UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(MARK ONE)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
January 30,
2010
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to .
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Commission File Number 1-13740
BORDERS GROUP, INC.
(Exact name of registrant as
specified in its charter)
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Michigan
(State or other jurisdiction of
incorporation or organization)
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38-3294588
(I.R.S. Employer
Identification No.)
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100 Phoenix Drive, Ann Arbor, Michigan
(Address of principal executive
offices)
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48108
(Zip code)
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(734) 477-1100
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the act:
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Title of Class
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Name of Exchange on which registered
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Common Stock
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New York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the
registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $239,067,155
based upon the closing market price of $3.97 per share of Common
Stock on the New York Stock Exchange as of August 1, 2009.
Number of shares of Common Stock outstanding as of
March 23, 2010: 59,812,407
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement for the Annual
Meeting of Stockholders are incorporated by reference into
Part III.
BORDERS
GROUP, INC. INDEX
PART I
Forward-Looking
Statements
This report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
One can identify these forward-looking statements by the use of
words such as projects, expect,
estimated, working toward, going
forward, continuing, planning,
returning, possibility,
opportunity, guidance, goal,
will, may, intend,
anticipates, and other words of similar meaning. One
can also identify them by the fact that they do not relate
strictly to historical or current facts. These statements are
likely to address matters such as our future financial condition
and performance (including earnings per share, the profitability
of Waldenbooks, liquidity, cash flows, debt levels, market share
growth and other sales information, inventory levels and capital
expenditures), our cost reduction initiatives and plans for
store closings and the expansion of product categories,
including eBook content.
These statements are subject to risks and uncertainties that
could cause actual results and plans to differ materially from
those included in our forward-looking statements. These risks
and uncertainties include, but are not limited to, consumer
demand for our products, particularly during the holiday season,
which is believed to be related to general economic and
geopolitical conditions, competition and other factors; the
availability of adequate capital, including vendor credit, to
fund our operations and to carry out our strategic plans;
adverse litigation results or other claims, and the performance
of our information technology systems.
Although it is not possible to predict or identify all such
factors, they may include the risks discussed in
Item 1A. Risk Factors. We do not
undertake any obligation to update forward-looking statements.
General
Borders Group, Inc., through our subsidiaries including Borders,
Inc. (Borders) (individually and collectively,
we, our or the Company), is
an operator of book, music and movie superstores and mall-based
bookstores. At January 30, 2010, we operated 511
superstores under the Borders name, including 508 in the United
States and three in Puerto Rico. We also operated 175 mall-based
and other small format bookstores, including stores operated
under the Waldenbooks, Borders Express and Borders Outlet names,
as well as 29 Borders-branded airport stores. In addition, we
owned and operated United Kingdom-based Paperchase Products
Limited (Paperchase), a designer and retailer of
stationery, cards and gifts. As of January 30, 2010,
Paperchase operated 85 stores, primarily in the United Kingdom,
and 333 Paperchase shops are in Borders superstores.
In addition, we operate a proprietary
e-commerce
Web site, www.Borders.com, which was launched in May 2008.
On June 10, 2008, we sold bookstores that we had owned and
operated in Australia, New Zealand and Singapore. On
September 21, 2007, we sold bookstores that we had owned
and operated in the U.K. and Ireland. See
Note 15 Discontinued Operations for
further discussion of our disposal of these bookstore operations.
Business
Strategy
Our business strategy is designed to address the most
significant opportunities and challenges facing our Company. In
particular, our challenges include commoditization in our
primary product categories and an extremely competitive
marketplace (including both store-based and online competitors),
product formats that are evolving from physical formats to
digital formats, and our own loss of market share. These
factors, among others, have contributed to declines in our
comparable store sales measures and in our sales per square foot
measures over the last several years. These declines have, in
turn, negatively impacted profitability.
1
The U.S. book retailing industry is a mature industry, and
has experienced little or no growth in recent years. Books
represent our primary product category in terms of sales. Rather
than opening new book superstores, we believe that there is
greater near-term opportunity in improving the productivity of
existing superstores and in enhancing Internet-based sales
channels. In particular, we see potential in combining the
greater selection offered by Internet retailing with the
inviting atmosphere of a physical store.
We believe that Web-based retailing will continue to increase in
popularity and market share as a distribution method for
physical book, music, and movie merchandise. In addition, the
Internet has enabled changes in the formats of many of the
product categories we offer. Sales of music in the physical
compact disc and movies in the DVD format, for example, have
declined over the past several years, as consumers have
increasingly turned to digital downloads of music and movies.
This trend, which we expect to continue, is also beginning to
manifest itself in the book category with the increasing
popularity of electronic book readers (eReaders).
Although sales of electronic books (eBooks)
currently represent a small percentage of total book sales, they
are expected to increase significantly over the next several
years. The shift toward digital formats represents an
opportunity for us as we continue to strengthen our Web-based
capabilities, both through Borders.com and through strategic
partnerships.
Our physical stores, however, remain integral to our future
success. The environment in which our stores operate is
intensely competitive and includes not only Internet-based
retailers and book superstore operators, but also mass merchants
and other non-bookseller retailers. Because of this, the
industry has experienced significant price competition over the
last several years, which has decreased our gross margin
percentages. We anticipate that these trends will continue,
rewarding those who can differentiate themselves by offering a
distinctive customer experience, and who can operate
efficiently. Therefore, we remain dedicated to the operational
improvement of our stores and offering our customers a rich
shopping experience in a relaxing, enjoyable atmosphere.
In order to focus on our existing superstores business, we have
effectively curtailed our new store program. In addition, we
continue to evaluate the performance of existing stores, and
additional store closures could occur in cases where our store
profitability goals are not met. During 2009 we closed 212
Waldenbooks Specialty Retail stores and ended the year with 175
small format stores. We believe that the Company has the
potential to operate mall-based stores profitably, and to that
end have signed short-term lease agreements for desirable
locations, which enables us to negotiate rents that are
responsive to the then-current sales environment. We will,
however, continue to close stores that do not meet our
profitability goals, a process which could result in additional
future asset impairments and store closure costs.
The principal components of our strategic plan are as follows:
Restore the
financial health and profitability of the
Company. We
believe that fiscal 2010 will continue to be challenging for
retailers due to continued uncertainty in the economic
environment, and as a consequence we will maintain our focus on
maximizing cash flow, reducing debt, conserving capital, tightly
managing expenses and improving profitability. In addition, we
will continue to reduce working capital needs by further driving
inventory productivity, thus improving cash flow and lowering
supply chain costs.
Acquire, engage
and retain
customers. We are
focused on the following key objectives:
Improve the
in-store
experience. During
the fourth quarter of 2009, we invested in inventory within our
key book categories and plan to continue to maintain these new
in-stock percentages. Our goal is to have the right titles in
the right stores at the right time to meet our customers
needs. We are also reallocating our payroll dollars from back
office tasks to the sales floor in order to improve the shopping
experience for our customers. We expect to continue to enhance
our in-store boutique shops, including our shops for kids, teens
and teachers. These shops have a distinct look and feel,
including unique signage, fixtures and other elements which we
expect to increase sales growth and profitability. In addition,
we will continue with our in-stock guarantee, which was launched
in the fourth quarter of 2009 and which is helping to retain
sales that would have been lost to competitors. This program
allows any customer who cannot find a title that is available at
Borders.com in their local store to have it shipped to their
home with no shipping charges.
2
Leverage Borders
Rewards. We
continue to develop our loyalty program, Borders Rewards. To
date, a total of approximately 37 million members have
signed up for the program. We will continue to focus on growing
membership and increasing the profitability of the program, on
driving revenue through partnerships with other organizations,
and increasing sales by employing customer data to tailor
promotions that meet specific customer needs and interests. To
achieve these results we are redesigning the Borders Rewards
program to facilitate a higher level of participation and value
for our customers. Although we will continue to use Borders
Rewards to drive traffic into our stores, we will also invest in
additional marketing programs to acquire new customers.
Become a
community gathering
place. The
commoditization of our primary product categories will continue,
and as a result we must be more than a bookstore. We plan to
strengthen our position as a community gathering place, hosting
customer events including author and celebrity signings, local
events, educator appreciation weekends, and other community
driven events that are of interest to our customers and which
are expected to drive sales.
Leverage
Borders.com and the digital
revolution. We
expect to use emerging technologies across all channels to
attract customers and deliver a valued experience which we
anticipate will drive sales. For instance, we are working to
strengthen Borders.com as a way to engage customers who share
our passion for our products. In addition, we will become a
device-neutral, content-focused digital book provider, as we
believe there is opportunity to occupy the niche of
neutral expert for our customers, and we plan to
offer a wide variety of eReaders for sale in our stores. This
will be done through the introduction of a new shop in our
stores called Area-e, where multiple eReaders will
be available for sale. We will enhance the Area-e experience
through our partnership with Kobo, through which we plan to
launch our digital bookstore on Borders.com during the second
quarter of 2010. Kobo, Inc. is a global eReading service that is
the newly named spin-off of Toronto-based Indigo
Books & Music Inc.s Shortcovers.
Create a winning,
high-performance company
culture. We are
focused on customer satisfaction and we will leverage our
knowledgeable associates in order to drive improved sales,
profitability and shareholder value.
Segment
Information
Our business is organized based upon the following reportable
segments: Borders Superstores (including Borders.com, which
launched in May 2008), Waldenbooks Specialty Retail stores and
International stores (including Borders and Paperchase stores).
Corporate consists of the unallocated portion of certain
corporate governance and corporate incentive costs. See
Note 14 Segment Information in the
notes to consolidated financial statements for further
information relating to these segments.
Borders
Superstores
Borders is a premier operator of book, music and movie
superstores in the United States. In 2009, we achieved average
sales per superstore of $4.3 million and sales per square
foot of $173 across the chain. Borders superstores offer
customers a vast assortment of books, music and movies, gifts
and stationery, superior customer service and an inviting and
comfortable environment designed to encourage browsing. Borders
superstores average 24,800 square feet in size and on
average, carry 82,000 book titles, with individual store
selections ranging from 53,000 titles to 141,000 titles, across
numerous categories, including many
hard-to-find
titles. In 2009, we did not open any new Borders superstores.
As of January 30, 2010, the majority of Borders superstores
were in a book, music and movie format. During 2008, we
reallocated floor space in our stores in order to reduce the
floor space allocated to the music category. This primarily
resulted in additional square footage devoted to gifts and
stationery and books. We continued to reduce the space allocated
to music during 2009, as well as movies, and increased the space
devoted to an expanded assortment of childrens books and
other growth categories within books, gifts and stationery and
non-book products such as teaching materials and educational
toys and games. We have placed stores into four tiers, with
stores in the highest-performing tier maintaining their current
music and
3
movie title count (up to 18,300 titles of music and up to 10,400
titles of movies), and stores in the
lowest-performing
tier reducing their title count to the top 500 titles in each
category.
In 2005, we began to install Paperchase shops in all new and
most remodeled superstores as part of a long-term plan to
enhance the variety and distinctiveness of our gifts and
stationery offering. In addition, we devote approximately
1,800 square feet to a cafe within virtually all Borders
superstores. We have a licensing agreement with Seattles
Best Coffee, a wholly-owned subsidiary of Starbucks Corporation,
through which we operate Seattles Best Coffee-branded
cafes within all of our existing Borders superstores in the
U.S. and new stores as they are opened.
We are focused on improving key retailing practices at our
superstores. This includes increasing effectiveness of
merchandise presentation, improving assortment planning,
replenishment and supply chain effectiveness, and ensuring
consistency of execution across the chain. Additionally, we have
made significant reductions in corporate and other selling,
general and administrative costs over the last twelve months. A
key element of this strategy is the enhancement of certain key
categories, which we believe will help to distinguish our
domestic superstores from competitors. These categories include
childrens, wellness, cooking, educational materials,
Seattles Best Coffee cafes and Paperchase
gifts & stationery shops, which continue to be drivers
of both sales and increased profitability for their categories.
The number of Borders superstores located in each state and the
District of Columbia as of January 30, 2010 is listed below:
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Number of
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State
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Stores
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Alaska
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1
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Arizona
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11
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Arkansas
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1
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California
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80
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Colorado
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13
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Connecticut
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11
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Delaware
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2
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District of Columbia
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3
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Florida
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25
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Georgia
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15
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Hawaii
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8
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Idaho
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2
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Illinois
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36
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Indiana
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13
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Iowa
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4
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Kansas
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6
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Kentucky
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5
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Louisiana
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3
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Maine
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3
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Maryland
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11
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Massachusetts
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16
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Michigan
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18
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Minnesota
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7
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Mississippi
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1
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Missouri
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11
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Montana
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3
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Nebraska
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3
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Nevada
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7
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New Hampshire
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4
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New Jersey
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15
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New Mexico
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5
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New York
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28
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North Carolina
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10
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Ohio
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19
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Oklahoma
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4
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Oregon
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7
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Pennsylvania
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24
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Rhode Island
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2
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South Dakota
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1
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Tennessee
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7
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Texas
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23
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Utah
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3
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Vermont
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1
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Virginia
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15
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Washington
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13
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West Virginia
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2
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Wisconsin
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6
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Total
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508
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4
Waldenbooks
Specialty Retail Stores
Waldenbooks Specialty Retail operates small format stores in
malls, airports and outlet malls, offering customers a
convenient source for new releases, hardcover and paperback
bestsellers, periodicals and a standard selection of other
titles. Waldenbooks Specialty Retail operates stores under the
Waldenbooks, Borders Express and Borders Outlet names, as well
as Borders-branded airport stores and our mall-based seasonal
businesses. Average sales per store were $1.0 million and
average sales per square foot were $282 for 2009. Waldenbooks
Specialty Retail stores average approximately 1,300 square
feet in size, and carry an average of 13,500 titles, ranging
from 5,500 in airport stores to 19,000 in large format stores.
The number of Waldenbooks Specialty Retail stores located in
each state and the District of Columbia as of January 30,
2010 is listed below:
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Number of
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State
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Stores
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Alaska
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1
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Arizona
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2
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California
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7
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Colorado
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2
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Connecticut
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4
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Delaware
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1
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District of Columbia
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1
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Florida
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8
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Georgia
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2
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Hawaii
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4
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Idaho
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1
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Illinois
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7
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Indiana
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5
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Kansas
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3
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Kentucky
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5
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Maine
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1
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Maryland
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7
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Massachusetts
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6
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Michigan
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14
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Montana
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1
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Nevada
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3
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New Hampshire
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2
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New Jersey
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4
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New Mexico
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1
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New York
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8
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North Carolina
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6
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Ohio
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10
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Oklahoma
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4
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Oregon
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4
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Pennsylvania
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19
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Rhode Island
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2
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South Carolina
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2
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South Dakota
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1
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Tennessee
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1
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Texas
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8
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Vermont
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1
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Virginia
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5
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Washington
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3
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West Virginia
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4
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Wisconsin
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4
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Wyoming
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1
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Total
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175
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International
Stores
Our International stores include three Borders superstores in
Puerto Rico and our Paperchase U.K. business. Paperchase is a
brand leader in design-led and innovative stationery retailing
in the United Kingdom. As of January 30, 2010, we operated
85 Paperchase locations, including 51 stand-alone stores, 27
concessions in the stores of other retailers, and seven stores
located in railway stations. The vast majority of
Paperchases merchandise is developed specifically by and
for Paperchase and, as such, can only be found in Paperchase
stores.
5
We sold all of our bookstores in Australia, New Zealand, and
Singapore on June 10, 2008. On September 21, 2007, we
sold bookstores that we owned and operated in the United Kingdom
and Ireland. See Note 15 Discontinued
Operations in the notes to consolidated financial
statements for further information relating to the sale of these
bookstores.
Internet
Our business strategy includes the operation of a proprietary
e-commerce
platform, launched in May 2008, which includes both in-store and
online
e-commerce
components.
Distribution
Our centralized distribution system, consisting of seven
distribution facilities worldwide, enhances our ability to
manage inventory on a
store-by-store
basis. Inventory is shipped from vendors primarily to our
distribution centers. Approximately 90% of the books carried by
our stores are processed through our distribution facilities.
Borders purchases substantially all of its music and movie
merchandise directly from manufacturers and utilizes our
distribution centers to ship approximately 95% of its music and
movie inventory to stores.
In general, unsold books and magazines can be returned to
vendors at cost. Borders superstores and Waldenbooks Specialty
Retail stores return books to our centralized returns center
near Nashville, Tennessee to be processed for return to the
publishers. In general, Borders can return music and movie
merchandise to its vendors at cost plus an additional fee to
cover handling and processing costs.
As of January 30, 2010, our active distribution centers and
returns processing centers were located in the following
localities:
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Approx Square
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Locality, Country
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Number
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Footage
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Northamptonshire, United Kingdom (services Paperchase)
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1
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150,000
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California, United States
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1
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414,000
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Pennsylvania, United States
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1
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600,000
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Puerto Rico
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1
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10,500
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Tennessee, United States
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3
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926,000
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Total
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7
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2,100,500
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During the fourth quarter of 2009, we began processing returns
through our Pennsylvania distribution center. As a result, we
will be closing our Tennessee returns center during the first
half of 2010.
Employees
As of January 30, 2010, we had a total of approximately
8,500 full-time employees and approximately
12,100 part-time employees worldwide. When hiring new
employees, we consider a number of factors, including education,
experience, diversity, personality and orientation toward
customer service. All new store employees participate in a
training program that provides up to two weeks of in-store
training in all aspects of customer service and selling,
including title searches for in-stock and in-print merchandise,
sorting, merchandising, operation of
point-of-sale
terminals and store policies and procedures. We believe that our
relations with employees are generally excellent. Our employees
are not represented by unions.
Trademarks
Borders®,
Borders Book
Shop®,
Borders Books &
Music®,
Borders Books Music
Cafe®,
Borders Books Music Movies
Cafe®,
Borders
Express®,
Borders
Outlet®,
Borders
Rewards®,
Day By Day Calendar
Co.®
and
Waldenbooks®,
among other marks, are all registered trademarks used by
Borders.
Paperchase®
is a
6
registered trademark used by Paperchase Products Limited and
Borders.
Borders.com®
is a registered trademark used by Borders Direct, LLC.
Executive
Officers of the Company
Set forth below is certain information regarding the executive
officers of the Company:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Michael J. Edwards
|
|
|
49
|
|
|
Interim President and Chief Executive Officer
|
Mark R. Bierley
|
|
|
43
|
|
|
Executive Vice President, Chief Financial Officer
|
Thomas D. Carney
|
|
|
63
|
|
|
Executive Vice President, General Counsel and Secretary
|
David Scott Laverty
|
|
|
50
|
|
|
Senior Vice President, Chief Information Officer
|
James M. Frering
|
|
|
48
|
|
|
Senior Vice President, Store Operations
|
Shereen Solaiman
|
|
|
37
|
|
|
Senior Vice President, Human Resources
|
On January 25, 2010, Michael J. Edwards was appointed
Interim President and Chief Executive Officer of the Company.
Mr. Edwards joined the Company in September 2009 as
Executive Vice President and Chief Merchandising Officer. Prior
to joining the Company, Mr. Edwards served as President and
Chief Executive Officer of Ellington Leather, a leather handbags
and accessories wholesaler. From 2004 through 2007, he was
President and Chief Executive Officer of lucy activewear, inc.,
an apparel retailer. Prior to lucy, Mr. Edwards was
Executive Vice President, Operations for fabric and specialty
craft retailer Jo-Ann Stores. He is a 1983 graduate of
Philadelphias Drexel University and currently serves as a
trustee of the International Council of Shopping Centers.
Mark R. Bierley was appointed Executive Vice President, Chief
Financial Officer, effective January 5, 2009.
Mr. Bierley has more than 20 years of financial and
accounting experience and has been with Borders Group since
1996. He has progressed through a variety of management
positions within the Company, including inventory and financial
posts, and most recently served as Senior Vice President,
Finance. Mr. Bierley holds a bachelors degree in
business/accounting from Michigan State University and earned a
masters in business administration from the University of
Michigans Ross School of Business. He is a certified
public accountant.
Thomas D. Carney has served as Executive Vice President, General
Counsel and Secretary for the Company since April 2008. From
April 2004 through April 2008, Mr. Carney served as Senior
Vice President, General Counsel and Secretary for the Company.
From December 1994 through April 2004, Mr. Carney served as
Vice President, General Counsel and Secretary for the Company.
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.
Mr. Carney holds a bachelors degree from the University of
Michigan and a juris doctor degree from The University of
Michigan School of Law.
David Scott Laverty was appointed Senior Vice President, Chief
Information Officer in May 2009. Prior to joining Borders Group,
Mr. Laverty was a partner with IBM for two years. From 2001
through 2006, he was a senior manager with Deloitte Consulting,
where he was the North American Oracle Retail practice leader.
Mr. Laverty served as a principal consultant from 1997
through 2001 at PricewaterhouseCoopers. Earlier in his career,
Mr. Laverty worked in the retail industry, including
positions with Payless Shoesource and Michaels Arts and Crafts.
Mr. Laverty holds a bachelors degree in business from the
Louisiana State University and a masters degree in finance, also
from Louisiana State.
James M. Frering was appointed Senior Vice President, Store
Operations effective February 15, 2010. Mr. Frering
joined the Company in August 2009 as Vice President, Paperchase
U.S. Operations. Prior to joining Borders Group,
Mr. Frering was with Linens N Things for
13 years, where he progressed through a series of
leadership positions, most recently serving as Corporate Vice
President, Financial and
7
Merchandise Planning and Control. Prior to Linens N
Things, Mr. Frering worked for East Coast electronics
retailer Lechmere, Inc. He holds a bachelors degree from the
State University of New York at Albany.
Shereen Solaiman has served as Senior Vice President, Human
Resources for the Company since August 2009. Ms. Solaiman
served as Vice President, Human Resources from February 2009
until August 2009 and Vice President, Corporate, D.C. and Field
Human Resources from August 2007 until February 2009. Prior to
that Ms. Solaiman served as Director, Corporate Human
Resources from December 2003 until August 2007.
Ms. Solaiman has a bachelor of science in journalism with a
major in public relations from Ohio University and a masters in
public administration with a specialization in management from
New York University.
Additional
Information
Our corporate Web site is located at
http://www.borders.com/about
us. The information found on our Web site is not part of this or
any other report filed or furnished to the U.S. Securities
and Exchange Commission. We have made available on our Web site
under Investors annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports as soon as reasonably
practicable after having electronically filed or furnished such
materials to the U.S. Securities and Exchange Commission.
Also available on this Web site are our corporate governance
documents, including our committee charters and our Business
Conduct Policy, Policy and Procedures Regarding Related Party
Transactions, and a Code of Ethics Relating to Financial
Reporting. We will disclose on our Web site any amendments to
the Business Conduct Policy or the Code of Ethics Relating to
Financial Reporting and any waiver that would otherwise be
required to be filed on a
Form 8-K.
Printed copies of any of the documents available on our Web site
will be provided to any shareholder without charge upon written
request to Investor Relations, Borders Group, Inc., 100 Phoenix
Drive, Ann Arbor, Michigan
48108-2202.
We have filed with the Securities and Exchange Commission, as an
exhibit to our
Form 10-K
annual report for fiscal 2009, the Sarbanes-Oxley Act
Section 302 Certifications regarding the quality of our
public disclosure. During calendar year 2009 Ron Marshall, in
the capacity as Chief Executive Officer of the Company,
certified to the New York Stock Exchange that he was not aware
of any violation by the Company of any NYSE Corporate Governance
Listing Standards.
Risk
Factors
The following risk factors and other information included in
this Annual Report on
Form 10-K
should be carefully considered. The risks and uncertainties
described below are not the only ones we face. Additional risks
and uncertainties not presently known to us or that we currently
deem immaterial also may impair our business operations. If any
of the following risks occur, our business, financial condition,
operating results and cash flows could be materially adversely
affected.
Consumer
Spending Patterns
Sales of books, music and movies have historically been
dependent upon discretionary consumer spending, which may be
affected by general economic conditions, consumer confidence and
other factors beyond our control. We believe that 2010 will be a
challenging year due to continued uncertainty in the economic
environment. We also believe that the increase in consumer
spending via Internet retailers and on eBooks may significantly
affect our ability to generate sales in our stores. In addition,
sales are dependent in part on the strength of new release
products which are controlled by vendors. A decline in consumer
spending on books, music and movies, or a significant shift to
the purchase of eBooks from physical books, could have a
material adverse effect on our financial condition and results
of operations and our ability to fund our business strategy.
8
Economic
Conditions
Our financial condition and results of operations are dependent
upon discretionary spending by consumers, which may be affected
by general economic conditions. Worldwide economic conditions
and consumer spending have deteriorated significantly and may
remain depressed for some time. Some of the factors that are
having an impact on discretionary consumer spending include
increased unemployment, reductions in disposable income as a
result of financial market declines and declines in residential
real estate values, credit availability and consumer confidence.
Competitive
Environment
We have experienced operating losses over the last two years and
such losses may continue. We believe that the losses are
attributable to a number of factors, including increased
competition from Internet retailers and a greater concentration
on the sale of books and music by mass merchants and other
non-bookstore retailers. In addition, with respect to music and
movies, the downloading of titles has significantly impacted our
sale of CDs and DVDs. The increasing popularity of eBooks has
the potential to significantly impact our sales of physical
books. Also, the overall consumer demand for products that we
sell, particularly music and movies, has either declined or not
experienced significant growth in recent years.
The retail book business is highly competitive. Competition
within the retail book industry is fragmented, with Borders
facing competition from the Internet and other superstore
operators. In addition, Borders and Waldenbooks compete with
other specialty retail stores that offer books in a particular
area of specialty, independent single store operators, discount
stores, drug stores, warehouse clubs, mail order clubs, mass
merchandisers and other non-bookstore retailers. In the future,
Borders and Waldenbooks may face additional competition from
other categories of Internet and brick and mortar retailers
entering the retail book market.
The music and movie businesses are also highly competitive and
Borders faces competition from large established music chains,
established movie chains, as well as specialty retail stores,
movie rental stores, discount stores, warehouse clubs and mass
merchandisers. In addition, consumers receive television and
mail order offers and have access to mail order clubs. The
largest mail order clubs are affiliated with major manufacturers
of pre-recorded music and may have advantageous marketing
relationships with their affiliates.
The Internet is a significant channel for retailing in all media
categories that we carry. In particular, the retailing of books,
music and movies over the Internet is highly competitive. In
addition, we face competition from companies engaged in the
business of selling books, music and movies via electronic
means, including the downloading of books, music and movie
content.
Availability
of Capital Resources
Our success is dependent on the availability of adequate capital
to fund our operations and to carry out our strategic plans. Key
drivers of our cash flows are sales, expense management, capital
spending and our inventory turn improvement initiative. There
can be no assurance that we will have access to adequate
capital, which could have a material adverse effect on our
ability to implement our business strategy and on our financial
condition and results of operations.
On March 31, 2010, we entered into a Third Amended and
Restated Revolving Credit Agreement (the Credit
Agreement), which replaces our prior senior revolving
credit agreement, and a Term Loan Agreement (the Term Loan
Agreement) under which we have obtained a secured term
loan.
Our ability to borrow under the Credit Agreement and the Term
Loan Agreement is subject to borrowing base restrictions
calculated based primarily on the estimated net orderly
liquidation value of our eligible inventory. Our lenders have
significant discretion in determining the eligibility of
inventory for purposes the borrowing base restrictions under the
Credit Agreement and Term Loan Agreement. Our lenders are also
permitted under certain circumstances to reduce the percentage
of our eligible inventories used to calculate our borrowing
base. If our lenders reduce the percentage of eligible inventory
used to calculate
9
our borrowing base, the amounts we will be permitted to borrow
under the Credit Agreement and Term Loan Agreement could be
materially reduced and our financial condition and results of
operations could be materially adversely affected.
In addition to being subject to borrowing base restrictions, we
are required to maintain specified levels of excess availability
in order to continue to borrow under the Credit Agreement.
Similar excess availability requirements apply under the Term
Loan Agreement, including a seasonal excess availability
requirement that obligates us to maintain higher levels of
excess availability under the Term Loan Agreement during the
months of December and January of each year. If we fail to
achieve at least 80% of our projected consolidated earnings
before interest, taxes, depreciation and amortization, these
increased excess availability requirements will become
applicable throughout the year. If at any time we fail to meet
the borrowing base or excess availability requirements under the
Term Loan Facility, the lenders under the Revolving Credit
Facility will be required to reduce the availability under the
Credit Agreement by a corresponding amount. In addition, under
the Term Loan Agreement, if we do not complete an offering of
equity securities resulting in net proceeds of at least
$25 million within 45 days after the date of the Term
Loan Agreement, a reserve of $10 million will be recorded
against the borrowing base under the Credit Agreement, which
will reduce the amounts we are permitted to borrow under the
Credit Agreement.
The Credit Agreement and Term Loan Agreement limit our ability
to incur additional indebtedness, create liens, make
investments, make restricted payments (including any required
cash-out of the Pershing Square warrants) or specified payments
and merge or acquire assets, among other things. In addition,
certain additional covenants, including fixed charge coverage
ratio requirements, would be triggered if availability under the
Credit Agreement falls below certain specified levels. The
lenders under the Credit Agreement may also be permitted to
assume dominion and control over our cash and cash equivalents
if availability under the Credit Agreement falls below certain
specified levels. These restrictions may limit our ability to
operate our business and implement our business strategy and
could have material adverse effect on our financial condition
and results of operations.
We plan to operate our business and execute our strategic
initiatives principally with funds generated from operations,
financing through the Credit Agreement and Term Loan Agreement,
credit provided by our vendors and other sources of new
financing, including potential equity financing, as deemed
necessary and available. In addition, our liquidity is impacted
by a number of factors, including our sales levels, the amount
of credit that our vendors extend to us and our borrowing
capacity under the Credit Agreement and Term Loan Agreement. We
rely upon vendor credit to finance approximately 45% of our
inventory (calculated as trade accounts payable divided by
merchandise inventories). We are working closely with vendors to
optimize inventory levels to improve our performance and to
maintain acceptable levels of payables with our vendors. Based
on current internal sales projections, current vendor payable
support and borrowing capacity, as well as other initiatives to
maximize cash flow, we believe that we will have adequate
capital to fund our operations during fiscal 2010. However,
there can be no assurance that we will achieve our internal
sales projections or that we will be able to maintain our
current vendor payable support or borrowing capacity, and any
failure to do so could result in us having insufficient funds
for our operations.
Potential
Dilution Resulting from Equity Offerings
We may seek to raise additional capital through one or more
public or private offerings of our common stock or derivative
securities that are exercisable or exchangeable for or
convertible into shares of our common stock. Any such offering
may be at a price per share that is substantially less than the
trading price of our common stock at the time of the offering.
Any offering of common stock or derivative securities could
result in a decrease in the trading price of our common stock
and in significant dilution to the holders of outstanding shares
of our common stock. In connection with the term loan to the
Company made by Pershing Square, we have issued warrants to
Pershing Square to acquire 14.7 million shares of our
common stock, which currently represent approximately 19.7% of
our outstanding shares. Under the terms of the Pershing Square
warrants, if we issue shares of our common stock or derivative
securities at a price less than $0.65 per share, the exercise
price of the outstanding Pershing Square warrants will be
10
reduced to the lowest price at which such shares or securities
are issued. In addition, if we issue shares of our common stock
or derivative securities in an offering transaction, we will be
obligated to issue additional warrants to Pershing Square with
an exercise price of $0.65 per share so that the fully-diluted
percentage of our common stock issuable upon the exercise of
Pershing Squares warrants is not reduced as a result of
the offering. Due to this provision, holders of our common stock
may suffer significant dilution in addition to any dilution
resulting directly from the offering of our common stock or
derivative securities. There can be no assurance that we will be
able to raise additional capital through offerings of our common
stock or derivative securities or with respect to the price or
other terms and conditions that may be applicable to any such
offering.
Business
Strategy
Our future results will depend, among other things, on our
success in implementing our business strategy, as discussed in
Item 1 under the heading Business Strategy.
There can be no assurance that we will be successful in
implementing our business strategy, or that the strategy will be
successful in achieving acceptable levels of sales growth and
profitability. Our customer acquisition and retention strategy
may not be successful, and there can be no assurance that we
will successfully leverage the Borders Rewards program, redesign
it effectively or that such efforts will increase traffic into
our stores or will increase sales, revenue or profitability.
There can also be no assurance that we will be able to
successfully implement our digital strategy, including the
ability to obtain and sell eReaders that would be acceptable to
our customers and to profitably sell such eReaders in our
stores. There also can be no assurance that we will be able to
profitably sell eBooks though our partnership with Kobo. Any
failure to implement our business strategy could have a material
impact on our financial condition and results of operations.
Seasonality
Our business is highly seasonal, with sales generally highest in
the fourth quarter. In 2009, 33.6% of our sales and 36.8% of our
gross margin dollars were generated in the fourth quarter. Our
results of operations depend significantly upon the holiday
selling season in the fourth quarter and less than satisfactory
net sales for such period could have a material adverse effect
on our financial condition or results of operations for the year
and may not be sufficient to cover any losses which may be
incurred in the first three quarters of the year. Other factors
that could affect the holiday selling season include general
economic and geopolitical conditions, overall consumer spending
patterns, weather conditions and, with respect to our mall
business, overall mall traffic. Because of the seasonal nature
of our business, our operations typically use cash during the
first three quarters of the year and generate cash from
operations in the fourth quarter.
