SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 23, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 1-13740
Borders Group, Inc.
(Exact name of registrant as specified in its charter)
MICHIGAN
(State or other jurisdiction of incorporation or organization)
38-3196915
(I.R.S. Employer
Identification No.)
100 Phoenix Drive, Ann Arbor, Michigan 48108
(Address of principal executive offices)
(zip code)
(734) 477-1100
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Title of Class Shares Outstanding As of
-------------- August 15, 2000
Common Stock ---------------
78,620,447
<PAGE>
BORDERS GROUP, INC.
INDEX
Part I - Financial Information
Page
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk N/A
Part II - Other information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds N/A
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a vote of 15
Securityholders
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
<PAGE>
<TABLE>
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions except common share data)
(Unaudited)
<CAPTION>
13 Weeks Ended
July 23, July 25,
2000 1999
--------------- ---------------
<S> <C> <C>
Sales $ 699.7 $ 631.0
Cost of merchandise sold, including
occupancy costs 519.9 468.9
--------------- ---------------
Gross margin 179.8 162.1
Selling, general and administrative
expenses 176.3 158.7
Pre-opening expense 1.2 2.2
Goodwill amortization 0.9 0.9
--------------- ---------------
Operating income 1.4 0.3
Interest expense 4.0 4.6
--------------- ---------------
Loss before income tax (2.6) (4.3)
Income tax benefit (1.0) (1.7)
--------------- ---------------
Net loss $ (1.6) $ (2.6)
=============== ===============
Earnings per common share data --
Diluted loss per common share $ (0.02) $ (0.03)
=============== ===============
Diluted weighted average common shares
outstanding (in thousands) 80,691 80,633
=============== ===============
Basic loss per common share $ (0.02) $ (0.03)
=============== ===============
Basic weighted average common shares
outstanding (in thousands) 78,380 77,876
=============== ===============
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
<PAGE>
<TABLE>
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions except common share data)
(Unaudited)
<CAPTION>
26 Weeks Ended
July 23, July 25,
2000 1999
--------------- ---------------
<S> <C> <C>
Sales $ 1,380.6 $ 1,249.7
Cost of merchandise sold, including
occupancy costs 1,025.3 926.1
--------------- ---------------
Gross margin 355.3 323.6
Selling, general and administrative
expenses 348.4 320.7
Pre-opening expense 2.4 3.6
Goodwill amortization 1.8 1.6
--------------- ---------------
Operating income (loss) 2.7 (2.3)
Interest expense 6.8 8.7
--------------- ---------------
Loss before income tax (4.1) (11.0)
Income tax benefit (1.6) (4.3)
--------------- ---------------
Net loss $ (2.5) $ (6.7)
=============== ===============
Earnings per common share data --
Diluted loss per common share $ (0.03) $ (0.09)
=============== ===============
Diluted weighted average common shares
outstanding (in thousands) 80,424 77,610
=============== ===============
Basic loss per common share $ (0.03) $ (0.09)
=============== ===============
Basic weighted average common shares
outstanding (in thousands) 78,171 77,610
=============== ===============
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
<PAGE>
<TABLE>
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions except per common share data)
(Unaudited)
<CAPTION>
July 23, July 25, January 23,
2000 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash $ 51.5 $ 60.8 $ 41.6
Merchandise inventories 1,115.4 1,032.6 1,077.7
Accounts receivable and other current
assets 70.2 59.5 78.9
------------ ------------ ------------
Total Current Assets 1,237.1 1,152.9 1,198.2
Property and equipment, net of
accumulated depreciation of $434.9,
$360.6 and $395.4 at July 23, 2000,
July 25, 1999 and January 23, 2000,
respectively 559.3 508.3 558.2
Other assets and deferred charges 35.7 34.0 36.6
Goodwill, net of accumulated amortization
of $51.3, $47.6 and $49.5 at July 23,
2000, July 25, 1999 and January 23,
2000, respectively 113.6 120.1 121.8
------------ ------------ ------------
Total Assets $ 1,945.7 $ 1,815.3 $ 1,914.8
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt and capital lease
obligations due within one year $ 289.3 $ 345.0 $ 136.1
Trade accounts payable 538.2 490.6 580.4
Accrued payroll and other liabilities 194.1 178.1 232.2
