the Company's
ability to incur indebtedness, make acquisitions, dispose of assets, issue or
repurchase its common stock in excess of $100.0 (plus any proceeds and tax
benefits resulting from stock option exercises and tax benefits resulting from
restricted shares purchased by employees from the Company), pay dividends on its
common stock, and require the Company to meet certain financial measures
regarding fixed charge coverage, leverage and tangible net worth. The Company
had borrowings outstanding under the Credit Facility of $131.9 at January 24,
1999 and $122.5 at January 25, 1998. The weighted average interest rate in 1998
and 1997 was approximately 6.4% and 6.3%, respectively.
The Company's long-term debt obligations consist of capital lease
liabilities at January 24, 1999. Scheduled principal payments and capitalized
lease obligations as of January 24, 1999 are as follows: 1999 -- $1.9; 2000 --
$1.8; 2001 -- $0.3; 2002 -- $0.3; 2003 -- $0.3; 2004 and, thereafter, -- $4.1.
NOTE 8 -- LEASES
Operating Leases: The Company conducts operations primarily in leased
facilities. Store leases are generally for terms of 5 to 20 years. Borders'
leases generally contain multiple three to five-year renewal options which allow
Borders the option to extend the life of the leases up to 25 years beyond the
initial noncancellable term. Walden's leases generally do not contain renewal
options. Certain leases provide for additional rental payments based on a
percentage of sales in excess of a specified base. Also, certain leases provide
for the payment by the Company of executory costs (taxes, maintenance and
insurance).
Lease Commitments: Future minimum lease payments under operating leases at
January 24, 1999 total $222.5 in 1999, $218.8 in 2000, $213.1 in 2001, $203.1 in
2002, $184.4 in 2003, $1,616.2 in all later years and, in the aggregate, total
$2,658.1.
Rental Expenses: A summary of operating lease rental expense and short-term
rentals follows:
1998 1997 1996
---- ---- ----
Rental Expenses:
Minimum rentals..................................... $222.3 $190.3 $163.8
Percentage rentals.................................. 2.3 2.7 3.3
------ ------ ------
Total............................................ $224.6 $193.0 $167.1
====== ====== ======
Capitalized Leases: The Company accounts for one store and certain computer
equipment under capital leases. At January 24, 1999, the Company's commitments
under leases accounted for as capital leases aggregated $8.7.
Lease Financing Facility: The Company has a $250.0 lease financing facility
(the Lease Facility) to finance new stores and other property through operating
leases, which expires in October, 2002. The Lease Facility provides financing to
lessors through loans from a third party lender for up to 95% of a project cost.
It is expected that Lessors will make equity contributions approximating 5% of
each project. Independent of its obligations as lessee, the Company guarantees
payment when due of all amounts required to be paid to the third party lender.
The principal amount guaranteed is limited to approximately 89% of the original
cost of a project so long as the Company is not in default under the lease
relating to such project. There was $123.9 and $157.9 outstanding under the
Lease Facility at January 24, 1999 and January 25, 1998, respectively. In
December, 1998, 17 properties previously financed through the Lease Facility
with a total financed value of $70.9 were permanently financed through operating
leases.
25
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
NOTE 9 -- EMPLOYEE BENEFIT PLANS
Employee Savings Plan: Employees of Borders who meet certain requirements
as to age and service are eligible to participate in the Company's Savings Plan.
The Company's expense related to this plan was $2.5, $2.5 and $2.8 for 1998,
1997 and 1996, respectively.
NOTE 10 -- STOCK-BASED BENEFIT PLANS
Stock Option Plans: The Company has various stock option plans pursuant to
which the Company may grant options to purchase its common stock. The exercise
price of options granted under these plans will generally not be less than the
fair value per share of the Company's common stock at the date of grant with
vesting periods up to six years from grant date and maximum option terms up to
ten years from grant date. At January 24, 1999, the Company has 32.5 million
shares authorized for the grant of stock options under these plans.
The Company has established a compensation philosophy that is designed to
foster a performance-oriented ownership culture. The stock option plans are an
integral part of the Company's employee ownership culture and compensation
program. Options have been granted under the plans to all full-time employees of
the Company and its subsidiaries with 30 days or more of service, consisting of
approximately 16,000 employees. The Company's executive compensation is heavily
oriented toward equity incentives that includes a combination of stock and
options which require at least some annual out-of-pocket investment in the
business on the part of management. Restrictions on the equity incentives
promote a long-term focus on the part of management and maximize retention of
personnel. Management believes the equity incentives have been integral to its
success in meeting operating objectives and reducing employee turnover.
Stock Purchase Plans: The Company has a management stock purchase plan (the
Management Plan) and an employee stock purchase plan (the Employee Plan). Under
the Management Plan, the Company's senior management personnel are required to
use 20%, and may use up to 100%, of their annual incentive bonuses to purchase
restricted shares of the Company's common stock, at a 20% discount from the fair
value of the same number of unrestricted shares of common stock. Restricted
shares of common stock purchased under the Management Plan will generally be
restricted from sale or transfer for three years from date of purchase. The
Employee Plan allows the Company's associates not covered under the Management
Plan to purchase shares of the Company's common stock at a 15% discount from
their fair market value.