Potential
gift card liabilities
We issue gift cards that may be used to purchase products in our
stores. We recognize income from unredeemed cards when we
determine that the likelihood of the cards being redeemed is
remote. Certain states include gift cards under their abandoned
property laws, and require companies to remit to the state cash
in an amount equal to all or a designated portion of the
unredeemed balance on the gift cards after a specified period of
time. We do not remit any amounts relating to unredeemed gift
cards to states based upon our assessment of applicable laws.
The analysis of the potential application of the abandoned
property laws to our gift cards is complex, involving an
analysis of constitutional, statutory provisions and factual
issues. In the event that one or more states successfully
challenges our position on the application of its abandoned
property law to our gift cards, or if the estimates that we use
in projecting the likelihood of the cards being redeemed prove
to be inaccurate, our liabilities with respect to unredeemed
gift cards may be materially higher than the amounts shown in
our financial statements. If we are required to materially
increase the estimated liability recorded in our financial
statements with respect to unredeemed gift cards, our net income
could be materially and adversely affected.
11
Foreign
Exchange Risk
The results of operations of the International segment are
exposed to foreign exchange rate fluctuations as the financial
results of the applicable subsidiaries are translated from the
local currency into U.S. dollars upon consolidation. As
exchange rates vary, sales and other operating results, when
translated, may differ materially from expectations. In
addition, we are subject to gains and losses on foreign currency
transactions, which could vary based on fluctuations in exchange
rates and the timing of the transactions and their settlement.
Guarantees
of Disposed Foreign Businesses
We guarantee the leases of four stores that we previously owned
in the U.K. and Ireland. These guarantees were required by
certain of our landlords as conditions of the leases upon
inception, and were unrelated to our disposition of operations
in the U.K. and Ireland in 2007. The maximum potential liability
under these lease guarantees is approximately
$139.7 million. The leases provide for periodic rent
reviews, which could increase our potential liability. One of
the applicable lease guarantee agreements provides that the
guarantee would automatically terminate if Borders U.K. Limited
achieved a specified level of net assets, a provision which we
believe has been met. The maximum potential liability for this
location is $26.2 million. This limitation has not been
considered in calculating the maximum exposures set forth above.
In addition, in the event of a default under the primary leases,
in certain circumstances a landlord may have an obligation to
mitigate its loss or to act reasonably, which could further
reduce our potential liability. At January 30, 2010, we
have reserved $10.1 million based upon the likelihood that
we will be required to perform under these guarantees.
On December 22, 2009, Borders U.K. Limited ceased
operations, a result of filing for administration on
November 26, 2009. Previously, Borders U.K. Limited
announced that it had agreed to sell the leasehold interests in
five stores, including two of the leases guaranteed by the
Company, to a fashion retailer. In addition, one of the leases
was assigned to another retailer as part of the administration
process and the Companys guarantee was continued. These
events have been considered in the determination of our reserves
relating to the lease guarantees.
Also under the terms of the sale agreement, we indemnified the
buyer of our U.K. and Ireland operations from the tax liability,
if any, imposed upon it as a result of the forgiveness of the
portions of intercompany indebtedness owing from us. The maximum
potential liability is approximately $8.7 million, and as
of January 30, 2010 we have recorded a liability of
approximately $3.5 million based upon the likelihood that
we will be required to perform under the indemnification.
We also guarantee four store leases relating to our former
subsidiaries in Australia and New Zealand. Based upon current
rents, taxes, common area maintenance charges and exchange
rates, the maximum amount of potential future payments
(undiscounted) is approximately $12.9 million. As of
January 30, 2010, we have recorded a liability of
approximately $0.8 million based upon the likelihood that
we will be required to perform under the guarantees. Also under
the terms of the sale agreement, we provided certain tax
indemnifications to the purchasers, with the maximum amount of
potential future payments (undiscounted) totaling approximately
$6.7 million. We have recorded a tax liability of
$2.0 million for this contingency as of January 30,
2010.
There can be no assurance that our reserves relating to our
disposed foreign businesses will be adequate should we be
required to perform under any of the guarantees described above,
and amounts beyond our reserves could have a material adverse
effect on our financial condition and results of operations.
New
York Stock Exchange Listing
A failure by the Company to meet any of the following standards
of the NYSE could result in a delisting of our shares from the
NYSE: (1) Our average market capitalization falls below
$50 million over a
30-day
trading period and, at the same time, our stockholders
equity is less than $50 million; (2) Our average
12
market capitalization falls below $15 million over a
30-day
trading period; or (3) Our average closing price is less
than $1.00 over a consecutive a
30-day
trading period.
Thus, in addition to meeting the $1.00 average trading price
requirement, the Company also must satisfy the average market
capitalization requirement, which is $15 million if we
maintain stockholders equity of at least $50 million,
but jumps to $50 million if we fall below that level.
Our share price did fall below a closing price of $1.00 for six
consecutive trading days during the period from January 26,
2010 through February 2, 2010. Although our stock traded
below $1.00 for a period of time, we were not considered
below criteria for the NYSEs price criteria
for common stock, as defined above. Subject to shareholder
approval, we may implement a reverse split of our common stock,
if required to enable us to meet the NYSE minimum share price
standards. There can be no assurance that our shares will remain
listed on the NYSE or that any reverse split that may be
completed will increase our share price sufficiently to permit
us to continue to satisfy the NYSEs listing standards.
In connection with our financing agreement with Pershing Square,
we have issued warrants to Pershing Square exercisable for a
total of 14.7 million shares of our common stock at an
exercise price of $0.65 per share. These warrants are required
to be settled for cash in certain circumstances, including the
sale of the Company to a non-publicly-held entity or the
de-listing of our common stock from trading on the NYSE. Holders
of the warrants have the right to require us to redeem the
warrants for an amount in cash equal to the fair value of the
redeemed warrants, as determined by an independent financial
expert. Any such payment may be subject to restrictions under
our Credit Agreement. To the extent we are unable to pay the
redemption price in cash when due, we will be obligated to pay
interest on the unpaid redemption amount at a rate of 10% per
annum. Accordingly, our inability to maintain the continued
listing of our common stock could have a material adverse effect
on our liquidity and financial condition.
Potential
for Uninsured Losses
We are subject to the possibility of uninsured losses from risks
such as terrorism, earthquakes, hurricanes or floods, as well as
employee medical claims and workers compensation claims, for
which no, or limited, insurance coverage is maintained.
Litigation
and Other Claims
We are subject to risk of losses which may arise from adverse
litigation results or other claims, including the matters
described under Legal Proceedings in Item 3.
Information
Technology Systems Risks
The capacity, reliability and security of our information
technology hardware and software infrastructure and our ability
to expand and update this infrastructure in response to changing
needs is essential to our ability to execute our business
strategy. In addition, our strategy is dependent on enhancing
our existing merchandising systems, a process currently under
way, as well as implementing the current Borders superstores
in-store systems into the Waldenbooks Specialty Retail stores.
There can be no assurance that we will be able to effectively
integrate, maintain, upgrade or enhance systems, or add new
systems, in a timely and cost effective manner and may not be
able to integrate any newly developed or purchased technologies
with existing systems. These disruptions or impacts, if not
anticipated and appropriately mitigated, could have a material
adverse effect on our ability to implement our business strategy
and on our financial condition and results of operations.
The failure of our information systems to perform as designed or
our failure to implement and operate our information systems
effectively could disrupt our operations or subject us to
liability, which could have a material adverse effect on our
financial condition and results of operations.
In addition, the confidentiality of our data, as well as that of
our employees, customers and other third parties, must be
protected. We have systems and processes in place that are
designed to protect information and prevent fraudulent payment
transactions and other security breaches. There can be no
13
assurance that these systems and processes will be effective in
preventing or mitigating such fraud, and such breaches could
have a material adverse effect on our financial condition and
results of operations.
Disruption
of Vendor Relationships and/or Supply Chain.
The products that we sell originate from a wide variety of
domestic and international vendors. During fiscal 2009, our six
largest suppliers accounted for approximately 51% of merchandise
purchased. While we believe that our relationships with vendors
are strong, vendors may modify the terms of these relationships
due to general economic conditions, our financial condition or
otherwise. A significant unfavorable change in our relationships
with key suppliers could materially adversely affect our
financial condition and results of operations. In addition, any
significant change in the payment terms that we have with our
key suppliers could adversely affect our financial condition and
liquidity.
Reliance
on Key Personnel
We believe that our continued success will depend to a
significant extent upon the efforts and abilities of Michael J.
Edwards, Interim President and Chief Executive Officer, and Mark
R. Bierley, Executive Vice President and Chief Financial
Officer, as well as certain of our other key officers of the
Company and of our subsidiaries. The loss of the services of
Mr. Edwards, Mr. Bierley or of other such key officers
could have a material adverse effect on our results of
operations. We do not maintain key man life
insurance on any of our key officers.
Other
Risks
We are also subject to numerous other risks and uncertainties
which could adversely affect our business, financial condition,
operating results and cash flows. These risks include, but are
not limited to, higher than anticipated interest, occupancy,
labor, merchandise, distribution and inventory shrinkage costs,
unanticipated work stoppages, energy disruptions or shortages or
higher than anticipated energy costs, asset impairments relating
to underperforming stores or other unusual items, including any
charges that may result from the implementation of our strategic
plan, higher than anticipated costs associated with the closing
of underperforming stores, and changes in accounting rules.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
Borders leases all of its stores. Borders store leases generally
have an average initial term of 15 to 20 years with
multiple three- to five-year renewal options. At
January 30, 2010, the average unexpired term under Borders
existing store leases in the United States was 8.1 years
prior to the exercise of any options. The expirations of Borders
leases for stores open at January 30, 2010 are as follows:
|
|
|
|
|
|
|
Number of
|
|
Lease Terms to
Expire During 12 Months Ending on or About January 30
|
|
Stores
|
|
|
2011
|
|
|
25
|
|
2012
|
|
|
13
|
|
2013
|
|
|
19
|
|
2014
|
|
|
20
|
|
2015
|
|
|
25
|
|
2016
|
|
|
37
|
|
2017 and later
|
|
|
369
|
|
|
|
|
|
|
Total
|
|
|
508
|
|
|
|
|
|
|
14
Waldenbooks Specialty Retail leases all of its stores.
Waldenbooks Specialty Retail store leases generally have renewal
terms of one to five years. At present, the average unexpired
term under Waldenbooks Specialty Retail existing store leases is
approximately 1.4 years. The expirations of Waldenbooks
Specialty Retail leases for stores open at January 30, 2010
are as follows:
|
|
|
|
|
|
|
Number of
|
|
Lease Terms to
Expire During 12 Months Ending on or About January 30
|
|
Stores
|
|
|
2011
|
|
|
102
|
|
2012
|
|
|
46
|
|
2013
|
|
|
10
|
|
2014
|
|
|
9
|
|
2015
|
|
|
2
|
|
2016
|
|
|
4
|
|
2017 and later
|
|
|
2
|
|
|
|
|
|
|
Total
|
|
|
175
|
|
|
|
|
|
|
We lease all three of our International superstores in Puerto
Rico, with initial lease terms of approximately 15 to
20 years and which all expire in 2017 or later. The average
unexpired term under these leases is approximately
8.8 years as of January 30, 2010. Our Paperchase
operations in the U.K. generally lease stores under operating
leases with terms ranging from five to 25 years. The
average remaining lease term for Paperchase stores in the U.K.
is 7.6 years.
We lease a portion of our corporate headquarters in Ann Arbor,
Michigan and own the remaining building and improvements. We
also lease all distribution centers.
|
|
Item 3.
|
Legal
Proceedings
|
Litigation: In
February 2009, three former employees, individually and on
behalf of a purported class consisting of all current and former
employees who work or worked as General Managers in Borders
stores in the State of California at any time from
February 19, 2005, through February 19, 2009, have
filed an action against us in the Superior Court of California
for the County of Orange. The Complaint alleges, among other
things, that the individual plaintiffs and the purported class
members were improperly classified as exempt employees and that
we violated the California Labor Code by failing to (i) pay
required overtime and (ii) provide meal periods and rest
periods, and (iii) that those practices also violate the
California Business and Professions Code. The relief sought
includes damages, restitution, penalties, injunctive relief,
interest, costs, and attorneys fees and such other relief
as the court deems proper. We have not included any liability in
our consolidated financial statements in connection with this
matter and have expensed as incurred all legal costs to date. We
cannot reasonably estimate the amount or range of possible loss,
if any, at this time.
Certain states and private litigants have sought to impose sales
or other tax collection efforts on
out-of-jurisdiction
companies that engage in
e-commerce.
From August 2001 through May 2008, we had agreements with
Amazon.com, Inc. (Amazon) to operate web sites
utilizing the Borders.com and Waldenbooks.com URLs. These
agreements contained mutual indemnification provisions,
including provisions that define between the parties, the
responsibilities with respect to any liabilities for sales, use
and similar taxes, including penalties and interest, associated
with products sold on the web sites. The Company and Amazon have
been named as defendants in an action filed by a private
litigant on behalf of the state of Illinois under the
states False Claims Act relating to the failure to collect
use taxes on Internet sales in Illinois for periods both before
and after the implementation of the web site agreements.
The Complaints seek judgments, jointly and severally, against
the defendants for, among other things, injunctive relief,
treble the amount of damages suffered by the state of Illinois
as a result of the alleged violations of the defendants,
penalties, costs and expenses, including legal fees. The
complaint covers time
15
periods both before and during the period that Amazon operated
Borders.com, and the complaint contains broad allegations that
cover both us and Amazon without specifying the total amount
sought or the allocation of alleged responsibility between us
and Amazon. Joint motions to dismiss the case based on common
issues were filed by the defendants and have been denied, and
the court is now proceeding to consider individual motions to
dismiss the case, including a motion filed by the Company. We
have not included any liability in our consolidated financial
statements in connection with this matter and have expensed as
incurred all legal costs to date. We cannot reasonably estimate
the amount or range of possible loss, if any, at this time.
In March 2009, Amanda Rudd, on behalf of herself and a putative
class consisting of all other customers who received Borders
gift cards from March 2005 to March 2009, filed an action in the
Superior Court for the State of California, County of
San Diego alleging that we sell gift cards that are not
redeemable for cash in violation of Californias Business
and Professionals Code Section 17200, et seq. The Complaint
sought disgorgement of profits, restitution, attorneys
fees and costs and an injunction. The Complaint has been
dismissed with prejudice and the matter has been concluded
without any payment by the Company to the plaintiffs.
In October 2009, U.S. Ethernet Innovations, LLC offered us
an unsolicited license to 35 U.S. and foreign patents
relating to Ethernet technology for a one-time fee of
$3.0 million, and implied that it would commence litigation
if we do not accept the offer. We are evaluating the offer, as
well as the amount of our potential exposure, which could be
greater or less than $3.0 million, if we do not accept the
offer. We intend to seek indemnification from the relevant
equipment vendors. We have not included any liability in our
consolidated financial statements in connection with this matter
and have expensed as incurred all legal costs to date. We cannot
reasonably estimate the amount or range of possible loss, if
any, at this time.
In addition to the matters described above, we are, from time to
time, involved in or affected by other litigation incidental to
the conduct of our businesses.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
The following table sets forth, for the fiscal quarters
indicated, the high and low closing market prices for our Common
Stock and the quarterly dividends declared.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
|
High
|
|
|
Low
|
|
|
Declared
|
|
|
Fiscal Quarter 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
2.97
|
|
|
$
|
0.45
|
|
|
$
|
|
|
Second Quarter
|
|
$
|
4.34
|
|
|
$
|
2.07
|
|
|
$
|
|
|
Third Quarter
|
|
$
|
3.99
|
|
|
$
|
1.94
|
|
|
$
|
|
|
Fourth Quarter
|
|
$
|
2.14
|
|
|
$
|
0.86
|
|
|
$
|
|
|
Fiscal Quarter 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
11.23
|
|
|
$
|
5.07
|
|
|
$
|
|
|
Second Quarter
|
|
$
|
7.30
|
|
|
$
|
4.12
|
|
|
$
|
|
|
Third Quarter
|
|
$
|
7.80
|
|
|
$
|
2.44
|
|
|
$
|
|
|
Fourth Quarter
|
|
$
|
3.39
|
|
|
$
|
0.35
|
|
|
$
|
|
|
Our Common Stock is traded on the New York Stock Exchange under
the symbol BGP.
A failure by the Company to meet any of the following standards
of the NYSE could result in a delisting of our shares from the
NYSE: (1) Our average market capitalization falls below
$50 million over a
30-day
trading period and, at the same time, our stockholders
equity is less than $50 million; (2) Our average
16
market capitalization falls below $15 million over a
30-day
trading period; or (3) Our average closing price is less
than $1.00 over a consecutive a
30-day
trading period.
Thus, in addition to meeting the $1.00 average trading price
requirement, the Company also must satisfy the average market
capitalization requirement, which is $15 million if we
maintain stockholders equity of at least $50 million,
but jumps to $50 million if we fall below that level.
Our share price did fall below a closing price of $1.00 for six
consecutive trading days during the period from January 26,
2010 through February 2, 2010. Although our stock traded
below $1.00 for a period of time, we were not considered
below criteria for the NYSEs price criteria
for common stock, as defined above. Subject to shareholder
approval, we may implement a reverse split of our common stock,
if required to enable us to meet the NYSE minimum share price
standards.
As of March 23, 2010, there were 2,537 holders of record of our
Common Stock.
The Board of Directors has suspended the quarterly dividend
program in order to preserve capital for operations and
strategic initiatives.
In connection with our financing agreement with Pershing Square,
we have issued warrants to Pershing Square exercisable for a
total of 14.7 million shares of our common stock. The
current exercise price of the warrants is $0.65 per share. These
warrants are required to be settled for cash in certain
circumstances, including the sale of the Company to a
non-publicly-held entity or the de-listing of our common stock
from trading on the NYSE. The warrants feature full
anti-dilution protection, including preservation of the right to
convert into the same percentage of the fully-diluted shares of
our common stock that would be outstanding on a pro forma basis
giving effect to the issuance of the shares underlying the
warrants at all times, and full-ratchet adjustment
to the exercise price for future issuances (in each case,
subject to certain exceptions), and adjustments to compensate
for all dividends and distributions. The warrants are
exercisable until October 9, 2014.
17
Stock
Performance Graph
The following graph compares the cumulative total shareholder
return on our Common Stock from January 21, 2005 through
January 30, 2010 with the cumulative total return on the
Standard & Poors 500 Stock Index (S&P
500) and the S&P Midcap 400 Specialty Retail Index.
In accordance with the rules of the Securities and Exchange
Commission, the returns are indexed to a value of $100 at
January 21, 2005.
COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN
18
Equity
Securities Authorized for Issuance Under Equity Compensation
Plans
The following table provides information with respect to the
equity compensation plan under which equity securities were
authorized for issuance on January 30, 2010 (number of
shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
Number of
|
|
|
Weighted-
|
|
|
Shares
|
|
|
|
Awards
|
|
|
Average
|
|
|
Available
|
|
Plan Category
|
|
Outstanding(2)
|
|
|
Exercise Price(3)
|
|
|
for Issuance
|
|
|
Plans approved by stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 Long-Term Incentive
Plan(1)
|
|
|
1,335
|
|
|
$
|
8.10
|
|
|
|
4,619
|
|
|
|
|
(1) |
|
The 2004 Long-Term Incentive Plan (the 2004 Plan)
was approved by shareholders in May 2004, and replaced all prior
equity compensation plans (the Prior Plans). At
January 30, 2010 there were approximately 0.2 million
stock options outstanding under the Prior Plans with a
weighted-average exercise price of $18.55 which, if forfeited or
cancelled, become available for issuance under the 2004 Plan. At
January 30, 2010, there were 1.8 million stock options
outstanding related to the employment inducement award granted
to Ron Marshall, our former President and Chief Executive
Officer, with an exercise price of $0.57 per share, representing
the fair market value on the date of grant. The unvested portion
of this award was forfeited by Mr. Marshall upon his
resignation from the Company in February of 2010, and as a
result 1.2 million shares were forfeited. Mr. Marshall
has three months from his last day of employment with the
Company to exercise the option to acquire the vested portion of
this award. If not exercised during such period of time, the
remaining 0.6 million shares will also be forfeited. |
|
(2) |
|
Number of awards outstanding as of January 30, 2010
includes approximately 10,000 restricted share units and
approximately 1,325,278 stock options. |
|
(3) |
|
Reflects the weighted-average exercise price of stock options
outstanding as of January 30, 2010. |
Purchases
of Equity Securities
There were no shares repurchased during the fourth quarter of
fiscal 2009.
19
|
|
Item 6.
|
Selected
Financial Data
|
SELECTED
CONSOLIDATED FINANCIAL AND OPERATING DATA
The information set forth below should be read in conjunction
with Managements Discussion and Analysis of
Financial Condition and Results of Operations and our
consolidated financial statements and the notes thereto.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
Jan. 30,
|
|
|
Jan. 31,
|
|
|
Feb. 2,
|
|
|
Feb. 3,
|
|
|
Jan. 28,
|
|
(dollars in millions except per share data)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007(1)
|
|
|
2006(1)
|
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borders Superstores sales
|
|
$
|
2,265.8
|
|
|
$
|
2,625.4
|
|
|
$
|
2,847.2
|
|
|
$
|
2,750.0
|
|
|
$
|
2,709.5
|
|
Waldenbooks Specialty Retail sales
|
|
|
387.3
|
|
|
|
480.0
|
|
|
|
562.8
|
|
|
|
663.9
|
|
|
|
744.8
|
|
International
sales(2)
|
|
|
138.0
|
|
|
|
136.7
|
|
|
|
145.1
|
|
|
|
118.4
|
|
|
|
99.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
sales(2)
|
|
$
|
2,791.1
|
|
|
$
|
3,242.1
|
|
|
$
|
3,555.1
|
|
|
$
|
3,532.3
|
|
|
$
|
3,554.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
(loss)(2)
|
|
$
|
(94.9
|
)
|
|
$
|
(149.2
|
)
|
|
$
|
4.1
|
|
|
$
|
5.2
|
|
|
$
|
172.0
|
|
Income (loss) from continuing
operations(2)
|
|
$
|
(110.2
|
)
|
|
$
|
(184.7
|
)
|
|
$
|
(19.9
|
)
|
|
$
|
(21.9
|
)
|
|
$
|
96.7
|
|
Income (loss) from operations of discontinued operations
|
|
|
|
|
|
|
(1.7
|
)
|
|
|
(8.7
|
)
|
|
|
(129.4
|
)
|
|
|
4.3
|
|
Income (loss) from disposal of discontinued operations
|
|
|
0.8
|
|
|
|
(0.3
|
)
|
|
|
(128.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
|
0.8
|
|
|
|
(2.0
|
)
|
|
|
(137.5
|
)
|
|
|
(129.4
|
)
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(109.4
|
)
|
|
$
|
(186.7
|
)
|
|
$
|
(157.4
|
)
|
|
$
|
(151.3
|
)
|
|
$
|
101.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (basic) earnings (loss) from continuing operations per
common
share(2)
|
|
$
|
(1.83
|
)
|
|
$
|
(3.07
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
1.36
|
|
Diluted (basic) earnings (loss) from discontinued operations per
common share
|
|
$
|
0.01
|
|
|
$
|
(0.03
|
)
|
|
$
|
(2.34
|
)
|
|
$
|
(2.09
|
)
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (basic) earnings (loss) per common share
|
|
$
|
(1.82
|
)
|
|
$
|
(3.10
|
)
|
|
$
|
(2.68
|
)
|
|
$
|
(2.44
|
)
|
|
$
|
1.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.44
|
|
|
$
|
0.41
|
|
|
$
|
0.37
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital continuing
operations(2)
|
|
$
|
60.6
|
|
|
$
|
77.5
|
|
|
$
|
(6.3
|
)
|
|
$
|
69.0
|
|
|
$
|
254.9
|
|
Working capital
|
|
$
|
60.6
|
|
|
$
|
77.5
|
|
|
$
|
38.2
|
|
|
$
|
127.7
|
|
|
$
|
326.7
|
|
Total assets continuing
operations(2)
|
|
$
|
1,425.2
|
|
|
$
|
1,609.0
|
|
|
$
|
2,147.1
|
|
|
$
|
2,234.9
|
|
|
$
|
2,146.8
|
|
Total assets
|
|
$
|
1,425.2
|
|
|
$
|
1,609.0
|
|
|
$
|
2,302.7
|
|
|
$
|
2,613.4
|
|
|
$
|
2,572.2
|
|
Short-term borrowings continuing
operations(2)
|
|
$
|
274.0
|
|
|
$
|
329.0
|
|
|
$
|
548.4
|
|
|
$
|
501.4
|
|
|
$
|
183.0
|
|
Short-term borrowings
|
|
$
|
274.0
|
|
|
$
|
329.0
|
|
|
$
|
548.4
|
|
|
$
|
542.0
|
|
|
$
|
206.4
|
|
Long-term debt, including current portion
|
|
$
|
4.8
|
|
|
$
|
6.6
|
|
|
$
|
5.6
|
|
|
$
|
5.4
|
|
|
$
|
5.6
|
|
Long-term capital lease obligations, including current portion
|
|
$
|
3.2
|
|
|
$
|
2.0
|
|
|
$
|
|
|
|
$
|
0.4
|
|
|
$
|
0.5
|
|
Stockholders equity
|
|
$
|
158.3
|
|
|
$
|
263.1
|
|
|
$
|
479.1
|
|
|
$
|
644.0
|
|
|
$
|
929.1
|
|
|
|
|
(1)
|
|
Our 2005 and 2006 fiscal years
consisted of 53 weeks.
|
|
(2)
|
|
Excludes the results of
discontinued operations (Borders Ireland Limited, Books etc.,
U.K. Superstores, Australia, New Zealand, and Singapore).
|
20
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
General
Borders Group, Inc., through our subsidiaries including Borders,
Inc. (Borders) (individually and collectively,
we, us or the Company), is
an operator of book, music and movie superstores and mall-based
bookstores. At January 30, 2010, we operated 511
superstores under the Borders name, including 508 in the United
States and three in Puerto Rico. We also operated 175 mall-based
and other bookstores, including stores operated under the
Waldenbooks, Borders Express and Borders Outlet names, as well
as 29 Borders-branded airport stores. In addition, we own and
operate United Kingdom-based Paperchase Products Limited
(Paperchase), a designer and retailer of stationery,
cards and gifts. As of January 30, 2010, Paperchase
operated 85 stores, primarily in the United Kingdom, and 333
Paperchase shops are in Borders superstores.
In addition, we operate a proprietary
e-commerce
Web site, www.Borders.com, which was launched in May 2008.
On June 10, 2008, we sold bookstores that we had owned and
operated in Australia, New Zealand and Singapore. On
September 21, 2007, we sold bookstores that we had owned
and operated in the U.K. and Ireland. The sale of these
businesses is discussed below under the caption
Discontinued Operations.
Business
Strategy
Our business strategy is designed to address the most
significant opportunities and challenges facing our Company. In
particular, our challenges include commoditization in our
primary product categories and an extremely competitive
marketplace (including both store-based and online competitors),
product formats that are evolving from physical formats to
digital formats, and our own loss of market share. These
factors, among others, have contributed to declines in our
comparable store sales measures and in our sales per square foot
measures over the last several years. These declines have, in
turn, negatively impacted profitability.
The U.S. book retailing industry is a mature industry, and
has experienced little or no growth in recent years. Books
represent our primary product category in terms of sales. Rather
than opening new book superstores, we believe that there is
greater near-term opportunity in improving the productivity of
existing superstores and in enhancing Internet-based sales
channels. In particular, we see potential in combining the
greater selection offered by Internet retailing with the
inviting atmosphere of a physical store.
We believe that Web-based retailing will continue to increase in
popularity and market share as a distribution method for
physical book, music, and movie merchandise. In addition, the
Internet has enabled changes in the formats of many of the
product categories we offer. Sales of music in the physical
compact disc and movies in the DVD format, for example, have
declined over the past several years, as consumers have
increasingly turned to digital downloads of music and movies.
This trend, which we expect to continue, is also beginning to
manifest itself in the book category with the increasing
popularity of electronic book readers (eReaders).
Although sales of electronic books (eBooks)
currently represent a small percentage of total book sales, they
are expected to increase significantly over the next several
years. The shift toward digital formats represents an
opportunity for us as we continue to strengthen our Web-based
capabilities, both through Borders.com and through strategic
partnerships.
Our physical stores, however, remain integral to our future
success. The environment in which our stores operate is
intensely competitive and includes not only Internet-based
retailers and book superstore operators, but also mass merchants
and other non-bookseller retailers. Because of this, the
industry has experienced significant price competition over the
last several years, which has decreased our gross margin
percentages. We anticipate that these trends will continue,
rewarding those who can differentiate themselves by offering a
distinctive customer experience, and who can operate
efficiently. Therefore, we remain dedicated to the operational
improvement of our stores and offering our customers a rich
shopping experience in a relaxing, enjoyable atmosphere.
21
In order to focus on our existing superstores business, we have
effectively curtailed our new store program. In addition, we
continue to evaluate the performance of existing stores, and
additional store closures could occur in cases where our store
profitability goals are not met. During 2009 we closed 212
Waldenbooks Specialty Retail stores and ended the year with 175
small format stores. We believe that the Company has the
potential to operate mall-based stores profitably, and to that
end have signed short-term lease agreements for desirable
locations, which enables us to negotiate rents that are
responsive to the then-current sales environment. We will,
however, continue to close stores that do not meet our
profitability goals, a process which could result in additional
future asset impairments and store closure costs.
The principal components of our strategic plan are as follows:
Restore the
financial health and profitability of the
Company. We
believe that fiscal 2010 will continue to be challenging for
retailers due to continued uncertainty in the economic
environment, and as a consequence we will maintain our focus on
maximizing cash flow, reducing debt, conserving capital, tightly
managing expenses and improving profitability. In addition, we
will continue to reduce working capital needs by further driving
inventory productivity, thus improving cash flow and lowering
supply chain costs.
Acquire, engage
and retain
customers. We are
focused on the following key objectives:
Improve the
in-store
experience. During
the fourth quarter of 2009, we invested in inventory within our
key book categories and plan to continue to maintain these new
in-stock percentages. Our goal is to have the right titles in
the right stores at the right time to meet our customers
needs. We are also reallocating our payroll dollars from back
office tasks to the sales floor in order to improve the shopping
experience for our customers. We expect to continue to enhance
our in-store boutique shops, including our shops for kids, teens
and teachers. These shops have a distinct look and feel,
including unique signage, fixtures and other elements which we
expect to increase sales growth and profitability. In addition,
we will continue with our in-stock guarantee, which was launched
in the fourth quarter of 2009 and which is helping to retain
sales that would have been lost to competitors. This program
allows any customer who cannot find a title that is available at
Borders.com in their local store to have it shipped to their
home with no shipping charges.
Leverage Borders
Rewards. We
continue to develop our loyalty program, Borders Rewards. To
date, a total of approximately 37 million customers have
signed up for the program. We will continue to focus on growing
membership and increasing the profitability of the program, on
driving revenue through partnerships with other organizations,
and increasing sales by employing customer data to tailor
promotions that meet specific customer needs and interests. To
achieve these results we are redesigning the Borders Rewards
program to facilitate a higher level of participation and value
for our customers. Although we will continue to use Borders
Rewards to drive traffic into our stores, we will also invest in
additional marketing programs to acquire new customers.
Become a
community gathering
place. The
commoditization of our primary product categories will continue,
and as a result we must be more than a bookstore. We plan to
strengthen our position as a community gathering place, hosting
customer events including author and celebrity signings, local
events, educator appreciation weekends, and other community
driven events that are of interest to our customers and which
are expected to drive sales.
Leverage
Borders.com and the digital
revolution. We
expect to use emerging technologies across all channels to
attract customers and deliver a valued experience which we
anticipate will drive sales. For instance, we are working to
strengthen Borders.com as a way to engage customers who share
our passion for our products. In addition, we will become a
device-neutral, content-focused digital book provider, as we
believe there is opportunity to occupy the niche of
neutral expert for our customers, and we plan to
offer a wide variety of eReaders for sale in our stores. This
will be done through the introduction of a new shop in our
stores called Area-e where multiple eReaders will be
available for sale. We will enhance the Area-e experience
through our partnership with Kobo, through which we plan to
launch our digital bookstore on Borders.com during the second
quarter of 2010. Kobo, Inc. is a global eReading service that is
the newly named spin-off of Toronto-based Indigo
Books & Music Inc.s Shortcovers.
22
Create a winning,
high-performance company
culture. We are
focused on customer satisfaction and we will leverage our
knowledgeable associates in order to drive improved sales,
profitability and shareholder value.
Other
Information
We operate a loyalty program, Borders Rewards. Membership in
Borders Rewards is free, with no enrollment costs or annual
fees. Members can earn Borders Bucks in increments of $5 for
each cumulative $150 they spend on qualifying purchases in a
calendar year at Borders and Waldenbooks stores nationwide.
Borders Bucks expire 30 days after receipt by the member if
not redeemed. In addition, we offer Bonus Rewards Events,
whereby members get special deals periodically throughout the
year. We are redesigning the Borders Rewards program and intend
to announce changes to the program during 2010.