Taxes, including income taxes 37.4 19.4 79.2
------------ ------------ ------------
Total Current Liabilities 1,059.0 1,033.1 1,027.9
Long-term debt and capital lease
obligations 15.7 6.3 16.2
Other long-term liabilities 68.7 63.3 68.1
------------ ------------ ------------
Total Liabilities 1,143.4 1,102.7 1,112.2
------------ ------------ ------------
Stockholders' Equity:
Common stock; 300,000,000 shares
authorized; 78,455,228, 78,052,169 and
77,687,829 issued and outstanding at
July 23, 2000, July 25, 1999, and
January 23, 2000, respectively 685.1 688.0 679.6
Officers receivable and deferred
compensation (1.3) (5.0) (3.9)
Accumulated other comprehensive income (5.7) (0.1) 0.2
Retained earnings 124.2 29.7 126.7
------------ ------------ ------------
Total Stockholders' Equity 802.3 712.6 802.6
------------ ------------ ------------
Total Liabilities & Stockholders'
Equity $ 1,945.7 $ 1,815.3 $ 1,914.8
============ ============ ============
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
<PAGE>
<TABLE>
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE 26 WEEKS ENDED JULY 23, 2000
(Dollars in millions)
(Unaudited)
<CAPTION>
Deferred Accumulated
Compensation Other
Common Stock and Officer Comprehensive Retained
Shares Amount Receivables Income Earnings Total
---------- -------- ------------ ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 23, 2000 77,687,829 $ 679.6 $ (3.9) $ 0.2 $ 126.7 $ 802.6
---------- -------- ------------ ------------- -------- --------
Net loss -- -- -- -- (2.5) (2.5)
Currency translation
adjustment -- -- -- (5.9) -- (5.9)
--------
Comprehensive loss (8.4)
Issuance of common
stock 906,080 8.5 -- -- -- 8.5
Repurchase and retirement
of common stock (138,681) (3.0) -- -- -- (3.0)
Change in receivable and
deferred compensation -- -- 2.6 -- -- 2.6
---------- -------- ------------ ------------- -------- --------
Balance at July 23, 2000 78,455,228 $ 685.1 $ (1.3) $ (5.7) $ 124.2 $ 802.3
========== ======== ============ ============= ======== ========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
<PAGE>
<TABLE>
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
<CAPTION>
26 Weeks Ended
July 23, July 25,
2000 1999
------------ -------------
<S> <C> <C>
Cash provided by (used for):
Operations
Net loss $ (2.5) $ (6.7)
Adjustments to reconcile net loss to operating
cash flows:
Depreciation and goodwill amortization 46.8 40.8
Change in other long-term assets and liabilities 1.9 1.2
Cash provided by (used for) current assets and
current liabilities:
Increase in inventories (41.2) (10.0)
Decrease in accounts payable (40.7) (116.7)
Decrease in accrued liabilities (36.7) (41.8)
Decrease in taxes payable (42.1) (6.4)
Other, net 8.0 11.9
------------ -------------
Net cash used for operations (106.5) (127.7)
Investing
Capital expenditures (52.7) (52.8)
Acquisitions, net of cash acquired -- (16.5)
------------ -------------
Net cash used for investing (52.7) (69.3)
Financing
Net funding from credit facility 161.5 210.9
Issuance of common stock 8.5 8.1
Repurchase of common stock (3.0) (7.4)
Other, net 1.4 3.4
------------ -------------
Net cash provided by financing 168.4 215.0
Effect of exchange rates on cash and equivalents 0.7 --
------------ -------------
Net increase in cash and equivalents 9.9 18.0
Cash and equivalents at beginning of year 41.6 42.8
------------ -------------
Cash and equivalents at end of period $ 51.5 $ 60.8
============ =============
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
<PAGE>
BORDERS GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions except per common share data)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Borders Group, Inc. (the Company) have been prepared in accordance with Rule
10-01 of Regulation S-X and do not include all the information and notes
required by generally accepted accounting principles for complete financial
statements. All adjustments, consisting only of normal recurring adjustments,
have been made which, in the opinion of management, are necessary for a fair
presentation of the results of the interim periods. The results of operations
for such interim periods are not necessarily indicative of results of operations
for a full year. The unaudited condensed consolidated financial statements
should be read in conjunction with the Company's consolidated financial
statements and notes thereto for the fiscal year ended January 23, 2000.