The Company recognizes compensation expense for the discount on restricted
shares of common stock purchased under the Management Plan. Such discounts are
recognized as expense on a straight-line basis over the three-year period during
which the shares are restricted from sale or transfer. The Company is not
required to record compensation expense with respect to shares purchased under
the Employee Plan.
26
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
A summary of the information relative to the Company's stock option plans
follows:
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
--------- --------------
(NUMBER OF SHARES
IN THOUSANDS)
STOCK OPTIONS
Outstanding at January 28, 1996............................. 14,704 $ 7.25
Granted................................................... 3,361 16.00
Exercised................................................. 297 5.44
Forfeited................................................. 1,581 9.19
Outstanding at January 26, 1997............................. 16,187 8.92
Granted................................................... 8,304 27.99
Exercised................................................. 1,800 3.43
Forfeited................................................. 1,394 12.63
Outstanding at January 25, 1998............................. 21,297 16.58
Granted................................................... 3,549 27.17
Exercised................................................. 3,759 9.57
Forfeited................................................. 1,901 22.51
Outstanding at January 24, 1999............................. 19,186 19.36
Balance exercisable at:
January 26, 1997.......................................... 2,278 2.70
January 25, 1998.......................................... 2,791 9.51
January 24, 1999.......................................... 5,365 11.87
The weighted average fair values of options at their grant date where the
exercise price equals the market price on the grant date were $11.52, $12.27 and
$7.33 in 1998, 1997 and 1996, respectively.
As permitted, the Company has adopted the disclosure-only option of
Financial Accounting Standards Board Statement No. 123, "Accounting for Stock
Based Compensation" (FAS 123). The pro forma net income had the Company adopted
the fair-value accounting provisions of FAS 123 would have been $72.6, $69.0 and
$50.8 in 1998, 1997, and 1996 respectively. Pro forma diluted and basic earnings
per share would have been $0.88, $0.84 and $0.62 and $0.95, $0.91, and $0.67 in
1998, 1997 and 1996 respectively.
The Black-Scholes option valuation model was used to calculate the fair
market value of the options at the grant date for the purpose of disclosures
required by FAS 123. The following assumptions were used in the calculation:
1998 1997 1996
---- ---- ----
Risk-Free Interest Rate.................................. 4.2-6.8% 5.5-6.8% 5.5-6.5%
Expected Life............................................ 3-10 years 2-10 years 2-10 years
Expected Volatility...................................... 33.3-40.7% 33.3-39.0% 33.3-40.0%
Expected Dividends....................................... 0% 0% 0%
27
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
The following table summarizes the information regarding stock options
outstanding at January 24, 1999 (number of shares in thousands):
OUTSTANDING EXERCISABLE
----------------------------------------------- ----------------------------
RANGE OF NUMBER OF WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
EXERCISE PRICES SHARES REMAINING LIFE EXERCISE PRICE SHARES EXERCISE PRICE
- --------------- --------- ---------------- ---------------- --------- ----------------
$ 3.06-$ 4.64 461 1.3 $ 4.22 461 $ 4.22
$ 6.86-$11.57 7,049 5.2 8.42 3,483 8.03
$14.25-$17.81 1,492 6.0 16.54 555 17.00
$18.63-$27.50 3,253 8.2 23.29 268 23.81
$28.56-$34.06 6,931 8.4 30.22 598 29.98
A summary of the information relative to the Company's stock purchase plans
follows:
NUMBER OF WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES PURCHASE PRICE AT GRANT DATE FMV
--------- ---------------- -----------------
(NUMBER OF SHARES IN THOUSANDS)
STOCK ISSUED UNDER STOCK PURCHASE PLANS
Management Plan
1996.......................................... 48 $ 9.33 $11.67
1997.......................................... 923 18.09 22.62
1998.......................................... 68 19.52 24.40
Employee Plan
1996.......................................... 196 14.00 16.48
1997.......................................... 157 20.06 23.60
1998.......................................... 115 24.78 29.15
NOTE 11 -- FINANCIAL INSTRUMENTS
The Company enters into interest rate swap and collar agreements to reduce
the impact of changes in interest rates on its variable-rate debt. The swap
agreements are contracts to exchange variable-rate for fixed-interest payments
periodically over the life of the agreements without the exchange of the
underlying notional amounts. The collar agreements are contracts to effectively
limit the variability of interest on a portion of the Company's variable-rate
debt. The notional amounts of these agreements are used to measure interest paid
or received and do not represent the amount of exposure to credit loss.