We have an agreement with Berjaya Corporation Berhad
(Berjaya), a publicly-listed diversified corporation
headquartered in Malaysia, establishing a franchise arrangement
under which Berjaya operates Borders stores in Malaysia. We also
have an agreement with Al Maya Group (Al Maya), a
diversified corporation headquartered in the United Arab
Emirates, establishing a franchise agreement under which Al Maya
or its affiliates operates Borders stores in the United Arab
Emirates and other Gulf Cooperation Council (GCC)
countries.
Through our subsidiaries, we had agreements with Amazon.com,
Inc. (Amazon) to operate Web sites utilizing the
Borders.com and Waldenbooks.com URLs (the Web
Sites). Under these agreements, Amazon was the merchant of
record for all sales made through the Web Sites, and determined
all prices and other terms and conditions applicable to such
sales. Amazon was responsible for the fulfillment of all
products sold through the Web Sites and retained all payments
from customers. We received referral fees for products purchased
through the Web Sites. The agreements contained mutual
indemnification provisions, including provisions that define
between the parties the responsibilities with respect to any
liabilities for sales, use and similar taxes, including
penalties and interest, associated with products sold on the Web
Sites. Taxes were not collected with respect to products sold on
the Web Sites except in certain states. As previously discussed,
we launched our proprietary
e-commerce
site during May 2008, and the Amazon agreements have been
terminated subject to the survival of indemnification and
certain other provisions.
Our fiscal year ends on the Saturday closest to the last day of
January. Fiscal 2009 consisted of 52 weeks, and ended on
January 30, 2010. Fiscal 2008 consisted of 52 weeks,
and ended on January 31, 2009. Fiscal 2007 consisted of
52 weeks, and ended on February 2, 2008. References
herein to years are to our fiscal years.
Discontinued
Operations
On June 10, 2008, we sold all of our bookstores in
Australia, New Zealand, and Singapore. On September 21,
2007, we sold bookstores that we owned and operated in the
United Kingdom and Ireland. We have accounted for the sale of
these operations as discontinued operations, and all previous
years have been restated to reflect the results of our
continuing operations excluding these operations. The results of
all the discontinued operations were previously reported as part
of our International segment. These disposals resulted in income
of $0.8 million, a loss of $0.3 million and a loss of
$128.8 million for the years ended January 30, 2010,
January 31, 2009 and February 2, 2008, respectively,
while the operation of the disposed businesses resulted in
losses of $1.7 million and $8.7 million for the years
ended January 31, 2009 and February 2, 2008,
respectively.
We retained several lease guarantees following the sale of these
operations, as well as certain tax indemnifications, and discuss
these obligations under the heading Off-Balance Sheet
Arrangements within this Managements Discussion and
Analysis.
Subsequent
Events
On March 31, 2010, we entered into a Third Amended and Restated
Revolving Credit Agreement (the Credit Agreement)
and a Term Loan Agreement (the Term Loan Agreement).
Separately on March 31, 2010, we
23
paid the principal outstanding to Pershing Square. Please see
the full descriptions of the Credit Agreement and the Term Loan
Agreement under the heading Sources of Liquidity
within this Managements Discussion and Analysis.
Results
of Operations
The following table presents our consolidated statements of
operations data, as a percentage of sales, for the three most
recent fiscal years. All amounts reflect the results of our
continuing operations unless otherwise noted.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan. 30,
|
|
|
Jan. 31,
|
|
|
Feb. 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Other revenue
|
|
|
1.2
|
|
|
|
1.0
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
101.2
|
|
|
|
101.0
|
|
|
|
101.2
|
|
Cost of merchandise sold (includes occupancy)
|
|
|
78.6
|
|
|
|
76.7
|
|
|
|
75.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
22.6
|
|
|
|
24.3
|
|
|
|
26.1
|
|
Selling, general and administrative expenses
|
|
|
25.5
|
|
|
|
25.9
|
|
|
|
25.6
|
|
Goodwill impairment
|
|
|
|
|
|
|
1.2
|
|
|
|
|
|
Asset impairments and other writedowns
|
|
|
0.6
|
|
|
|
1.8
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(3.5
|
)
|
|
|
(4.6
|
)
|
|
|
0.1
|
|
Interest expense
|
|
|
0.9
|
|
|
|
1.3
|
|
|
|
1.2
|
|
Warrant/put expense (income)
|
|
|
0.7
|
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
1.6
|
|
|
|
0.1
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax
|
|
|
(5.1
|
)
|
|
|
(4.7
|
)
|
|
|
(1.1
|
)
|
Income tax expense (benefit)
|
|
|
(1.1
|
)
|
|
|
0.9
|
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(4.0
|
)%
|
|
|
(5.6
|
)%
|
|
|
(0.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Results Comparison of 2009 to 2008
Sales
Consolidated sales decreased $451.0 million, or 13.9%, to
$2,791.1 million in 2009 from $3,242.1 million in
2008. This resulted from decreased sales in the Borders
Superstores and Waldenbooks Specialty Retail segments.
Comparable store sales measures include stores open more than
one year, with new stores included in the calculation upon their
13th
month of operation. Comparable store sales measures for
Waldenbooks Specialty Retail include our mall-based seasonal
businesses.
Comparable store sales for Borders Superstores decreased 14.4%
in 2009. This was primarily due to negative sales trends in the
book, music, movie and cafe categories due to a decline in
customer traffic and spending that began in September 2008 and
which persisted throughout 2009. This contributed to negative
comparable store sales in trade books of 10.7%. Early in 2009 we
substantially reduced the music and movies categories to a more
tailored assortment, and excluding the impact of these
categories comparable store sales decreased by 10.8%. On a
comparable store basis, transactions decreased by 9.6% and
transaction dollars decreased by 5.4%. The impact of price
changes on comparable store sales was not significant.
24
Waldenbooks Specialty Retails comparable store sales
decreased 8.1% in 2009, primarily due to a significant decline
in customer traffic and spending discussed previously. As a
result, on a comparable store sales basis, transactions
decreased by 6.3% and transaction dollars decreased by 1.9%. The
impact of price changes on comparable store sales was not
significant.
Other
revenue
Other revenue for the Borders segment primarily consists of
income recognized from unredeemed gift cards, as well as
marketing revenue earned through partnerships with third parties
and wholesale revenue earned through sales of merchandise to
other retailers and from franchisees. Other revenue in the
Waldenbooks Specialty Retail segment primarily consists of
income recognized from unredeemed gift cards.
Other revenue decreased $0.5 million, or 1.5%, to
$32.8 million in 2009 from $33.3 million in 2008, due
to a decrease in the Borders Superstores segment, partly offset
by an increase in the Waldenbooks Specialty Retail segment. The
decrease in the Borders Superstores segment was due to the
cessation of referral fees received from Amazon as part of the
Web Site agreement, partially offset by increased wholesale
revenue earned through sales of merchandise to other retailers
and franchisees.
Gross
margin
Consolidated gross margin decreased $158.0 million, or
20.0%, to $632.6 million in 2009 from $790.6 million
in 2008. As a percentage of sales, consolidated gross margin
decreased 1.7%, to 22.6% in 2009 from 24.3% in 2008. This was
due to a decrease in the Borders Superstore segment and the
Waldenbooks Specialty Retail segment. The decrease in the
Borders Superstores segment was primarily due to increased
occupancy costs as a percentage of sales, which was a result of
the de-leveraging of costs driven by negative comparable store
sales. Also contributing to the decline in the gross margin rate
were discounts and markdowns related to the liquidation of
multimedia product during the first quarter of 2009 as a
percentage of sales, partially offset by decreased distribution,
freight and other costs as a percentage of sales. The decrease
as a percentage of sales in the Waldenbooks Specialty Retail
segment was primarily due to increased product markdowns as a
percentage of sales in closing stores in 2009, when we closed
212 stores, compared to 2008 during which we closed 112 stores.
We classify the following items as Cost of merchandise
sold (includes occupancy) on our consolidated statements
of operations: product costs and related discounts, markdowns,
freight, shrinkage, capitalized inventory costs, distribution
center costs (including payroll, rent, supplies, depreciation,
and other operating expenses), and store occupancy costs
(including rent, common area maintenance, depreciation, repairs
and maintenance, taxes, insurance, and others). Our gross margin
may not be comparable to that of other retailers, which may
exclude the costs related to their distribution network from
cost of sales and include those costs in other financial
statement lines.
Selling,
general and administrative expenses
Consolidated selling, general and administrative expenses
(SG&A) decreased $131.1 million, or 15.6%,
to $711.3 million in 2009 from $842.4 million in 2008.
As a percentage of sales, SG&A decreased 0.4%, to 25.5% in
2009 from 25.9% in 2008, due to decreases as a percentage of
sales in the Borders Superstores segment and the Waldenbooks
Specialty Retail segment. The improvement in the Borders
Superstores and Waldenbooks Specialty Retail segment as a
percentage of sales was due to our expense reduction initiatives.
We classify the following items as Selling, general and
administrative expenses on our consolidated statements of
operations: store and administrative payroll, pre-opening costs,
rent, depreciation, utilities, supplies and equipment costs,
credit card and bank processing fees, bad debt, legal and
consulting fees, certain advertising income and expenses and
others.
25
Goodwill
Impairment
We perform our annual test for goodwill impairment at the end of
each fiscal year. As of January 31, 2010 we have
$0.3 million of goodwill on our consolidated balance sheet,
relating to our Paperchase U.K. business. As of January 30,
2010, no impairment of this goodwill was required. As a result
of our annual test on January 31, 2009, all of the goodwill
allocated to the Borders Superstores segment was impaired, and
we recorded a resulting charge of $40.3 million in the
fourth quarter of 2008. This impairment was primarily the result
of changes in fair value due to the material decline in our
market capitalization during the fourth quarter of 2008.
Asset
Impairments and Other Writedowns
During 2009, due to the economic environment and our operating
results, we concluded that there were sufficient indicators to
require the performance of long-lived asset impairment tests at
the end of the fourth quarter of 2009. As a result of these
tests, we recorded a pre-tax charge of $16.2 million,
comprised of the following: $15.0 million related to
Borders Superstores, $0.4 million related to Waldenbooks
Specialty Retail stores and $0.8 million related to
Paperchase U.K. stores.
During 2008, due to the impairment of the goodwill related to
the Borders Superstores segment and the items present in 2009,
we concluded that there were sufficient indicators to require
the performance of long-lived asset impairment tests at the end
of the third and fourth quarters of 2008. As a result of these
tests, we recorded a pre-tax charge of $53.5 million,
comprised of the following: $48.1 million related to
Borders Superstores, $4.7 million related to Waldenbooks
Specialty Retail stores and $0.7 million related to one
Borders store in Puerto Rico. Also during 2008, we recorded a
$3.6 million charge for the closing costs of our stores,
consisting of the following: $3.5 million asset impairment
charge related to the closure of 6 Borders Superstores and
$0.1 million asset impairment charge related to the closure
of 112 Waldenbooks Specialty Retail stores.
Interest
expense
Consolidated interest expense decreased $21.3 million, or
46.9%, to $24.1 million in 2009 from $45.4 million in
2008. This was primarily a result of a decrease in interest due
to lower debt levels during 2009 as compared to 2008 and a
decrease in the LIBOR rate in 2009 as compared to 2008. We paid
cash interest of $16.6 million in 2009 compared to
$36.3 million in 2008.
Warrant/put
expense
Consolidated warrant/put expense increased $60.8 million,
to expense of $20.7 million in 2009 from income of
$40.1 million in 2008. This was primarily a result of
expense recognized on the fair value adjustment of the warrant
liability of $4.5 million in 2009 compared to income of
$40.1 million recognized in 2008. The expense recognized in
2009 resulted primarily from the increase in our share price
during 2009, and the income recognized in 2008 resulted
primarily from the decrease in our share price during 2008.
Also impacting 2009 was the write-off of the intangible asset
related to the backstop purchase offer for our Paperchase U.K.
business of $16.2 million, due to the expiration of the
purchase offer. This intangible asset was previously categorized
as Accounts receivable and other current assets on
our consolidated balance sheets.
Taxes
The effective tax rate in 2009 was a benefit of 21.1%, compared
to expense of 19.5% in 2008. For 2009, the rate of 21.1%
differed from the federal statutory rate due to the need to
recognize a valuation allowance against the deferred benefit of
our current year domestic loss, which had a federal tax effect
of $43.7 million, favorably offset by the realization of
the deferred portion of the benefit of our 2008 federal domestic
loss, which had a federal tax effect of $29.0 million. In
2008, the majority of this loss represented a
26
net operating loss carryforward, and required a valuation
allowance. In November of 2009, the Worker Homeownership, and
Business Assistance Act of 2009 was signed into law, extending
the loss carryback period from two to five years, and allowed us
to carry back our 2008 loss to recover taxes paid in 2003 and
2004, totaling $32.4 million. Because of this, in 2009 we
were able to reverse the 2008 valuation allowance associated
with the 2008 domestic loss carryforward.
For 2008, the effective tax rate was an expense of 19.5%. This
rate differed from the federal statutory rate primarily due to
the unfavorable impact of recording a valuation allowance
against net domestic deferred tax assets. This non-cash
valuation allowance charge was necessary due to the
determination during the year that it was more-likely-than-not
that a future benefit would not be realized from these assets.
Also impacting the effective rate was a non-deductible goodwill
impairment charge, offset by the favorable impact of non-taxable
book income associated with the re-measure of stock warrants to
fair market value.
Loss
from continuing operations
Due to the factors mentioned above, loss from continuing
operations as a percentage of sales decreased to 4.0% in 2009
from 5.6% in 2008, and loss from continuing operations dollars
decreased to $110.2 million in 2009 from
$184.7 million in 2008.
Consolidated
Results Comparison of 2008 to 2007
Sales
Consolidated sales decreased $313.0 million, or 8.8%, to
$3,242.1 million in 2008 from $3,555.1 million in
2007. This resulted from decreased sales in all segments.
Comparable store sales measures include stores open more than
one year, with new stores included in the calculation upon their
13th month of operation. Comparable store sales measures for
Waldenbooks Specialty Retail include our mall-based seasonal
businesses.
Comparable store sales for Borders Superstores decreased 10.8%
in 2008. This was primarily due to a significant decline in
customer traffic that began in September 2008 and continued
through the fourth quarter, as well as the 2007 release of the
final book in the Harry Potter series. These items both
contributed to negative comparable store sales in trade books of
8.2%. Also contributing to the decline in comparable store sales
were decreased comparable store sales in the multimedia
categories, primarily due to continuing negative sales trends of
the CD and DVD formats and the planned reduction in inventory
and floor space devoted to the category. Partially offsetting
these declines were positive comparable store sales in gifts and
stationery. These items contributed to a comparable store sales
decline in non-book categories of 16.1% in 2008. Also, on a
comparable store basis, transactions decreased by 7.0% and
transaction dollars decreased by 4.1%. The impact of price
changes on comparable store sales was not significant.
Waldenbooks Specialty Retails comparable store sales
decreased 5.1% in 2008, also primarily due to a significant
decline in customer traffic that began in September 2008 and
continued through the fourth quarter, as well as the 2007
release of the final book in the Harry Potter series. Also, on a
comparable store sales basis, transactions decreased by 4.2% and
transaction dollars decreased by 0.8%. The impact of price
changes on comparable store sales was not significant.
Other
revenue
Other revenue for the Borders segment primarily consists of
income recognized from unredeemed gift cards, as well as
marketing revenue earned through partnerships with third
parties, wholesale revenue earned through sales of merchandise
to other retailers and franchisees, and referral fees received
from Amazon as part of the Web site agreement in 2007. Other
revenue in the Waldenbooks Specialty Retail segment primarily
consists of income recognized from unredeemed gift cards.
27
Other revenue decreased $9.0 million, or 21.3%, to
$33.3 million in 2008 from $42.3 million in 2007, due
to a decrease in the Borders Superstores segment. This resulted
from decreased income recognized from unredeemed gift cards in
2008, which was due to a revised estimate of our gift card
breakage rate. This was partially offset by increased marketing
revenue earned through partnerships with third parties. Also
contributing to the decrease was a decrease in the Waldenbooks
Specialty Retail segment, which was also affected by our
revision of the gift card breakage rate.
Gross
margin
Consolidated gross margin decreased $138.5 million, or
14.9%, to $790.6 million in 2008 from $929.1 million
in 2007. As a percentage of sales, consolidated gross margin
decreased 1.8%, to 24.3% in 2008 from 26.1% in 2007. This was
due to a decrease in the Borders Superstore segment, primarily
due to increased occupancy costs as a percentage of sales, which
was a result of the de-leveraging of costs driven by negative
comparable store sales. Gross margin rate was also negatively
impacted by increased store markdowns, increased freight costs,
and increased cost of sales related to merchandise sales to the
new owners of Borders Asia Pacific, all as a percentage of
sales. Also contributing to the decline in the gross margin rate
was decreased other revenue. These items were partially offset
by decreased promotional discounts and decreased shrinkage
expense as a percentage of sales. Also contributing to the
consolidated decrease in the gross margin rate was a decrease in
the Waldenbooks Specialty Retail segment. This was primarily due
to increased promotional discounts as a percentage of sales.
This increase in promotional discounts was due to lower store
count in 2008 as compared to 2007, while we operated essentially
the same number of calendar kiosks, which discount merchandise
to a higher degree than our stores. In addition, we closed 112
stores in 2008 compared to 75 stores closed in 2007, which
negatively impacted the gross margin rate, due to the
liquidation of inventory prior to the stores closing. Also
contributing to the decline in the gross margin rate were
increased occupancy costs as a percentage of sales, due to the
de-leveraging of expense caused by the decrease in comparable
store sales, and decreased other revenue. Partially offsetting
these items were decreased distribution and other costs as a
percentage of sales.
We classify the following items as Cost of merchandise
sold (includes occupancy) on our consolidated statements
of operations: product costs and related discounts, markdowns,
freight, shrinkage, capitalized inventory costs, distribution
center costs (including payroll, rent, supplies, depreciation,
and other operating expenses), and store occupancy costs
(including rent, common area maintenance, depreciation, repairs
and maintenance, taxes, insurance, and others). Our gross margin
may not be comparable to that of other retailers, which may
exclude the costs related to their distribution network from
cost of sales and include those costs in other financial
statement lines.
Selling,
general and administrative expenses
Consolidated selling, general and administrative expenses
(SG&A) decreased $69.6 million, or 7.6%,
to $842.4 million in 2008 from $912.0 million in 2007.
As a percentage of sales, SG&A increased 0.3%, to 25.9% in
2008 from 25.6% in 2007, primarily due to an increase as a
percentage of sales in the Borders Superstores segment. This
resulted from severance costs related to management and staff
reductions in the corporate office and in the stores during
2008. This was partially offset by decreased corporate payroll
and operating expenses and decreased advertising costs as a
percentage of sales, all a result of expense reduction
initiatives. Store payroll and operating expenses in Borders
Superstores were flat as a percentage of sales in 2008 compared
to 2007 while comparable store sales declined over the same
period, reflecting the results of our expense reduction
initiatives. Partially offsetting the increase as a percentage
of sales in the Borders Superstores segment was a decrease in
the Waldenbooks Specialty Retail segment. This was primarily due
to a decrease in corporate and store payroll and operating
expenses as a percentage of sales, primarily as a result of
expense reduction initiatives. This was partially offset by
severance costs related to management and staff reductions in
the corporate office and in the stores during 2008, and
increased advertising and other costs as a percentage of sales.
We classify the following items as Selling, general and
administrative expenses on our consolidated statements of
operations: store and administrative payroll, store pre-opening
costs, rent, depreciation,
28
utilities, supplies and equipment costs, credit card and bank
processing fees, bad debt, legal and consulting fees, certain
advertising income and expenses and others.
Goodwill
Impairment
As a result of our annual test on January 31, 2009, all of
the goodwill allocated to the Borders Superstores segment was
impaired, and we recorded a resulting charge of
$40.3 million in the fourth quarter of 2008. This
impairment was primarily the result of changes in fair value due
to the material decline in our market capitalization during the
fourth quarter of 2008.
Asset
Impairments and Other Writedowns
During 2008, due to the impairment of the goodwill related to
the Borders Superstores segment, the economic environment and
our operating results, we concluded that there were sufficient
indicators to require the performance of long-lived asset
impairment tests at the end of the third and fourth quarters of
2008. As a result of these tests, we recorded a pre-tax charge
of $53.5 million, comprised of the following:
$48.1 million related to Borders Superstores,
$4.7 million related to Waldenbooks Specialty Retail stores
and $0.7 million related to one Borders store in Puerto
Rico. Also during 2008, we recorded a $3.6 million charge
for the closing costs of our stores, comprised of the following:
$3.5 million asset impairment charge related to the closure
of 6 Borders Superstores and $0.1 million asset impairment
charge related to the closure of 112 Waldenbooks Specialty
Retail stores.
In 2007, assets of underperforming Borders Superstores were
tested for impairment and as a result, we recorded a charge of
$5.5 million. In addition, we recorded a fourth quarter
2007 charge of $0.7 million related to underperforming
Waldenbooks Specialty Retail stores. In the International
segment, we recorded an asset impairment charge of
$0.5 million related to one Borders store in Puerto Rico.
Also during 2007, we recorded a $6.3 million charge for the
closing costs of our stores, consisting of the following:
$5.6 million related to the closure of eight Borders
Superstores and $0.7 million related to the closure of 75
Waldenbooks Specialty Retail stores. The charge for both
segments consisted primarily of asset impairments.
Interest
expense
Consolidated interest expense increased $2.3 million, or
5.3%, to $45.4 million in 2008 from $43.1 million in
2007. The increase was due to the amortization of the term loan
discount of $7.0 million, partially offset by decreased
interest expense due to lower debt levels during 2008 as
compared to 2007. We paid cash interest of $36.3 million in
2008 compared to $43.8 million in 2007.
Warrant/put
expense
We recognized non-cash income of $40.1 million in 2008
related to the fair value adjustment of the warrant liability.
The income recognized in 2008 resulted primarily from the
decrease in our share price during 2008.
Taxes
During 2008, we recorded a non-cash charge of $86.1 million
related to establishing a full valuation allowance against our
domestic net deferred tax assets. In making this determination,
we utilized a consistent approach that considered our three-year
cumulative loss position. During the year, we determined a full
valuation allowance against our net domestic deferred tax assets
was needed, based primarily on our assumption that we would be
in a three-year cumulative loss position as of year-end 2008,
along with certain other factors.
Our effective tax rate was an expense of 19.5% in 2008 compared
to a benefit of 49.0% in 2007. The effective tax rate of
−19.5% in 2008 differed from the federal statutory rate
primarily due to the unfavorable impact of recording the
valuation allowance described above. Also impacting the
effective
29
rate was the non-deductible goodwill impairment charge, offset
by the favorable impact of non-taxable book income associated
with the re-measure of stock warrants to fair market value. The
effective tax rate of 49.0% in 2007 differed from the federal
statutory rate primarily due to the favorable impact of the
realization of the benefit of prior year foreign net operating
loss carry-forwards.
Loss
from continuing operations
Due to the factors mentioned above, loss from continuing
operations as a percentage of sales increased to 5.6% in 2008
from 0.6% in 2007, and loss from continuing operations dollars
increased to $184.7 million in 2008 from $19.9 million
in 2007.
Borders
Superstores
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollar amounts in
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Sales
|
|
$
|
2,265.8
|
|
|
$
|
2,625.4
|
|
|
$
|
2,847.2
|
|
Other revenue
|
|
$
|
26.0
|
|
|
$
|
26.5
|
|
|
$
|
35.3
|
|
Operating income (loss)
|
|
$
|
(47.1
|
)
|
|
$
|
(100.9
|
)
|
|
$
|
30.6
|
|
Operating income (loss) as % of sales
|
|
|
(2.1
|
)%
|
|
|
(3.8
|
)%
|
|
|
1.1
|
%
|
Store openings
|
|
|
|
|
|
|
12
|
|
|
|
18
|
|
Store closings
|
|
|
7
|
|
|
|
6
|
|
|
|
8
|
|
Store count
|
|
|
508
|
|
|
|
515
|
|
|
|
509
|
|
Borders
Superstores Comparison of 2009 to 2008
Sales
Borders Superstore sales decreased $359.6 million, or
13.7%, to $2,265.8 million in 2009 from
$2,625.4 million in 2008. This decrease was driven by
declining comparable store sales of $367.5 million and by
non-comparable sales of $6.8 million associated with 2009
and 2008 store closings, partially offset by increased
Borders.com sales of $14.7 million in 2009.
Other
revenue
Other revenue decreased $0.5 million, or 1.9%, to
$26.0 million in 2009 from $26.5 million in 2008. This
was primarily due to the cessation of referral fees received
from Amazon as part of the Web Site agreement, partially offset
by increased wholesale revenue earned through sales of
merchandise to other retailers and from franchisees.
Gross
margin
Gross margin as a percentage of sales decreased 1.4%, to 22.9%
in 2009 from 24.3% in 2008. This was primarily due to increased
occupancy costs of 1.5% as a percentage of sales, which was a
result of the de-leveraging of costs driven by negative
comparable store sales. Also contributing to the decline in the
gross margin rate were discounts and markdowns related to the
liquidation of multimedia product during the first quarter of
2009 of 0.4% as a percentage of sales. These items were
partially offset by decreased distribution freight and other
costs of 0.5% as a percentage of sales.
Gross margin dollars decreased $118.7 million, or 18.6%, to
$518.1 million in 2009 from $636.8 million in 2008,
due primarily to the decrease in gross margin percentage noted
above and the decrease in comparable store sales.
30
Selling,
general and administrative expenses
SG&A as a percentage of sales decreased 0.3%, to 24.3% in
2009 from 24.6% in 2008, The decrease was primarily due to
decreases as a percentage of sales in store payroll of 0.6% and
advertising cost costs of 0.1%, both a result of our expense
reduction initiatives, as well as decreased store pre-opening
costs of 0.1% as a percentage of sales, due to the lack of new
superstore openings in 2009. These decreases were partially
offset by an increase in store operating expenses of 0.5% as a
percentage of sales, due to de-leveraging of expense resulting
from the decline in comparable store sales. Overhead payroll and
operating expenses were flat as a percentage of sales in 2009 as
compared to 2008, reflecting the results of our expense
reduction initiatives.
SG&A dollars decreased $95.5 million, or 14.8%, to
$550.3 million in 2009 from $645.8 million in 2008,
primarily due to the Companys expense reduction
initiatives.
Goodwill
Impairment
As of January 30, 2010, we have no goodwill on the balance
sheet associated with the Borders Superstores segment. As a
result of our annual test on January 31, 2009, all of the
goodwill allocated to the Borders Superstores segment was
impaired, and we recorded a resulting charge of
$40.3 million in the fourth quarter of 2008. This
impairment was primarily the result of changes in fair value due
to the material decline in our market capitalization during the
fourth quarter of 2008.
Asset
Impairments and Other Writedowns
During 2009, due to the economic environment and our operating
results, we concluded that there were sufficient indicators to
require the performance of long-lived asset impairment tests at
the end of the fourth quarter of 2009. As a result of this
evaluation in 2009, we recorded a pre-tax charge of
$15.0 million related to Borders stores.
During 2008, due to the impairment of the goodwill related to
the Borders Superstores segment and the items present in 2009,
we concluded that there were sufficient indicators to require
the performance of long-lived asset impairment tests at the end
of the third and fourth quarters of 2008. As a result of these
tests, we recorded a pre-tax charge of $48.1 million
related to Borders stores. We also recorded a $3.5 million
asset impairment charge related to the closure of six Borders
Superstores.
Operating
loss
Due to the factors mentioned above, operating loss as a
percentage of sales decreased to 2.1% in 2009 compared to 3.8%
in 2008, and operating loss dollars decreased to
$47.1 million in 2009 compared to $100.9 million in
2008.
Borders
Superstores Comparison of 2008 to 2007
Sales
Borders Superstore sales decreased $221.8 million, or 7.8%,
to $2,625.4 million in 2008 from $2,847.2 million in
2007. This decrease was driven by declining comparable store
sales of $303.4 million, partially offset by non-comparable
sales of $35.9 million associated with 2008 and 2007 store
openings, and Borders.com sales of $45.7 million in 2008.
Other
revenue
Other revenue decreased $8.8 million, or 24.9%, to
$26.5 million in 2008 from $35.3 million in 2007. This
was primarily due to decreased income recognized from unredeemed
gift cards in 2008 of $11.5 million, due to a revised
estimate of our gift card breakage rate. This was partially
offset by marketing revenue earned through partnerships with
third parties of $2.3 million.
31
Gross
margin
Gross margin as a percentage of sales decreased 1.7%, to 24.3%
in 2008 from 26.0% in 2007. This was primarily due to increased
occupancy costs of 1.3% as a percentage of sales, which was a
result of the de-leveraging of costs driven by negative
comparable store sales. Gross margin rate was also negatively
impacted by increased store markdowns and other costs of 0.6%,
increased freight costs of 0.3% and increased cost of sales
related to merchandise sales to the new owners of Borders Asia
Pacific of 0.2%, all as a percentage of sales. Also contributing
to the decline in the gross margin rate was decreased other
revenue of 0.2% as a percentage of sales. These items were
partially offset by decreased promotional discounts of 0.6% and
decreased shrinkage expense of 0.3% as a percentage of sales.
Gross margin dollars decreased $103.4 million, or 14.0%, to
$636.8 million in 2008 from $740.2 million in 2007,
due primarily to the decrease in gross margin percentage noted
above, and the decrease in comparable store sales, partially
offset by a landlord lease termination payment of
$7.5 million received during the third quarter of 2008.
Selling,
general and administrative expenses
SG&A as a percentage of sales increased 0.1%, to 24.6% in
2008 from 24.5% in 2007, primarily due to severance costs of
0.4% as a percentage of sales, related to management and staff
reductions in the corporate office and in the stores during
2008. This was partially offset by decreased corporate payroll
and operating expenses of 0.2% and decreased advertising costs
of 0.1% as a percentage of sales, all a result of expense
reduction initiatives. Store payroll and operating expenses were
flat as a percentage of sales in 2008 compared to 2007 while
comparable store sales declined over the same period, reflecting
the results of our expense reduction initiatives.
SG&A dollars decreased $52.7 million, or 7.5%, to
$645.8 million in 2008 from $698.5 million in 2007,
primarily due to the Companys expense reduction
initiatives.
Goodwill
Impairment
As a result of our annual test on January 31, 2009, all of
the goodwill allocated to the Borders Superstores segment was
impaired, and we recorded a resulting charge of
$40.3 million in the fourth quarter of 2008. This
impairment was primarily the result of changes in fair value due
to the material decline in our market capitalization during the
fourth quarter of 2008.
Asset
Impairments and Other Writedowns
During 2008, due to the impairment of the goodwill related to
the Borders Superstores segment, the economic environment and
our operating results, we concluded that there were sufficient
indicators to require the performance of long-lived asset
impairment tests at the end of the third and fourth quarters of
2008. As a result of these tests, we recorded a pre-tax charge
of $48.1 million related to Borders Superstores. In addition, we
recorded a charge of $3.5 million related to the closure
costs of certain Borders stores.
In 2007, we recorded a $5.5 million writedown related to
the impairment of assets at underperforming Borders stores. In
addition, we recorded a charge of $5.6 million related to
the closure costs of certain Borders stores.
Operating
loss
Due to the factors mentioned above, operating loss as a
percentage of sales increased to a loss of 3.8% in 2008 compared
to income of 1.1% in 2007, and operating loss dollars increased
to a loss of $100.9 million in 2008 compared to income of
$30.6 million in 2007.
32
Waldenbooks
Specialty Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollar amounts in
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Sales
|
|
$
|
387.3
|
|
|
$
|
480.0
|
|
|
$
|
562.8
|
|
Other revenue
|
|
$
|
2.5
|
|
|
$
|
1.7
|
|
|
$
|
3.8
|
|
Operating loss
|
|
$
|
(33.3
|
)
|
|
$
|
(27.5
|
)
|
|
$
|
(21.4
|
)
|
Operating loss as % of sales
|
|
|
(8.6
|
)%
|
|
|
(5.7
|
)%
|
|
|
(3.8
|
)%
|
Store openings
|
|
|
1
|
|
|
|
8
|
|
|
|
1
|
|
Store closings
|
|
|
212
|
|
|
|
112
|
|
|
|
75
|
|
Store count
|
|
|
175
|
|
|
|
386
|
|
|
|
490
|
|
Waldenbooks
Specialty Retail Comparison of 2009 to
2008
Sales
Waldenbooks Specialty Retail sales decreased $92.7 million,
or 19.3%, to $387.3 million in 2009 from
$480.0 million in 2008. This was comprised of decreased
non-comparable store sales associated with 2009 and 2008 store
closings of $65.0 million and decreased comparable store
sales of $27.7 million. Of the 212 store closures during
2009, 186 were closed in the fourth quarter of 2009.
Other
revenue
Other revenue increased $0.8 million, or 47.1%, to
$2.5 million in 2009 from $1.7 million in 2008. This
was due to increased income recognized from unredeemed gift
cards in 2009.
