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 October 22, 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
-------------- November 28, 2000
Common Stock ---------------------
78,611,784
<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 11
Item 3. Quantitative and Qualitative Disclosures about
Market Risk N/A
Part II - Other information
Item 1. Legal Proceedings 17
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 N/A
Securityholders
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
<PAGE>
<TABLE>
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions except common share data)
(Unaudited)
<CAPTION>
13 Weeks Ended
October 22, October 24,
2000 1999
--------------- ---------------
<S> <C> <C>
Sales $ 703.8 $ 656.3
Cost of merchandise sold, including
occupancy costs 527.2 483.7
--------------- ---------------
Gross margin 176.6 172.6
Selling, general and administrative expenses 176.8 167.0
Pre-opening expense 2.3 2.0
Goodwill amortization 0.9 1.0
--------------- ---------------
Operating income (loss) (3.4) 2.6
Interest expense 4.8 5.1
--------------- ---------------
Loss before income tax (8.2) (2.5)
Income tax benefit (3.2) (1.0)
--------------- ---------------
Net loss $ (5.0) $ (1.5)
=============== ===============
Earnings per common share data --
Diluted loss per common share $ (0.06) $ (0.02)
=============== ===============
Diluted weighted average common shares
outstanding (in thousands) 78,579 77,618
=============== ===============
Basic loss per common share $ (0.06) $ (0.02)
=============== ===============
Basic weighted average common shares
outstanding (in thousands) 78,579 77,618
=============== ===============
</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>
39 Weeks Ended
October 22, October 24,
2000 1999
--------------- ---------------
<S> <C> <C>
Sales $ 2,084.4 $ 1,906.0
Cost of merchandise sold, including
occupancy costs 1,552.5 1,409.8
--------------- ---------------
Gross margin 531.9 496.2
Selling, general and administrative expenses 525.2 487.7
Pre-opening expense 4.7 5.6
Goodwill amortization 2.7 2.6
--------------- ---------------
Operating income (loss) (0.7) 0.3
Interest expense 11.6 13.8
--------------- ---------------
Loss before income tax (12.3) (13.5)
Income tax benefit (4.8) (5.3)
--------------- ---------------
Net loss $ (7.5) $ (8.2)
=============== ===============
Earnings per common share data --
Diluted loss per common share $ (0.10) $ (0.11)
=============== ===============
Diluted weighted average common shares
outstanding (in thousands) 78,307 77,613
=============== ===============
Basic loss per common share $ (0.10) $ (0.11)
=============== ===============
Basic weighted average common shares
outstanding (in thousands) 78,307 77,613
=============== ===============
</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>
October 22, October 24, January 23,
2000 1999 2000
------------ ----------- ------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash $ 56.4 $ 48.8 $ 41.6
Merchandise inventories 1,386.5 1,241.2 1,077.7
Accounts receivable and other current
assets 78.4 64.2 78.9
------------ ----------- ------------
Total Current Assets 1,521.3 1,354.2 1,198.2
Property and equipment, net of accumulated
depreciation of $456.8, $380.1 and
$395.4 at October 22, 2000, October 24,
1999 and January 23, 2000, respectively 566.4 532.7 558.2
Other assets and deferred charges 35.3 33.9 36.6
Goodwill, net of accumulated amortization
of $52.2, $48.6 and $49.5 at October 22,
2000, October 24, 1999 and January 23,
2000, respectively 110.2 122.1 121.8
------------ ----------- ------------
Total Assets $ 2,233.2 $ 2,042.9 $ 1,914.8
============ =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt and capital lease
obligations due within one year $ 386.7 $ 376.2 $ 136.1
Trade accounts payable 754.1 697.3 580.4
Accrued payroll and other liabilities 183.5 181.5 232.2
Taxes, including income taxes 30.0 18.0 79.2
------------ ----------- ------------
Total Current Liabilities 1,354.3 1,273.0 1,027.9
Long-term debt and capital lease
obligations 15.6 5.7 16.2
Other long-term liabilities 70.1 65.4 68.1
------------ ----------- ------------
Total Liabilities 1,440.0 1,344.1 1,112.2
------------ ----------- ------------
Stockholders' Equity:
Common stock: 300,000,000 shares
authorized; 78,501,289, 77,169,700,and
77,687,829 issued and outstanding at
October 22, 2000, October 24, 1999, and