The Company's fiscal year ends on the Sunday immediately preceding the last
Wednesday in January. At July 23, 2000, the Company operated 319 superstores
under the Borders name, including eight in the United Kingdom, two in Australia,
and one each in Singapore and New Zealand. The Company also operated 891
mall-based and other bookstores primarily under the Waldenbooks name, and 30
bookstores under the Books etc. name in the United Kingdom. The Company, through
its subsidiary Borders Online, Inc., is also an online retailer of books, music
and video through the operation of its Internet commerce site, Borders.com.
Unexercised employee stock options to purchase $16.8 million common shares as
of July 25, 1999 were not included in the weighted average shares outstanding
calculation for the 26 weeks ended July 25, 1999 because to do so would have
been antidilutive.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
During 1994, the Company entered into agreements in which leases with respect
to four Borders' locations serve as collateral for certain mortgage pass-through
certificates. The mortgage pass-through certificates include a provision
requiring the Company to repurchase the underlying mortgage notes in certain
events, including the failure by the Company to make payments of rent under the
related leases, the failure by Kmart Corporation (the former parent of the
Company) to maintain required investment grade ratings or the termination of the
guarantee by Kmart of the Company's obligations under the related leases (which
would require mutual consent of Kmart and Borders). In the event the Company is
required to repurchase all of the underlying mortgage notes, the Company would
be obligated to pay approximately $36.6 million. The Company would expect to
fund this obligation through its Credit Facility.
In March 1998, the American Booksellers Association ("ABA") and 26
independent bookstores filed a lawsuit in the United States District Court for
the Northern District of California against the Company and Barnes & Noble, Inc.
alleging violations of the Robinson-Patman Act, the California Unfair Trade
Practice Act and the California Unfair Competition Act. The Complaint seeks
injunctive and declaratory relief; treble damages on behalf of each of the
bookstore plaintiffs, and, with respect to the California bookstore plaintiffs,
any other damages permitted by California law; disgorgement of money, property
and gains wrongfully obtained in connection with the purchase of books for
resale, or offered for resale, in California from March 18, 1994 until the
action is completed and prejudgement interest on any amounts awarded in the
action, as well as attorney fees and costs. The trial is scheduled for April 9,
2001. The Company intends to vigorously defend the action.
<PAGE>
BORDERS GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions except per common share data)
In August 1998, The Intimate Bookshop, Inc. ("Intimate") and its owner,
Wallace Kuralt, filed a lawsuit in the United States District Court for the
Southern District of New York against the Company, Barnes & Noble, Inc., and
others alleging violation of the Robinson-Patman Act and other federal laws, New
York statutes governing trade practices and common law. In response to
Defendants' Motion to Dismiss the Complaint, plaintiff Kuralt withdrew his
claims and plaintiff Intimate voluntarily dismissed all but its Robinson-Patman
claims. Intimate recently filed a Second Amended Complaint limited to
allegations of violation of the Robinson-Patman act. The Second Amended
Complaint alleges that Intimate has suffered $11.3 or more in damages and
requests treble damages, injunctive and declaratory relief, interest, costs,
attorneys fees and other unspecified relief. Many of the allegations in the
Second Amended Complaint are similar to those contained in the action instituted
by the ABA and 26 bookseller plaintiffs against the Company and Barnes & Noble,
Inc. in March, 1998. The Company intends to vigorously defend the action.
In April 2000, two former employees, individually and on behalf of a
purported class, filed an action against Borders in the Superior Court of
California for the County of San Francisco. The purported class consists of all
current and former store management employees of Borders in California who,
within the applicable statutes of limitations, were denied payment of overtime
compensation in violation of California law. The Complaint alleges that the
individual plaintiffs and the purported class members worked hours for which
they were entitled to receive, but did not receive, overtime compensation under
California law, and that they were classified as "exempt" store management
employees but were forced to work more than 50% of their time in non-exempt
tasks. The Complaint alleges violations of the California Labor Code, the
California Business and Professions Code and conversion. The relief sought
includes compensatory and punitive damages, penalties, preliminary and permanent
injunctions requiring Borders to pay overtime compensation as required under
California and Federal law, prejudgment interest, costs, attorneys fees and such
other relief as the Court deems proper. On August 17, 2000, the Court entered a
Tentative Order dismissing the class action, conversion and punitive damage
aspects of the Complaint on the following grounds: (i) individual issues will
predominate and, therefore, class treatment is not warranted, and (ii) the
plaintiffs failed to allege facts sufficient to state a cause of action for
conversion, and punitive damages could only be awarded on the conversion claims
in the Complaint. The Court stated that the plaintiffs would be entitled to
limited discovery on the class action aspects of the case, and that they could
file an amended complaint asserting more specifically the basis for class action
status upon the conclusion of that discovery. The Company intends to vigorously
defend the action.