Gross
margin
Gross margin as a percentage of sales decreased 4.3%, to 17.4%
in 2009 from 21.7% in 2008. This was primarily due to increased
product markdowns in closing stores in 2009, during which we
closed 212 stores, compared to 2008 when we closed 112 stores.
Gross margin dollars decreased $37.0 million, or 35.5%, to
$67.3 million in 2009 from $104.3 million in 2008,
primarily due to the decline in the gross margin rate noted
above, store closings and the decline in comparable store sales.
Selling,
general and administrative expenses
SG&A as a percentage of sales decreased 0.6%, to 25.9% in
2009 from 26.5% in 2008. This was primarily due to a decrease in
corporate payroll of 1.2% and decreased advertising expenses of
0.1% as a percentage of sales, primarily as a result of expense
reduction initiatives. This was partially offset by increased
store and corporate operating expenses of 0.7% as a percentage
of sales, primarily a result of the decline in comparable store
sales. Store payroll remained flat as a percentage of sales.
SG&A dollars decreased $26.6 million, or 21.0%, to
$100.3 million in 2009 from $126.9 million in 2008,
primarily due to store closures and the Companys expense
reduction initiatives.
Asset
Impairments and Other Writedowns
In 2009, due to the segments operating results,
Waldenbooks Specialty Retail incurred pre-tax asset impairment
charges of $0.4 million related to underperforming stores.
During 2008, due to the economic environment and Waldenbooks
Specialty Retails operating results, we concluded that
there were sufficient indicators to require the performance of
long-lived asset impairment tests at the end of the third and
fourth quarters of 2008. As a result of these tests, we recorded
a pre-tax
33
charge of $4.7 million related to Waldenbooks Specialty
Retail stores. In addition, we recorded a charge of
$0.1 million related to the closure of 112 Waldenbooks
Specialty Retail stores.
Operating
loss
Due to the factors mentioned above, operating loss as a
percentage of sales increased to 8.6% in 2009 from 5.7% in 2008,
while operating loss dollars increased to $33.3 million in
2009 from $27.5 million in 2008.
Waldenbooks
Specialty Retail Comparison of 2008 to
2007
Sales
Waldenbooks Specialty Retail sales decreased $82.8 million,
or 14.7%, to $480.0 million in 2008 from
$562.8 million in 2007. This was comprised of decreased
non-comparable store sales associated with 2008 and 2007 store
closings of $57.7 million and decreased comparable store
sales of $25.1 million.
Other
revenue
Other revenue decreased $2.1 million, or 55.3%, to
$1.7 million in 2008 from $3.8 million in 2007. This
was due to decreased income recognized from unredeemed gift
cards in 2008 of $2.1 million, due to a revised estimate of
our gift card breakage rate.
Gross
margin
Gross margin as a percentage of sales decreased 1.7%, to 21.7%
in 2008 from 23.4% in 2007. This was primarily due to increased
promotional discounts of 1.3% as a percentage of sales. This
increase in promotional discounts was primarily due to lower
store count in 2008 as compared to 2007, while we operated
essentially the same number of calendar kiosks, which discount
merchandise to a higher degree than our stores. In addition, we
closed 112 stores in 2008 compared to 75 stores closed in 2007,
which negatively impacted the gross margin rate by 0.8% as a
percentage of sales, due to the liquidation of inventory prior
to the stores closing. Also contributing to the decline in
the gross margin rate were increased occupancy costs of 0.3% as
a percentage of sales, due to the de-leveraging of expense
caused by the decrease in comparable store sales, and decreased
other revenue of 0.3% as a percentage of sales. Partially
offsetting these items were decreased distribution and other
costs of 1.0% as a percentage of sales.
Gross margin dollars decreased $27.6 million, or 20.9%, to
$104.3 million in 2008 from $131.9 million in 2007,
primarily due to the decline in the gross margin rate noted
above, store closings and the decline in comparable store sales.
Selling,
general and administrative expenses
SG&A as a percentage of sales decreased 0.5%, to 26.5% in
2008 from 27.0% in 2007. This was primarily due to a decrease in
corporate payroll and operating expenses of 0.9% and decreased
store payroll and operating expenses of 0.2% as a percentage of
sales, primarily as a result of expense reduction initiatives.
This was partially offset by severance costs of 0.3% as a
percentage of sales, related to management and staff reductions
in the corporate office and in the stores during 2008, and
increased advertising and other costs of 0.3% as a percentage of
sales.
SG&A dollars decreased $24.9 million, or 16.4%, to
$126.9 million in 2008 from $151.8 million in 2007,
primarily due to store closures and expense reductions.
Asset
Impairments and Other Writedowns
During 2008, due to the economic environment and Waldenbooks
Specialty Retails operating results, we concluded that
there were sufficient indicators to require the performance of
long-lived asset impairment tests at the end of the third and
fourth quarters of 2008. As a result of these tests, we recorded
a pre-tax
34
charge of $4.7 million related to Waldenbooks Specialty
Retail stores. In addition, we recorded a charge of
$0.1 million related to the closure of 112 Waldenbooks
Specialty Retail stores.
In 2007, Waldenbooks Specialty Retail incurred asset impairment
charges of $0.7 million related to underperforming stores.
In addition, we recorded a charge of $0.7 million related
to the closure costs of certain Waldenbooks Specialty Retail
stores in 2007.
Operating
loss
Due to the factors mentioned above, operating loss as a
percentage of sales increased to 5.7% in 2008 from 3.8% in 2007,
while operating loss dollars increased to $27.5 million in
2008 from $21.4 million in 2007.
International
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollar amounts in
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Operating income
|
|
$
|
0.9
|
|
|
$
|
3.7
|
|
|
$
|
8.0
|
|
International
Comparison of 2009 to 2008
Operating
Income
Operating income decreased $2.8 million, or 75.7%, to
$0.9 million in 2009 from $3.7 million in 2008. This
was primarily due to the impairment of the fixed assets of three
underperforming Paperchase U.K. stores during the second quarter
of 2009, as well as the disposal of Paperchase U.K. assets
located in Borders U.K. stores, which were closed during
December 2009. Also contributing to the increase were increased
occupancy costs related to new Paperchase U.K. store openings.
Partially offsetting these increases was improved profitability
of the Puerto Rico superstores.
International
Comparison of 2008 to 2007
Operating
Income
Operating income decreased $4.3 million, or 53.8%, to
$3.7 million in 2008 from $8.0 million in 2007. This
was primarily a result of decreased operating income generated
by our Paperchase U.K. business, primarily due to a decline in
sales in 2008.
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollar amounts in
millions)
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
Operating loss
|
|
$
|
(15.4
|
)
|
|
$
|
(24.5
|
)
|
|
$
|
(13.1
|
)
|
The Corporate segment includes various corporate governance and
corporate incentive costs.
Corporate
Comparison of 2009 to 2008
Operating loss dollars decreased $9.1 million, or 37.1%, to
$15.4 million in 2009 from $24.5 million in 2008. This
was primarily due to decreased consulting expense associated
with our turnaround effort in 2009, as well as overall cost
decreases resulting from our cost reduction initiatives.
Corporate
Comparison of 2008 to 2007
Operating loss dollars increased $11.4 million, or 87.0%,
to $24.5 million in 2008 from $13.1 million in 2007.
This was primarily due to costs incurred to explore strategic
alternatives in 2008 of $11.2 million, and an increase in
the U.K. lease guarantee liability of $2.9 million. These
increases were partially offset by expense reductions.
35
Costs
Associated with Turnaround Effort
During 2008 we launched a turnaround effort designed to return
our business to profitability. This effort included exploring
strategic alternatives for our business, including the possible
sale of some or all of our business, expense reduction
initiatives, management consolidation and staff reductions in
our corporate office and in our stores, as well as a reduction
in our investment in music and movie inventory. These efforts
continued throughout 2009, and included a reduction of floor
space devoted to multimedia product in our superstores.
A summary of the costs associated with our turnaround effort
follows:
|
|
|
|
|
|
|
|
|
(dollar amounts in
millions)
|
|
2009
|
|
|
2008
|
|
|
Consulting and legal fees
|
|
$
|
6.0
|
|
|
$
|
11.2
|
|
Severance costs
|
|
|
6.7
|
|
|
|
16.4
|
|
Retention costs
|
|
|
1.3
|
|
|
|
2.3
|
|
Multimedia inventory reduction costs, including accelerated
depreciation costs
|
|
|
11.3
|
|
|
|
|
|
Music inventory markdowns
|
|
|
|
|
|
|
6.5
|
|
Paperchase strategic alternative costs
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25.3
|
|
|
$
|
36.5
|
|
|
|
|
|
|
|
|
|
|
The charge related to music inventory markdowns is categorized
as Cost of merchandise sold on our consolidated
statements of operations. The multimedia inventory reduction
costs are categorized partially as Cost of merchandise
sold and partially as Selling, general and
administrative expenses on our consolidated statements of
operations. All other charges are categorized as Selling,
general and administrative expenses on our consolidated
statements of operations.
Liquidity
and Capital Resources
Cash
Flows
Operating
Activities
Cash flow from operating activities of continuing operations
decreased $177.5 million, or 76.0%, to $56.1 million
in 2009 from $233.6 million in 2008. This was primarily due
to a decrease in the cash generated by decreasing our inventory
levels (net of the change in accounts payable) of
$117.1 million and decreased cash generated from operating
results of $26.9 million (defined as gross margin dollars
less selling, general and administrative expenses). The
remainder of the decrease is due to changes in the timing of
payments to employees and to non-merchandise vendors. These
items were partially offset by decreased cash interest paid of
$19.7 million and increased cash income taxes received of
$7.9 million.
Cash flow from operating activities of continuing operations
increased $128.6 million, or 122.5%, to $233.6 million
in 2008 from $105.0 million in 2007. This was primarily due
to an increase in cash generated through a reduction in
inventories (net of accounts payable) in 2008 as compared to
2007, primarily due to improved inventory management and store
closures in 2008. Partially offsetting the cash generated by
lower inventory levels was a larger net loss in 2008 as compared
to 2007 (see discussion of our operating results under the
caption Results of Operations), offset by larger
non-cash charges for depreciation, goodwill impairments, asset
impairments and other writedowns and deferred tax asset
impairments. Also contributing to the increase in cash generated
from operating activities was a decrease in accrued payroll and
other liabilities, primarily due to the timing of payments to
employees and a lower gift card liability.
Investing
Activities
Net cash used for investing activities of continuing operations
was $17.9 million in 2009. This was the result of capital
expenditures for one new airport store and the maintenance of
existing stores, distribution
36
centers and management information systems. Net cash provided by
investing activities of continuing operations was
$13.8 million in 2008. This was primarily the result of the
cash proceeds of $97.3 million received during 2008 from
the sale of our Australia, New Zealand and Singapore businesses.
These proceeds were partially offset by capital expenditures of
$79.9 million for new stores, new information technology
systems including spending on our
e-commerce
Web site, and maintenance of existing stores, distribution
centers and management information systems. Net cash used for
investing activities of continuing operations was
$111.7 million in 2007. This was primarily the result of
capital expenditures of $131.3 million, partially offset by
the cash proceeds of $20.4 million received during 2007
from the sale of our U.K. and Ireland bookstore operations.
Financing
Activities
Net cash used for financing activities of continuing operations
was $55.9 million in 2009, resulting primarily from
repayment of borrowings under our Prior Credit Agreement of
$54.5 million. Net cash used for financing activities of
continuing operations was $226.4 million in 2008, resulting
primarily from the repayment of borrowings under the Prior
Credit Agreement of $261.7 million and the payment of cash
dividends during the first quarter on shares of our common stock
of $6.5 million. Partially offsetting these items were
funding generated by the term note financing from Pershing
Square of $42.5 million. Net cash provided by financing
activities of continuing operations was $27.4 million in
2007, resulting primarily from funding from the Prior Credit
Agreement of $43.4 million, partially offset by the payment
of cash dividends of $19.4 million.
Capital
Expenditures
We reduced capital expenditures significantly in 2009 to
$17.9 million, compared to $79.9 million in 2008.
Capital spending in 2010 will be relatively flat compared to
2009 and limited to a minimal number of previously committed new
store openings, as well as maintenance spending on existing
stores, distribution centers, and management information
systems. This will allow continued focus on improving the
profitability of our existing stores and reduce our cash
requirements.
Dividends
The Board of Directors has suspended the companys
quarterly dividend program in order to preserve capital for
operations and strategic initiatives.
Sources
of Liquidity
Revolving
Credit Agreement
On March 31, 2010, we entered into a Third Amended and
Restated Revolving Credit Agreement (the Credit
Agreement) with Bank of America, N.A., as administrative
agent, and other lenders, under which the lenders committed to
provide up to $970.5 million in loans under a secured
revolving credit facility (the Credit Facility). The
Credit Agreement amends and restates our existing Second Amended
and Restated Multicurrency Revolving Credit Agreement dated as
of July 31, 2006, as previously amended (the Prior
Credit Agreement). Bank of America, N.A. and General
Electric Capital Corporation are the co-collateral agents, Wells
Fargo Retail Finance, LLC and General Electric Capital
Corporation are co-syndication agents and JPMorgan Chase Bank,
N.A. is the documentation agent for the Credit Facility. Banc of
America Securities LLC, J.P. Morgan Securities Inc., GE
Capital Markets, Inc. and Wells Fargo Retail Finance, LLC are
the joint lead arrangers and joint bookrunners for the Credit
Facility.
The commitments of the lenders to provide the Credit Facility
are divided into an existing tranche maturing on July 31,
2011 (the Existing Tranche) and an extended tranche
maturing on March 31, 2014 (the Extended
Tranche). The aggregate commitments of the lenders in
connection with the Existing Tranche and Extended Tranche are
$270.5 million and $700.0 million, respectively.
37
The Credit Facility will be secured by a first priority security
interest in substantially all of the inventory, accounts
receivable, cash and cash equivalents and certain other
collateral of the borrowers and guarantors under the Credit
Facility (collectively, the Credit Facility Parties)
and a first priority pledge of equity interests in certain of
the our subsidiaries, and a second priority security interest in
equity interests in certain of our other subsidiaries,
intellectual property, equipment and certain other property.
The commitments by the lenders under the Credit Facility are
subject to borrowing base and availability restrictions. Up to
$75.0 million of the Credit Facility may be used for the
issuance of letters of credit and up to $50.0 million of
the Credit Facility may be used for the making of swing line
loans.
Interest under the Credit Facility will accrue, at our election,
at a Base Rate or LIBO Rate, plus, in each case, an Applicable
Margin, which is determined by reference to the level of
Availability as defined in the Credit Agreement, with the
Applicable Margin for LIBO Rate loans ranging from 2.00% to
4.25% and the Applicable Margin for Base Rate loans ranging from
0.25% to 3.25%. In addition, commitment fees ranging from 0.25%
to 0.75% (determined by reference to the level of usage under
the Credit Facility) are also payable on unused commitments.
Letter of credit fees are payable on the maximum daily amount to
be drawn under a letter of credit at a rate equal to the
Applicable Margin for LIBO Rate Loans ranging from 1.00% to
4.25%. Lower Applicable Margins and fees are generally
applicable to borrowings under the Existing Tranche, which
matures on July 31, 2011, than to borrowings under the
Extended Tranche.
The Credit Agreement limits our ability to incur additional
indebtedness, create liens, make investments, make restricted
payments (including any required cash-out of the warrants issued
to Pershing Square Capital Management, L.P. or its affiliates)
or specified payments and merge or acquire assets, among other
things. The lenders will assume dominion and control over the
Credit Facility Parties cash if Availability (or, if in
effect, Adjusted Excess Availability) under the Credit Facility
falls below the greater of (i) $65.0 million or
(ii) 15% of the lesser of the applicable borrowing base or
the aggregate commitments of the lenders in connection with the
Credit Facility.
The Credit Agreement contains customary events of default,
including payment defaults, breaches of representations and
warranties, covenant defaults, cross-defaults to similar
obligations, customary ERISA defaults, certain events of
bankruptcy and insolvency, judgment defaults, the invalidity of
liens on collateral, change in control, cessation of business or
the liquidation of material assets of the Credit Facility
Parties taken as a whole, the occurrence of an uninsured loss to
a material portion of collateral and failure of the obligations
under the Credit Facility to constitute senior indebtedness
under any applicable subordination or intercreditor agreements.
The proceeds from the Credit Facility will be used by the
Company to refinance existing indebtedness, for working capital,
to finance capital expenditures and for other general corporate
purposes.
We will pay certain customary fees and expenses in connection
with obtaining the lenders commitments pursuant to the
terms of a related fee letter.
Term
Loan Agreement
On March 31, 2010, we entered into a Term Loan Agreement
(the Term Loan Agreement) with GA Capital LLC, as
administrative agent, and other lenders, under which the lenders
committed to provide a secured term loan facility (the
Term Loan Facility) comprised of a
$80.0 million tranche and a $10.0 million tranche.
Banc of America Securities LLC is the sole arranger and sole
bookrunner for the Term Loan Facility.
The $10.0 million tranche of the Term Loan Facility will be
payable in equal monthly installments of $2.5 million each
on the first day of September, October, November and December,
2010, with the remaining $80.0 million tranche maturing on
March 31, 2014. We may prepay the Term Loan Facility at any
time, subject to a prepayment premium of the greater of all
remaining unpaid interest and fees that
38
would have otherwise accrued through the end of the first year
of the facility, a 3% prepayment premium if prepaid during the
second year and a 2% prepayment premium if prepaid during the
third year. We may also prepay up to $20 million of the
Term Loan Facility at any time, subject to a prepayment premium
of 2% if the prepayment occurs prior to the third anniversary of
the Term Loan Agreement. If we sell the stock or assets of our
Paperchase Products Limited (Paperchase) subsidiary,
we will be obligated under the Term Loan Agreement to apply the
first $25.0 million of proceeds from the sale to prepay the
Term Loan Facility, without premium or penalty, and to apply the
remainder of the proceeds from the sale to prepay the
outstanding loans under the Credit Facility.
The Term Loan Facility will be secured by (i) a first
priority security interest in 65% of the voting stock of
Paperchase, our intellectual property and that of our
subsidiaries, and the fixed assets of the borrowers and
guarantors under the Term Loan Facility (collectively, the
Term Loan Facility Parties) and (ii) a second
priority security interest in all of the collateral securing the
Credit Facility. In the event that any prepayments (other than a
mandatory prepayment as a result of the sale of Paperchase)
result in a reduction of the outstanding amount of the Term Loan
Facility to $65.0 million or less, the liens of the lenders
under the Term Loan Facility on our intellectual property will
be subordinated to the liens of the lenders under the Credit
Facility.
The commitments by the lenders under the Term Loan Facility are
subject to borrowing base and availability restrictions. The
Term Loan Agreement provides for a seasonal minimal excess
availability requirement that obligates us to maintain higher
levels of excess availability under the Term Loan Facility
during the months of December and January of each year. The
seasonal minimum excess Availability amount is equal to
(i) 10% of lesser of the applicable borrowing base under
the Term Loan Facility and the amount of the Term Loan Facility
(but no less than $50.0 million) plus
(ii) $35.0 million minus the amount of any prepayments
under the Term Loan Facility. If we fail to achieve at least 80%
of our projected consolidated earnings before interest, taxes,
depreciation and amortization, these increased excess
availability requirements will become applicable throughout the
remainder of the term. If at any time we fail to meet the
borrowing base or excess availability requirements under the
Term Loan Facility, the lenders under the Credit Facility will
be required to reduce the availability under the Credit Facility
by a corresponding amount. We may also remedy any such failure
through repayments of principal under the Term Loan Facility. In
addition, under the Term Loan Agreement, if we do not complete
an offering of equity securities resulting in net proceeds of at
least $25.0 million within 45 days after the date of
the Term Loan Agreement, a reserve of $10.0 million will be
recorded against the borrowing base under the Credit Agreement,
which will reduce the amounts we are permitted to borrow under
the Credit Agreement. This reserve amount is reduced by the
amount of any repayments of the $10.0 million tranche of
the Term Loan Facility required to be repaid during 2010.
Interest under the Term Loan Facility will accrue at a LIBO Rate
as defined in the Term Loan Agreement, plus 12.25%. The minimum
LIBO Rate under the Term Loan Agreement is 2.5%.
The Term Loan Agreement limits our ability to incur additional
indebtedness, create liens, make investments, make restricted
payments (including any required cash-out of the warrants issued
to Pershing Square Capital Management, L.P. or its affiliates)
or specified payments and merge or acquire assets, among other
things. The negative and affirmative covenants in the Term Loan
Agreement are substantially consistent with the covenants in the
Credit Agreement, subject in certain cases to differences that
make the covenants in the Term Loan Agreement less restrictive
than the corresponding covenants in the Credit Agreement, except
that our ability to pay certain debt will be limited. The Term
Loan Agreement does not include any financial covenants.
The Term Loan Agreement contains customary events of default,
including payment defaults, breaches of representations and
warranties, covenant defaults, cross-defaults to similar
obligations, customary ERISA defaults, certain events of
bankruptcy and insolvency, judgment defaults, the invalidity of
liens on collateral, change of control, cessation of business or
the liquidation of material assets of the Term Loan Facility
Parties taken as a whole, the occurrence of an uninsured loss to
a material portion of collateral and
39
failure of the obligations under the Term Loan Facility to
constitute senior indebtedness under any subordinated
indebtedness.
The proceeds from the Term Loan Facility will be used by the
Company, for working capital, to finance capital expenditures
and for other general corporate purposes.
We will pay certain customary fees and expenses in connection
with obtaining the lenders commitments pursuant to the
terms of a related fee letter.
Intercreditor
Agreement
On March 31, 2010, we entered into an Intercreditor Agreement
(the Intercreditor Agreement) with the lenders under
the Credit Facility and the Term Loan Facility. The
Intercreditor Agreement includes provisions establishing the
rights and obligations of the lenders under the Credit Agreement
and Term Loan Agreement with respect to payments and prepayments
of principal and interest by the Company and with respect to the
collateral securing our obligations under the Credit Agreement
and Term Loan Agreement.
At January 30, 2010, the additional funding available under
the Prior Credit Agreement was $257.6 million. This amount,
however, is not necessarily indicative of our future funding
capacity, due to the substantial fluctuation in this amount
throughout the year and within a given month. This amount varies
not only in response to seasonal factors, such as the
accumulation of inventory in advance of the holiday selling
season, but also due to
day-to-day
operating factors, such as the timing of payments to vendors.
These factors, among others, can significantly impact the amount
of funding available on any given day.
As of January 30, 2010, we were in compliance with our debt
covenants. We currently do not meet the Credit Agreements
fixed charge coverage ratio requirement. This requirement is not
currently applicable, however, because borrowings under the
Credit Agreement have not exceeded the permitted borrowing
levels.
On March 31, 2010, we paid our $42.5 million term loan
from Pershing Square Capital Management, L.P.
Our most significant sources of liquidity are funds generated by
operating activities and borrowings under the Credit Agreement.
Borrowings typically peak in the fall as we build inventories in
anticipation of the holiday selling season. Conversely,
borrowings reach their lowest levels during December. We plan to
operate our business and execute our strategic initiatives
principally with funds generated from operations, financing
through the Credit Agreement, credit provided by our vendors and
other sources of new financing as deemed necessary and
available. Our liquidity is impacted by a number of factors,
including our sales levels, the amount of credit that our
vendors extend to us and our borrowing capacity under the Credit
Agreement. We rely on vendor credit to finance approximately 45%
of our inventory (calculated as trade accounts payable divided
by merchandise inventories). We are working closely with vendors
to optimize inventory levels to improve our performance and to
maintain acceptable levels of payables with our vendors. In
addition, the lenders under the Credit Agreement have the right
to periodically obtain third party valuations of the liquidation
value of our inventory, and the lowering of the liquidation
value of our inventory reduces the amount that we are able to
borrow under the Credit Agreement.
The global economic downturn has adversely affected our sales
over the past two years, and has introduced added uncertainty
into our projections of liquidity. However, based on current
internal sales projections, current vendor payable support and
borrowing capacity, as well as other initiatives to maximize
cash flow, we believe that we will have adequate capital to fund
our operations during fiscal 2010. Going forward, we will
continue to focus on improving sales, strengthening the balance
sheet, reducing occupancy and other costs, and, if available,
pursuing additional financing.
There can be no assurance that we will achieve our internal
sales projections or that we will be able to maintain our
current vendor payable support or borrowing capacity, and any
failure to do so could result in our having insufficient funds
for our operations. In the event that our internal sales
projections or other
40
assumptions affecting liquidity are not achieved, we intend to
take steps to mitigate such shortfalls. These steps include, but
are not limited to, payroll and inventory reductions.
Warrants
Our financing agreement with Pershing Square includes
14.7 million warrants to purchase our common stock at $0.65
per share, all of which are outstanding as of January 30,
2010. These warrants are required to be settled for cash in
certain circumstances, including the sale of the Company to a
non-publicly-held entity or the de-listing of our common stock
from trading on the NYSE. We estimate the fair value of this
cash settlement liability to be $9.5 million and
$0.7 million as of January 30, 2010 and
January 31, 2009, respectively, based upon a Black-Scholes
valuation, and have recorded this liability as a component of
Other long-term liabilities in our consolidated
balance sheets. The Black-Scholes valuation model takes into
account several inputs, one of which is our share price.
Fluctuations in our share price may have a material impact on
this liability and the cash required to settle this liability,
thus impacting our liquidity. Ignoring changes in all other
factors, an increase in our share price would result in an
increase in the liability and an increase in the potential cash
exposure. We recognized non-cash expense of $4.5 million
and non-cash income $40.1 million for the years ended
January 30, 2010 and January 31, 2009, respectively,
related to the remeasurement of this liability. This fair value
measurement is based upon significant unobservable inputs,
referred to as a Level 3 measurement under Accounting
Standards Codification 820, Fair Value Measurements and
Disclosure. These adjustments, all of which are
unrealized, are categorized as Warrant/put expense
(income) on our consolidated statements of operations.
Off-Balance
Sheet Arrangements
At January 30, 2010, we were the primary beneficiary of two
variable interest entities (VIEs), due to our
guarantee of the debt of these entities. These entities were
established by third-party developers to own, construct, and
lease two of our store locations. To refinance the debt
associated with the construction of these stores, we were
required to guarantee the debt of these two entities. As a
result, we consolidate these VIEs and have recorded property and
equipment, net of accumulated depreciation, of $4.5 million
and long-term debt (including current portion) of
$4.8 million at January 30, 2010. The existence of
these VIEs does not significantly impact our liquidity, capital
resources or market risk support, or confer significant benefits
to us.
As discussed previously, we guarantee the leases of four stores
that we previously owned in Australia and New Zealand. These
guarantees were required by certain of our landlords as
conditions of the leases upon inception, and were not impacted
by our disposition of our Australian and New Zealand operations.
The maximum amount of potential future payments under these
guarantees (undiscounted) is approximately $12.9 million.
We have recorded a contingent liability of approximately
$0.8 million based upon the likelihood that we will be
required to perform under the guarantees. Also under the terms
of the sale agreement, we provided certain tax indemnifications
to the purchasers, with the maximum amount of potential future
payments (undiscounted) totaling approximately
$6.7 million. We have recorded a tax liability of $2.0
million for this contingency as of January 30, 2010.
We also guarantee the leases of four stores that we previously
owned in the U.K. and Ireland. These guarantees were required by
certain of our landlords as conditions of the leases upon
inception, and were unrelated to our disposition of operations
in the U.K. and Ireland in 2007. The maximum potential liability
under these lease guarantees is approximately
$139.7 million. The leases provide for periodic rent
reviews, which could increase our potential liability. One of
the applicable lease guarantee agreements provides that the
guarantee would automatically terminate if Borders U.K. Limited
achieved a specified level of net assets, a provision which we
believe has been met. The maximum potential liability for this
location is $26.2 million. This limitation has not been
considered in calculating the maximum exposures set forth above.
In addition, in the event of a default under the primary leases,
in certain circumstances a landlord may have an obligation to
mitigate its loss or to act reasonably, which could further
reduce our potential liability. At January 30, 2010, we
have reserved $10.1 million based upon the likelihood that
we will be required to perform under these guarantees.
41
On December 22, 2009, Borders U.K. Limited ceased
operations, a result of filing for administration on
November 26, 2009. Previously, Borders U.K. Limited
announced that it had agreed to sell the leasehold interests in
five stores, including two of the leases guaranteed by the
Company, to a fashion retailer. In addition, one of the leases
was assigned to another retailer as part of the administration
process and the Companys guarantee was continued. These
events have been considered in the determination of our reserves
relating to the lease guarantees.
We also have agreed to indemnify the purchasers of the U.K. and
Ireland operations from the tax liability, if any, imposed upon
it as a result of the forgiveness of the portions of
intercompany indebtedness owing from us. The maximum potential
liability is approximately $8.7 million, and we have
recorded a liability of approximately $3.5 million based
upon the likelihood that we will be required to perform under
the indemnification.
The various guarantees and indemnifications related to our
Australian, New Zealand, U.K., and Ireland businesses are not
currently expected to significantly impact our liquidity,
capital resources or market risk support, or confer significant
benefits to us. If, however, we are required to perform under
these obligations, there is the potential for a significant
adverse impact on our liquidity.
Significant
Contractual Obligations
The following table summarizes the Companys significant
contractual obligations at January 30, 2010, excluding
interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 and
|
|
|
|
|
(dollars in millions)
|
|
2010
|
|
|
2011-2012
|
|
|
2013-2014
|
|
|
Thereafter
|
|
|
Total
|
|
|
Credit Agreement borrowings
|
|
$
|
232.3
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
232.3
|
|
Term Loan borrowings
|
|
|
42.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42.5
|
|
Operating lease obligations
|
|
|
291.2
|
|
|
|
543.1
|
|
|
|
491.8
|
|
|
|
1,015.0
|
|
|
|
2,341.1
|
|
Capital lease obligations
|
|
|
1.3
|
|
|
|
1.6
|
|
|
|
0.3
|
|
|
|
|
|
|
|
3.2
|
|
Debt of consolidated VIEs
|
|
|
0.2
|
|
|
|
0.5
|
|
|
|
0.6
|
|
|
|
3.5
|
|
|
|
4.8
|
|
Letters of credit
|
|
|
37.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
604.9
|
|
|
|
545.2
|
|
|
|
492.7
|
|
|
|
1,018.5
|
|
|
|
2,661.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table above excludes any amounts related to the payment of
uncertain tax positions as we cannot make a reasonably reliable
estimate of the periods of cash settlements with the respective
taxing authorities. Excluding interest and penalties, these
uncertain tax positions total $23.3 million at
January 30, 2010.
The table above also excludes any amounts related to required
interest payments on the Credit Agreement, which are expected to
range from $14 million to $17 million in fiscal 2010.
This range was developed using the interest rate in effect at
January 30, 2010 and utilized estimates of the amount and
timing of borrowings and payments. Currently, we are required to
pay interest on Credit Agreement borrowings when various
short-term tranches mature. At any given time we have multiple
outstanding tranches with various principal amounts, interest
rates and maturity dates. Due to these factors, as well as the
uncertainty of future borrowing amounts and rates, we cannot
make a reasonably reliable estimate of the cash required to pay
interest on Credit Agreement borrowings in years beyond fiscal
2009. We paid $12.2 million and $25.4 million of
interest on Credit Agreement borrowings in fiscal 2009 and 2008,
respectively.
The table above also excludes any amounts related to taxes,
insurance and other charges payable under operating lease
agreements, which are expected to range from $66 million to
$80 million in fiscal 2010. This range was based on the
historical trend of these expenses, as adjusted for store
activity. Because of the future variability of these amounts,
which are dependent on future store count and ongoing
negotiations with our landlords, among other things, we cannot
make a reasonably reliable estimate in years beyond
42
fiscal 2009. We paid $85.9 million and $93.5 million
related to these expenses in fiscal 2009 and 2008, respectively.
Seasonality
The Companys business is highly seasonal, with sales
significantly higher during the fourth quarter, which includes
the holiday selling season.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009
|
|
(dollars in millions)
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
Sales
|
|
$
|
641.5
|
|
|
$
|
616.8
|
|
|
$
|
595.5
|
|
|
$
|
937.3
|
|
Operating income (loss)
|
|
|
(29.1
|
)
|
|
|
(26.8
|
)
|
|
|
(60.5
|
)
|
|
|
21.5
|
|
% of full year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
23.0
|
%
|
|
|
22.1
|
%
|
|
|
21.3
|
%
|
|
|
33.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
|
|
(dollars in millions)
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
Sales
|
|
$
|
729.5
|
|
|
$
|
749.2
|
|
|
$
|
682.1
|
|
|
$
|
1,081.3
|
|
Operating income (loss)
|
|
|
(44.9
|
)
|
|
|
(23.1
|
)
|
|
|
(108.2
|
)
|
|
|
27.0
|
|
% of full year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
22.5
|
%
|
|
|
23.1
|
%
|
|
|
21.0
|
%
|
|
|
33.4
|
%
|
Critical
Accounting Policies and Estimates
In the ordinary course of business, we make a number of
estimates and assumptions relating to the reporting of results
of operations and financial condition in the preparation of our
financial statements in conformity with accounting principles
generally accepted in the United States. Actual results could
differ from those estimates under different assumptions and
conditions. We believe that the following discussion addresses
our most critical accounting policies and estimates.