As of January 24, 1999 and January 25, 1998, the Company had the following
interest rate instruments in effect:
JANUARY 24, 1999
----------------------------------------------------
FAIR
NOTIONAL STRIKE MARKET
AMOUNT RATE PERIOD VALUE
-------- ------ ------ ------
Interest Rate Swaps............... $ 33.1(a) 6.6% 9/98-9/03 $(2.1)
$ 33.1(a) 6.9% 9/98-9/03 $(1.6)
Interest Rate Collar.............. $100.0 4.1%-5.5% 1/99-12/00 $ 0.1
---------------------------------------
(a) Notional amount is the U.S. Dollar equivalent of 20.0 British
Pounds. Replaced swaps outstanding at January 25, 1998
28
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
JANUARY 25, 1998
-------------------------------------------------
FAIR
NOTIONAL STRIKE MARKET
AMOUNT RATE PERIOD VALUE
-------- ------ ------ ------
Interest Rate Swaps.................... $33.5(a) 7.2% 11/97-11/00 $(0.6)
$33.5(a) 7.1% 11/97-11/02 $(0.4)
Treasury Lock.......................... $50.0 5.5% 1/98- 8/98 $ 0.7
---------------------------------------
(a) Notional amount is the U.S. Dollar equivalent of 20.0 British
Pounds
In the first month of fiscal 1999, the Company entered into an interest
rate swap with a notional amount of $175.0, which effectively converted variable
rate U.S. dollar-denominated borrowings to a fixed rate of 4.6%. This swap
agreement expires in 1 or 3 years from the date the Company entered into the
agreement, at the option of the counterparty.
NOTE 12 -- SEGMENT INFORMATION
The Company is organized based upon the following operating segments:
domestic Borders stores, international Borders and Books etc. stores, Walden
stores and online retailing through Borders.com. These operating segments have
been aggregated into two reporting segments: stores and Borders.com. Although
stores and Borders.com share a number of characteristics, such as the nature of
the merchandise sold, the methods of merchandise procurement used, and the type
of customer for the merchandise sold, they differ in their method of
distributing merchandise to customers.
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. The Company
evaluates the performance of its segments and allocates resources to them based
on anticipated future contribution.
1998 1997 1996
---- ---- ----
Sales:
Stores.................................................... $2,590.4 $2,266.0 $1,958.8
Borders.com............................................... 4.6 -- --
-------- -------- --------
Total sales............................................... 2,595.0 2,266.0 1,958.8
======== ======== ========
Interest expense:
Stores.................................................... 13.5 6.9 7.0
Borders.com............................................... 2.7 0.3 --
-------- -------- --------
Total interest expense.................................... 16.2 7.2 7.0
======== ======== ========
Income tax expense (benefit):
Stores.................................................... 65.2 54.3 38.2
Borders.com............................................... (6.2) (3.7) --
-------- -------- --------
Total income tax expense.................................. 59.0 50.6 38.2
======== ======== ========
Depreciation and amortization expense:
Stores.................................................... 64.8 54.8 42.9
Borders.com............................................... 1.9 -- --
-------- -------- --------
Total depreciation and amortization expense............... 66.7 54.8 42.9
======== ======== ========
Net income (loss):
Stores.................................................... 102.6 86.2 57.9
Borders.com............................................... (10.5) (6.0) --
-------- -------- --------
Total net income.......................................... 92.1 80.2 57.9
======== ======== ========
29
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
1998 1997
---- ----
Total assets:
Stores.................................................... $1,718.4 $1,509.4
Borders.com............................................... 48.2 25.5
-------- --------
Total assets.............................................. 1,766.6 1,534.9
======== ========
Capital expenditures:
Stores.................................................... 168.2 98.7
Borders.com............................................... 11.6 14.9
-------- --------
Total capital expenditures................................ 179.8 113.6
======== ========
NOTE 13 -- UNAUDITED QUARTERLY FINANCIAL DATA
FISCAL 1998 QUARTER ENDED
--------------------------------------
APRIL JULY OCTOBER JANUARY
----- ---- ------- -------
(DOLLARS IN MILLIONS EXCEPT
PER SHARE AMOUNTS)
SALES....................................................... $545.3 $546.0 $558.3 $945.4
Cost of merchandise sold (includes occupancy)............... 405.5 406.1 412.9 634.9
Operating Income............................................ 9.0 7.9 3.2 147.2
Net Income (loss)........................................... 3.8 2.4 (0.8) 86.7
Diluted earnings (loss) per common share.................... 0.05 0.03 (0.01) 1.06
Basic earnings (loss) per common share...................... 0.05 0.03 (0.01) 1.13
FISCAL 1997 QUARTER ENDED
--------------------------------------
APRIL JULY OCTOBER JANUARY
------ ------ ------- -------
SALES....................................................... $463.6 $466.3 $477.3 $858.8
Cost of merchandise sold (includes occupancy)............... 350.8 351.1 355.1 577.3
Operating Income............................................ 1.8 2.3 2.2 131.7
Net Income.................................................. 0.4 0.5 0.4 78.9
Diluted earnings per common share 0.00 0.01 0.00 0.96
Basic earnings per common share............................. 0.01 0.01 0.01 1.05
Earnings per share amounts for each quarter are required to be computed
independently and may not equal the amount computed for the total year.