On May 31, 2000, Keith Markowitz instituted an action in the United States
District Court for the Eastern District of Pennsylvania as a purported class
action against Sony Music Entertainment, Inc. ("Sony"), Warner-Elektra-Atlantic
Corporation ("WEA"), EMI Music Distribution ("EMI"), BMG Music ("BMG"),
Universal Music & Video Corp. ("UMVD"), Wal Mart Stores, Inc., ("Wal Mart") and
Borders, Inc., ("Borders", a subsidiary of the Company). The purported Plaintiff
Class is composed of all similarly situated purchasers who since May 31, 1996
(the "Class Period") purchased compact discs of prerecorded music distributed
and/ or manufactured by defendants. Wal Mart and Borders are named as defendants
individually and as representatives of a purported Defendant Class consisting of
all retailers and other distributors of compact discs produced by defendants
Sony, WEA, EMI, BMG, and UMVD during the Class Period, and who conspired with
Sony, WEA, EMI, BMG, and/or UMVD to carry out the unlawful conduct alleged in
the complaint. The complaint alleges that Sony, WEA, EMI, BMG, and UMVD each had
agreements with retailers setting out minimum advertised price policies and the
benefits conferred on retailers for adhering to such policy, and that such
agreements amounted to vertical agreements in restraint of trade fixing a
minimum price for prerecorded music products, including CDs. The complaint
further alleges that the alleged agreements violated of the Sherman Anti-Trust
Act and caused the plaintiffs to pay supra-competitive prices for the CDs they
purchased. Plaintiffs seek a permanent injunction, treble damages, attorneys'
fees, costs and disbursements, pre- and post-judgment interest and such other
relief as the court may deem as appropriate. Borders denies the allegations of
wrongdoing and intends to vigorously defend this litigation.
The Company has not included any liability in its financial statements in
connection with the lawsuits described above and has expensed as incurred all
costs to date.
<PAGE>
BORDERS GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions except per common share data)
In addition to the matters described above, the Company is from time to time
involved in or affected by other litigation incidental to the conduct of its
businesses. The Company does not believe that any such other litigation will
have a material adverse effect on its liquidity, financial position or results
of operations.
NOTE 3 - FINANCING
Credit Facility: The Company has a $472.8 multicurrency credit agreement (the
Credit Facility) which expires in October, 2002. Borrowings under the Credit
Facility bear interest at a base rate or an increment over LIBOR at the
Company's option. The Credit Facility contains operating covenants which limit
the Company's ability to incur indebtedness, make acquisitions, dispose of
assets, issue or repurchase its common stock in excess of $100.0 million (plus
any proceeds and tax benefits resulting from stock option exercises and tax
benefits resulting from restricted shares purchased by employees from the
Company), and require the Company to meet certain financial measures regarding
fixed charge coverage, leverage and tangible net worth. The Company is
prohibited under the Credit Facility from paying cash dividends on common
shares. The Company had borrowings outstanding under the Credit Facility of
$287.4 as of July 23, 2000 and $133.4 as of January 23, 2000.
Lease Financing Facility: The Company has a $175.0 lease financing facility
(the Lease Facility) to finance new stores and other property through operating
leases, which expires in October, 2002. The Lease Facility provides financing to
lessors through loans from a third party lender for up to 95% of a project's
cost. It is expected that Lessors will make equity contributions approximating
5% of each project. Independent of its obligations as lessee, the Company will
guarantee payment when due of all amounts required to be paid to the third party
lender. The principal amount guaranteed is limited to approximately 89% of the
original cost of a project so long as the Company is not in default under the
lease relating to such project. The Lease Facility contains covenants and events
of default that are similar to those contained in the Credit Facility described
above. There was $164.9 outstanding under the Lease Facility as of July 23, 2000
and $162.9 as of January 23, 2000.
Seasonal Facility: The Company had a $25.0 multicurrency seasonal revolving
credit facility (the Seasonal Facility) which expired in July, 2000. The Company
had no borrowings outstanding under the Seasonal Facility during the period
ended July 23, 2000 or as of January 23, 2000.