Long-Lived
Assets
The carrying value of long-lived assets is evaluated whenever
changes in circumstances indicate the carrying amount of such
assets may not be recoverable. In performing such reviews for
recoverability, we compare the assets undiscounted
expected future cash flows to their carrying values. If the
expected future cash flows are less than the carrying amount of
the assets, we recognize an impairment loss for the difference
between the carrying amount and the estimated fair value.
Expected future cash flows, which are estimated over the
assets remaining useful lives, contain estimates of sales
and the impact those future sales will have upon cash flows.
Future sales are estimated based, in part, upon a projection of
each stores sales trend based on the actual sales of the
past several years. Additionally, each stores future cash
contribution is based upon the most recent years actual
cash contribution, but is adjusted based upon projected trends
in sales and store operating costs. Fair value is estimated
using expected discounted future cash flows.
We have not made any material changes in the accounting
methodology used to calculate long-lived asset impairment losses
during the past three years, and we do not believe there is a
reasonable likelihood that there will be a material change in
the estimates or assumptions we use in the future. However, if
actual results are not consistent with our estimates and
assumptions used in estimating future cash flows and asset fair
values, material additional asset impairment losses could occur.
43
Inventory
Reserves
The carrying value of our inventory is affected by reserves for
shrinkage (i.e., physical loss due to theft, etc.) and
markdowns. We have not made any material changes in the
accounting methodologies used to establish these reserves during
the past three years.
Our shrinkage reserve represents anticipated physical inventory
losses that have occurred since the last physical inventory
date. Physical inventory counts are taken on a regular basis to
ensure the inventory reported in our financial statements is
properly stated. During the interim period between physical
inventory counts, we reserve for anticipated losses on a
location-by-location
basis. Shrinkage estimates are typically based upon our most
recent experience of losses for each particular location. We do
not believe there is a reasonable likelihood that there will be
a material change in the estimates or assumptions we use to
calculate our shrinkage reserve. However, if our estimates are
inaccurate, we may be exposed to losses or gains that could be
material. A 10% difference in actual shrinkage reserved for at
January 30, 2010 would have affected net income (loss) by
approximately $2 million in 2009.
Our reserve for the markdown of inventories below cost is based
on our estimates of inventory aging, customer demand, and the
promotional environment. We do not believe there is a reasonable
likelihood that there will be a material change in the estimates
or assumptions we use to calculate our markdown reserve.
However, if our estimates are inaccurate, we may be exposed to
losses or gains that could be material. A 10% difference in our
actual markdown reserve at January 30, 2010 would have
affected net income (loss) by approximately $1 million in
2009.
Costs
Associated With Exit Activities
We occasionally vacate stores and other locations prior to the
expiration of the related lease. For vacated locations that are
under long-term leases, we record a liability for the difference
between our future lease payments and related costs from the
date of closure through the end of the remaining lease term, net
of expected sublease rental income. This liability contains
estimates of the amount and duration of potential sublease
rental income, which are based upon historical experience and
knowledge of the relevant real estate markets. We have not made
any material changes in our accounting methodology used to
establish this reserve during the past three years, and we do
not believe there is a reasonable likelihood that there will be
a material change in the estimates or assumptions we use in the
future. However, if actual results are not consistent with our
estimates and assumptions, we may be exposed to losses or gains
that could be material. A 10% difference in our reserve at
January 30, 2010 would have affected net income (loss) by
approximately $2 million in 2009.
Self-Insured
Liabilities
We are self-insured for certain losses related to health,
workers compensation and general liability claims.
However, we obtain third-party insurance coverage to limit our
exposure to these claims. Our self-insured liabilities contains
estimates, based in part upon historical experience, of the
ultimate cost to settle reported claims and claims incurred but
not reported at the balance sheet date. We have not made any
material changes in our accounting methodologies used to
establish these reserves during the past three years, and we do
not believe there is a reasonable likelihood that there will be
a material change in the estimates or assumptions we use in the
future. However, if actual results are not consistent with our
estimates and assumptions, we may be exposed to losses or gains
that could be material. A 10% difference in our reserve at
January 30, 2010 would have affected net income (loss) by
approximately $2 million in 2009.
Liabilities
For Lease Guarantees of Disposed Foreign
Businesses
We guarantee eight store leases relating to former subsidiaries
in the United Kingdom, Ireland, Australia and New Zealand. Our
liabilities for these guarantees contain estimates of the
likelihood that we would be required to perform under the
guarantees, changes in anticipated rental amounts, and the
amount and duration of potential sublease rental income. We have
not made any material changes in our accounting
44
methodology used to establish these reserves during the past
three years, and we do not believe there is a reasonable
likelihood that there will be a material change in the estimates
or assumptions we use in the future. However, if actual results
are not consistent with our estimates and assumptions, we may be
exposed to losses or gains that could be material.
Gift
Cards
We sell gift cards to our customers and record a liability for
the face value of all cards issued and unredeemed within the
last 12 months. For cards older than 12 months, we
record a liability for a portion of the cards face value
based upon historical redemption trends. This methodology has
been materially consistent during the past three years. We do
not believe there is a reasonable likelihood that there will be
a material change in the estimates or assumptions we use to
calculate our gift card liability. However, if our estimates are
inaccurate, we may be exposed to losses or gains that could be
material. A 10% change in our unredeemed gift card breakage rate
at January 30, 2010 would have affected net income (loss)
by approximately $15 million in 2009.
Income
Taxes
We must make certain estimates and judgments in determining
income tax expense for financial statement purposes. These
estimates and judgments occur in the calculation of certain tax
assets and liabilities, which arise from differences in the
timing of recognition of revenue and expense for tax and
financial statement purposes.
In addition, the calculation of our tax liabilities involves
dealing with uncertainties in the application of complex tax
regulations. We recognize liabilities for anticipated tax issues
in the United States and other tax jurisdictions based on an
estimate of whether, and to the extent which, additional taxes
will be due. These liabilities are calculated in accordance with
Accounting Standards Codification Topic 740, Accounting for
Income Taxes (ASC 740).
We recognize the tax effects of a position only if it is
more-likely-than-not to be sustained based solely on its
technical merits as of the reporting date. The
more-likely-than-not threshold represents a positive assertion
by management that a company is entitled to the economic
benefits of a tax position. If a tax position is not considered
more-likely-than-not to be sustained based solely on its
technical merits, no benefits of the position are to be
recognized. Moreover, the more-likely-than-not threshold must
continue to be met in each reporting period to support continued
recognition of a benefit.
Our effective tax rate in a given financial statement period may
be materially impacted by changes in the mix and level of
earnings, changes in the expected outcome of audit controversies
or changes in the deferred tax valuation allowance. During 2008,
we recorded a non-cash charge related to establishing a full
valuation allowance against our domestic net deferred tax
assets. In 2009, we reversed a portion of this valuation
allowance for 2008 losses that could be carried back to earlier
tax years through the extended five-year net operating loss
carryback period allowed under the Worker Homeownership, and
Business Assistance Act of 2009. For 2009, we expect a federal
net operating loss carryforward, against which we have
recognized a full valuation allowance.
If, in the future, we realize domestic taxable income on a
sustained basis of the appropriate character and within the net
operating loss carryforward period, we would be allowed to
reverse some or all of this valuation allowance, resulting in an
income tax benefit. Further, changes in existing tax laws could
also affect valuation allowance needs in the future.
New
Accounting Guidance
In December 2007, the Financial Accounting Standards Board
(FASB) issued new accounting and disclosure guidance
on business combinations. This guidance significantly changes
the accounting for business combinations in a number of areas,
including the treatment of contingent consideration,
contingencies, acquisition costs, in-process research and
development and restructuring costs. This
45
guidance is effective for fiscal years beginning after
December 15, 2008. The adoption of this guidance did not
have a material impact on our consolidated financial position or
results of operations.
In December 2007, the FASB amended its guidance on the treatment
of noncontrolling interests in consolidated balance sheets and
consolidated statements of income. Noncontrolling interests have
become a part of stockholders equity in the consolidated
balance sheets and consolidated income statements will report
income attributable to our business and to noncontrolling
interests separately. The accounting guidance is effective for
fiscal years beginning after December 15, 2008. The
adoption of this guidance did not have a material impact on our
consolidated financial position or results of operations.
In March 2008, the FASB issued new accounting and disclosure
guidance for disclosures about derivative instruments and
hedging activities. This guidance requires additional
disclosures regarding: (1) how and why an entity uses
derivative instruments; (2) how derivative instruments and
related hedged items are accounted; and (3) how derivative
instruments and related hedged items affect an entitys
financial position, financial performance, and cash flows. In
addition, the guidance requires qualitative disclosures about
objectives and strategies for using derivatives described in the
context of an entitys risk exposures, quantitative
disclosures about the location and fair value of derivative
instruments and associated gains and losses, and disclosures
about credit-risk-related contingent features in derivative
instruments. This guidance is effective for fiscal years and
interim periods within these fiscal years, beginning after
November 15, 2008. The adoption of this guidance did not
have a material impact on our consolidated financial statements.
In June 2009, the FASB issued Statement of Financial Accounting
Standards No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles a replacement of FASB Statement
No. 162 This guidance establishes the Accounting
Standards Codification as the source of authoritative accounting
principles recognized by the FASB for all nongovernmental
entities in the preparation of financial statements in
accordance with GAAP. For SEC registrants, rules and
interpretive releases of the SEC under federal securities laws
are also considered authoritative sources of GAAP. The
provisions of this statement are effective for financial
statements issued for interim and annual periods ending after
September 15, 2009. Since the Codification did not alter
existing U.S. GAAP, the adoption did not have any impact on
our consolidated financial statements.
During June 2009, the FASB amended its guidance on accounting
for variable interest entities (VIE), which changes
the approach in determining the primary beneficiary of a VIE.
Among other things, the new guidance requires a qualitative
rather than a quantitative analysis to determine the primary
beneficiary of a VIE; requires continuous assessments of whether
an enterprise is the primary beneficiary of a VIE; enhances
disclosures about an enterprises involvement with a VIE;
and amends certain guidance for determining whether an entity is
a VIE. This accounting guidance is effective for annual periods
beginning after November 15, 2009. We do not expect the
adoption of this guidance to have a material impact on our
consolidated financial statements.
In February 2010, the FASB amended its May 2009 accounting and
disclosure guidance for subsequent events, which established
general standards of accounting for and disclosure of events
that occur after the balance sheet date, but before the
financial statements are issued or available to be issued. The
February amendment eliminated the requirement that SEC
registrants disclose the date through which the entity has
evaluated subsequent events. The amended guidance is effective
immediately. We implemented the guidance as originally issued
during the quarter ended October 31, 2009, and implemented
the amended guidance in this
Form 10-K
report. The adoption of this guidance did not have a material
impact on our consolidated financial statements.
Related
Party Transactions
We have not engaged in any related party transactions, with the
exception of the financing agreement with Pershing Square
Capital Management, L.P., as discussed in this report, which
would have had a material effect on our financial position, cash
flows, or results of operations.
46
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
We are exposed to market risk during the normal course of
business from changes in interest rates and foreign currency
exchange rates. The exposure to these risks is managed though a
combination of normal operating and financing activities, which
may include the use of derivative financial instruments in the
form of forward foreign currency exchange contracts.
Interest
Rate Risk
We are subject to risk resulting from interest rate
fluctuations. LIBOR is the rate upon which our variable rate
debt is principally based. If LIBOR were to increase 1% for the
full year of 2010 as compared to 2009, our after-tax losses
would increase approximately $2.3 million based on our
outstanding debt as of January 30, 2010.
Foreign
Currency Exchange Risk
We are subject to foreign currency exchange exposure for
operations with assets and liabilities that are denominated in
currencies other than U.S. dollars. On a normal basis, we
do not attempt to hedge the foreign currency translation
fluctuations in the net investments in its foreign subsidiaries.
We do, from time to time, enter into short-term forward exchange
contracts to sell or purchase foreign currencies at specified
rates based on estimated foreign currency cash flows. It is our
policy not to purchase financial
and/or
derivative instruments for speculative purposes. At
January 30, 2010, we had no material foreign currency
forward contracts outstanding.
47
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
INDEX TO
FINANCIAL STATEMENTS
48
CONSOLIDATED
STATEMENTS OF OPERATIONS
(dollars in millions except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan. 30,
|
|
|
Jan. 31,
|
|
|
Feb. 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Sales
|
|
$
|
2,791.1
|
|
|
$
|
3,242.1
|
|
|
$
|
3,555.1
|
|
Other revenue
|
|
|
32.8
|
|
|
|
33.3
|
|
|
|
42.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
2,823.9
|
|
|
$
|
3,275.4
|
|
|
$
|
3,597.4
|
|
Cost of merchandise sold (includes occupancy)
|
|
|
2,191.3
|
|
|
|
2,484.8
|
|
|
|
2,668.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
632.6
|
|
|
|
790.6
|
|
|
|
929.1
|
|
Selling, general and administrative expenses
|
|
|
711.3
|
|
|
|
842.4
|
|
|
|
912.0
|
|
Goodwill impairment
|
|
|
|
|
|
|
40.3
|
|
|
|
|
|
Asset impairments and other writedowns
|
|
|
16.2
|
|
|
|
57.1
|
|
|
|
13.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(94.9
|
)
|
|
|
(149.2
|
)
|
|
|
4.1
|
|
Interest expense
|
|
|
24.1
|
|
|
|
45.4
|
|
|
|
43.1
|
|
Warrant/put expense (income)
|
|
|
20.7
|
|
|
|
(40.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
44.8
|
|
|
|
5.3
|
|
|
|
43.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax
|
|
|
(139.7
|
)
|
|
|
(154.5
|
)
|
|
|
(39.0
|
)
|
Income tax provision (benefit)
|
|
|
(29.5
|
)
|
|
|
30.2
|
|
|
|
(19.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(110.2
|
)
|
|
$
|
(184.7
|
)
|
|
$
|
(19.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations of discontinued operations (net of income
tax benefit of $, $0.9 and $2.9)
|
|
|
|
|
|
|
(1.7
|
)
|
|
|
(8.7
|
)
|
Gain (loss) from disposal of discontinued operations (net of
income tax benefit of $, $3.1 and $7.6)
|
|
|
0.8
|
|
|
|
(0.3
|
)
|
|
|
(128.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from discontinued operations (net of tax)
|
|
|
0.8
|
|
|
|
(2.0
|
)
|
|
|
(137.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(109.4
|
)
|
|
$
|
(186.7
|
)
|
|
$
|
(157.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share data (Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations per common share
|
|
$
|
(1.83
|
)
|
|
$
|
(3.07
|
)
|
|
$
|
(0.34
|
)
|
Gain (loss) from discontinued operations per common share
|
|
$
|
0.01
|
|
|
$
|
(0.03
|
)
|
|
$
|
(2.34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share
|
|
$
|
(1.82
|
)
|
|
$
|
(3.10
|
)
|
|
$
|
(2.68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding (in millions)
|
|
|
60.1
|
|
|
|
60.2
|
|
|
|
58.7
|
|
See accompanying notes to consolidated financial statements.
49
CONSOLIDATED
BALANCE SHEETS
(dollars in millions except share amounts)
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
Jan. 30,
|
|
|
Jan. 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Assets
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
37.0
|
|
|
$
|
53.6
|
|
Merchandise inventories
|
|
|
873.8
|
|
|
|
915.2
|
|
Accounts receivable and other current assets
|
|
|
76.5
|
|
|
|
102.4
|
|
Deferred income taxes
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
988.3
|
|
|
|
1,071.2
|
|
Property and equipment, net
|
|
|
392.8
|
|
|
|
494.2
|
|
Other assets
|
|
|
39.9
|
|
|
|
39.4
|
|
Deferred income taxes
|
|
|
3.9
|
|
|
|
4.0
|
|
Goodwill
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,425.2
|
|
|
$
|
1,609.0
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Short-term borrowings and current portion of long-term debt
|
|
$
|
275.4
|
|
|
$
|
329.8
|
|
Trade accounts payable
|
|
|
350.8
|
|
|
|
350.0
|
|
Accrued payroll and other liabilities
|
|
|
257.4
|
|
|
|
279.8
|
|
Taxes, including income taxes
|
|
|
44.1
|
|
|
|
30.1
|
|
Deferred income taxes
|
|
|
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
927.7
|
|
|
|
993.7
|
|
Long-term debt
|
|
|
6.6
|
|
|
|
6.4
|
|
Other long-term liabilities
|
|
|
332.6
|
|
|
|
345.8
|
|
Contingencies (Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,266.9
|
|
|
|
1,345.9
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, 300,000,000 shares authorized; 59,869,384 and
59,903,232 shares issued and outstanding at
January 30, 2010 and January 31, 2009, respectively
|
|
|
187.2
|
|
|
|
187.4
|
|
Accumulated other comprehensive income
|
|
|
16.7
|
|
|
|
11.9
|
|
Retained earnings (deficit)
|
|
|
(45.6
|
)
|
|
|
63.8
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
158.3
|
|
|
|
263.1
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,425.2
|
|
|
$
|
1,609.0
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
50
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
Jan. 30,
|
|
|
Jan. 31,
|
|
|
Feb. 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cash provided by (used for):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(109.4
|
)
|
|
$
|
(186.7
|
)
|
|
$
|
(157.4
|
)
|
Net income (loss) from discontinued operations
|
|
|
0.8
|
|
|
|
(2.0
|
)
|
|
|
(137.5
|
)
|
Loss from continuing operations
|
|
|
(110.2
|
)
|
|
|
(184.7
|
)
|
|
|
(19.9
|
)
|
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile loss from continuing operations to
operating cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
98.8
|
|
|
|
107.1
|
|
|
|
103.7
|
|
Loss on disposal of assets
|
|
|
3.8
|
|
|
|
1.9
|
|
|
|
0.5
|
|
Stock-based compensation cost (income)
|
|
|
(0.3
|
)
|
|
|
3.0
|
|
|
|
5.1
|
|
Increase in warrant liability
|
|
|
8.8
|
|
|
|
0.8
|
|
|
|
|
|
(Increase) decrease in deferred income taxes
|
|
|
(4.8
|
)
|
|
|
34.5
|
|
|
|
(3.7
|
)
|
Decrease in other long-term assets
|
|
|
0.2
|
|
|
|
23.6
|
|
|
|
0.3
|
|
(Decrease) increase in other long-term liabilities
|
|
|
(22.5
|
)
|
|
|
(15.7
|
)
|
|
|
4.9
|
|
Goodwill impairment
|
|
|
|
|
|
|
40.3
|
|
|
|
|
|
Write-off intangible asset
|
|
|
16.2
|
|
|
|
|
|
|
|
|
|
Asset impairments and other writedowns
|
|
|
16.2
|
|
|
|
57.1
|
|
|
|
13.0
|
|
Cash provided by (used for) current assets and current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in inventories
|
|
|
43.9
|
|
|
|
321.4
|
|
|
|
52.2
|
|
Decrease in accounts receivable
|
|
|
10.4
|
|
|
|
10.2
|
|
|
|
13.3
|
|
Decrease (increase) in prepaid expenses
|
|
|
3.9
|
|
|
|
9.8
|
|
|
|
(1.0
|
)
|
Increase (decrease) in accounts payable
|
|
|
0.2
|
|
|
|
(160.2
|
)
|
|
|
(59.2
|
)
|
Increase (decrease) in taxes payable
|
|
|
13.4
|
|
|
|
13.7
|
|
|
|
(36.4
|
)
|
Increase (decrease) in accrued payroll and other liabilities
|
|
|
(21.9
|
)
|
|
|
(29.2
|
)
|
|
|
32.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities of continuing
operations
|
|
|
56.1
|
|
|
|
233.6
|
|
|
|
105.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(17.9
|
)
|
|
|
(79.9
|
)
|
|
|
(131.3
|
)
|
Investment in Paperchase
|
|
|
|
|
|
|
(3.6
|
)
|
|
|
(0.8
|
)
|
Proceeds from the sale of discontinued operations
|
|
|
|
|
|
|
97.3
|
|
|
|
20.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) investing activities of
continuing operations
|
|
|
(17.9
|
)
|
|
|
13.8
|
|
|
|
(111.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the excess tax benefit of options exercised
|
|
|
|
|
|
|
0.5
|
|
|
|
0.9
|
|
Net funding from (repayment of) credit facility
|
|
|
(54.5
|
)
|
|
|
(261.7
|
)
|
|
|
43.4
|
|
Funding from short-term note financing
|
|
|
|
|
|
|
42.5
|
|
|
|
|
|
Issuance of long-term debt
|
|
|
|
|
|
|
1.2
|
|
|
|
0.4
|
|
Repayment of long-term debt
|
|
|
(0.3
|
)
|
|
|
(1.4
|
)
|
|
|
|
|
Repayment of long-term capital lease obligations
|
|
|
(1.2
|
)
|
|
|
(0.4
|
)
|
|
|
(0.4
|
)
|
Issuance of common stock
|
|
|
0.1
|
|
|
|
(0.4
|
)
|
|
|
3.1
|
|
Repurchase of common stock
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
(0.6
|
)
|
Payment of cash dividends
|
|
|
|
|
|
|
(6.5
|
)
|
|
|
(19.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities of
continuing operations
|
|
|
(55.9
|
)
|
|
|
(226.4
|
)
|
|
|
27.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash and cash equivalents of
continuing operations
|
|
|
0.3
|
|
|
|
(0.9
|
)
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) provided by operating activities
of discontinued operations
|
|
|
0.8
|
|
|
|
(21.3
|
)
|
|
|
(0.7
|
)
|
Net cash used for investing activities of discontinued operations
|
|
|
|
|
|
|
(6.5
|
)
|
|
|
(17.8
|
)
|
Net cash used for by financing activities of discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
(41.9
|
)
|
Effect of exchange rates on cash and cash equivalents of
discontinued operations
|
|
|
|
|
|
|
2.8
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) discontinued operations
|
|
|
0.8
|
|
|
|
(25.0
|
)
|
|
|
(60.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(16.6
|
)
|
|
|
(4.9
|
)
|
|
|
(39.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
53.6
|
|
|
|
58.5
|
|
|
|
97.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
37.0
|
|
|
$
|
53.6
|
|
|
$
|
58.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
16.6
|
|
|
$
|
36.3
|
|
|
$
|
43.8
|
|
Net income taxes (received) paid
|
|
$
|
(42.5
|
)
|
|
$
|
(34.6
|
)
|
|
$
|
12.4
|
|
See accompanying notes to consolidated financial statements.
51
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
(dollars in millions except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Income (Loss)
|
|
|
Earnings (Deficit)
|
|
|
Total
|
|
|
Balance at February 3, 2007
|
|
|
58,476,306
|
|
|
$
|
177.5
|
|
|
$
|
28.5
|
|
|
$
|
438.0
|
|
|
$
|
644.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(157.4
|
)
|
|
|
(157.4
|
)
|
Discontinued operations currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
8.7
|
|
|
|
|
|
|
|
8.7
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
5.2
|
|
|
|
|
|
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(143.5
|
)
|
Adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.2
|
)
|
|
|
(4.2
|
)
|
Cash dividends declared ($0.41 per common share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25.9
|
)
|
|
|
(25.9
|
)
|
Issuance of common stock
|
|
|
450,855
|
|
|
|
8.4
|
|
|
|
|
|
|
|
|
|
|
|
8.4
|
|
Repurchase and retirement of common stock
|
|
|
(132,937
|
)
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.6
|
)
|
Tax benefit of equity compensation
|
|
|
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 2, 2008
|
|
|
58,794,224
|
|
|
$
|
186.2
|
|
|
$
|
42.4
|
|
|
$
|
250.5
|
|
|
$
|
479.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(186.7
|
)
|
|
|
(186.7
|
)
|
Discontinued operations currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
(17.1
|
)
|
|
|
|
|
|
|
(17.1
|
)
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
(13.4
|
)
|
|
|
|
|
|
|
(13.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(217.2
|
)
|
Issuance of common stock
|
|
|
1,787,776
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
0.9
|
|
Repurchase and retirement of common stock
|
|
|
(678,768
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
Tax benefit of equity compensation
|
|
|
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 31, 2009
|
|
|
59,903,232
|
|
|
$
|
187.4
|
|
|
$
|
11.9
|
|
|
$
|
63.8
|
|
|
$
|
263.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(109.4
|
)
|
|
|
(109.4
|
)
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
4.8
|
|
|
|
|
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(104.6
|
)
|
Issuance of common stock
|
|
|
908,210
|
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
3.1
|
|
Repurchase and retirement of common stock
|
|
|
(942,058
|
)
|
|
|
(3.3
|
)
|
|
|
|
|
|
|
|
|
|
|
(3.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 30, 2010
|
|
|
59,869,384
|
|
|
$
|
187.2
|
|
|
$
|
16.7
|
|
|
$
|
(45.6
|
)
|
|
$
|
158.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
52
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions except per share data)
|
|
NOTE 1
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Nature of
Business: Borders
Group, Inc., through our subsidiaries including Borders, Inc.
(Borders) (individually and collectively,
we, our or the Company), is
an operator of book, music and movie superstores and mall-based
bookstores. At January 30, 2010, we operated 511
superstores under the Borders name, including 508 in the United
States and three in Puerto Rico. We also operated 175 mall-based
and other small format bookstores, including stores operated
under the Waldenbooks, Borders Express and Borders Outlet names,
as well as 29 Borders-branded airport stores. In addition, we
owned and operated United Kingdom-based Paperchase Products
Limited (Paperchase), a designer and retailer of
stationery, cards and gifts. As of January 30, 2010,
Paperchase operated 85 stores, primarily in the United Kingdom,
and Paperchase shops have been added to 333 Borders superstores.
In addition, we operate a proprietary
e-commerce
Web site, www.Borders.com, which was launched in May 2008.
On June 10, 2008, we sold bookstores that we had owned and
operated in Australia, New Zealand and Singapore. On
September 21, 2007, we sold bookstores that we had owned
and operated in the U.K. and Ireland. See
Note 15 Discontinued Operations for
further discussion of our disposal of these bookstore operations.
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.
The results of Borders Ireland Limited, Books etc., U.K.
Superstores, Borders Australia, New Zealand, and Singapore are
presented as discontinued operations for all periods presented.
Use of
Estimates: The
preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Fiscal
Year: Our fiscal
year ends on the Saturday closest to the last day of January.
Fiscal 2009 consisted of 52 weeks and ended on
January 30, 2010. Fiscal 2008 consisted of 52 weeks
and ended on January 31, 2009. Fiscal 2007 consisted of
52 weeks and ended February 2, 2008. References herein
to years are to our fiscal years.
Foreign Currency
and Translation of Foreign
Subsidiaries: The
functional currencies of our foreign operations are the
respective local currencies. All assets and liabilities of our
foreign operations are translated into U.S. dollars at
fiscal period-end exchange rates. Income and expense items are
translated at average exchange rates prevailing during the year.
The resulting translation adjustments are recorded as a
component of stockholders equity and comprehensive income.
Excluding discontinued operations, foreign currency transaction
gains/(losses) were $1.1, $1.5, and $(1.9) in 2009, 2008, and
2007, respectively.
Cash and Cash
Equivalents: Cash
and cash equivalents include short-term investments with
original maturities of 90 days or less. The recorded value
of our cash and cash equivalents approximates their fair value.
Inventories: Merchandise
inventories are valued on a
first-in,
first-out (FIFO) basis at the lower of cost or
market using the retail inventory method. The Company includes
certain distribution and other expenses in its inventory costs,
totaling $69.3 and $80.9 as of January 30, 2010, and
January 31, 2009, respectively.
53
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
The carrying value of our inventory is affected by reserves for
shrinkage (i.e., physical loss due to theft, etc.) and
markdowns. Our shrinkage reserve represents anticipated physical
inventory losses that have occurred since the last physical
inventory date. Our reserve for the markdown of inventories
below cost is based on our estimates of inventory aging,
customer demand, and the promotional environment. We account for
inventory markdowns in a manner that creates a new cost basis
for the applicable inventory as set forth in Accounting
Standards Codification 330, Inventory (ASC
330). As such, write-downs of inventories are not restored
if market value recovers prior to sale or disposition.
Property and
Equipment: Property
and equipment are recorded at cost, including capitalized
interest, and depreciated over their estimated useful lives on a
straight-line basis for financial statement purposes and on
accelerated methods for income tax purposes.
Store properties are leased and improvements are amortized over
the shorter of their estimated useful lives or the initial term
of the related lease, generally over three to 20 years.
Other annual rates used in computing depreciation for financial
statement purposes approximate 3% for buildings and 10% to 33%
for other fixtures and equipment. Amortization of assets under
capital leases is included in depreciation expense.
The carrying value of long-lived assets is evaluated whenever
changes in circumstances indicate the carrying amount of such
assets may not be recoverable. In performing such reviews for
recoverability, we compare the assets undiscounted
expected future cash flows to their carrying values. If the
expected future cash flows are less than the carrying amount of
the assets, we recognize an impairment loss for the difference
between the carrying amount and the estimated fair value.
Expected future cash flows, which are estimated over the
assets remaining useful lives, contain estimates of sales
and the impact those future sales will have upon cash flows.
Future sales are estimated based, in part, upon a projection of
each stores sales trend based on the actual sales of the
past several years. Additionally, each stores future cash
contribution is based upon the most recent years actual
cash contribution, but is adjusted based upon projected trends
in sales and store operating costs. Fair value is estimated
using expected discounted future cash flows.
Goodwill: Pursuant
to the provisions of Accounting Standards Codification 350,
Intangibles Goodwill and Other
(ASC 350), our goodwill is tested for impairment
annually (or more frequently if impairment indicators arise).
Pursuant to ASC 350, a reporting unit is defined as an operating
segment or one level below an operating segment (a component),
for which discrete financial information is available and
reviewed by management. Our reporting units were identified as
the operating segments of the Borders Superstores reporting
segment, the Waldenbooks Specialty Retail operating segment, and
the components of the International operating segment. The
carrying amounts of the net assets of the applicable reporting
units (including goodwill) are compared to the estimated fair
values of those reporting units. Fair value is principally
estimated using a discounted cash flow model which depends on,
among other factors, estimates of future sales and expense
trends, liquidity and capitalization. The discount rate used
approximates the weighted average cost of capital of a
hypothetical third party buyer. Changes in any of the
assumptions underlying these estimates may result in the future
impairment of goodwill.
If an impairment is detected due to the carrying value of the
reporting unit being greater than the fair value, ASC 350
requires that an analysis be completed to determine the amount
of the goodwill impairment. To determine the amount of the
goodwill impairment, the fair value of the reporting unit is
allocated to each of the reporting units assets and
liabilities. The amount of fair value remaining (if any) after
this allocation is then compared to the recorded value of
goodwill. If the remaining fair value exceeds the recorded value
of goodwill, no impairment exists. If, however, the remaining
fair value is less than the recorded value of goodwill, goodwill
must be reduced to the amount of remaining fair value, with the
reduction being recorded as an expense on the statement of
operations. We perform our annual test for goodwill impairment
at the end of each fiscal year.
54
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
Leases: All
leases are reviewed for capital or operating classification at
their inception under the guidance of Accounting Standards
Codification 840, Leases (ASC 840). We
use our incremental borrowing rate in the assessment of lease
classification, and define initial lease term to include the
construction build-out period, but to exclude lease extension
period(s). We conduct operations primarily under operating
leases. For leases that contain rent escalations, we record the
total rent payable during the lease term, as defined above, on a
straight-line basis over the term of the lease and record the
difference between the rents paid and the straight-line rent as
a deferred rent liability, under Other long-term
liabilities on our consolidated balance sheets, totaling
$126.2 and $125.3 of January 30, 2010 and January 31,
2009, respectively.
Landlord
Allowances: We
classify landlord allowances as deferred rent liabilities, under
Other long-term liabilities on our consolidated
balance sheets, totaling $91.7 and $106.7 as of January 30,
2010 and January 31, 2009, respectively, and as an
operating activity on our consolidated statements of cash flows.
Also, we amortize landlord allowances over the life of the
initial lease term, and classify this amortization as a
reduction of occupancy expense, included as a component of
Cost of merchandise sold (includes occupancy) in our
consolidated statements of operations.
Financial
Instruments: The
recorded values of our financial instruments, which include
accounts receivable, accounts payable and indebtedness,
approximate their fair values.
Pursuant to the provisions of Accounting Standards Codification
815, Derivatives and Hedging (ASC 815),
we recognize the fair value of derivatives on the consolidated
balance sheets when applicable.
Accumulated Other
Comprehensive Income
(Loss): Accumulated
other comprehensive income (loss) includes exchange rate
fluctuations. Disclosure of comprehensive income (loss) is
incorporated into the consolidated statements of
stockholders equity for all years presented. Accumulated
other comprehensive income (loss) represents $16.7 and $11.9 for
exchange rate fluctuations as of January 30, 2010 and
January 31, 2009, respectively.
Revenue: Revenue
is recognized, net of estimated returns, at the point of sale
for all of our segments. Revenue excludes sales taxes and any
value-added taxes.