30
32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Borders Group, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of cash flows and of
stockholders' equity present fairly, in all material respects, the financial
position of Borders Group, Inc. and its subsidiaries at January 24, 1999 and
January 25, 1998, and the results of their operations and their cash flows for
each of the three years in the period ended January 24, 1999, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Bloomfield Hills, Michigan
March 8, 1999
31
33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
32
34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information regarding the directors and
executive officers of the Company:
NAME AGE POSITION
---- --- --------
Robert F. DiRomualdo........... 54 Chairman, Chief Executive Officer, President and Director
George R. Mrkonic.............. 46 Vice Chairman and Director
Bruce A. Quinnell.............. 50 Vice Chairman
Vincent E. Altruda............. 49 President, International
Thomas D. Carney............... 52 Vice President, General Counsel and Secretary
Richard L. Flanagan............ 46 President, Borders Stores
Timothy J. Hopkins............. 45 President, Merchandising and Distribution
Richard D. Joseph.............. 42 Chairman and Chief Executive Officer, Borders (UK) Ltd.
Kenneth E. Scheve.............. 52 Senior Vice President, Chief Financial Officer and Treasurer
Ronald S. Staffieri............ 49 President, Waldenbooks Stores
Cedric J. Vanzura.............. 35 President, Borders Online, Inc.
Kathryn L. Winkelhaus.......... 43 President, Borders Group Stores
Peter R. Formanek.............. 55 Director
Victor L. Lund................. 51 Director
Dr. Edna Greene Medford........ 47 Director
Larry Pollock.................. 51 Director
Leonard A. Schlesinger......... 46 Director
The Company's Certificate provides, among other things, that Directors will
be elected annually for one year terms. Directors hold office until their
successors are elected and qualified.
Robert F. DiRomualdo has served as the Chairman and a Director of the
Company since its formation in August 1994. Mr. DiRomualdo also served as the
Chief Executive Officer of the Company until November, 1998, and became
President and Chief Executive Officer in April 1999. Prior to the formation of
the Company, Mr. DiRomualdo was President and Chief Executive Officer of Borders
from January 1989 to February 1994. From February 1994 to August 1994, Mr.
DiRomualdo was responsible for overall operations at Borders and Walden.
George R. Mrkonic has served as the Vice Chairman of the Company since
December 1994, and a Director since its formation in August 1994. He has also
served as President of the Company from December 1994 until January 1997. Prior
to joining the Company, Mr. Mrkonic served as Executive Vice President,
Specialty Retailing Group of Kmart Corporation, where he had overall
responsibility for the specialty retailing operations of Kmart including, among
others, Borders and Walden, from November 1990 to November 1994. Mr. Mrkonic is
also a director of Champion Enterprises, Inc., a manufacturer and seller of
manufactured homes and mid-sized buses and Syntel, Inc., a computer software and
development company, and Cheap Tickets, Inc., a retail seller of discount
tickets for domestic leisure air travel.
Bruce A. Quinnell has served as Vice Chairman of the Company since April
1999. Mr. Quinnell served as President and Chief Operating Officer of the
Company from February 1997 to April 1999. Mr. Quinnell served as President and
Chief Operating Officer of Walden from November 1994 to February 1997. From
January 1994 to November 1994, Mr. Quinnell held the position of Executive Vice
President and Chief Operating Officer of Walden. Prior to joining Walden, Mr.
Quinnell was Executive Vice President, Finance and Administration for PACE
Membership Warehouse, Inc., a former subsidiary of Kmart, from October 1992 to
January 1994. From September 1987 until October 1992, Mr. Quinnell was Chief
Financial Officer of Dollar General Corp., a general merchandise retailer.
33
35
Vincent E. Altruda has served as President of the Company's international
operations since December, 1997. From February 1997 through December 1997, Mr.
Altruda served as Senior Vice President of Borders Store Development. From
February 1995 through February 1997, Mr. Altruda served as Senior Vice President
of Borders Store Operations. From December 1992 through February 1995, Mr.
Altruda served as Vice President of Borders Store Operations.
Thomas D. Carney has been Vice President, General Counsel and Secretary of
the Company since December 1994. For more than five years prior to joining the
Company, Mr. Carney was a Partner at the law firm of Dickinson, Wright, Moon,
Van Dusen & Freeman in Detroit, Michigan.
Richard L. Flanagan has served as President of Borders Stores since
February 1997. From February 1994 until February 1997, Mr. Flanagan served as
President and Chief Operating Officer of Borders. Prior thereto, Mr. Flanagan
served as Chief Financial Officer of Borders from April 1991 to February 1994.
From 1987 until April 1991, Mr. Flanagan was Vice President and Chief Financial
Officer of Ellwood Group, Inc., a steel manufacturer.