<PAGE>
BORDERS GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions except per common share data)
NOTE 4 - SEGMENT INFORMATION
The Company is organized based upon the following operating segments:
domestic Borders stores, international Borders and Books etc. stores, Walden
stores, online retailing through Borders.com, and other (consisting of interest
expense and certain corporate governance costs).
Segment data includes charges allocating certain corporate headquarters costs
to each segment. Transactions between segments, consisting principally of
inventory transfers, are recorded primarily at cost. The Company evaluates the
performance of its segments and allocates resources to them based on anticipated
future contribution.
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
July 23, July 25, July 23, July 25,
2000 1999 2000 1999
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Sales:
Borders $ 462.3 $ 405.6 $ 909.3 $ 797.7
Walden 187.5 186.2 372.8 374.7
International 44.8 35.9 88.1 70.8
---------- ---------- ----------- -----------
Total stores 694.6 627.7 1,370.2 1,243.2
Borders.com 5.1 3.3 10.4 6.5
---------- ---------- ----------- -----------
$ 699.7 $ 631.0 $1,380.6 $1,249.7
========== ========== =========== ===========
Net income (loss):
Borders $ 10.2 $ 4.7 $ 18.5 $ 9.8
Walden (1.3) 0.3 (1.6) 3.4
International (3.9) (2.9) (7.4) (5.3)
Other (2.4) (1.3) (3.2) (6.9)
---------- ---------- ----------- -----------
Total stores 2.6 0.8 6.3 1.0
Borders.com (4.2) (3.4) (8.8) (7.7)
---------- ---------- ----------- -----------
$ (1.6) $ (2.6) $ (2.5) $ (6.7)
========== ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
July 23, July 25,
2000 1999
----------- -----------
<S> <C> <C>
Total assets:
Borders $1,158.6 $1,050.4
Walden 442.9 456.1
International 202.5 168.1
Other 85.0 90.0
----------- -----------
Total stores 1,889.0 1,764.6
Borders.com 56.7 50.7
----------- -----------
$1,945.7 $1,815.3
=========== ===========
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The Company, through its subsidiaries, is the second largest operator of book
and music superstores and the largest operator of mall-based bookstores in the
world based upon both sales and number of stores. At July 23, 2000, the Company
operated 319 superstores under the Borders name, including eight in the United
Kingdom, two in Australia, and one each in Singapore and New Zealand. The
Company also operated 891 mall-based and other bookstores primarily under the
Waldenbooks name, and 30 bookstores under the Books etc. name in the United
Kingdom. The Company, through its subsidiary Borders Online, Inc., is also an
online retailer of books, music and video through the operation of its Internet
commerce site, Borders.com.
The Company's second quarters of 2000 and 1999 consisted of the 13 weeks
ended July 23, 2000 and July 25, 1999, respectively.
Results of Operations
The following table presents the Company's statement of operations data, as a
percentage of sales, for the periods indicated. Data for the 26 weeks ended July
25, 1999 excludes a one-time charge ($5.5 million pre-tax, $3.4 million
net-of-tax) related to the departure of a former executive of the Company.
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
July 23, July 25, July 23, July 25,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of merchandise sold, including
occupancy costs 74.3 74.3 74.3 74.1
--------- --------- --------- ---------
Gross margin 25.7 25.7 25.7 25.9
Selling, general and administrative
expenses 25.2 25.1 25.2 25.3
Pre-opening expense 0.2 0.4 0.2 0.3
Goodwill amortization 0.1 0.1 0.1 0.1
--------- --------- --------- ---------
Operating income 0.2 0.1 0.2 0.2
Interest expense 0.6 0.8 0.5 0.7
--------- --------- --------- ---------
Loss before income taxes (0.4) (0.7) (0.3) (0.5)
Income tax benefit (0.2) (0.3) (0.1) (0.2)
--------- --------- --------- ---------
Net loss (0.2)% (0.4)% (0.2)% (0.3)%
========= ========= ========= =========
</TABLE>
<PAGE>
Store Activity
The Company's store activity is summarized below:
<TABLE>
<CAPTION>
Year
13 Weeks Ended 26 Weeks Ended Ended
July 23, July 25, July 23, July 25, January 23,
2000 1999 2000 1999 2000
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Borders Superstores
Beginning number of
stores 309 262 300 250 250
Openings 10 12 19 24 50
--------- --------- --------- --------- -----------
Ending number of stores 319 274 319 274 300
========= ========= ========= ========= ===========
Walden Mall Bookstores
Beginning number of
stores 887 886 904 900 900
Openings 5 8 5 16 39
Closings (1) (6) (18) (28) (35)
--------- --------- --------- --------- -----------
Ending number of stores 891 888 891 888 904
========= ========= ========= ========= ===========
</TABLE>
13 Weeks Ended July 23, 2000 and July 25, 1999
Store sales in the second quarter of 2000 were $694.6 million, a $66.9
million, or 10.7%, increase over second quarter 1999 sales of $627.7 million.