Through our subsidiaries, we had agreements with Amazon.com,
Inc. (Amazon) to operate Web sites utilizing the
Borders.com and Waldenbooks.com URLs (the Web
Sites). Under these agreements, which expired in early
2008, Amazon was the merchant of record for all sales made
through the Web Sites, and determined all prices and other terms
and conditions applicable to such sales. Amazon was responsible
for the fulfillment of all products sold through the Web Sites
and retained all payments from customers. We received referral
fees for products purchased through the Web Sites. The
agreements contained mutual indemnification provisions,
including provisions that defined between the parties the
responsibilities with respect to any liabilities for sales, use
and similar taxes, including penalties and interest, associated
with products sold on the Web Sites. Taxes were not collected
with respect to products sold on the Web Sites except in certain
states.
Pre-Opening
Costs: We expense
pre-opening costs as incurred and classify such costs as a
component of Selling, general, and administrative
expenses in our consolidated statements of operations.
Closing
Costs: Pursuant to
the provisions of Statement of Accounting Standards Codification
420, Exit or Disposal Cost Obligation (ASC
420), the Company expenses when incurred all amounts
related to the discontinuance of operations of stores identified
for closure. For vacated locations that are under long-term
leases, we record a liability for the difference between our
future lease payments and related costs from the date of closure
through the end of the remaining lease term, net of expected
sublease rental income.
Borders
Rewards: Membership
in our loyalty program, Borders Rewards, is free, with no
enrollment costs or annual fees. Members can earn Borders Bucks
in increments of $5 for each cumulative $150 they spend on
55
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
qualifying purchases in a calendar year in any of our stores
nationwide. Borders Bucks are awarded to members on the first of
the month following the month they reach the qualifying $150
spend level, and they expire on the last day of the month of
receipt.
We accrue the cost of Borders Bucks awards once they are earned
by members, less an assumed breakage rate for those awards not
expected to be redeemed. The breakage rate is determined by
historical redemption experience. Any difference between the
liability recorded for Borders Bucks and the amount of Borders
Bucks that are actually redeemed in the subsequent month are
categorized as an adjustment of Sales on our
consolidated statements of operations in that month.
Gift
Cards: We sell
gift cards to our customers and record a liability for the face
value of all certificates issued and unredeemed within the last
12 months. For unredeemed certificates older than
12 months, we adjust the related liability to represent
only that amount expected to be redeemed. We recognize the
income related to this adjustment as a component of Other
revenue in our consolidated statements of operations,
totaling $10.6 in 2009, $9.6 in 2008, and $23.2 in 2007. We have
included the liability for gift cards as a component of
Accrued payroll and other liabilities on our
consolidated balance sheets, totaling $115.5 and $122.9 as of
January 30, 2010 and January 31, 2009, respectively.
We recognize income from unredeemed gift cards when the
likelihood of the cards being redeemed is remote, which occurs
when unredeemed cards reach 13 months past their issuance
date. No income is recognized on unredeemed gift cards that have
been issued within the past 12 months. Our gift cards do
not have expiration dates.
A breakage factor, representing the percentage of gift card
dollar value expected to never be redeemed, is applied to the
total unredeemed gift card dollar value issued beyond the past
12 months. This breakage factor is based upon analysis of
historical redemption trends, and is updated annually to reflect
recent experience. The historical data that we evaluate to
determine the breakage factor ranges from the current date back
to 1998, when we first issued electronic gift cards.
We do not believe we are required to remit unredeemed gift card
receipts to governmental jurisdictions as abandoned property
based upon our assessment of applicable laws, after consultation
with external legal counsel.
Advertising
Costs: We expense
advertising costs as incurred, and recorded approximately $19.4,
$24.8, and $32.5 of gross advertising expenses in 2009, 2008,
and 2007, respectively.
We receive payments and credits from vendors pursuant to
co-operative advertising programs, shared markdown programs,
purchase volume incentive programs and magazine slotting
programs.
Pursuant to co-operative advertising programs offered by
vendors, we contract with vendors to promote merchandise for
specified time periods. Vendor consideration, which represents a
reimbursement of specific, incremental, identifiable costs, is
included in the Selling, general and administrative
expense in our consolidated statements of operations,
along with the related costs, in the period the promotion takes
place. As a percentage of gross advertising expenses, such
consideration totaled approximately (82.7%), (78.4%), and
(65.2%) in 2009, 2008, and 2007, respectively. Consideration
that exceeds such costs is classified as a reduction of the
Cost of merchandise sold line on the consolidated
statements of operations. Additionally, we recorded $2.3 and
$2.5 of vendor consideration as a reduction to our inventory
balance at January 30, 2010 and January 31, 2009,
respectively.
We also receive credits from vendors pursuant to shared markdown
programs, purchase volume programs, and magazine slotting
programs. Credits received pursuant to these programs are
classified as the Cost of merchandise sold in our
consolidated statements of operations, and are recognized upon
certain product volume thresholds being met or product
placements occurring.
56
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
Advertising costs not part of the programs listed above are
included in the Selling, general and administrative
expenses in our consolidated statements of operations.
Income
Taxes: We must
make certain estimates and judgments in determining income tax
expense for financial statement purposes. These estimates and
judgments occur in the calculation of certain tax assets and
liabilities, which arise from differences in the timing of
recognition of revenue and expense for tax and financial
statement purposes.
In addition, the calculation of our tax liabilities involves
dealing with uncertainties in the application of complex tax
regulations. We recognize liabilities for anticipated tax issues
in the United States and other tax jurisdictions based on an
estimate of whether, and to the extent which, additional taxes
will be due.
We recognize the tax effects of a position only if it is
more-likely-than-not to be sustained based solely on its
technical merits as of the reporting date. The
more-likely-than-not threshold represents a positive assertion
by management that a company is entitled to the economic
benefits of a tax position. If a tax position is not considered
more-likely-than-not to be sustained based solely on its
technical merits, no benefits of the position are to be
recognized. Moreover, the more-likely-than-not threshold must
continue to be met in each reporting period to support continued
recognition of a benefit.
Our effective tax rate in a given financial statement period may
be materially impacted by changes in the mix and level of
earnings, changes in the expected outcome of audits or changes
in the deferred tax valuation allowance. We record a valuation
allowance against deferred tax assets when it is more likely
than not that some portion or all of the assets will not be
realized.
Equity-Based
Compensation: We
account for equity-based compensation in accordance with the
provisions of Statement of Accounting Standards Codification
718, Compensation Stock Compensation
(ASC 718)). We record compensation cost for
equity-based compensation in the Selling, general and
administrative expense of our consolidated statements of
operations.
New Accounting
Guidance: In
December 2007, the Financial Accounting Standards Board
(FASB) issued new accounting and disclosure guidance
on business combinations. This guidance significantly changes
the accounting for business combinations in a number of areas,
including the treatment of contingent consideration,
contingencies, acquisition costs, in-process research and
development and restructuring costs. This guidance is effective
for fiscal years beginning after December 15, 2008. The
adoption of this guidance did not have a material impact on our
consolidated financial position or results of operations.
In December 2007, the FASB amended its guidance on the treatment
of noncontrolling interests in consolidated balance sheets and
consolidated statements of income. Noncontrolling interests have
become a part of stockholders equity in the consolidated
balance sheets and consolidated income statements will report
income attributable to our business and to noncontrolling
interests separately. The accounting guidance is effective for
fiscal years beginning after December 15, 2008. The
adoption of this guidance did not have a material impact on our
consolidated financial position or results of operations.
In March 2008, the FASB issued new accounting and disclosure
guidance for disclosures about derivative instruments and
hedging activities. This guidance requires additional
disclosures regarding: (1) how and why an entity uses
derivative instruments; (2) how derivative instruments and
related hedged items are accounted; and (3) how derivative
instruments and related hedged items affect an entitys
financial position, financial performance, and cash flows. In
addition, the guidance requires qualitative disclosures about
objectives and strategies for using derivatives described in the
context of an entitys risk exposures, quantitative
disclosures about the location and fair value of derivative
instruments and associated gains and losses, and disclosures
about credit-risk-related contingent features in derivative
instruments. This guidance is effective for fiscal years and
interim periods within these fiscal years, beginning after
November 15, 2008. The adoption of this guidance did not
have a material impact on our consolidated financial statements.
57
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
In June 2009, the FASB issued Statement of Financial Accounting
Standards No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles a replacement of FASB Statement
No. 162 This guidance establishes the Accounting
Standards Codification as the source of authoritative accounting
principles recognized by the FASB for all nongovernmental
entities in the preparation of financial statements in
accordance with GAAP. For SEC registrants, rules and
interpretive releases of the SEC under federal securities laws
are also considered authoritative sources of GAAP. The
provisions of this statement are effective for financial
statements issued for interim and annual periods ending after
September 15, 2009. Since the Codification did not alter
existing U.S. GAAP, the adoption did not have any impact on
our consolidated financial statements.
During June 2009, the FASB amended its guidance on accounting
for variable interest entities (VIE), which changes
the approach in determining the primary beneficiary of a VIE.
Among other things, the new guidance requires a qualitative
rather than a quantitative analysis to determine the primary
beneficiary of a VIE; requires continuous assessments of whether
an enterprise is the primary beneficiary of a VIE; enhances
disclosures about an enterprises involvement with a VIE;
and amends certain guidance for determining whether an entity is
a VIE. This accounting guidance is effective for annual periods
beginning after November 15, 2009. We do not expect the
adoption of this guidance to have a material impact on our
consolidated financial statements.
In February 2010, the FASB amended its May 2009 accounting and
disclosure guidance for subsequent events, which established
general standards of accounting for and disclosure of events
that occur after the balance sheet date, but before the
financial statements are issued or available to be issued. The
February amendment eliminated the requirement that SEC
registrants disclose the date through which the entity has
evaluated subsequent events. The amended guidance is effective
immediately. We implemented the guidance as originally issued
during the quarter ended October 31, 2009, and implemented
the amended guidance in this
Form 10-K
report. The adoption of this guidance did not have a material
impact on our consolidated financial statements.
Reclassifications: Certain
prior year amounts have been reclassified to conform to current
year presentation, including reclassifying pre-opening costs
into Selling, general and administrative expenses.
|
|
NOTE 2
|
WEIGHTED-AVERAGE
SHARES OUTSTANDING
|
Weighted-average shares outstanding are calculated as follows
(thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Weighted-average common shares outstanding basic
|
|
|
60,058
|
|
|
|
60,212
|
|
|
|
58,742
|
|
Dilutive effect of employee stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding diluted
|
|
|
60,058
|
|
|
|
60,212
|
|
|
|
58,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unexercised employee stock options and unvested restricted share
units to purchase 3.4 million, 4.5 million, and
3.6 million common shares as of January 30, 2010,
January 31, 2009, and February 2, 2008, respectively,
were not included in the weighted-average shares outstanding
calculation because to do so would have been antidilutive, due
to the Company generating losses in each of the respective
fiscal years.
We also have unexercised warrants which were issued to Pershing
Square to purchase 14.7 million common shares outstanding
as of January 30, 2010 and January 31, 2009. These
shares were not included in the weighted-average shares
outstanding calculation because to do so would have been
antidilutive, due to the Company generating losses in each of
the respective fiscal years.
58
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
|
|
NOTE 3
|
GOODWILL
IMPAIRMENT
|
As of January 31, 2010 we have $0.3 of goodwill on our
consolidated balance sheet, relating to our Paperchase U.K.
business. As of January 30, 2010, no impairment of this
goodwill was required.
As a result of our annual test on January 31, 2009, all of
the goodwill allocated to the Borders Superstores segment was
impaired, and we recorded a resulting charge of $40.3 in the
fourth quarter of 2008. This impairment was primarily the result
of changes in fair value due to the material decline in our
market capitalization during the fourth quarter of 2008.
The charge is categorized as Goodwill impairment on
our consolidated statements of operations.
|
|
NOTE 4
|
ASSET
IMPAIRMENTS AND OTHER WRITEDOWNS
|
Asset
Impairments: In
accordance with the provisions of Accounting Standards
Codification 360, Property, Plant, and Equipment,
(ASC 360) we evaluate the carrying values of
long-lived assets whenever changes in circumstances indicate the
carrying amounts of such assets may not be recoverable. When an
indicator of impairment is present, we evaluate the
recoverability of the affected assets.
During 2009, due to the economic environment and our operating
results, we concluded that there were sufficient indicators to
require the performance of long-lived asset impairment tests at
the end of the fourth quarter of 2009. As a result of these
tests, we recorded a charge of $16.2, comprised of the
following: $15.0 related to Borders superstores, $0.4 related to
Waldenbooks Specialty Retail stores and $0.8 related to
Paperchase U.K.
During 2008, due to the impairment of the goodwill related to
the Borders Superstores segment and the items present in 2009,
we concluded that there were sufficient indicators to require
the performance of long-lived asset impairment tests at the end
of the third and fourth quarters of 2008. As a result of these
tests, we recorded a pre-tax charge of $53.5, comprised of the
following: $48.1 related to Borders superstores, $4.7 related to
Waldenbooks Specialty Retail stores and $0.7 related to one
Borders store in Puerto Rico.
In 2007, assets of underperforming Borders superstores were
tested for impairment and as a result, we recorded a charge of
$5.5. Due to the Waldenbooks Specialty Retail segments
operating results, we tested all assets of the segment for
impairment. This resulted in a fourth quarter 2007 charge of
$0.7 related to underperforming Waldenbooks Specialty Retail
stores. In the International segment, we recorded an asset
impairment charge of $0.5 related to one Borders store in Puerto
Rico.
Significant deterioration in our operating performance compared
to projections could result in significant additional asset
impairments.
The charges taken for these impairments are categorized as
Asset impairments and other writedowns in our
consolidated statements of operations.
During the fourth quarter of 2009, we identified approximately
$10.3 of revisions to inventory recorded in prior years. The
revisions were recorded in the fourth quarter and are
categorized as Cost of merchandise sold (includes
occupancy) in our consolidated statements of operations. They
were not material to our financial statements.
Store
Closings: In
accordance with the provisions of Accounting Standards
Codification 420, Exit or Disposal Cost Obligations
(ASC 420), we expense when incurred all amounts
related to the discontinuance of operations of facilities
identified for closure. These expenses typically pertain to
occupancy costs, inventory markdowns, asset impairments, and
store payroll and other costs. When we close any of our
facilities, the inventory of the closed store is either returned
to vendors or marked down and sold.
59
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
Leasehold improvements, furniture, fixtures and equipment are
generally discarded or sold for nominal amounts.
Borders superstores closed during 2009 averaged approximately
20 employees per store and Waldenbooks Specialty Retail
stores closed during 2009 averaged between five to
18 employees per store, who have been or will be displaced
by the closures, with a portion being transferred to other
Borders superstore or Waldenbooks Specialty Retail locations.
Those employees not transferred are eligible for involuntary
termination benefits. The total amount of these benefits for the
Borders superstores closed in 2009 is not significant. The total
amount of these benefits for the Waldenbooks Specialty Retail
stores closed in 2009 is approximately $2.3.
During 2009, we recorded a $11.5 charge for the closing costs of
our stores, consisting of the following: $3.2 related to the
closure of seven Borders superstores (which included $3.0 of
income related to occupancy items and $3.5 of expense related to
asset disposals), $7.8 related to the closure of 212 Waldenbooks
Specialty Retail stores (of which $1.9 were occupancy costs,
$4.2 were inventory writeoffs and $0.4 of asset disposals), and
$0.5 related to Paperchase U.K. The remainder of the charges for
both the Borders superstores and Waldenbooks Specialty Retail
segments consisted primarily of costs to close the stores,
including signage removal and cleaning costs. The charge for
Paperchase U.K. related to the disposal of assets located in
Borders U.K. stores, which were closed during December 2009.
During 2008, we recorded a $4.9 charge for the closing costs of
our stores, consisting of the following: $3.9 related to the
closure of six Borders superstores (of which $0.4 were occupancy
costs) and $1.0 related to the closure of 112 Waldenbooks
Specialty Retail stores (of which $0.9 were occupancy costs).
The non-occupancy charge for both segments consisted primarily
of asset impairments.
During 2007, we recorded a $12.3 charge for the closing costs of
our stores, consisting of the following: $11.0 related to the
closure of eight Borders superstores (of which $5.4 were
occupancy costs) and $1.3 related to the closure of 75
Waldenbooks Specialty Retail stores (of which $0.6 were
occupancy costs). The non-occupancy charge for both segments
consisted primarily of asset impairments.
Asset impairment costs related to store closings are categorized
as Asset impairments and other writedowns, inventory
writeoffs and occupancy costs are categorized as Cost of
merchandise sold (includes occupancy), and involuntary
termination benefits and other costs are categorized as
Selling, general and administrative expenses on our
consolidated statements of operations.
The following table summarizes our facility closure reserve
recorded in accordance with ASC 420:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
Beginning reserve balance
|
|
$
|
25.6
|
|
|
$
|
13.2
|
|
|
|
|
|
Current period charge
|
|
|
3.9
|
|
|
|
16.7
|
|
|
|
|
|
Current period reserve adjustment
|
|
|
(3.5
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
Current period cash payments
|
|
|
(8.3
|
)
|
|
|
(4.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending reserve balance
|
|
$
|
17.7
|
|
|
$
|
25.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The charge taken during 2009 was primarily due the closure of
212 Waldenbooks Specialty Retail stores during the year. The
reserve adjustment recorded during 2009 resulted from the
termination of store leases earlier than originally anticipated.
60
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
The following table summarizes the sales and operating loss for
Borders superstores closed in each of the following fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Sales
|
|
$
|
19.2
|
|
|
$
|
21.9
|
|
|
$
|
28.0
|
|
Operating loss
|
|
|
(2.0
|
)
|
|
|
(2.6
|
)
|
|
|
(3.8
|
)
|
The following table summarizes the sales and operating loss for
the Waldenbooks Specialty Retail stores closed in each of the
following fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Sales
|
|
$
|
149.7
|
|
|
$
|
64.4
|
|
|
$
|
37.1
|
|
Operating loss
|
|
|
(9.2
|
)
|
|
|
(5.7
|
)
|
|
|
(3.2
|
)
|
|
|
NOTE 5
|
COSTS
ASSOCIATED WITH TURNAROUND EFFORT
|
During 2008 we launched a turnaround effort designed to return
our business to profitability. This effort included exploring
strategic alternatives for our business, including the possible
sale of some or all of our business, expense reduction
initiatives, management consolidation and staff reductions in
our corporate office and in our stores, as well as a reduction
in our investment in music and movie inventory. These efforts
continued throughout 2009, and included a reduction of floor
space devoted to multimedia product in our superstores.
A summary of the costs associated with our turnaround effort
follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Consulting and legal fees
|
|
$
|
6.0
|
|
|
$
|
11.2
|
|
Severance costs
|
|
|
6.7
|
|
|
|
16.4
|
|
Retention costs
|
|
|
1.3
|
|
|
|
2.3
|
|
Multimedia inventory reduction costs, including accelerated
depreciation costs
|
|
|
11.3
|
|
|
|
|
|
Music inventory markdowns
|
|
|
|
|
|
|
6.5
|
|
Paperchase strategic alternative costs
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25.3
|
|
|
$
|
36.5
|
|
|
|
|
|
|
|
|
|
|
The charge related to music inventory markdowns is categorized
as Cost of merchandise sold on our consolidated
statements of operations. The multimedia inventory reduction
costs are categorized partially as Cost of merchandise
sold and partially as Selling, general and
administrative expenses on our consolidated statements of
operations. All other charges are categorized as Selling,
general and administrative expenses on our consolidated
statements of operations.
61
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
|
|
NOTE 6
|
PROPERTY
AND EQUIPMENT
|
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Property and equipment
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
6.3
|
|
|
$
|
6.3
|
|
Leasehold improvements
|
|
|
540.8
|
|
|
|
580.3
|
|
Furniture and fixtures
|
|
|
852.8
|
|
|
|
912.0
|
|
Construction in progress
|
|
|
5.4
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,405.3
|
|
|
|
1,501.8
|
|
Less accumulated depreciation and amortization
|
|
|
(1,012.5
|
)
|
|
|
(1,007.6
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
392.8
|
|
|
$
|
494.2
|
|
|
|
|
|
|
|
|
|
|
The income tax provision (benefit) from continuing operations
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(28.0
|
)
|
|
$
|
(12.4
|
)
|
|
$
|
(24.5
|
)
|
State and local
|
|
|
(3.3
|
)
|
|
|
0.3
|
|
|
|
(3.5
|
)
|
Foreign
|
|
|
4.0
|
|
|
|
2.3
|
|
|
|
5.8
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
31.4
|
|
|
|
4.5
|
|
State and local
|
|
|
|
|
|
|
8.7
|
|
|
|
0.9
|
|
Foreign
|
|
|
(2.2
|
)
|
|
|
(0.1
|
)
|
|
|
(2.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision (benefit)
|
|
$
|
(29.5
|
)
|
|
$
|
30.2
|
|
|
$
|
(19.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
A reconciliation of the federal statutory rate to our effective
tax rate follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Federal statutory rate
|
|
$
|
(48.9
|
)
|
|
$
|
(54.1
|
)
|
|
$
|
(13.7
|
)
|
State and local taxes, net of federal tax benefit
|
|
|
0.4
|
|
|
|
0.2
|
|
|
|
(2.6
|
)
|
Foreign income taxes
|
|
|
1.6
|
|
|
|
(1.1
|
)
|
|
|
(0.1
|
)
|
Increase (decrease) in valuation allowance
|
|
|
14.3
|
|
|
|
85.4
|
|
|
|
(2.7
|
)
|
Non-deductible goodwill impairment
|
|
|
|
|
|
|
14.1
|
|
|
|
|
|
Non-deductible expiration of put option
|
|
|
4.1
|
|
|
|
|
|
|
|
|
|
Non-deductible expense from stock warrant remeasure
|
|
|
1.6
|
|
|
|
(14.0
|
)
|
|
|
|
|
Other
|
|
|
(2.6
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision (benefit)
|
|
$
|
(29.5
|
)
|
|
$
|
30.2
|
|
|
$
|
(19.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities resulted from the following:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Accruals and other current liabilities
|
|
$
|
16.2
|
|
|
$
|
18.3
|
|
Deferred revenue
|
|
|
9.3
|
|
|
|
11.1
|
|
Other long-term liabilities
|
|
|
15.5
|
|
|
|
12.0
|
|
Deferred compensation
|
|
|
3.2
|
|
|
|
5.1
|
|
Deferred rent
|
|
|
53.2
|
|
|
|
57.2
|
|
State deferred tax assets, net of federal effect
|
|
|
2.9
|
|
|
|
5.6
|
|
Foreign deferred tax assets
|
|
|
3.4
|
|
|
|
2.6
|
|
Asset impairments and other writedowns
|
|
|
28.8
|
|
|
|
32.1
|
|
Capital loss carryforward
|
|
|
19.6
|
|
|
|
23.1
|
|
Net operating loss carryforward
|
|
|
69.3
|
|
|
|
43.8
|
|
Tax credit carryforwards
|
|
|
3.2
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
224.6
|
|
|
|
211.6
|
|
Less: valuation allowance
|
|
|
(140.7
|
)
|
|
|
(125.2
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
83.9
|
|
|
|
86.4
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
9.0
|
|
|
|
16.6
|
|
Property and equipment
|
|
|
69.6
|
|
|
|
68.0
|
|
Foreign deferred tax liabilities
|
|
|
0.4
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
79.0
|
|
|
|
86.4
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
4.9
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
63
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
From 2008 to 2009, our net deferred tax assets increased to $4.9
due to an increase in deferred tax assets in foreign
jurisdictions that do not require a valuation allowance and an
increase in deferred tax assets offset by uncertain tax
positions. Total deferred tax assets and the valuation allowance
for 2008 have been restated to include the tax effect of state
net operating loss carryforwards. The deferred benefit of these
state net operating loss carryforwards is fully offset by a
valuation allowance, as it is more likely than not that a future
benefit will not be realized for these assets. Net deferred tax
assets for 2008 have not changed.
We have a federal gross net operating loss (NOL) carryforward of
$141.0, which can be carried forward through 2029, state
apportioned NOL carryforwards of $252.1, with carryforward
periods ranging from one to 20 years, depending on the
taxing jurisdiction, and a federal gross capital loss
carryforward of $56.0, which can be carried forward through
2012. We have recorded a full valuation allowance against the
tax-effect of our domestic NOL carryforwards and the capital
loss carryforward, as it is more-likely-than-not that a future
benefit from these carryforwards will not be realized. We also
have gross tax NOL carryforwards from continuing operations in
foreign jurisdictions totaling $4.5 as of January 30, 2010,
$1.0 as of January 31, 2009, and $10.1 as of
February 2, 2008. These losses have an indefinite
carryforward period. We established a valuation allowance to
reflect the uncertainty of realizing a portion of the benefits
of these net operating losses and deferred assets in foreign
jurisdictions.
We evaluate our deferred income tax assets and liabilities
quarterly to determine whether or not a valuation allowance is
necessary. During the third quarter of 2008, we recorded a full
valuation allowance against our domestic net deferred tax
assets, as we determined that it was more-likely-than-not that a
future benefit would not be realized from these assets. This
determination was based upon several negative factors, including
our being in a three-year cumulative loss position as of the end
of the third quarter. This position has not changed as of
January 30, 2010. However, during 2009, we realized the
benefit of what was previously our 2008 federal net operating
loss carryforward as a result of the extended net operating loss
carryback period allowed under the Worker, Homeownership, and
Business Assistance Act of 2009 (The Act). This
change in tax law temporarily extended the federal net operating
loss carryback period from two to five years, allowing us to
recover taxes paid in 2003 and 2004, totaling $32.4. As a result
of this law change, we reversed the valuation allowance that had
previously been recorded against our 2008 net operating
loss carryforward. This does not affect our overall
determination that a valuation allowance should be maintained
against our other domestic deferred tax assets, including our
2009 domestic net operating loss carryforwards.
Should conditions improve to the extent that we generate future
taxable income of the appropriate character within the loss
carryforward period, we would then be able to reverse some or
all of this valuation allowance, resulting in an income tax
benefit.
Consolidated domestic income (loss) from continuing operations
before taxes was $(142.3) in 2009, $(167.0) in 2008, and $(46.1)
in 2007. The corresponding amounts for foreign operations were
$2.6 in 2009, $12.5 in 2008, and $7.1 in 2007.
During the year, Paperchase Products, Ltd., a foreign
subsidiary, declared a dividend to its parent companies of $7.0.
Of this amount, $1.0 was remitted back to the United States.
With respect to our Paperchase business, we no longer consider
the earnings of this subsidiary to be permanently reinvested,
and have provided U.S. income taxes for the potential
distribution of earnings and profits.
With respect to our other foreign companies, we assert our
historical policy and experience of permanently reinvesting the
foreign companies undistributed earnings. As such, we have
not accrued as an expense any U.S. income taxes
attributable to undistributed earnings for the current period
ending January 30, 2010. Cumulative foreign earnings
considered permanently reinvested totaled $ as of
January 30, 2010 and $37.9 as of January 31, 2009.
64
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
We adopted FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48,
codified within ASC
740-10), on
February, 4, 2007. Upon adoption, we recognized an additional
$4.2 liability for uncertain tax positions, which was accounted
for as a reduction to beginning retained earnings. The adoption
of FIN 48 also resulted in the reclassification of $7.2
from current taxes payable to non-current accrued liabilities,
based upon managements estimate of when these liabilities
will ultimately be settled.
As of January 31, 2009, gross unrecognized tax benefits
totaled $23.5. As of January 30, 2010 this balance
decreased to $23.3. The decrease in the liability for income
taxes associated with uncertain tax positions of $0.2 primarily
relates to the favorable impact of audit activity and statute of
limitation expirations, partially offset by recognizing the
unfavorable impact of certain domestic positions. These balances
represent the total amount of uncertain tax positions that, if
recognized, would favorably affect the effective tax rate.
The following table summarizes the total amount of unrecognized
tax benefits for 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Beginning balance
|
|
$
|
23.5
|
|
|
$
|
21.2
|
|
|
$
|
11.2
|
|
Additions to tax positions related to current year
|
|
|
1.6
|
|
|
|
5.0
|
|
|
|
15.3
|
|
Additions to tax positions related to prior years
|
|
|
2.2
|
|
|
|
2.0
|
|
|
|
0.3
|
|
Reductions to tax positions related to prior years
|
|
|
(3.3
|
)
|
|
|
(3.7
|
)
|
|
|
(3.2
|
)
|
Reductions to tax positions related to settlements with tax
authorities
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
Reductions to tax positions related to lapse of statutory
limitations
|
|
|
(0.5
|
)
|
|
|
(0.8
|
)
|
|
|
(2.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
23.3
|
|
|
$
|
23.5
|
|
|
$
|
21.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases or decreases to these unrecognized tax benefits that
are reasonably possible in the next 12 months are not
expected to be significant.
We recognize interest and penalties related to uncertain tax
positions in our income tax provision. We recognized net tax
expense for tax related interest and penalties of $0.7 for the
year ended January 30, 2010, $0.3 for the year ended
January 31, 2009 and $0.8 for the year ended
February 2, 2008 in the consolidated statement of
operations. We recognized a gross liability for the payment of
tax related interest and penalties of $8.7 for the year ended
January 30, 2010, $8.0 for the year ended January 31,
2009 and $7.5 for the year ended February 2, 2008 in our
consolidated balance sheets.
A number of our tax returns remain subject to examination by
taxing authorities. These include federal returns from 2003
through 2008, tax returns in certain states for 1996 through
2008, and tax returns in certain foreign jurisdictions for 2004
through 2008. For federal purposes, tax returns from earlier
years were reopened to examination as a result of the filing of
net operating loss carryback claims to recover taxes paid in
2003, 2004 and 2005.
Litigation: In
February 2009, three former employees, individually and on
behalf of a purported class consisting of all current and former
employees who work or worked as General Managers in Borders
stores in the State of California at any time from
February 19, 2005, through February 19, 2009, have
filed an action against us in the Superior Court of California
for the County of Orange. The Complaint alleges, among other
things, that the individual plaintiffs and the purported class
members were improperly classified as exempt employees and that
we violated the California Labor Code by failing to (i) pay
required overtime and (ii) provide meal periods and rest
periods, and (iii) that those practices also violate the
California Business and Professions Code. The relief sought
includes damages, restitution, penalties,
65
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
injunctive relief, interest, costs, and attorneys fees and
such other relief as the court deems proper. We have not
included any liability in our consolidated financial statements
in connection with this matter and have expensed as incurred all
legal costs to date. We cannot reasonably estimate the amount or
range of possible loss, if any, at this time.
Certain states and private litigants have sought to impose sales
or other tax collection efforts on
out-of-jurisdiction
companies that engage in
e-commerce.
From August 2001 through May 2008, we had agreements with
Amazon.com, Inc. (Amazon) to operate web sites
utilizing the Borders.com and Waldenbooks.com URLs. These
agreements contained mutual indemnification provisions,
including provisions that define between the parties, the
responsibilities with respect to any liabilities for sales, use
and similar taxes, including penalties and interest, associated
with products sold on the web sites. The Company and Amazon have
been named as defendants in an action filed by a private
litigant on behalf of the state of Illinois under the
states False Claims Act relating to the failure to collect
use taxes on Internet sales in Illinois for periods both before
and after the implementation of the web site agreements. The
Complaints seek judgments, jointly and severally, against the
defendants for, among other things, injunctive relief, treble
the amount of damages suffered by the state of Illinois as a
result of the alleged violations of the defendants, penalties,
costs and expenses, including legal fees. The complaint covers
time periods both before and during the period that Amazon
operated Borders.com, and the complaint contains broad
allegations that cover both us and Amazon without specifying the
total amount sought or the allocation of alleged responsibility
between us and Amazon. Joint motions to dismiss the case based
on common issues were filed by the defendants and have been
denied, and the court is now proceeding to consider individual
motions to dismiss the case, including a motion filed by the
Company. We have not included any liability in our consolidated
financial statements in connection with this matter and have
expensed as incurred all legal costs to date. We cannot
reasonably estimate the amount or range of possible loss, if
any, at this time.
In October 2009, U.S. Ethernet Innovations, LLC offered us
an unsolicited license to 35 U.S. and foreign patents
relating to Ethernet technology for a one-time fee of $3.0, and
implied that it would commence litigation if we do not accept
the offer. We are evaluating the offer, as well as the amount of
our potential exposure, which could be greater or less than
$3.0, if we do not accept the offer. We intend to seek
indemnification from the relevant equipment vendors. We have not
included any liability in our consolidated financial statements
in connection with this matter and have expensed as incurred all
legal costs to date. We cannot reasonably estimate the amount or
range of possible loss, if any, at this time.
In addition to the matters described above, we are, from time to
time, involved in or affected by other litigation incidental to
the conduct of our businesses.
Credit
Facility: We had a
Multicurrency Revolving Credit Agreement, as amended (the
Prior Credit Agreement), which was scheduled to
expire in July 2011. The Prior Credit Agreement provided for
borrowings of up to $1,125.0 secured by eligible inventory and
accounts receivable and related assets. Borrowings under the
Credit Agreement were limited to a specified percentage of
eligible inventories and accounts receivable and bore interest
at a variable base rate plus the applicable increment or LIBOR
plus the applicable increment at our option. Eligible inventory
was based upon the approximate liquidation value, as determined
from time to time by an independent third party. The Credit
Agreement (i) included a fixed charge coverage ratio
requirement of 1.1 to 1 that was applicable only if outstanding
borrowings under the facility exceed 90% of permitted borrowings
thereunder, (ii) contained covenants that limited, among
other things, our ability to incur indebtedness, grant liens,
make investments, consolidate or merge or dispose of assets,
(iii) prohibited dividend payments and share repurchases
that would result in borrowings under the facility exceeding 90%
of permitted borrowings thereunder, and (iv) contained
default provisions that are typical for this type of financing,
including a cross default provision relating to
66
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
other indebtedness of more than $25.0 and a default provision
should we receive a going concern qualification on our annual
financial statements from our independent registered public
accounting firm.