January 23, 2000, respectively 684.0 675.2 679.6
Officers receivable and deferred
compensation (1.2) (4.7) (3.9)
Accumulated other comprehensive income (8.8) 0.1 0.2
Retained earnings 119.2 28.2 126.7
------------ ----------- ------------
Total Stockholders' Equity 793.2 698.8 802.6
------------ ----------- ------------
Total Liabilities & Stockholders'
Equity $ 2,233.2 $ 2,042.9 $ 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 39 WEEKS ENDED OCTOBER 22, 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 -- -- -- -- (7.5) (7.5)
Currency translation
adjustment -- -- -- (9.0) -- (9.0)
-------
Comprehensive loss (16.5)
Issuance of common
stock 1,290,063 11.6 -- -- -- 11.6
Repurchase and
retirement of common
stock (476,603) (7.2) -- -- -- (7.2)
Change in receivable
and Deferred compen-
sation -- -- 2.7 -- -- 2.7
---------- ------- ---------- ----------- -------- -------
Balance at October 22,
2000 78,501,289 $ 684.0 $ (1.2) $ (8.8) $ 119.2 $ 793.2
========== ======= ========== =========== ======== =======
</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>
39 Weeks Ended
October 22, October 24,
2000 1999
------------ -------------
<S> <C> <C>
Cash provided by (used for):
Operations
Net loss $ (7.5) $ (8.2)
Adjustments to reconcile net loss to operating
cash flows:
Depreciation and goodwill amortization 70.0 60.8
Change in other long-term assets and liabilities 4.9 2.8
Cash provided by (used for) current assets and
current liabilities:
Increase in inventories (314.9) (218.6)
Increase in accounts payable 176.4 90.0
Decrease in accrued liabilities (47.2) (38.1)
Decrease in taxes payable (49.8) (7.8)
Other, net -- 7.2
------------ -------------
Net cash used for operations (168.1) (111.9)
Investing
Capital expenditures (86.0) (96.2)
Acquisitions, net of cash acquired -- (16.5)
------------ -------------
Net cash used for investing (86.0) (112.7)
Financing
Net funding from credit facility 263.8 242.1
Issuance of common stock 11.6 9.3
Repurchase of common stock (7.2) (21.4)
Other, net 0.9 0.6
------------ -------------
Net cash provided by financing 269.1 230.6
Effect of exchange rates on cash and equivalents (0.2) --
------------ -------------
Net increase in cash and equivalents 14.8 6.0
Cash and equivalents at beginning of year 41.6 42.8
------------ -------------
Cash and equivalents at end of period $ 56.4 $ 48.8
============ =============
</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 October 22, 2000, the Company operated 337
superstores under the Borders name, including nine in the United Kingdom, two
in Australia, and one each in Singapore and New Zealand. The Company also
operated 890 mall-based and other bookstores primarily under the Waldenbooks
name, and 31 bookstores under the Books etc. name in the United Kingdom. The
Company, through its subsidiary Borders Online, Inc., is also an online
retailer of books, music and video through the operation of its Internet
commerce site, Borders.com.
Unexercised employee stock options to purchase 15.7 million common shares
as of October 22, 2000 were not included in the weighted average shares
outstanding calculation for the 13 and 39 weeks ended October 22, 2000 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. 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 plaintiffs have
provided a report estimating damages against the Company, exclusive of
interest, as follows: (i) between an aggregate of approximately $2.8 and
approximately $3.3 (before trebling) with respect to the Robinson-Patman Act
claims of the 26 independent bookseller plaintiffs, and (ii) between an
aggregate of approximately $5.5 and approximately $9.5 with respect to the
disgorgement claims under California law for the geographic areas of the
California plaintiffs. The Company's pleadings in the action deny any
liability to plaintiffs, and the Company disputes plaintiffs' claims of
damages. On November 16, the court granted the motion of the Company and
Barnes & Noble to dismiss the disgorgement claims brought by the ABA under
California law on behalf of independent booksellers in the state of California
who are not named in the litigation. The trial is scheduled for April 9,
2001. The Company intends to vigorously defend the action.
<PAGE>
In August 1998, The Intimate Bookshop, Inc. (cIntimate") 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, Marissa Everett and Terry Blagsvedt,
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.