Timothy J. Hopkins has served as President of Merchandising and
Distribution since February 1997. From 1995 to February 1997, Mr. Hopkins served
as Sr. Vice President, Merchandising and Marketing for Walden. Prior to joining
the company, Mr. Hopkins served as Vice President, International and also Vice
President, Merchandising with QVC Network from 1992 through 1995.
Richard D. Joseph is the Chairman and Chief Executive Officer of Borders
(UK) Ltd. and served in executive positions with Books etc. since he co-founded
the company in 1981.
Kenneth E. Scheve has served as Senior Vice President, Chief Financial
Officer and Treasurer of Borders Group Inc. since February 1997. From 1994
through February 1997, Mr. Scheve served as Vice President, Finance for Walden.
Prior to joining the company, Mr. Scheve served as Director -- Internal Audit,
Specialty Retailing Group of Kmart Corporation from 1991 through 1994.
Ronald S. Staffieri has served as President of Waldenbooks Stores since
April 1999. Mr. Staffieri served as Chief Administrative Officer of the Company
from January 1998 to April 1999. From July 1997 to January 1998, Mr. Staffieri
served as President of Borders Outlet. Prior to joining the Company Mr.
Staffieri was President and Chief Executive Officer of Lil' Things, a chain of
children's superstores, from 1994 until January of 1997. From 1990 until 1994,
Mr. Staffieri served as President and Chief Executive Officer of Kaybee Toy
Stores, a division of Melville Corporation, and as a Vice President of Melville
Corporation and a member of its Operating Committee.
In June of 1997, Lil' Things filed a voluntary petition for reorganization
under Chapter 11 of the United States Bankruptcy Code and the business was
liquidated in December of 1997.
Cedric J. Vanzura has served as President of Borders Online, Inc. since
April 1999. Mr. Vanzura served as Senior Vice President of Electronic Commerce
and Fulfillment Services from February 1998 to April 1999. From August 1996 to
February 1998, Mr. Vanzura served as Vice President, Planning and Finance, and
Treasurer. From November 1994 until August 1996. Mr. Vanzura served as Vice
President, Group Planning and Resource Management. From May 1994 to November
1994, Mr. Vanzura held the position of Director, Business Development, Specialty
Retail Group of Kmart. Prior to joining Kmart, from 1990 to 1994, Mr. Vanzura
was a Senior Consultant and then a Manager, Management Consulting, at Deloitte &
Touche Management Consulting.
Kathryn L. Winkelhaus has served as President of Borders Group Stores since
April 1999. Ms. Winkelhaus served as President of Waldenbooks Stores from
February 1997 to April 1999. From 1992 through 1997, Ms. Winkelhaus served as
Sr. Vice President, Store Operations for Walden. Ms. Winkelhaus has held several
positions of increasing levels of responsibility in store operations since
joining Walden in 1979.
Peter R. Formanek has served as a director of the Company since August,
1995. Mr. Formanek was co-founder of Autozone Inc., a retailer of aftermarket
automotive parts, and served as President and Chief Operating Officer of
Autozone, Inc. from 1986 until his retirement in May, 1994. He currently is a
director of The Perrigo Company, a manufacturer of store brand over-the-counter
drug and personal care products and vitamins, and Gart Sports, Inc., a retailer
of sporting goods.
34
36
Victor L. Lund has served as a director of the Company since July, 1997.
Mr. Lund has served as Chairman of the Board of American Stores Company, a food
and drug retailer, since June 1995 and as its Chief Executive Officer since
August 1992. He was President of American Stores Company from August 1992 until
June 1995. Mr. Lund also serves as a director of American Stores Company.
Dr. Edna Greene Medford became a director of the Company in September,
1998. Dr. Medford is an Associate Professor of History and a former Director of
the Undergraduate Program in History at Howard University.
Larry Pollock has served as a director of the Company since August, 1995.
Since September, 1998, Mr. Pollock has served as President and Chief Executive
Officer of HomePlace, Inc., a chain of home furnishings and housewares
superstores, which he joined in January of 1997 as Executive Vice President and
Chief Operating Officer. From 1994 until 1996, he served as the President, Chief
Operating Officer and a director of Zale Corporation, a jewelry retailer. From
1990 through 1993, Mr. Pollock served as President and Chief Operating Officer
of Karten's Jewelers, Inc., a New England jewelry chain. Mr. Pollock is a
partner of Independent Group L.P., a privately-held radio broadcasting company
based in Cleveland, Ohio.
In January of 1998, HomePlace, Inc. filed a voluntary petition in the
United States Bankruptcy Court for the District of Delaware for reorganization
under Chapter 11 of the Bankruptcy Code.
Leonard A. Schlesinger has served as a director of the Company since
August, 1995. Mr. Schlesinger became Senior Vice President for Development of
Brown University and a professor of sociology and public policy in October 1998.