Borders domestic superstore sales increased $56.7 million, or 14.0%, due
primarily to new store openings and a 3.6% comparable store sales increase
during the quarter. Walden sales increased $1.3 million due to the higher number
of stores and a comparable store sales increase of 0.4%. Borders.com sales
increased 54.5% to $5.1 million versus $3.3 million for the same period last
year.
Gross margin as a percentage of sales was 25.7% in the second quarter of 2000
and 1999.
As a percentage of sales, SG&A expense was 25.2% in the second quarter of
2000, which was substantially the same as the 25.1% for the same period last
year.
Pre-opening expense in the second quarter of 2000 was $1.2 million versus
$2.2 million from the same period in 1999. Pre-opening expense consists
principally of grand-opening advertising expense and store payroll related to
the opening, and is expensed as incurred. Pre-opening expense per store varies
primarily as a result of differing levels of grand opening advertising,
depending on the presence of the Company and its competitors in the market and
differing levels of labor costs associated with merchandising the store. The
Company opened 10 Borders superstores and 5 Walden stores in the second quarter
of 2000 as compared to 12 Borders superstores and 8 Walden stores in the second
quarter of 1999.
Goodwill amortization was $0.9 million in the second quarter of 2000 and
1999.
<PAGE>
Interest expense was $4.0 million in the second quarter of 2000 as compared
to $4.6 million in 1999. The decrease of $0.6 million is primarily due to lower
debt levels during the quarter versus a year ago.
Income tax benefit in the second quarter of 2000 was $1.0 million versus
$1.7 million in 1999.
26 Weeks Ended July 23, 2000 and July 25, 1999
Store sales in the 26 weeks ended July 23, 2000 were $1,370.2 million, a
$127.0 million, or 10.2%, increase over sales of $1,243.2 a year ago. Borders
domestic superstore sales increased $111.6 million, or 14.0%, due primarily to
new store openings and a 3.0% comparable store sales increase during the period.
Walden sales decreased $1.9 million due primarily to a comparable store sales
decrease of 1.3%. Borders.com sales increased 60.0% to $10.4 million versus $6.5
million for the same period last year.
Gross margin as a percentage of sales was 25.7% for the 26 weeks ended July
23, 2000 versus 25.9% for the same period of 1999. The decrease primarily
reflects the loss of leverage on occupancy costs due to lower sales for Walden.
As a percentage of sales, SG&A expense (excluding one-time charge) was 25.2%
for the 26 weeks ended July 23, 2000 versus 25.3% for the same period a year
ago.
Pre-opening expense for the 26 weeks ended July 23, 2000 was $2.4 million
versus $3.6 million from the same period in 1999. Pre-opening expense consists
principally of grand-opening advertising expense and store payroll related to
the opening, and is expensed as incurred. Pre-opening expense per store varies
primarily as a result of differing levels of grand opening advertising,
depending on the presence of the Company and its competitors in the market and
differing levels of labor costs associated with merchandising the store. The
Company opened 19 Borders superstores and 5 Walden stores in the 26 weeks ended
July 23, 2000 as compared to 24 Borders superstores and 16 Walden stores in the
26 weeks ended July 25, 1999.
Goodwill amortization was $1.8 million for the 26 weeks ended July 23, 2000
versus $1.6 million for the same period last year. The increase in goodwill
amortization is due to the acquisition of All Wound Up in the first quarter of
1999.
Interest expense was $6.8 million for the 26 weeks ended July 23, 2000 as
compared to $8.7 million in 1999. The decrease of $1.9 million is primarily due
to lower debt levels during the period versus a year ago.