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. An Amended Complaint has been filed by four
named plaintiffs, individually and on behalf of a purported class consisting
of all current and former employees who worked as assistant managers in
Borders stores in the State of California at any time between April 10, 1996
and the present. The Amended Complaint alleges that the individual plaintiffs
and the purported class members worked hours for which they were entitled to
receive, but did not receive, overtime compensation under California law, and
that they were classified as "exempt" store management employees but were
forced to work more than 50% of their time in non-exempt tasks. The Amended
Complaint alleges violations of the California Labor Code and the California
Business and Professions Code. The relief sought includes compensatory and
punitive damages, penalties, preliminary and permanent injunctions requiring
Borders to pay overtime compensation as required under California and Federal
law, prejudgment interest, costs and attorneys fees and such other relief as
the court deems proper. The Company intends to vigorously defend the action,
including again contesting the certification of the action as a class 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.
<PAGE>
On October 10, 2000, Edward Michael O'Brien and Saviorg Corporation, as pro
se litigants, instituted an action in the United States District Court for the
Central District of California against Time Warner, Inc. ("Time Warner"),
Warner Music Group ("Warner Music"), Warner-Electra-Atlantic Corporation
("Warner-Electra"), Warner Bros. Records, Inc. ("Warner Bros."), Atlantic
Recording Corp. ("Atlantic"), Elektra Entertainment Group, Inc. ("Elektra
Entertainment"), Rhino Entertainment Company ("Rhino"), Wal-Mart Stores, Inc.
("Wal-Mart"), K-Mart Corporation ("K-Mart"), the Company and Morning Glory
Music ("Morning Glory"). The Complaint, which contains allegations similar to
those made in the Markowitz action described in the Company's Form 10-Q Report
for the quarter ended April 23, 2000, alleges that Warner Music,
Warner-Electra, Warner Bros., Atlantic, Elektra Entertainment, Rhino,
Wal-Mart, the Company and Morning Glory conspired with defendant Time Warner
to implement and maintain Time Warner's minimum advertised pricing policies,
and that those agreements were in restraint of trade and illegally fixed,
raised, maintained and/or stabilized, at artificial noncompetitive levels,
prices for prerecorded music products, including compact disks, cassettes and
albums. The Complaint asserts that as a result of these alleged agreements,
plaintiffs "and other consumers" were overcharged by defendants for the
prerecorded music products they purchased. The Complaint further alleges that
the purported agreements constituted illegal monopoly power, illegal tying and
price-fixing and violated Sections 1 and 2 of the Sherman Antitrust Act,
Section 3 of the Clayton Act and certain sections of the California Business
and Professions Code. Plaintiffs seek treble damages, attorneys' fees, costs
and disbursements and such further relief as the court may deem just and
proper. The Company 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.
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 (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 $385.3 as of October 22,
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 $173.5 outstanding under the Lease Facility as of October 22,
2000 and $162.9 as of January 23, 2000. During October, 2000, temporary
financing was provided for four of the properties previously financed under the
Lease Facility, totaling approximately $13.8, in order to provide capacity under
the Lease Facility. The temporary financing facility expires on January 25,
2000, with options to extend the term for up to an additional 90 days with the
consent of the lender. The Company's intent is to obtain permanent financing
prior to the expiration of the temporary facility for properties having a value
<PAGE>
of at least $13.8. If such permanent financing is not obtained, the Company
would be obligated under the applicable leases and lease guaranties to purchase
the properties for an amount equal to the payments required to repay the amount
of the temporary financing plus 12% of the original cost of the properties.