Prior to joining Brown University, he served as a faculty member at the Harvard
Business School for more than five years, most recently as the George Fisher
Baker, Jr. Professor of Business Administration. Mr. Schlesinger serves as a
director of The Limited, Inc., a specialty retailer, Pegasystems, Inc., a
customer relationship management software company, and GC Companies, Inc., a
motion picture exhibition company.
Officers of the Company are elected on an annual basis and serve at the
discretion of the Board of Directors.
COMMITTEES
The Audit Committee was established for the purpose of reviewing and making
recommendations regarding the Company's employment of independent accountants,
the annual audit of the Company's financial statements and the Company's
internal controls, accounting practices and policies. The current members of the
Audit Committee are Mr. Lund and Dr. Medford.
The Compensation Committee was established for the purpose of making
recommendations to the Board of Directors regarding the nature and amount of
compensation for executive officers of the Company. The Compensation Committee
also administers certain of the Company's employee benefit plans. The current
members of the Compensation Committee are Mr. Formanek, Mr. Pollock, and Mr.
Schlesinger.
COMPENSATION OF DIRECTORS
For service as a director during 1998, each director who is not an employee
of the Company received 2,000 restricted shares of Common Stock (the "Restricted
Shares") paid at the beginning of the relevant calendar year, subject to a
maximum value of $75,000. The restrictions on such Restricted Shares will
generally lapse one year from the date of grant.
On the date of each of the Company's Annual Meetings, each eligible
director receives an option to purchase 5,000 shares of common stock of the
Company. The exercise price of options granted under the Plan is the fair market
value on the date of grant. To be eligible to receive option grants at the
Annual Meetings to be held in 1999 and thereafter, a director generally must
have held at least 20,000 shares of common stock, for the one-year period prior
to the date of the meeting.
Each option vests and becomes exercisable on the third anniversary of the
date of grant except that (i) an option is forfeited in its entirety if the
director ceases, at any time prior to his or her exercise of the option, to hold
the minimum number of shares that he or she was required to hold for the one
year period prior to the grant to be eligible therefor; (ii) all outstanding
options vest and become immediately exercisable in the event of a change in
35
37
control of the Company, and (iii) all options held by a director who has served
as a director for six years or more vest and become immediately exercisable as
of the date upon which he or she ceases to serve as a director.
An option may be exercised only during the period that the optionee serves
as a director of the Company or within three months after termination of such
service and only if it is vested and has not expired at the time of termination.
However, if the director ceases to serve as such as a result of death or if the
individual has served as a director of the Company for more than 10 years, such
three month period is extended to three years.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by
reference to the information under the caption "Executive Compensation" in the
Proxy Statement for the Company's May 13, 1999 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 for the Company's May 13, 1999 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The information required by this Item 13 is incorporated herein by
reference to the information under the headings "Settlement Agreement" and
"Certain Transactions and Indebtedness of Management" in the Proxy Statement for
the Company's May 13, 1999 Annual Meeting of Stockholders.
36
38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith unless otherwise indicated:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1(6) Agreement and plan of Merger dated as of April 8, 1997
between Michigan Borders Group, Inc. and Borders Group, Inc.
3.1 Restated Articles of Incorporation of Borders Group, Inc.
3.3(6) Bylaws of Borders Group, Inc.
3.4 First Amendment to Bylaws of Borders Group, Inc.
3.5 Second Amendment to Bylaws of Borders Group, Inc.
3.6 Third Amendment to Bylaws of Borders Group, Inc.
10.1(1) Stockholder Agreement dated as of February 17, 1995, between
Borders Group, Inc. and Kmart Corporation.
10.2(5) Form of Severance Agreement.
10.3(6) Borders Group, Inc. Stock Option Plan.
10.4(8) First Amendment to the Borders Group, Inc. Stock Option
Plan.
10.5 Second Amendment to the Borders Group, Inc. Stock Option
Plan.
10.6 Third Amendment to the Borders Group, Inc. Stock Option
Plan.
10.7(3) Tax Allocation Agreement dated May 24, 1995 between Borders
Group, Inc. and Kmart Corporation.
10.8(3) Lease Guaranty Agreement dated May 24, 1995 between Borders
Group, Inc. and Kmart Corporation.
10.9(2) Borders Group, Inc. Management Stock Purchase Plan.
10.10(8) First Amendment to the Borders Group, Inc. Management Stock
Purchase Plan.
10.11(9) Second Amendment to the Borders Group, Inc. Management Stock
Purchase Plan.
10.12 Third Amendment to the Borders Group, Inc. Management Stock
Purchase Plan.
10.13(2) Borders Group, Inc. Employee Stock Purchase Plan.
10.14(4) First Amendment to the Borders Group, Inc. Employee Stock
Purchase Plan.
10.15 Second Amendment to the Borders Group, Inc. Employee Stock
Purchase Plan.
10.16 Third Amendment to the Borders Group, Inc. Employee Stock
Purchase Plan.
10.17(6) Borders Group, Inc. Annual Incentive Bonus Plan.