We had borrowings outstanding under the Prior Credit Agreement
of $232.3, $286.7, and $547.3 at January 30, 2010,
January 31, 2009, and February 2, 2008, respectively.
The weighted average interest rate on Prior Credit Agreement
borrowings in 2009, 2008, and 2007 was approximately 3.8%, 5.4%,
and 7.1%, respectively.
At January 30, 2010, the funding available under the Prior
Credit Agreement was $257.6. This amount, however, is not
necessarily indicative of our future funding capacity, due to
the substantial fluctuation in this amount throughout the year
and within a given month. This amount varies not only in
response to seasonal factors, such as the accumulation of
inventory in advance of the holiday selling season, but also due
to
day-to-day
operating factors, such as the timing of payments to vendors.
These factors, among others, can significantly impact the amount
of funding available on any given day.
Pershing Square
Term Loan: On
April 9, 2008, we completed a financing agreement with
Pershing Square Capital Management, L.P. (Pershing
Square) on behalf of certain of its affiliated investment
funds. Under the terms of the agreement, Pershing Square loaned
$42.5 to us with an original maturity of January 15, 2009.
This agreement contains covenants, restrictions, and default
provisions similar to those contained in the Prior Credit
Agreement described above. The agreement was subsequently
amended three times, most recently on March 30, 2009,
extending the expiration date of the term loan to April 1,
2010.
On March 31, 2010, we entered into a Third Amended and
Restated Revolving Credit Agreement (the Credit
Agreement) and a Term Loan Agreement (the Term Loan
Agreement). Separately on March 31, 2010, we paid the
principal outstanding to Pershing Square. Please see
Note 18 Subsequent Events for full
descriptions of the Credit Agreement and the Term Loan Agreement.
As of January 30, 2010, we were in compliance with our debt
covenants. We currently do not meet the Credit Agreements
fixed charge coverage ratio requirement. This requirement is not
currently applicable, however, because borrowings under the
Credit Agreement have not exceeded the permitted borrowing
levels.
Debt of
Consolidated
VIEs: We include
the debt of two variable interest entities (VIEs),
in our consolidated balance sheets. Scheduled principal payments
of this debt as of January 30, 2010 total $0.2 in 2010,
$0.2 in 2011, $0.3 in 2012, $0.3 in 2013, $0.3 in 2014, $3.5 in
all later years, and in the aggregate, total $4.8. See
Note 10 Leases for further
discussion of our consolidation of these VIEs.
The borrowings outstanding under the Credit Facility and the
Pershing Square term loan are categorized as Short-term
borrowings and current portion of long-term debt on our
consolidated balance sheets. The recorded value of these
borrowings approximates their fair value.
We plan to operate our business and execute our strategic
initiatives principally with funds generated from operations,
financing through the Credit Agreement, credit provided by our
vendors and other sources of new financing as deemed necessary
and available. However, there can be no assurance that we will
achieve our internal sales projections or that we will be able
to maintain our current vendor payable support or borrowing
capacity, and any failure to do so could result in our having
insufficient funds for our operations. We have taken a number of
steps to enhance our liquidity in 2008 and 2009 including
reduction of inventory, reduction in headcount and reduction of
actual and planned capital expenditures.
Operating
Leases: We conduct
operations primarily in leased facilities. Store leases are
generally for initial terms of 15 to 20 years.
Borders leases generally contain multiple three- to
five-year renewal options which
67
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
allow Borders the option to extend the life of the leases up to
25 years beyond the initial noncancellable term.
Waldenbooks Specialty Retails 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 30, 2010 total $291.2 in 2010, $276.7 in 2011,
$266.4 in 2012, $254.3 in 2013, $237.5 in 2014, and $1,015.0 in
all later years, and in the aggregate, total $2,341.1. Future
minimum lease payments to be received under subleasing
arrangements at January 30, 2010 total $4.2 in 2010, $4.1
in 2011, $3.8 in 2012, $3.4 in 2013, $2.5 in 2014, and $4.8 in
all later years, and in the aggregate, total $22.8.
Rental
Expenses: A
summary of operating lease minimum and percentage rental
expense, excluding discontinued operations, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Minimum rentals
|
|
$
|
331.5
|
|
|
$
|
353.9
|
|
|
$
|
338.8
|
|
Percentage rentals
|
|
|
1.5
|
|
|
|
1.7
|
|
|
|
30.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
333.0
|
|
|
$
|
355.6
|
|
|
$
|
369.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized
Leases: We, at
times, account for certain items under capital leases. Scheduled
principal payments of capitalized leases as of January 30,
2010 total $1.3 in 2010, $1.0 in 2011, $0.6 in 2012, $0.3 in
2013, and in the aggregate, total $3.2.
Consolidated
VIEs: At
January 30, 2010, we are the primary beneficiary of two
variable interest entities (VIEs), due to our
guarantee of the debt of these entities. These entities were
established by third-party developers to own, construct, and
lease two of our store locations. To refinance the debt
associated with the construction of these stores, we were
required to guarantee the debt of these two entities. As a
result, we consolidate these VIEs and have recorded property and
equipment, net of accumulated depreciation, of $4.5, and
long-term debt (including current portion) of $4.8 at
January 30, 2010, and have recorded property and equipment,
net of accumulated depreciation, of $4.7, and long-term debt
(including current portion) of $5.0 at January 31, 2009.
|
|
NOTE 11
|
EMPLOYEE
BENEFIT PLANS
|
Employee Savings
Plan: Employees
who meet certain requirements as to age and service are eligible
to participate in our 401(K) Savings Plan. Our expense related
to this plan was $, $1.6, and $4.0 for 2009, 2008, and
2007, respectively, and consisted primarily of a match of
certain employee contributions. We suspended this match payment
as of July 1, 2008.
|
|
NOTE 12
|
STOCK-BASED
COMPENSATION PLANS
|
2004 Long-Term
Incentive Plan: We
maintain the 2004 Long-Term Incentive Plan (the 2004
Plan), under which we may grant stock-based awards to our
employees and non-employee directors, including restricted
shares and share units of our common stock and options to
purchase our common stock. The 2004 Plan was approved by
shareholders in May 2004, and replaced all prior stock-based
benefit plans on a go-forward basis. Three million shares were
authorized for the grant of stock-based awards under the 2004
Plan (plus any shares forfeited or cancelled under the 2004 Plan
or any prior plan). At January 30, 2010, 4.6 million
shares remained available for grant.
Under the 2004 Plan, the exercise price of options granted will
not be less than the fair value of our common stock at the date
of grant. The plan provides for vesting periods as determined by
our
68
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
Compensation Committee of the Board of Directors. We recognize
compensation expense for options granted on a straight-line
basis over the vesting period.
We grant time-vested restricted stock to our senior management
personnel. We recognize compensation expense for time-vested
restricted stock in accordance with the provisions of Accounting
Standards Codification 718, Compensation Stock
Compensation (ASC 718). In accordance with ASC
718, we record compensation cost based on the fair market value
of the time-vested restricted stock on the date of grant over
the vesting period.
Upon the exercise of options, grant of restricted shares or
restricted share unit conversion, we issue new shares to satisfy
the share requirement. We do not expect to repurchase any shares
during the next twelve months.
A summary of the information relative to our stock option plans
are as follows (number of shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Aggregate
|
|
|
Weighted-
|
|
|
|
Number
|
|
|
Average
|
|
|
Intrinsic
|
|
|
Average
|
|
All Plans
|
|
of Shares
|
|
|
Exercise Price
|
|
|
Value
|
|
|
Contract Life
|
|
|
Outstanding at February 3, 2007
|
|
|
4,841
|
|
|
$
|
24.22
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,781
|
|
|
$
|
18.24
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
173
|
|
|
$
|
16.43
|
|
|
$
|
0.9
|
|
|
|
|
|
Forfeited
|
|
|
2,813
|
|
|
$
|
26.79
|
|
|
|
|
|
|
|
|
|
Outstanding at February 2, 2008
|
|
|
3,636
|
|
|
$
|
19.69
|
|
|
$
|
71.6
|
|
|
|
4.3
|
|
Granted
|
|
|
2,700
|
|
|
$
|
0.96
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
Forfeited
|
|
|
1,827
|
|
|
$
|
20.36
|
|
|
|
|
|
|
|
|
|
Outstanding at January 31, 2009
|
|
|
4,509
|
|
|
$
|
8.20
|
|
|
$
|
|
|
|
|
5.5
|
|
Granted
|
|
|
415
|
|
|
$
|
2.64
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
Forfeited
|
|
|
1,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 30, 2010
|
|
|
3,359
|
|
|
$
|
4.82
|
|
|
$
|
0.6
|
|
|
|
5.6
|
|
Balance exercisable at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, 2008
|
|
|
1,666
|
|
|
$
|
21.71
|
|
|
$
|
36.2
|
|
|
|
2.1
|
|
January 31, 2009
|
|
|
1,187
|
|
|
$
|
18.44
|
|
|
$
|
|
|
|
|
2.2
|
|
January 30, 2010
|
|
|
1,245
|
|
|
$
|
8.42
|
|
|
$
|
0.2
|
|
|
|
4.9
|
|
The weighted-average fair values of options at their grant date
were $1.61, $0.52, and $3.66 in 2009, 2008, and 2007,
respectively.
69
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
The Black-Scholes option valuation model was used to calculate
the fair market value of the options at the grant date. The
following assumptions were used in the calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Risk-free interest rate
|
|
|
2.4-3.4
|
%
|
|
|
1.9-3.2
|
%
|
|
|
3.9-5.1
|
%
|
Expected life
|
|
|
4 years
|
|
|
|
3-5 years
|
|
|
|
3-5 years
|
|
Historical volatility
|
|
|
108.3-114.7
|
%
|
|
|
45.0-90.8
|
%
|
|
|
25.3-29.7
|
%
|
Expected dividends
|
|
|
|
|
|
|
|
|
|
|
1.8-4.1
|
%
|
We recognized stock-based compensation expense of $3.1, or $0.05
per share, net of a $ tax benefit, for the year ended
January 30, 2010, $2.7, or $0.04 per share, net of a $0.3
tax benefit, for the year ended January 31, 2009, and $3.2,
or $0.05 per share, net of a $1.9 tax benefit, for the year
ended February 2, 2008. As of January 30, 2010, we
have $2.9 of stock-based compensation cost related to non-vested
awards, which is expected to be recognized in our statements of
operations within the next 1.75 years.
A summary of the information relative to our granting of
stock-based awards other than options follows (number of shares
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted-Average
|
|
|
Weighted-Average
|
|
|
|
Shares
|
|
|
Purchase Price
|
|
|
at Grant Date FMV
|
|
|
Stock purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 Plan (or prior plan)
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
30
|
|
|
$
|
16.82
|
|
|
$
|
21.37
|
|
2008
|
|
|
30
|
|
|
$
|
4.54
|
|
|
$
|
6.15
|
|
2009
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
Stock and stock units issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
Time-vested shares issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
250
|
|
|
$
|
|
|
|
$
|
18.06
|
|
2008
|
|
|
1,726
|
|
|
$
|
|
|
|
$
|
5.86
|
|
2009
|
|
|
698
|
|
|
$
|
|
|
|
$
|
1.17
|
|
A summary of the non-vested stock and stock units follows
(number of shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted-Average
|
|
All Plans
|
|
Shares
|
|
|
at Grant Date FMV
|
|
|
Outstanding at January 31, 2009
|
|
|
1,150
|
|
|
$
|
8.21
|
|
Granted
|
|
|
698
|
|
|
$
|
1.17
|
|
Vested
|
|
|
51
|
|
|
$
|
24.31
|
|
Forfeited
|
|
|
935
|
|
|
$
|
5.69
|
|
Outstanding at January 30, 2010
|
|
|
862
|
|
|
$
|
4.31
|
|
|
|
NOTE 13
|
ACQUISITION
OF REMAINING INTEREST IN PAPERCHASE PRODUCTS, LTD.
|
In 2007, we purchased an additional 0.5% interest in Paperchase
from the minority owners for cash consideration of $0.8.
70
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
During the fourth quarter of 2008, we purchased the remaining 3%
ownership interest in Paperchase that we had not previously
owned. As a result, our ownership of Paperchase increased to
100%. The cash consideration was $3.6.
|
|
NOTE 14
|
SEGMENT
INFORMATION
|
We are organized based upon the following reportable segments:
Borders Superstores (including Borders.com, which launched in
May 2008), Waldenbooks Specialty Retail stores, International
stores (including Borders Superstores in Puerto Rico, Paperchase
stores and our franchise business), and Corporate (consisting of
certain corporate governance and incentive costs). Segment data
includes charges allocating all corporate support costs to each
segment. Transactions between segments, consisting principally
of inventory transfers, are recorded primarily at cost. We
evaluate the performance of our segments and allocate resources
to them based on operating income and anticipated future
contribution.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Borders Superstores
|
|
$
|
2,265.8
|
|
|
$
|
2,625.4
|
|
|
$
|
2,847.2
|
|
Waldenbooks Specialty Retail
|
|
|
387.3
|
|
|
|
480.0
|
|
|
|
562.8
|
|
International
|
|
|
138.0
|
|
|
|
136.7
|
|
|
|
145.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
2,791.1
|
|
|
$
|
3,242.1
|
|
|
$
|
3,555.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Borders Superstores
|
|
$
|
85.0
|
|
|
$
|
90.7
|
|
|
$
|
90.2
|
|
Waldenbooks Specialty Retail
|
|
|
8.3
|
|
|
|
10.6
|
|
|
|
7.7
|
|
International
|
|
|
5.5
|
|
|
|
5.8
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation expense
|
|
$
|
98.8
|
|
|
$
|
107.1
|
|
|
$
|
103.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Borders Superstores
|
|
$
|
(47.1
|
)
|
|
$
|
(100.9
|
)
|
|
$
|
30.6
|
|
Waldenbooks Specialty Retail
|
|
|
(33.3
|
)
|
|
|
(27.5
|
)
|
|
|
(21.4
|
)
|
International
|
|
|
0.9
|
|
|
|
3.7
|
|
|
|
8.0
|
|
Corporate
|
|
|
(15.4
|
)
|
|
|
(24.5
|
)
|
|
|
(13.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss)
|
|
$
|
(94.9
|
)
|
|
$
|
(149.2
|
)
|
|
$
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Borders Superstores
|
|
$
|
1,208.5
|
|
|
$
|
1,312.7
|
|
|
$
|
1,719.5
|
|
Waldenbooks Specialty Retail
|
|
|
106.6
|
|
|
|
185.9
|
|
|
|
264.9
|
|
International
|
|
|
79.1
|
|
|
|
74.2
|
|
|
|
86.2
|
|
Corporate
|
|
|
31.0
|
|
|
|
36.2
|
|
|
|
76.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets of continuing operations
|
|
$
|
1,425.2
|
|
|
$
|
1,609.0
|
|
|
$
|
2,147.1
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
155.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,425.2
|
|
|
$
|
1,609.0
|
|
|
$
|
2,302.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
Borders Superstores
|
|
$
|
8.2
|
|
|
$
|
55.2
|
|
|
$
|
101.1
|
|
Waldenbooks Specialty Retail
|
|
|
1.4
|
|
|
|
6.5
|
|
|
|
8.9
|
|
International
|
|
|
6.4
|
|
|
|
14.5
|
|
|
|
10.0
|
|
Corporate
|
|
|
1.9
|
|
|
|
3.7
|
|
|
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
17.9
|
|
|
$
|
79.9
|
|
|
$
|
131.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets for the Corporate segment include certain corporate
headquarters asset balances, which have not been allocated to
the other segments; however, depreciation expense associated
with such assets has been allocated to the other segments as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Borders Superstores
|
|
$
|
7.3
|
|
|
$
|
7.2
|
|
|
$
|
10.4
|
|
Waldenbooks Specialty Retail
|
|
|
1.2
|
|
|
|
1.9
|
|
|
|
0.1
|
|
International
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8.5
|
|
|
$
|
9.1
|
|
|
$
|
10.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets by geographic area are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
405.3
|
|
|
$
|
508.9
|
|
|
$
|
714.5
|
|
International
|
|
|
31.6
|
|
|
|
28.9
|
|
|
|
28.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets of continuing operations
|
|
$
|
436.9
|
|
|
$
|
537.8
|
|
|
$
|
743.1
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
53.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
436.9
|
|
|
$
|
537.8
|
|
|
$
|
796.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
Sales by merchandise category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Books
|
|
$
|
1,890.6
|
|
|
$
|
2,184.2
|
|
|
$
|
2,330.7
|
|
Music
|
|
|
123.4
|
|
|
|
182.5
|
|
|
|
264.8
|
|
Video
|
|
|
125.8
|
|
|
|
188.0
|
|
|
|
248.6
|
|
Gifts & stationery
|
|
|
275.1
|
|
|
|
283.8
|
|
|
|
287.0
|
|
Newsstand
|
|
|
139.0
|
|
|
|
163.9
|
|
|
|
177.4
|
|
Other
|
|
|
237.2
|
|
|
|
239.7
|
|
|
|
246.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
2,791.1
|
|
|
$
|
3,242.1
|
|
|
$
|
3,555.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 15
|
DISCONTINUED
OPERATIONS
|
On June 10, 2008, we sold all of the outstanding shares of
Borders Australia Pty Limited, Borders New Zealand Limited and
Borders Pte. Ltd. to companies affiliated with A&R
Whitcoulls Group Holdings Pty Limited (the
Purchasers). Funds managed by Pacific Equity Partners Pty
Limited are the principal shareholders of A&R Whitcoulls
Group Holdings Pty Limited, a leading bookseller in Australia
and New Zealand. The consideration for the sale was a cash
payment of $97.3 and deferred payments payable if certain actual
operating results were achieved. Because the relevant operating
results were not achieved, we did not receive the deferred
consideration.
The sale agreement included all 30 Borders superstores located
in Australia, New Zealand and Singapore. All assets and
liabilities, with the exception of outstanding lease guarantees
relating to four stores, remained with the entities sold, which
are now owned by the Purchasers. With respect to the contingent
lease obligations, based upon current rents, taxes, common area
maintenance charges and exchange rates, the maximum amount of
potential future payments (undiscounted) is approximately $12.9.
As of January 30, 2010, we have recorded a liability of
approximately $0.8 based upon the likelihood that we will be
required to perform under the guarantees. Also under the terms
of the sale agreement, we provided certain tax indemnifications
to the Purchasers, with the maximum amount of potential future
payments (undiscounted) totaling approximately $6.7. We have
recorded a tax liability of $2.0 for this contingency as of
January 30, 2010.
As a result of the sale of the Australia, New Zealand and
Singapore bookstores, a portion of the intangible asset
attributable to these businesses, resulting from the Pershing
Square Financing Agreement and which totaled $17.5, was added to
the carrying value of the related businesses and expensed upon
disposal, which occurred in the second quarter of 2008.
On September 21, 2007, we sold our U.K. and Ireland
bookstore operations to Bookshop Acquisitions Ltd., a
corporation formed by Risk Capital Partners, a private equity
firm in the United Kingdom. The consideration for the sale was:
(i) cash of $20.4; (ii) deferred payments payable if
certain actual operating results were achieved; (iii) a
19.9% equity interest in Bookshop Acquisitions Ltd.; and
(iv) 7% loan notes of approximately $2.7 which mature in
2017 or sooner upon the occurrence of certain events. The
relevant operating results required to receive the deferred
payment described in (ii) above were not achieved, and we
did not receive the deferred consideration. During the third
quarter of 2009, we received a partial payment of $0.8 on the 7%
loan notes described in (iv) above. We had attributed only
a nominal value to our 7% loan notes, and as a result, recorded
a gain of $0.8. This gain is classified as discontinued
operations in our consolidated statements of operations.
73
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
We have accounted for the sale of the U.K., Ireland, Australia,
New Zealand, and Singapore operations as discontinued
operations, and all previous years have been restated to reflect
the results of our continuing operations excluding these
operations. The results of all the discontinued operations were
previously reported as part of our International segment. The
financial results of discontinued operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Total revenue
|
|
$
|
|
|
|
$
|
80.8
|
|
|
$
|
455.6
|
|
Loss from operations of discontinued operations before income tax
|
|
|
|
|
|
|
(2.6
|
)
|
|
|
(11.6
|
)
|
Loss from operations of discontinued operations (net of income
tax benefit of $, $0.9 and $2.9, respectively)
|
|
|
|
|
|
|
(1.7
|
)
|
|
|
(8.7
|
)
|
Gain (loss) on disposal of discontinued operations (net of
income tax benefit of $, $3.1 and $7.6, respectively)
|
|
|
0.8
|
|
|
|
(0.3
|
)
|
|
|
(128.8
|
)
|
Gain (loss) from discontinued operations (net of income tax
benefit of $, $4.0 and $10.5, respectively)
|
|
|
0.8
|
|
|
|
(2.0
|
)
|
|
|
(137.5
|
)
|
We also guarantee the leases of four stores that we previously
owned in the U.K. and Ireland. These guarantees were required by
certain of our landlords as conditions of the leases upon
inception, and were unrelated to our disposition of operations
in the U.K. and Ireland in 2007. The maximum potential liability
under these lease guarantees is approximately $139.7. The leases
provide for periodic rent reviews, which could increase our
potential liability. One of the applicable lease guarantee
agreements provides that the guarantee would automatically
terminate if Borders U.K. Limited achieved a specified level of
net assets, a provision which we believe has been met. The
maximum potential liability for this location is $26.2. This
limitation has not been considered in calculating the maximum
exposures set forth above. In addition, in the event of a
default under the primary leases, in certain circumstances a
landlord may have an obligation to mitigate its loss or to act
reasonably, which could further reduce our potential liability.
At January 30, 2010, we have reserved $10.1 based upon the
likelihood that we will be required to perform under these
guarantees.
On December 22, 2009, Borders U.K. Limited ceased
operations, a result of filing for administration on
November 26, 2009. Previously, Borders U.K. Limited
announced that it had agreed to sell the leasehold interests in
five stores, including two of the leases guaranteed by the
Company, to a fashion retailer. In addition, one of the leases
was assigned to another retailer as part of the administration
process and the Companys guarantee was continued. These
events have been considered in the determination of our reserves
relating to the lease guarantees.
Also under the terms of the sale agreement, we indemnified the
buyer of our U.K. and Ireland operations from the tax liability,
if any, imposed upon it as a result of the forgiveness of the
portions of intercompany indebtedness owing from us. The maximum
potential liability is approximately $8.7, and as of
January 30, 2010 we have recorded a liability of
approximately $3.5 based upon the likelihood that we will be
required to perform under the indemnification.
|
|
NOTE 16
|
PERSHING
SQUARE FINANCING ARRANGEMENT
|
On April 9, 2008, we completed a financing agreement with
Pershing Square on behalf of certain of its affiliated
investment funds. This agreement was subsequently amended three
times, most recently on March 30, 2009. The financing
agreement with Pershing Square, as amended, consists of the
following:
1. A $42.5 senior secured term loan with a maturity date of
April 1, 2010 and which was paid on March 31, 2010,
with an interest rate of 9.8% per annum. The term loan was
secured by an indirect
74
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
pledge of approximately 65% of the stock of Paperchase pursuant
to a Deed of Charge Over Shares. In the event that Paperchase
was sold, all proceeds from the sale were required to be used to
prepay the term loan. The representations, covenants and events
of default therein were otherwise substantially identical to our
Prior Credit Agreement, other than some relating to Paperchase.
Such exceptions were not expected to interfere with our
operations or the operations of Paperchase in the ordinary
course of business. See Note 18
Subsequent Events for further discussion related to the
payoff of the principal amounts outstanding under the term loan
to Pershing Square.
2. The issuance to Pershing Square of 14.7 million
warrants to purchase our common stock at $0.65 per share. The
warrants will be cash-settled in certain circumstances and
expire October 9, 2014. Except as otherwise noted, the
warrants will be settled in exchange for shares of the
Companys stock, and will be settled at such time
determined by the warrants holder. In the event of a
Public Stock Merger (defined as a business combination pursuant
to which all of the outstanding common stock of the Company is
exchanged for, converted into or constitute solely the right to
receive common stock listed on a national securities exchange)
the Company may elect to (i) keep all the unexercised
warrants outstanding after the Public Stock Merger, in which
case the warrants will remain outstanding, or (ii) cause
the outstanding warrants to be redeemed for an amount in cash
equal to the Cash Redemption Value of the warrants. The
Cash Redemption Value in respect of each warrant means
(1) its fair value, as determined by an independent
financial expert mutually agreed by the Company and the person
holding the greatest number of warrants, using standard option
pricing models for American style options; plus
(2) interest on such fair value from the consummation of
the Public Stock Merger to the payment date at the rate of 10%
per annum. Upon the occurrence of any change of control other
than a Public Stock Merger, or a delisting of the Common Stock
underlying the warrants, each holder of warrants may elect to
(i) keep such warrants outstanding, or (ii) require
the Company to redeem the warrants for an amount in cash equal
to the Cash Redemption Value.
The agreements were most recently amended on March 30, 2009
to extend the expiration date of the term loan to April 1,
2010. The amendment also resulted in a reduction of the exercise
price of the warrants to $0.65 per share, through the operation
of the antidilution provisions of the warrants. In accordance
with Accounting Standards Codification 480, Distinguishing
Liabilities from Equity (ASC 480), we recorded
the value of the warrants at their fair value, and used the
Black-Scholes valuation model in the calculation of their fair
value. The reduction in the exercise price of the warrants on
March 30, 2009 resulted in a $4.3 increase in their fair
value. We recorded this increase in fair value as a discount on
the secured term loan in the same amount. The warrants are
categorized as Other long-term liabilities and the
discount on the term loan is categorized as Short-term
borrowings and current portion of long-term debt in our
consolidated balance sheets. The discount will be amortized to
earnings over the term of the loan using the effective interest
method. The assumptions used to determine the change in the fair
value of the warrants as a result of the reduction in their
exercise price were:
|
|
|
|
|
|
|
Before re-pricing
|
|
After re-pricing
|
|
Warrant fair value:
|
|
$1.8 million
|
|
$6.1 million
|
Warrant exercise price:
|
|
$7.00 per
warrant(1)
|
|
$0.65 per
warrant(1)
|
Stock price:
|
|
$0.65 per share
|
|
$0.65 per share
|
Stock volatility:
|
|
74.26%(2)
|
|
74.26%(2)
|
Risk-free interest rate:
|
|
1.82%(3)
|
|
1.82%(3)
|
Annual dividend yield:
|
|
0%
|
|
0%
|
Expected life:
|
|
5.5 years(4)
|
|
5.5 years(4)
|
|
|
|
(1) |
|
Represents contractual value. |
75
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
|
|
|
(2) |
|
Represents volatility over the period matching the
warrants expected life. |
|
(3) |
|
Represents the five-year treasury note rate. |
|
(4) |
|
Assumes that the warrants will be held the duration of their
contractual lives. |
In accordance with ASC 480, changes in the fair value of the
warrants during the periods presented, excluding the change
attributable to the reduction in their exercise price, were
recognized in earnings. The assumptions used to determine the
fair value at the respective balance sheet dates were:
|
|
|
|
|
|
|
January 30, 2010
|
|
January 31, 2009
|
|
Warrant fair value:
|
|
$9.5 million
|
|
$0.7 million
|
Warrant exercise price:
|
|
$0.65 per
warrant(1)
|
|
$7.00 per
warrant(1)
|
Stock price at balance sheet date:
|
|
$0.86 per share
|
|
$0.44 per share
|
Stock volatility:
|
|
94.94%(2)
|
|
70.44% (2)
|
Risk-free interest rate:
|
|
2.48%(3)
|
|
1.60% (3)
|
Annual dividend yield:
|
|
0%
|
|
0%
|
Expected life:
|
|
4.63 years(4)
|
|
5.68 years(4)
|
|
|
|
(1) |
|
Represents contractual value. |
|
(2) |
|
Represents volatility over the period matching the
warrants expected life. |
|
(3) |
|
Represents the five-year treasury note rate. |
|
(4) |
|
Assumes that the warrants will be held the duration of their
contractual lives. |
We recognized non-cash expense of $4.5 and non-cash income of
$40.1 for the year ended January 30, 2010 and
January 31, 2009, respectively, related to changes in the
fair value of the warrants. These changes, all of which are
unrealized, are categorized as Warrant/put expense
(income) on our consolidated statements of operations.
This fair value measurement is based upon significant
unobservable inputs, referred to as a Level 3 measurement
under Accounting Standards Codification 820, Fair Value
Measurements and Disclosure.
The March 30, 2009 amendment did not extend the $65.0
backstop purchase offer related to our Paperchase subsidiary and
was allowed to expire. As a result, the intangible asset related
to the backstop purchase offer, totaling $16.2, was expensed
during the first quarter of 2009. This charge is categorized as
Warrant/put expense (income) on our consolidated
statements of operations.
76
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
|
|
NOTE 17
|
UNAUDITED
QUARTERLY FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
Total revenue
|
|
$
|
650.2
|
|
|
$
|
624.7
|
|
|
$
|
602.5
|
|
|
$
|
946.5
|
|
Gross margin
|
|
|
143.4
|
|
|
|
142.8
|
|
|
|
113.3
|
|
|
|
233.1
|
|
Income (loss) from continuing operations
|
|
|
(86.0
|
)
|
|
|
(45.6
|
)
|
|
|
(38.5
|
)
|
|
|
59.9
|
|
Gain from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
0.8
|
|
|
|
|
|
Net income (loss)
|
|
|
(86.0
|
)
|
|
|
(45.6
|
)
|
|
|
(37.7
|
)
|
|
|
59.9
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations per common share
|
|
|
(1.44
|
)
|
|
|
(0.76
|
)
|
|
|
(0.64
|
)
|
|
|
0.91
|
|
Gain from discontinued operations per common share
|
|
|
|
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
Net income (loss) per common share
|
|
|
(1.44
|
)
|
|
|
(0.76
|
)
|
|
|
(0.63
|
)
|
|
|
0.91
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations per common share
|
|
|
(1.44
|
)
|
|
|
(0.76
|
)
|
|
|
(0.64
|
)
|
|
|
1.00
|
|
Gain from discontinued operations per common share
|
|
|
|
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
Net income (loss) per common share
|
|
|
(1.44
|
)
|
|
|
(0.76
|
)
|
|
|
(0.63
|
)
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
Total revenue
|
|
$
|
735.8
|
|
|
$
|
758.5
|
|
|
$
|
693.4
|
|
|
$
|
1,087.7
|
|
Gross margin
|
|
|
168.2
|
|
|
|
182.0
|
|
|
|
147.0
|
|
|
|
293.4
|
|
Income (loss) from continuing operations
|
|
|
(30.1
|
)
|
|
|
(11.3
|
)
|
|
|
(172.2
|
)
|
|
|
28.9
|
|
Gain (loss) from discontinued operations
|
|
|
(1.6
|
)
|
|
|
2.1
|
|
|
|
(3.2
|
)
|
|
|
0.7
|
|
Net income (loss)
|
|
|
(31.7
|
)
|
|
|
(9.2
|
)
|
|
|
(175.4
|
)
|
|
|
29.6
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations per common share
|
|
|
(0.50
|
)
|
|
|
(0.19
|
)
|
|
|
(2.85
|
)
|
|
|
0.48
|
|
Gain (loss) from discontinued operations per common share
|
|
|
(0.03
|
)
|
|
|
0.04
|
|
|
|
(0.05
|
)
|
|
|
0.01
|
|
Net income (loss) per common share
|
|
|
(0.53
|
)
|
|
|
(0.15
|
)
|
|
|
(2.90
|
)
|
|
|
0.49
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations per common share
|
|
|
(0.50
|
)
|
|
|
(0.19
|
)
|
|
|
(2.85
|
)
|
|
|
0.48
|
|
Gain (oss) from discontinued operations per common share
|
|
|
(0.03
|
)
|
|
|
0.04
|
|
|
|
(0.05
|
)
|
|
|
0.01
|
|
Net income (loss) per common share
|
|
|
(0.53
|
)
|
|
|
(0.15
|
)
|
|
|
(2.90
|
)
|
|
|
0.49
|
|
Earnings per share amounts for each quarter are required to be
computed independently and may not equal the amount computed for
the total year.
77
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
|
|
NOTE 18
|
SUBSEQUENT
EVENTS
|
On March 31, 2010, we paid our $42.5 term loan from
Pershing Square Capital Management, L.P.