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 39 Weeks Ended
October 22, October 24, October 22, October 24,
2000 1999 2000 1999
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Sales:
Borders $ 460.2 $ 414.1 $ 1,369.5 $ 1,211.7
Walden 188.1 198.9 560.9 573.6
International 48.2 39.2 136.3 110.1
---------- ---------- ---------- ----------
Total stores 696.5 652.2 2,066.7 1,895.4
Borders.com 7.3 4.1 17.7 10.6
---------- ---------- ---------- ----------
$ 703.8 $ 656.3 $ 2,084.4 $ 1,906.0
========== ========== ========== ==========
Net income (loss):
Borders $ 6.5 $ 6.6 $ 25.0 $ 16.4
Walden (1.2) 0.8 (2.8) 4.2
International (4.0) (2.7) (11.4) (8.0)
Other (1.6) (2.3) (4.8) (9.2)
---------- ---------- ---------- ----------
Total stores (0.3) 2.4 6.0 3.4
Borders.com (4.7) (3.9) (13.5) (11.6)
---------- ---------- ---------- ----------
$ (5.0) $ (1.5) $ (7.5) $ (8.2)
========== ========== ========== ==========
<CAPTION>
October 22, October 24,
2000 1999
----------- -----------
<S> <C> <C>
Total assets:
Borders $ 1,318.1 $ 1,166.1
Walden 566.0 561.1
International 204.3 190.5
Other 84.6 72.8
---------- ----------
Total stores 2,173.0 1,990.5
Borders.com 60.2 52.4
---------- ----------
$ 2,233.2 $ 2,042.9
========== ==========
</TABLE>
<PAGE>
NOTE 5 - NEW ACCOUNTING GUIDANCE
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133),
which the Company is required to adopt effective January 29, 2001. Changes in
derivative fair values will either be recognized in earnings as offsets to the
changes in the fair value of related hedged assets, liabilities and firm
commitments or, for forecasted transactions, deferred and recorded as a
component of other stockholders' equity until the hedged transactions occur
and are recognized in earnings. The ineffective portion of a hedging
derivative's change in fair value will be immediately recognized in earnings.
The Company has reviewed the impact of adopting FAS 133 on its current
derivatives expected to be outstanding as of the January 29, 2001 adoption
date, and does not believe the effect of adopting FAS 133 will be material to
its financial position or results of operations.
<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 October 22, 2000,
the Company operated 337 superstores under the Borders name, including nine in
the United Kingdom, two in Australia, and one each in Singapore and New
Zealand. The Company also operated 890 mall-based and other bookstores
primarily under the Waldenbooks name, and 31 bookstores under the Books etc.
name in the United Kingdom. The Company, through its subsidiary Borders
Online, Inc., is also an online retailer of books, music and video through the
operation of its Internet commerce site, Borders.com.
The Company's third quarters of 2000 and 1999 consisted of the 13 weeks
ended October 22, 2000 and October 24, 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 39 weeks ended
October 24, 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 39 Weeks Ended
October October October October
22, 24, 22, 24,
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 74.9 73.7 74.5 74.0
--------- --------- --------- ---------
Gross margin 25.1 26.3 25.5 26.0
Selling, general and administrative
expenses 25.1 25.5 25.2 25.3
Pre-opening expense 0.4 0.3 0.2 0.3
Goodwill amortization 0.1 0.1 0.1 0.1
--------- --------- --------- ---------
Operating income (loss) (0.5) 0.4 0.0 0.3
Interest expense 0.7 0.8 0.6 0.7
--------- --------- --------- ---------
Loss before income taxes (1.2) (0.4) (0.6) (0.4)
Income tax benefit (0.5) (0.2) (0.2) (0.2)
--------- --------- --------- ---------
Net loss (0.7)% (0.2)% (0.4)% (0.2)%
========= ========= ========= =========
</TABLE>
<PAGE>
Store Activity
The Company's store activity is summarized below:
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended Year
Ended
October October October October January
22, 24, 22, 24, 23,
2000 1999 2000 1999 2000
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Borders Superstores
Beginning number of
stores 319 274 300 250 250
Openings 18 14 37 38 50
--------- --------- --------- --------- -----------
Ending number of stores 337 288 337 288 300
========= ========= ========= ========= ===========
Walden Mall Bookstores
Beginning number of
stores 891 888 904 900 900
Openings 3 8 8 24 39
Closings (4) (2) (22) (30) (35)
--------- --------- --------- --------- -----------
Ending number of stores 890 894 890 894 904
========= ========= ========= ========= ===========
</TABLE>
13 Weeks Ended October 22, 2000 and October 24, 1999
Store sales in the third quarter of 2000 were $696.5 million, a $44.3
million, or 6.8%, increase over third quarter 1999 sales of $652.2 million.