Income tax benefit for the 26 weeks ended July 23, 2000 was $1.6 million
versus $2.2 million in 1999 (excluding $2.1 million for one-time charge).
Liquidity and Capital Resources
The Company's principal capital requirements are to fund working capital
needs, the opening of new stores, the refurbishment and expansion of existing
stores and continued development of Borders.com and the retail convergence
strategy.
Net cash used for operations for the 26 weeks ended July 23, 2000 was $106.5
million as compared to $127.7 million in the corresponding period in the prior
year. Cash from operations for the period primarily reflects operating results
net of non-cash depreciation and amortization expense. Operating cash outflows
for the period were primarily the result of inventory purchases, and decreases
in accounts payable, taxes payable and accrued liabilities during the period.
Net cash used for investing for the first 26 weeks of 2000 was $52.7 million
as compared to $69.3 million in the first 26 weeks of 1999, and primarily
represents capital expenditures for new stores.
<PAGE>
Net cash provided by financing in the first 26 weeks of 2000 was $168.4
million versus $215.0 million in the first 26 weeks of 1999. Net cash provided
by financing resulted primarily from net borrowings under the credit facility.
On a consolidated basis, the Company expects its capital requirements to
increase as a result of its expansion program for its Borders superstores (both
domestic and international) and continued development of Borders.com and the
retail convergence strategy.
The Company has a $472.8 multicurrency credit agreement (the Credit Facility)
which expires in October, 2002. Borrowings under the Credit Facility bear
interest at a base rate or an increment over LIBOR at the Company's option. The
Credit Facility contains operating covenants which limit the Company's ability
to incur indebtedness, make acquisitions, dispose of assets, issue or repurchase
its common stock in excess of $100.0 million (plus any proceeds and tax benefits
resulting from stock option exercises and tax benefits resulting from restricted
shares purchased by employees from the Company), and require the Company to meet
certain financial measures regarding fixed charge coverage, leverage and
tangible net worth. The Company is prohibited under the Credit Facility from
paying cash dividends on common shares. The Company had borrowings outstanding
under the Credit Facility of $287.4 as of July 23, 2000 and $133.4 as of January
23, 2000.
The Company has a $175.0 lease financing facility (the Lease Facility) to
finance new stores and other property through operating leases, which expires in
October, 2002. The Lease Facility provides financing to lessors through loans
from a third party lender for up to 95% of a project's cost. It is expected that
Lessors will make equity contributions approximating 5% of each project.
Independent of its obligations as lessee, the Company will guarantee payment
when due of all amounts required to be paid to the third party lender. The
principal amount guaranteed is limited to approximately 89% of the original cost
of a project so long as the Company is not in default under the lease relating
to such project. The Lease Facility contains covenants and events of default
that are similar to those contained in the Credit Facility described above.
There were 44 and 41 properties financed through the Lease Facility, with a
financed value of $164.9 and $162.9 million, as of July 23, 2000 and January 23,
2000, respectively. Management believes that the rental payments for properties
financed through the lease facility may be lower than those which the Company
could obtain elsewhere due to, among other factors, (i) the lower borrowing
rates available to the Company's landlords under the facility, and (ii) the fact
the rental payments for properties financed through the facility do not include
amortization of the principal amounts of the landlords' indebtedness related to
the properties. Rental payments relating to such properties will be adjusted
when permanent financing is obtained to reflect the interest rates available at
the time of the refinancing and the amortization of principal.
The Company had a $25.0 multicurrency seasonal revolving credit facility (the
Seasonal Facility) which expired in July, 2000. The Company had no borrowings
outstanding under the Seasonal Facility during the period ended July 23, 2000 or
as of January 23, 2000.
During 1994, the Company entered into agreements in which leases with respect
to four Borders' locations serve as collateral for certain mortgage pass-through
certificates. The mortgage pass-through certificates include a provision
requiring the Company to repurchase the underlying mortgage notes in certain
events, including the failure by the Company to make payments of rent under the
related leases, the failure by Kmart Corporation (the former parent of the
Company) to maintain required investment grade ratings or the termination of the
guarantee by Kmart of the Company's obligations under the related leases (which
would require mutual consent of Kmart and Borders). In the event the Company is
required to repurchase all of the underlying mortgage notes, the Company would
be obligated to pay approximately $36.6 million. The Company would expect to
fund this obligation through its Credit Facility.