10.18 First Amendment to the Borders Group, Inc. Annual Incentive
Plan.
10.19(2) Borders Group, Inc. Director Stock Plan.
10.20(9) First Amendment to the Borders Group, Inc. Director Stock
Plan.
10.21(9) Second Amendment to the Borders Group, Inc. Director Stock
Plan.
10.22(7) Amended and Restated Multicurrency Credit Agreement among
Borders Group, Inc., its subsidiaries and Parties thereto.
10.23(7) Amended and Restated Participation Agreement among Borders
Group, Inc., its subsidiaries and Parties thereto.
10.24(7) Appendix A to Participation Agreement among Borders Group,
Inc., its subsidiaries and Parties thereto.
10.25(7) Amended and Restated Credit Agreement among Borders Group,
Inc., its subsidiaries and Parties thereto.
10.26(7) Amended and Restated Guarantee Credit Agreement among
Borders Group, Inc., its subsidiaries and Parties thereto.
10.27(5) Agreement dated April 19, 1996, between Borders Group, Inc.
and Richard L. Flanagan.
37
39
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.28(5) Agreement dated April 19, 1996, between Borders Group, Inc.
and Bruce A. Quinnell.
10.29(10) Borders Group, Inc. Stock Option Plan for International
Employees.
10.30 1998 Borders Group, Inc. Stock Option Plan.
10.31 Agreement dated November 16, 1998, between Borders Group,
Inc. and Robert F. DiRomualdo.
10.32 Agreement dated November 16, 1998, between Borders Group,
Inc. and George R. Mrkonic.
10.33 Agreement dated November 16, 1998, between Borders Group,
Inc. and Philip M. Pfeffer.
10.34 Participation Agreement dated as of December 1, 1998 by and
among Borders Group, Inc., Borders, Inc. and Parties
thereto.
10.35 Agreement dated April 20, 1999, between Borders Group, Inc.
and Philip M. Pfeffer.
18.1(3) Letter of PricewaterhouseCoopers LLP dated July 17, 1995.
21.1 Subsidiaries of Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule.
99.1 Cautionary Statement under the Private Securities Litigation
Reform Act of 1995 -- "Safe Harbor" for Forward-Looking
Statements.
- -------------------------
(1) Incorporated by reference from the Company's Registration Statement on Form
S-4 (File No. 33-90016).
(2) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-90918).
(3) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended April 23, 1995 (File No. 1-13740).
(4) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-80643).
(5) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended January 28, 1996 (File No. 1-13740).
(6) Incorporated by reference from the Company's Proxy Statement dated April 9,
1997 of Borders Group, Inc. (File No. 1-13740).
(7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended October 26, 1997 (File No. 1-13740).
(8) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended October 22, 1995 (File No. 1-13740).
(9) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended January 25, 1998 (File No. 1-13740).
(10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended July 26, 1998 (File No. 1-13740).
(b) Financial Statement Schedules:
All financial statement schedules are omitted as they are not applicable or
the required information is included in the consolidated financial statements of
the Registrant.
(c) Reports on Form 8-K:
One report was filed on Form 8-K under Item 5 -- Other Events which stated
the time and place of the Company's Annual Meeting of Stockholders. This report
was dated and filed on March 5, 1999 (File No. 1-13740).
38
40
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/ ROBERT F. DIROMUALDO
------------------------------------
Robert F. DiRomualdo
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.
NAME TITLE DATE
---- ----- ----
/s/ ROBERT F. DIROMUALDO Chairman, Chief Executive Officer, April 26, 1999
- --------------------------------------------- President and Director
Robert F. DiRomualdo
/s/ GEORGE R. MRKONIC Vice Chairman and Director April 26, 1999
- ---------------------------------------------
George R. Mrkonic
/s/ KENNETH E. SCHEVE Senior Vice President, Chief April 26, 1999
- --------------------------------------------- Financial Officer and Treasurer
Kenneth E. Scheve (Principal Financial and Accounting
Officer)
/s/ PETER R. FORMANEK Director April 26, 1999
- ---------------------------------------------
Peter R. Formanek
/s/ VICTOR L. LUND Director April 26, 1999
- ---------------------------------------------
Victor L. Lund
/s/ DR. EDNA GREENE MEDFORD Director April 26, 1999
- ---------------------------------------------
Dr. Edna Greene Medford
/s/ LARRY POLLOCK Director April 26, 1999
- ---------------------------------------------
Larry Pollock
/s/ LEONARD A. SCHLESINGER Director April 26, 1999
- ---------------------------------------------
Leonard A. Schlesinger
39
41
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1(6) Agreement and plan of Merger dated as of April 8, 1997
between Michigan Borders Group, Inc. and Borders Group, Inc.
3.1 Restated Articles of Incorporation of Borders Group, Inc.
3.3(6) Bylaws of Borders Group, Inc.