On March 31, 2010, we entered into a Third Amended and
Restated Revolving Credit Agreement (the Credit
Agreement) with Bank of America, N.A., as administrative
agent, and other lenders, under which the lenders committed to
provide up to $970.5 in loans under a secured revolving credit
facility (the Credit Facility). The Credit Agreement
amends and restates our existing Second Amended and Restated
Multicurrency Revolving Credit Agreement dated as of
July 31, 2006, as previously amended (the Prior
Credit Agreement). Bank of America, N.A. and General
Electric Capital Corporation are the co-collateral agents, Wells
Fargo Retail Finance, LLC and General Electric Capital
Corporation are co-syndication agents and JPMorgan Chase Bank,
N.A. is the documentation agent for the Credit Facility. Banc of
America Securities LLC, J.P. Morgan Securities Inc., GE
Capital Markets, Inc. and Wells Fargo Retail Finance, LLC are
the joint lead arrangers and joint bookrunners for the Credit
Facility.
The commitments of the lenders to provide the Credit Facility
are divided into an existing tranche maturing on July 31,
2011 (the Existing Tranche) and an extended tranche
maturing on March 31, 2014 (the Extended
Tranche). The aggregate commitments of the lenders in
connection with the Existing Tranche and Extended Tranche are
$270.5 and $700.0, respectively.
The Credit Facility will be secured by a first priority security
interest in substantially all of the inventory, accounts
receivable, cash and cash equivalents and certain other
collateral of the borrowers and guarantors under the Credit
Facility (collectively, the Credit Facility Parties)
and a first priority pledge of equity interests in certain of
the our subsidiaries, and a second priority security interest in
equity interests in certain of our other subsidiaries,
intellectual property, equipment and certain other property.
The commitments by the lenders under the Credit Facility are
subject to borrowing base and availability restrictions. Up to
$75.0 of the Credit Facility may be used for the issuance of
letters of credit and up to $50.0 of the Credit Facility may be
used for the making of swing line loans.
Interest under the Credit Facility will accrue, at our election,
at a Base Rate or LIBO Rate, plus, in each case, an Applicable
Margin, which is determined by reference to the level of
Availability as defined in the Credit Agreement, with the
Applicable Margin for LIBO Rate loans ranging from 2.00% to
4.25% and the Applicable Margin for Base Rate loans ranging from
0.25% to 3.25%. In addition, commitment fees ranging from 0.25%
to 0.75% (determined by reference to the level of usage under
the Credit Facility) are also payable on unused commitments.
Letter of credit fees are payable on the maximum daily amount to
be drawn under a letter of credit at a rate equal to the
Applicable Margin for LIBO Rate Loans ranging from 1.00% to
4.25%. Lower Applicable Margins and fees are generally
applicable to borrowings under the Existing Tranche, which
matures on July 31, 2011, than to borrowings under the
Extended Tranche.
The Credit Agreement limits our ability to incur additional
indebtedness, create liens, make investments, make restricted
payments (including any required cash-out of the warrants issued
to Pershing Square Capital Management, L.P. or its affiliates)
or specified payments and merge or acquire assets, among other
things. The lenders will assume dominion and control over the
Credit Facility Parties cash if Availability (or, if in
effect, Adjusted Excess Availability ) under the Credit Facility
falls below the greater of (i) $65.0 or (ii) 15% of
the lesser of the applicable borrowing base or the aggregate
commitments of the lenders in connection with the Credit
Facility.
The Credit Agreement contains customary events of default,
including payment defaults, breaches of representations and
warranties, covenant defaults, cross-defaults to similar
obligations, customary ERISA defaults, certain events of
bankruptcy and insolvency, judgment defaults, the invalidity of
liens on
78
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
collateral, change in control, cessation of business or the
liquidation of material assets of the Credit Facility Parties
taken as a whole, the occurrence of an uninsured loss to a
material portion of collateral and failure of the obligations
under the Credit Facility to constitute senior indebtedness
under any applicable subordination or intercreditor agreements.
The proceeds from the Credit Facility will be used by the
Company to refinance existing indebtedness, for working capital,
to finance capital expenditures and for other general corporate
purposes.
We will pay certain customary fees and expenses in connection
with obtaining the lenders commitments pursuant to the
terms of a related fee letter.
On March 31, 2010, we entered into a Term Loan Agreement
(the Term Loan Agreement) with GA Capital LLC,
as administrative agent, and other lenders, under which the
lenders committed to provide a secured term loan facility (the
Term Loan Facility) comprised of a $80.0 tranche and
a $10.0 tranche. Banc of America Securities LLC is the sole
arranger and sole bookrunner for the Term Loan Facility.
The $10.0 tranche of the Term Loan Facility will be payable in
equal monthly installments of $2.5 each on the first day of
September, October, November and December, 2010, with the
remaining $80.0 tranche maturing on March 31, 2014. We may
prepay the Term Loan Facility at any time, subject to a
prepayment premium of the greater of all remaining unpaid
interest and fees that would have otherwise accrued through the
end of the first year of the facility, a 3% prepayment premium
if prepaid during the second year and a 2% prepayment premium if
prepaid during the third year. We may also prepay up to $20 of
the Term Loan Facility at any time, subject to a prepayment
premium of 2% if the prepayment occurs prior to the third
anniversary of the Term Loan Agreement. If we sell the stock or
assets of our Paperchase Products Limited
(Paperchase) subsidiary, we will be obligated under
the Term Loan Agreement to apply the first $25.0 of proceeds
from the sale to prepay the Term Loan Facility, without premium
or penalty, and to apply the remainder of the proceeds from the
sale to prepay the outstanding loans under the Credit Facility.
The Term Loan Facility will be secured by (i) a first
priority security interest in 65% of the voting stock of
Paperchase, our intellectual property and that of our
subsidiaries, and the fixed assets of the borrowers and
guarantors under the Term Loan Facility (collectively, the
Term Loan Facility Parties) and (ii) a second
priority security interest in all of the collateral securing the
Credit Facility. In the event that any prepayments (other than a
mandatory prepayment as a result of the sale of Paperchase)
result in a reduction of the outstanding amount of the Term Loan
Facility to $65.0 or less, the liens of the lenders under the
Term Loan Facility on our intellectual property will be
subordinated to the liens of the lenders under the Credit
Facility.
The commitments by the lenders under the Term Loan Facility are
subject to borrowing base and availability restrictions. The
Term Loan Agreement provides for a seasonal minimal excess
availability requirement that obligates us to maintain higher
levels of excess availability under the Term Loan Facility
during the months of December and January of each year. The
seasonal minimum excess Availability amount is equal to
(i) 10% of lesser of the applicable borrowing base under
the Term Loan Facility and the amount of the Term Loan Facility
(but no less than $50.0 million) plus (ii) $35.0 minus
the amount of any prepayments under the Term Loan Facility. If
we fail to achieve at least 80% of our projected consolidated
earnings before interest, taxes, depreciation and amortization,
these increased excess availability requirements will become
applicable throughout the remainder of the term. If at any time
we fail to meet the borrowing base or excess availability
requirements under the Term Loan Facility, the lenders under the
Credit Facility will be required to reduce the availability
under the Credit Facility by a corresponding amount. We may also
remedy any such failure through repayments of principal under
the Term Loan Facility. In addition, under the Term Loan
Agreement, if we do not complete an offering of equity
securities resulting in net proceeds of at least $25.0 within
45 days after the date of the Term Loan Agreement, a
reserve of $10.0 will be recorded against the borrowing base
under the Credit Agreement, which will reduce the amounts we are
permitted to borrow under the Credit Agreement. This reserve
79
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(dollars in millions except per share data)
amount is reduced by the amount of any repayments of the $10.0
tranche of the Term Loan Facility required to be repaid during
2010.
Interest under the Term Loan Facility will accrue at a LIBO Rate
as defined in the Term Loan Agreement, plus 12.25%. The minimum
LIBO Rate under the Term Loan Agreement is 2.5%.
The Term Loan Agreement limits our ability to incur additional
indebtedness, create liens, make investments, make restricted
payments (including any required cash-out of the warrants issued
to Pershing Square Capital Management, L.P. or its affiliates)
or specified payments and merge or acquire assets, among other
things. The negative and affirmative covenants in the Term Loan
Agreement are substantially consistent with the covenants in the
Credit Agreement, subject in certain cases to differences that
make the covenants in the Term Loan Agreement less restrictive
than the corresponding covenants in the Credit Agreement, except
that our ability to pay certain debt will be limited. The Term
Loan Agreement does not include any financial covenants.
The Term Loan Agreement contains customary events of default,
including payment defaults, breaches of representations and
warranties, covenant defaults, cross-defaults to similar
obligations, customary ERISA defaults, certain events of
bankruptcy and insolvency, judgment defaults, the invalidity of
liens on collateral, change of control, cessation of business or
the liquidation of material assets of the Term Loan Facility
Parties taken as a whole, the occurrence of an uninsured loss to
a material portion of collateral and failure of the obligations
under the Term Loan Facility to constitute senior indebtedness
under any subordinated indebtedness.
The proceeds from the Term Loan Facility will be used by the
Company, for working capital, to finance capital expenditures
and for other general corporate purposes.
We will pay certain customary fees and expenses in connection
with obtaining the lenders commitments pursuant to the
terms of a related fee letter.
Intercreditor
Agreement
On March 31, 2010, we entered into an Intercreditor Agreement
(the Intercreditor Agreement) with the lenders under
the Credit Facility and the Term Loan Facility. The
Intercreditor Agreement includes provisions establishing the
rights and obligations of the lenders under the Credit Agreement
and Term Loan Agreement with respect to payments and prepayments
of principal and interest by the Company and with respect to the
collateral securing our obligations under the Credit Agreement
and Term Loan Agreement.
80
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON CONSOLIDATED FINANCIAL STATEMENTS
The Board of Directors and Stockholders of
Borders Group, Inc.
We have audited the accompanying consolidated balance sheets of
Borders Group, Inc. and subsidiaries as of January 30, 2010
and January 31, 2009 and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended
January 30, 2010. Our audits also included the financial
statement schedule listed in the Index at Item 15(a)(2).
These financial statements and schedule are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these financial statements and schedule
based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Borders Group, Inc. and subsidiaries at
January 30, 2010 and January 31, 2009 and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended January 30,
2010, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 7 to the consolidated financial
statements, in 2007 the Company adopted the required provisions
of the guidance originally issued in Financial Accounting
Standards Board Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (codified in FASB ASC Topic 740,
Income Taxes).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Borders Group, Inc.s internal control over financial
reporting as of January 30, 2010, based on criteria
established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated April 1, 2010 expressed an
unqualified opinion thereon.
Detroit, Michigan
April 1, 2010
81
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
Not applicable.
|
|
Item 9A.
|
Controls
and Procedures
|
Controls and
Procedures: Our
Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of our disclosure controls and
procedures, as such term is defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended (the
Exchange Act), as of January 30, 2010 (the
Evaluation Date). Based on such evaluation, such
officers have concluded that our controls and procedures were
effective to ensure that information required to be disclosed in
this annual report is recorded, processed, summarized and
reported within the time periods specified in the SECs
rules and forms, and that such information is accumulated and
communicated to management, including our Chief Executive
Officer (principal executive officer) and Chief Financial
Officer (principal financial officer), to allow timely decisions
regarding required disclosure.
Changes in
Internal
Control: There
have been no changes in our internal control over financial
reporting that occurred in the last fiscal quarter that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Managements
Annual Report on Internal Control over Financial Reporting:
Management is
responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in
Rule 13a-15(f)
under the Securities Exchange Act of 1934, as amended).
Management assessed the effectiveness of our internal control
over financial reporting as of January 30, 2010. In making
this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control Integrated
Framework. Based on this assessment, management has
concluded that, as of January 30, 2010, our internal
control over financial reporting was effective to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles. Our independent registered public
accounting firm, Ernst & Young LLP, has issued an
audit report on our effectiveness of internal control over
financial reporting as of January 30, 2010, which is
included herein.
82
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders of
Borders Group, Inc.
We have audited Borders Group, Incs internal control over
financial reporting as of January 30, 2010, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). Borders Group
Incs management is responsible for maintaining effective
internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting included in the accompanying
Managements Annual Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion
on the companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Borders Group, Inc maintained, in all material
respects, effective internal control over financial reporting as
of January 30, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets as of January 30, 2010 and
January 31, 2009 and the related consolidated statements of
operations, stockholders equity and cash flows for each of
the three years in the period ended January 30, 2010 of
Borders Group, Inc. and our report dated April 1, 2010
expressed an unqualified opinion thereon.
Detroit, Michigan
April 1, 2010
83
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
Information regarding our executive officers required by this
Item 10 is set forth in Item 1 of Part I herein
under the caption Executive Officers of the Company.
Information pertaining to our directors required by Item 10
is included under the caption Election of Directors
in our Proxy Statement related to our 2010 Annual Meeting of
Stockholders, and is incorporated herein by reference.
Information relating to compliance with Section 16(a) of
the Securities Exchange Act of 1934, as amended, is set forth in
the Proxy Statement and incorporated herein by reference.
Section 16(a)
Beneficial Ownership Reporting Compliance
The information required by this section is incorporated herein
by reference to the information under the caption
Section 16(a) Beneficial Ownership Reporting
Compliance in the Proxy Statement related to our 2010
Annual Meeting of Stockholders.
Code
of Ethics and Other Corporate Governance
Information
Information regarding our Business Conduct Policy and our Code
of Ethics Relating to Financial Reporting, as well the names of
the individuals determined by the Board of Directors to be
audit committee financial experts, is included in
the Election of Directors Board of Directors
Meetings and Committees and Election of
Directors Corporate Governance sections of the
Companys Proxy Statement related to our 2010 Annual
Meeting of Stockholders, and is incorporated herein by reference.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this Item 11 is incorporated
herein by reference to the information under the captions
Executive Compensation and Compensation of
Directors in the Proxy Statement related to our 2010
Annual Meeting of Stockholders.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this Item 12 is incorporated
herein by reference to the information under the heading
Beneficial Ownership of Common Stock in the Proxy
Statement related to our 2010 Annual Meeting of Stockholders.
|
|
Item 13.
|
Certain
Relationships and Related Transactions and Director
Independence
|
The information required by this Item 13 is incorporated by
reference to the information under the heading Information
Regarding the Board of Directors and Corporate Governance
in the Proxy Statement related to our 2010 Annual Meeting of
Stockholders.
|
|
Item 14:
|
Principal
Accounting Fees and Services
|
The information required by this Item 14 is incorporated
herein by reference to the information under the heading
Fees Paid to Independent Registered Public Accounting
Firm in the Proxy Statement related to our 2010 Annual
Meeting of Stockholders.
84
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules
|
(a) 1. Our Consolidated Financial Statements are included
in Part II, Item 8:
|
|
|
|
|
|
|
Page
|
|
|
Consolidated Statements of Operations for the fiscal years ended
January 30, 2010, January 31, 2009 and
February 2, 2008
|
|
|
49
|
|
Consolidated Balance Sheets as of January 30, 2010 and
January 31, 2009
|
|
|
50
|
|
Consolidated Statements of Cash Flows for the fiscal years ended
January 30, 2010, January 31, 2009 and
February 2, 2008
|
|
|
51
|
|
Consolidated Statements of Stockholders Equity for the
fiscal years ended January 30, 2010, January 31, 2009
and February 2, 2008
|
|
|
52
|
|
Notes to Consolidated Financial Statements
|
|
|
53
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
81
|
|
2. Financial Statement Schedules
Schedule II
Valuation
and Qualifying Accounts Deferred Tax Asset
Fiscal
Year Ended January 30, 2010, January 31, 2009 and
February 2, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
Costs
|
|
|
Balance at End
|
|
|
|
Beginning of
Year
|
|
|
and
Expenses
|
|
|
of Year
|
|
|
Balance at January 30, 2010
|
|
$
|
125.2
|
|
|
$
|
15.5
|
|
|
$
|
140.7
|
|
Balance at January 31, 2009
|
|
$
|
32.3
|
|
|
$
|
92.9
|
|
|
$
|
125.2
|
|
Balance at February 2, 2008
|
|
$
|
14.6
|
|
|
$
|
17.7
|
|
|
$
|
32.3
|
|
3. The following exhibits are filed herewith unless
otherwise indicated:
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
2
|
.1(1)
|
|
Agreement and plan of Merger dated as of April 8, 1997
between Michigan Borders Group, Inc. and Borders Group, Inc.
|
|
3
|
.1(3)
|
|
Restated Articles of Incorporation of Borders Group, Inc.
|
|
3
|
.2(10)
|
|
Amendment to the Restated Articles of Incorporation of Borders
Group, Inc.
|
|
3
|
.3(5)
|
|
Restated bylaws of Borders Group, Inc.
|
|
3
|
.4(9)
|
|
First Amendment to the Restated By laws of Borders Group, Inc.
|
|
3
|
.5(10)
|
|
Second Amendment to the Restated By laws of Borders Group, Inc.
|
|
3
|
.6(11)
|
|
Third Amendment to the Restated By laws of Borders Group, Inc.
|
|
3
|
.7(12)
|
|
Fourth Amendment to the Restated By laws of Borders Group, Inc.
|
|
4
|
.1(13)
|
|
Warrant and Registration Rights Agreement, dated as of
April 9, 2008, among Borders Group, Inc. and Computershare
Inc. and Computershare Trust Company, N.A., as Warrant
Agent.
|
|
4
|
.2(13)
|
|
Side Letter, dated as of April 9, 2008, between Pershing
Square Capital Management, L.P. and Borders Group, Inc.
|
|
4
|
.3(17)
|
|
Side Letter to the Warrant and Registration Rights Agreement,
dated as of March 30, 2009 from Borders Group, Inc. to
Pershing Square Capital Management, L.P.
|
|
10
|
.1
|
|
Restated Borders Group, Inc. Annual Incentive Bonus Plan
|
|
10
|
.2(1)
|
|
Borders Group, Inc. Stock Option Plan
|
85
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.3(5)
|
|
Amendment to the Borders Group, Inc. Stock Option Plan
|
|
10
|
.4(2)
|
|
Borders Group, Inc. Stock Option Plan for International Employees
|
|
10
|
.5(3)
|
|
1998 Borders Group, Inc. Stock Option Plan
|
|
10
|
.6(4)
|
|
Amendment No. 1 to 1998 Borders Group, Inc. Stock Option
Plan
|
|
10
|
.7(8)
|
|
Non-Qualified Deferred Compensation Plan
|
|
10
|
.8(3)
|
|
Participation Agreement dated as of December 1, 1998 by and
among Borders Group, Inc., Borders, Inc. and Parties thereto
|
|
10
|
.9(5)
|
|
Participation Agreement dated as of January 22, 2001 by and
among Borders Group, Inc., Borders, Inc. and Parties thereto
|
|
10
|
.10(6)
|
|
Participation Agreement dated as of November 15, 2002 by
and among Borders Group, Inc., Borders, Inc. and Parties thereto
|
|
10
|
.11(7)
|
|
Security Agreement dated as of July 30, 2004 among Borders
Group, Inc., its subsidiaries and Parties thereto
|
|
10
|
.12(14)
|
|
Sale and Purchase Agreement between Borders Group, Inc.,
A&R Whitcoulls Group Holdings Pty Limited, Spine Newco (NZ)
Limited and Spine Newco Pty Limited.
|
|
10
|
.13(14)
|
|
Brand License Deed between Borders Properties, Inc. and Spine
Newco Pty Limited
|
|
10
|
.14(14)
|
|
Purchasing Agreement between Borders Group, Inc., Borders
Australia Pty Limited, Borders New Zealand Limited, Borders Pte.
Limited, Spine Newco Pty Limited, Spine Newco (NZ) Limited and
A&R Witcoulls Group Holdings Pty Limited.
|
|
10
|
.15(14)
|
|
Transition Services Agreement between Borders International
Services, Inc., Borders Australia Pty Limited, Borders New
Zealand Limited, Borders Pte. Limited, Spine Newco Pty Limited,
and Spine Newco (NZ) Limited.
|
|
10
|
.16(15)
|
|
Form of Executive Officer Severance Agreement.
|
|
10
|
.17(16)
|
|
Borders Group, Inc. Indemnification Letter Agreement with
Directors and Officers
|
|
10
|
.18(17)
|
|
Subscription and Purchase Agreement, dated as of March 30,
2009 by and between Pershing Square, L.P. and Borders Group, Inc.
|
|
10
|
.19(18)
|
|
First Amendment to the Amended and Restated Borders Group, Inc.
2004 Long-Term Incentive Plan
|
|
10
|
.20(19)
|
|
Amended and Restated Borders Group, Inc. 2004 Long-Term
Incentive Plan
|
|
10
|
.21(20)
|
|
Third Amended and Restated Revolving Credit Agreement dated as
of March 31, 2010 between and among Borders Group, Inc.,
Borders, Inc. and the lenders and agents named therein.
|
|
10
|
.22(20)
|
|
Term Loan Agreement dated as of March 31, 2010 between and among
Borders Group, Inc., Borders, Inc. and the lenders and agents
named therein
|
|
10
|
.23(20)
|
|
Intercreditor Agreement dated as of March 31, 2010 between and
among Borders Group, Inc., Borders, Inc. and the lenders and
agents named therein.
|
|
21
|
.1
|
|
Subsidiaries of Registrant
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm
|
|
31
|
.1
|
|
Statement of Michael J. Edwards, Interim President and Chief
Executive Officer of Borders Group, Inc. pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31
|
.2
|
|
Statement of Mark R. Bierley, Executive Vice President and Chief
Financial Officer of Borders Group, Inc. pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32
|
.1
|
|
Statement of Michael J. Edwards, Interim President and Chief
Executive Officer of Borders Group, Inc. pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
32
|
.2
|
|
Statement of Mark R. Bierley, Executive Vice President and Chief
Financial Officer of Borders Group, Inc. pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
(1) |
|
Incorporated by reference from the Companys Proxy
Statement dated April 9, 1997 of Borders Group, Inc. (File
No. 1-13740). |
86
|
|
|
(2) |
|
Incorporated by reference from the Companys Quarterly
Report on
Form 10-Q
for the quarter ended July 26, 1998 (File
No. 1-13740). |
|
(3) |
|
Incorporated by reference from the Companys Annual Report
on
Form 10-K
for the year ended January 24, 1999 (File
No. 1-13740). |
|
(4) |
|
Incorporated by reference from the Companys Quarterly
Report on
Form 10-Q
for the quarter ended October 24, 1999 (File
No. 1-13740). |
|
(5) |
|
Incorporated by reference from the Companys Annual Report
on
Form 10-K
for the year ended January 28, 2001 (File
No. 1-13740). |
|
(6) |
|
Incorporated by reference from the Companys Annual Report
on
Form 10-K
for the year ended January 25, 2004 (Filed
No. 1-13740). |
|
(7) |
|
Incorporated by reference from the Companys Quarterly
Report on
Form 10-Q
for the quarter ended July 25, 2004 (File
No. 1-13740). |
|
(8) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
dated November 5, 2004 (File
No. 1-13740). |
|
(9) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
dated July 13, 2006 (File
No. 1-13740). |
|
(10) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
dated May 25, 2007 (File
No. 1-13740). |
|
(11) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
dated October 2, 2007 (File
No. 1-13740). |
|
(12) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
dated January 17, 2008 (File
No. 1-13740). |
|
(13) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
dated April 9, 2008 (File
No. 1-13740). |
|
(14) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
dated June 4, 2008 (File
No. 1-13740). |
|
(15) |
|
Incorporated by reference from the Companys Quarterly
Report on
Form 10-Q
for the quarter ended May 3, 2008 (File
No. 1-13740). |
|
(16) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
dated November 25, 2008 (File
No. 1-13740). |
|
(17) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
dated March 30, 2009 (File
No. 1-13740). |
|
(18) |
|
Incorporated by reference from the Companys Quarterly
Report on
Form 10-Q
for the quarter ended May 2, 2009 (File
No. 1-13740). |
|
(19) |
|
Incorporated by reference from the Companys Proxy
Statement dated April 24, 2009 (File
No. 1-13740). |
|
(20) |
|
Incorporated by reference from the Companys Current Report
on Form 8-K dated March 31, 2010 (File
No. 1-13740). |
87
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/ MICHAEL
J. EDWARDS
|
Michael J. Edwards
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.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Michael
J. Edwards
Michael
J. Edwards
|
|
Interim President and Chief Executive Officer
|
|
April 1, 2010
|
|
|
|
|
|
/s/ Mark
R. Bierley
Mark
R. Bierley
|
|
Executive Vice President and Chief Financial Officer (Principal
Financial and Accounting Officer)
|
|
April 1, 2010
|
|
|
|
|
|
/s/ Michael
G. Archbold
Michael
G. Archbold
|
|
Director
|
|
April 1, 2010
|
|
|
|
|
|
/s/ Paul
J. Brown
Paul
J. Brown
|
|
Director
|
|
April 1, 2010
|
|
|
|
|
|
/s/ Ronald
J. Floto
Ronald
J. Floto
|
|
Director
|
|
April 1, 2010
|
|
|
|
|
|
/s/ Michael
Grossman
Michael
Grossman
|
|
Director
|
|
April 1, 2010
|
|
|
|
|
|
/s/ Dan
Rose
Dan
Rose
|
|
Director
|
|
April 1, 2010
|
|
|
|
|
|
/s/ David
Shelton
David
Shelton
|
|
Director
|
|
April 1, 2010
|
|
|
|
|
|
/s/ Richard
McGuire
Richard
McGuire
|
|
Director, Non-Executive Chairman
|
|
April 1, 2010
|
|
|
|
|
|
/s/ Timothy
V. Wolf
Timothy
V. Wolf
|
|
Director
|
|
April 1, 2010
|
88
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
2
|
.1(1)
|
|
Agreement and plan of Merger dated as of April 8, 1997
between Michigan Borders Group, Inc. and Borders Group, Inc.
|
|
3
|
.1(3)
|
|
Restated Articles of Incorporation of Borders Group, Inc.
|
|
3
|
.2(10)
|
|
Amendment to the Restated Articles of Incorporation of Borders
Group, Inc.
|
|
3
|
.3(5)
|
|
Restated bylaws of Borders Group, Inc.
|
|
3
|
.4(9)
|
|
First Amendment to the Restated By laws of Borders Group, Inc.
|
|
3
|
.5(10)
|
|
Second Amendment to the Restated By laws of Borders Group, Inc.
|
|
3
|
.6(11)
|
|
Third Amendment to the Restated By laws of Borders Group, Inc.
|
|
3
|
.7(12)
|
|
Fourth Amendment to the Restated By laws of Borders Group, Inc.
|
|
4
|
.1(13)
|
|
Warrant and Registration Rights Agreement, dated as of
April 9, 2008, among Borders Group, Inc. and Computershare
Inc. and Computershare Trust Company, N.A., as Warrant
Agent.
|
|
4
|
.2(13)
|
|
Side Letter, dated as of April 9, 2008, between Pershing
Square Capital Management, L.P. and Borders Group, Inc.
|
|
4
|
.3(17)
|
|
Side Letter to the Warrant and Registration Rights Agreement,
dated as of March 30, 2009 from Borders Group, Inc. to
Pershing Square Capital Management, L.P.
|
|
10
|
.1
|
|
Restated Borders Group, Inc. Annual Incentive Bonus Plan
|
|
10
|
.2(1)
|
|
Borders Group, Inc. Stock Option Plan
|
|
10
|
.3(5)
|
|
Amendment to the Borders Group, Inc. Stock Option Plan
|
|
10
|
.4(2)
|
|
Borders Group, Inc. Stock Option Plan for International Employees
|
|
10
|
.5(3)
|
|
1998 Borders Group, Inc. Stock Option Plan
|
|
10
|
.6(4)
|
|
Amendment No. 1 to 1998 Borders Group, Inc. Stock Option
Plan
|
|
10
|
.7(8)
|
|
Non-Qualified Deferred Compensation Plan
|
|
10
|
.8(3)
|
|
Participation Agreement dated as of December 1, 1998 by and
among Borders Group, Inc., Borders, Inc. and Parties thereto
|
|
10
|
.9(5)
|
|
Participation Agreement dated as of January 22, 2001 by and
among Borders Group, Inc., Borders, Inc. and Parties thereto
|
|
10
|
.10(6)
|
|
Participation Agreement dated as of November 15, 2002 by
and among Borders Group, Inc., Borders, Inc. and Parties thereto
|
|
10
|
.11(7)
|
|
Security Agreement dated as of July 30, 2004 among Borders
Group, Inc., its subsidiaries and Parties thereto
|
|
10
|
.12(14)
|
|
Sale and Purchase Agreement between Borders Group, Inc.,
A&R Whitcoulls Group Holdings Pty Limited, Spine Newco (NZ)
Limited and Spine Newco Pty Limited.
|
|
10
|
.13(14)
|
|
Brand License Deed between Borders Properties, Inc. and Spine
Newco Pty Limited
|
|
10
|
.14(14)
|
|
Purchasing Agreement between Borders Group, Inc., Borders
Australia Pty Limited, Borders New Zealand Limited, Borders Pte.
Limited, Spine Newco Pty Limited, Spine Newco (NZ) Limited and
A&R Witcoulls Group Holdings Pty Limited.
|
|
10
|
.15(14)
|
|
Transition Services Agreement between Borders International
Services, Inc., Borders Australia Pty Limited, Borders New
Zealand Limited, Borders Pte. Limited, Spine Newco Pty Limited,
and Spine Newco (NZ) Limited.
|
|
10
|
.16(15)
|
|
Form of Executive Officer Severance Agreement.
|
|
10
|
.17(16)
|
|
Borders Group, Inc. Indemnification Letter Agreement with
Directors and Officers
|
|
10
|
.18(17)
|
|
Subscription and Purchase Agreement, dated as of March 30,
2009 by and between Pershing Square, L.P. and Borders Group,
Inc.
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.19(18)
|
|
First Amendment to the Amended and Restated Borders Group, Inc.
2004 Long-Term Incentive Plan
|
|
10
|
.20(19)
|
|
Amended and Restated Borders Group, Inc. 2004 Long-Term
Incentive Plan
|
|
10
|
.21(20)
|
|
Third Amended and Restated Revolving Credit Agreement dated as
of March 31, 2010 between and among Borders Group, Inc.,
Borders, Inc. and the lenders and agents named therein.
|
|
10
|
.22(20)
|
|
Term Loan Agreement dated as of March 31, 2010 between and among
Borders Group, Inc., Borders, Inc. and the lenders and agents
named therein
|
|
10
|
.23(20)
|
|
Intercreditor Agreement dated as of March 31, 2010 between and
among Borders Group, Inc., Borders, Inc. and the lenders and
agents named therein.
|
|
21
|
.1
|
|
Subsidiaries of Registrant
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm
|
|
31
|
.1
|
|
Statement of Michael J. Edwards, Interim President and Chief
Executive Officer of Borders Group, Inc. pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31
|
.2
|
|
Statement of Mark R. Bierley, Executive Vice President and Chief
Financial Officer of Borders Group, Inc. pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32
|
.1
|
|
Statement of Michael J. Edwards, Interim President and Chief
Executive Officer of Borders Group, Inc. pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
32
|
.2
|
|
Statement of Mark R. Bierley, Executive Vice President and Chief
Financial Officer of Borders Group, Inc. pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
(1) |
|
Incorporated by reference from the Companys Proxy
Statement dated April 9, 1997 of Borders Group, Inc. (File
No. 1-13740). |
|
(2) |
|
Incorporated by reference from the Companys Quarterly
Report on
Form 10-Q
for the quarter ended July 26, 1998 (File
No. 1-13740). |
|
(3) |
|
Incorporated by reference from the Companys Annual Report
on
Form 10-K
for the year ended January 24, 1999 (File
No. 1-13740). |
|
(4) |
|
Incorporated by reference from the Companys Quarterly
Report on
Form 10-Q
for the quarter ended October 24, 1999 (File
No. 1-13740). |
|
(5) |
|
Incorporated by reference from the Companys Annual Report
on
Form 10-K
for the year ended January 28, 2001 (File
No. 1-13740). |
|
(6) |
|
Incorporated by reference from the Companys Annual Report
on
Form 10-K
for the year ended January 25, 2004 (Filed
No. 1-13740). |
|
(7) |
|
Incorporated by reference from the Companys Quarterly
Report on
Form 10-Q
for the quarter ended July 25, 2004 (File
No. 1-13740). |
|
(8) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
dated November 5, 2004 (File
No. 1-13740). |
|
(9) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
dated July 13, 2006 (File
No. 1-13740). |
|
(10) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
dated May 25, 2007 (File
No. 1-13740). |
|
(11) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
dated October 2, 2007 (File
No. 1-13740). |
|
(12) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
dated January 17, 2008 (File
No. 1-13740). |
|
(13) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
dated April 9, 2008 (File
No. 1-13740). |
|
|
|
(14) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
dated June 4, 2008 (File
No. 1-13740). |
|
(15) |
|
Incorporated by reference from the Companys Quarterly
Report on
Form 10-Q
for the quarter ended May 3, 2008 (File
No. 1-13740). |
|
(16) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
dated November 25, 2008 (File
No. 1-13740). |
|
(17) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
dated March 30, 2009 (File
No. 1-13740). |
|
(18) |
|
Incorporated by reference from the Companys Quarterly
Report on
Form 10-Q
for the quarter ended May 2, 2009 (File
No. 1-13740). |
|
(19) |
|
Incorporated by reference from the Companys Proxy
Statement dated April 24, 2009 (File
No. 1-13740). |
|
(20) |
|
Incorporated by reference from the Companys Current Report
on Form 8-K dated March 31, 2010 (File
No. 1-13740). |