Borders domestic superstore sales increased $46.1 million, or 11.1%, due
primarily to new store openings and a 1.3% comparable store sales increase
during the quarter. Walden sales decreased $10.8 million due to the lower
number of stores, a comparable store sales decrease of 5.4%, and $2.5 million
lower sales at All Wound Up. The percentage change in comparable store sales
in the third quarter of 2000 was negatively impacted by approximately 1.8% at
Borders and 4.2% at Walden as a result of the unusually high level of prior
year sales of Pokemon product. International sales of $48.2 million increased
23.0% over 1999 sales of $39.2 million, reflecting primarily new store
openings. Borders.com sales increased 78.0% to $7.3 million versus $4.1
million for the same period last year.
Gross margin as a percentage of sales declined to 25.1% in the third
quarter of 2000 from 26.3% in the third quarter of 1999. As a percentage of
sales, the decrease in gross margin was caused primarily by 0.5% from reduced
leverage of occupancy costs, 0.2% from increased promotional activity at
Walden in the third quarter as compared to the prior year, 0.2% from the All
Wound Up business and 0.2% from a shrinkage adjustment at Borders.
As a percentage of sales, SG&A expense improved to 25.1% in the third
quarter of 2000, compared to 25.5% for the same period last year. The
improvement in SG&A as a percent of sales resulted from strong control of
expenses in all segments of the business, particularly payroll expense in the
Borders and Walden stores.
Pre-opening expense in the third quarter of 2000 was $2.3 million versus
$2.0 million from the same period in 1999. Pre-opening expense consists
<PAGE>
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 18 Borders superstores and 3 Walden stores in the third quarter
of 2000 as compared to 14 Borders superstores and 8 Walden stores in the third
quarter of 1999.
Goodwill amortization was $0.9 million in the third quarter of 2000
compared to $1.0 million for the same period in 1999.
Interest expense was $4.8 million in the third quarter of 2000 as compared
to $5.1 million in 1999. The decrease of $0.3 million is primarily due to
lower debt levels during the quarter versus a year ago.
Income tax benefit in the third quarter of 2000 was $3.2 million versus
$1.0 million in 1999, reflecting an effective tax rate of 38.8% in 2000 versus
39.1% in 1999.
The Company's consolidated net loss was $5.0 million in the third quarter
of 2000 compared to a net loss of $1.5 million in the third quarter of 1999.
The net loss incurred by All Wound Up in the third quarter of 2000 was $2.4
million compared to a net loss of $2.1 million in the third quarter of 1999.
39 Weeks Ended October 22, 2000 and October 24, 1999
Store sales in the 39 weeks ended October 22, 2000 were $2,066.7 million, a
$171.3 million, or 9.0%, increase over sales of $1,895.4 million a year ago.
Borders domestic superstore sales increased $157.8 million, or 13.0%, due
primarily to new store openings and a 2.3% comparable store sales increase
during the period. Walden sales decreased $12.7 million due primarily to a
comparable store sales decrease of 2.8%. International sales of $136.3 million
increased 23.8% over 1999 sales of $110.1 million, reflecting primarily new
store openings. Borders.com sales increased 67.0% to $17.7 million versus $10.6
million for the same period last year.
Gross margin as a percentage of sales was 25.5% for the 39 weeks ended
October 22, 2000 versus 26.0% for the same period of 1999. The decrease
primarily reflects the loss of leverage on occupancy costs due to lower sales
for Walden and increased promotional activity at Walden in the third quarter
of 2000.
As a percentage of sales, SG&A expense (excluding one-time charge) was
25.2% for the 39 weeks ended October 22, 2000 versus 25.3% for the same period
a year ago.
Pre-opening expense for the 39 weeks ended October 22, 2000 was $4.7
million versus $5.6 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 37 Borders superstores and 8 Walden stores in
the 39 weeks ended October 22, 2000 as compared to 38 Borders superstores and
24 Walden stores in the 39 weeks ended October 24, 1999.
Goodwill amortization was $2.7 million for the 39 weeks ended October 22,
2000 versus $2.6 million for the same period last year.
Interest expense was $11.6 million for the 39 weeks ended October 22, 2000
as compared to $13.8 million in 1999. The decrease of $2.2 million is
primarily due to lower debt levels during the period versus a year ago.