3.4 First Amendment to Bylaws of Borders Group, Inc.
3.5 Second Amendment to Bylaws of Borders Group, Inc.
3.6 Third Amendment to Bylaws of Borders Group, Inc.
10.1(1) Stockholder Agreement dated as of February 17, 1995, between
Borders Group, Inc. and Kmart Corporation.
10.2(5) Form of Severance Agreement.
10.3(6) Borders Group, Inc. Stock Option Plan.
10.4(8) First Amendment to the Borders Group, Inc. Stock Option
Plan.
10.5 Second Amendment to the Borders Group, Inc. Stock Option
Plan.
10.6 Third Amendment to the Borders Group, Inc. Stock Option
Plan.
10.7(3) Tax Allocation Agreement dated May 24, 1995 between Borders
Group, Inc. and Kmart Corporation.
10.8(3) Lease Guaranty Agreement dated May 24, 1995 between Borders
Group, Inc. and Kmart Corporation.
10.9(2) Borders Group, Inc. Management Stock Purchase Plan.
10.10(8) First Amendment to the Borders Group, Inc. Management Stock
Purchase Plan.
10.11(9) Second Amendment to the Borders Group, Inc. Management Stock
Purchase Plan.
10.12 Third Amendment to the Borders Group, Inc. Management Stock
Purchase Plan.
10.13(2) Borders Group, Inc. Employee Stock Purchase Plan.
10.14(4) First Amendment to the Borders Group, Inc. Employee Stock
Purchase Plan.
10.15 Second Amendment to the Borders Group, Inc. Employee Stock
Purchase Plan.
10.16 Third Amendment to the Borders Group, Inc. Employee Stock
Purchase Plan.
10.17(6) Borders Group, Inc. Annual Incentive Bonus Plan.
10.18 First Amendment to the Borders Group, Inc. Annual Incentive
Plan.
10.19(2) Borders Group, Inc. Director Stock Plan.
10.20(9) First Amendment to the Borders Group, Inc. Director Stock
Plan.
10.21(9) Second Amendment to the Borders Group, Inc. Director Stock
Plan.
10.22(7) Amended and Restated Multicurrency Credit Agreement among
Borders Group, Inc., its subsidiaries and Parties thereto.
10.23(7) Amended and Restated Participation Agreement among Borders
Group, Inc., its subsidiaries and Parties thereto.
10.24(7) Appendix A to Participation Agreement among Borders Group,
Inc., its subsidiaries and Parties thereto.
10.25(7) Amended and Restated Credit Agreement among Borders Group,
Inc., its subsidiaries and Parties thereto.
10.26(7) Amended and Restated Guarantee Credit Agreement among
Borders Group, Inc., its subsidiaries and Parties thereto.
10.27(5) Agreement dated April 19, 1996, between Borders Group, Inc.
and Richard L. Flanagan.
10.28(5) Agreement dated April 19, 1996, between Borders Group, Inc.
and Bruce A. Quinnell.
10.29(10) Borders Group, Inc. Stock Option Plan for International
Employees.
40
42
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.30 1998 Borders Group, Inc. Stock Option Plan.
10.31 Agreement dated November 16, 1998, between Borders Group,
Inc. and Robert F. DiRomualdo.
10.32 Agreement dated November 16, 1998, between Borders Group,
Inc. and George R. Mrkonic.
10.33 Agreement dated November 16, 1998, between Borders Group,
Inc. and Philip M. Pfeffer.
10.34 Participation Agreement dated as of December 1, 1998 by and
among Borders Group, Inc., Borders, Inc. and Parties
thereto.
10.35 Agreement dated April 20, 1999, between Borders Group, Inc.
and Philip M. Pfeffer.
18.1(3) Letter of PricewaterhouseCoopers LLP dated July 17, 1995.
21.1 Subsidiaries of Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule.
99.1 Cautionary Statement under the Private Securities Litigation
Reform Act of 1995 -- "Safe Harbor" for Forward-Looking
Statements.
- -------------------------
(1) Incorporated by reference from the Company's Registration Statement on Form
S-4 (File No. 33-90016).
(2) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-90918).
(3) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended April 23, 1995 (File No. 1-13740).
(4) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-80643).
(5) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended January 28, 1996 (File No. 1-13740).
(6) Incorporated by reference from the Company's Proxy Statement dated April 9,
1997 of Borders Group, Inc. (File No. 1-13740).
(7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended October 26, 1997 (File No. 1-13740).
(8) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended October 22, 1995 (File No. 1-13740).
(9) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended January 25, 1998 (File No. 1-13740).
(10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended July 26, 1998 (File No. 1-13740).
(b) Financial Statement Schedules:
All financial statement schedules are omitted as they are not applicable or
the required information is included in the consolidated financial statements of
the Registrant.
(c) Reports on Form 8-K:
One report was filed on Form 8-K under Item 5 -- Other Events which stated
the time and place of the Company's Annual Meeting of Stockholders. This report
was dated and filed on March 5, 1999 (File No. 1-13740).
41