The Company currently has a share repurchase program in place with remaining
authorization to repurchase approximately $66.9 million of its common stock as
of July 23, 2000. During the 26 weeks ended July 23, 2000, the Company
repurchased $3.0 million of its common stock.
<PAGE>
Other Matters
Strategic Alternatives
On July 6, 2000, the Company announced that discussions with regards to a
potential acquisition were terminated. Also, in a press release dated August 17,
2000, the Company announced that the Board of Directors reaffirmed its authority
previously granted to management to purchase Company stock from time to time.
That authority, which was approximately $66.9 million as stated above, was not
increased. In its release the Company stated, "the Company carefully considered
a major stock repurchase. However, given the favorable borrowing rates that the
Company enjoys and the need to renegotiate those rates and other agreements in
order to do a major stock buy back, shareholders simply would not be better off
by the Company pursuing that course at this time."
Year 2000 Issue
The Company has experienced no significant disruptions to operations of
business systems to date as a result of the transition from 1999 to 2000. The
Company does not expect any material subsequent disruption to its operations or
business systems from this transition.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements as
defined in the Private Securities Litigation Reform Act of 1995. Forward-looking
statements reflect management's current expectations and are inherently
uncertain. The Company's actual results may differ significantly from
management's expectations. Exhibit 99.1 to this report, "Cautionary Statement
under the Private Securities Litigation Reform Act of 1995", identifies the
forward-looking statements and describes some, but not all, of the factors that
could cause these differences.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company's Form 10-K Annual Report for the fiscal year ended January 23,
2000 and its Form 10-Q report for the fiscal quarter ended April 23, 2000
describe pending lawsuits against the Company. An adverse judgment against the
Company in any of these matters could have a material adverse effect on the
Company. There have not been any material developments in these matters during
the fiscal quarter covered by this Report except as follows: On August 17, 2000,
the Court entered a Tentative Order dismissing the class action, conversion and
punitive damage aspects of the litigation relating to overtime pay brought by
two former employees of Borders in the Superior Court of California for the
County of San Francisco. The grounds for the court's decision were as follows:
(i) individual issues will predominate and, therefore, class treatment is not
warranted, and (ii) the plaintiffs failed to allege facts sufficient to state a
cause of action for conversion, and punitive damages could only be awarded on
the conversion claims in the Complaint. The Court stated that the plaintiffs
would be entitled to limited discovery on the class action aspects of the case,
and that they could file an amended complaint asserting more specifically the
basis for class action status upon the conclusion of that discovery.
In addition to the matters described above, the Company is from time to time
involved in or affected by other litigation incidental to the conduct of its
businesses. The Company does not believe that any such other litigation will
have a material adverse effect on its liquidity, financial position or results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
The following actions were taken at the Annual Meeting of Stockholders of the
Company held on May 24, 2000, with the votes on such matters being as indicated
below:
1. The following individuals were elected to serve as directors for one year
terms expiring in 2000:
<TABLE>
<CAPTION>
Authority
Name For Withheld
<S> <C> <C>
Robert F. DiRomualdo 72,096,162 Shares 1,560,704
Peter R. Formanek 72,407,417 Shares 1,249,449
Gregory P. Josefowicz 72,400,861 Shares 1,256,005
Victor L. Lund 72,392,520 Shares 1,264,346
Dr. Edna Greene Medford 72,385,248 Shares 1,271,618
George R. Mrkonic 72,085,616 Shares 1,571,250
Larry Pollock 72,384,807 Shares 1,272,059
Beth M. Pritchard 72,396,817 Shares 1,260,049
</TABLE>
2. The amendment to extend the term of the Company's Annual Incentive Bonus Plan
and to re-affirm the performance goals and maximum amounts payable under the
Plan was approved and adopted:
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-votes
<S> <C> <C> <C>
68,698,933 4,666,837 291,096 --
</TABLE>
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
(a) Exhibits:
27.0 Financial Data Schedule.
99.1 Cautionary Statement under the Private Securities Litigation Reform Act of
1995 "Safe Harbor" for Forward-Looking Statements.
(b) Reports on Form 8-K:
During the 13 week period ended July 23, 2000, one report was filed on
Form 8-K under Item 5 - Other Events. This report stated that discussions
with respect to the potential acquisition of the Company had been
terminated.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
BORDERS GROUP, INC.
(Registrant)
Date: September 6, 2000 By: /s/
---------------------------
Edward W. Wilhelm
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