Income tax benefit for the 39 weeks ended October 22, 2000 was $4.8 million
versus $3.2 million in 1999 (excluding $2.1 million for a one-time charge
related to the departure of a former executive), reflecting an effective tax
rate of 38.8% in 2000 versus 39.1% in 1999.
<PAGE>
The Company's year-to-date consolidated net loss was $7.5 million in 2000
compared to a net loss of $4.8 million in 1999 (excluding a one-time charge
incurred in 1999 related to an executive departure). The net loss incurred by
All Wound Up in 2000 was $5.7 million compared to a net loss of $3.4 million
in 1999. All Wound Up has performed below expectations in the current year.
All Wound Up is a highly seasonal business and the fourth quarter is vitally
important. The Company will evaluate the future of this business after
assessing its performance in the holiday season.
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 39 weeks ended October 22, 2000 was
$168.1 million as compared to $111.9 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 net of
accounts payable, tax payments and payment of accrued liabilities during the
period.
Net cash used for investing for the first 39 weeks of 2000 was $86.0
million as compared to $112.7 million in the first 39 weeks of 1999, and
primarily represents capital expenditures for new stores. Excluding $16.5
million for the acquisition of All Wound Up in 1999, the reduction in net cash
used for investing was primarily caused by a lower amount of capital
expenditures as a result of fewer store openings through the first 39 weeks of
2000 as compared to the same period in 1999.
Net cash provided by financing in the first 39 weeks of 2000 was $269.1
million versus $230.6 million in the first 39 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 $385.3 as of October 22, 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.
<PAGE>
There were 44 and 41 properties financed through the Lease Facility, with a
financed value of $173.5 million and $162.9 million, as of October 22, 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.
During October 2000, temporary financing was provided for four of the
properties previously financed under the Lease Facility, totaling approximately
$13.8 million, in order to provide capacity under the Lease Facility. The
temporary financing facility expires on January 25, 2000, with options to extend
the term for up to an additional 90 days with the consent of the lender. The
Company's intent is to obtain permanent financing prior to the expiration of the
temporary facility for properties having a value of at least $13.8 million. If
such permanent financing is not obtained, the Company would be obligated under
the applicable leases and lease guaranties to purchase the properties for an
amount equal to the payments required to repay the amount of the temporary
financing plus 12% of the original cost of the properties.
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 $65.8 million of its
common stock as of October 22, 2000. During the 39 weeks ended October 22,
2000, the Company repurchased $7.2 million of its common stock.
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 quarterly reports 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
significant developments in these matters since the filing of the Company's
Form 10-Q Report for the quarter ended July 23, 2000, except as follows:
The plaintiffs in the litigation instituted by the American
Booksellers Association (ABA) and 26 independent bookstores in the
United States District Court for the Northern District of California
against the Company and Barnes & Noble, have provided a report
estimating damages against the Company, exclusive of interest, as
follows: (i) between an aggregate of approximately $2.8 and
approximately $3.3 million (before trebling) with respect to the
Robinson-Patman Act claims of the 26 independent bookseller
plaintiffs, and (ii) between an aggregate of approximately $5.5
million and approximately $9.5 million with respect to the
disgorgement claims under California law for the geographic areas of
the California plaintiffs. The Company's pleadings in the action
deny any liability to plaintiffs, and the Company disputes
plaintiffs' claims of damages. On November 16, the court granted the
motion of the Company and Barnes & Noble to dismiss the disgorgement
claims brought by the ABA under California law on behalf of
independent booksellers in the state of California who are not named
in the litigation.
An Amended Complaint has been filed in the action relating to
overtime pay initially brought by two former employees, Marissa
Everett and Terry Blagsvedt, in the Superior Court of California. The
Amended Complaint was filed by four named plaintiffs, individually
and on behalf of a purported class consisting of all current and
former employees who worked as assistant managers in Borders stores
in the State of California at any time between April 10, 1996 and the
present. The Amended Complaint alleges that the individual
plaintiffs and the purported class members worked hours for which
they were entitled to receive, but did not receive, overtime
compensation under California law, and that they were classified as
"exempt" store management employees but were forced to work more than
50% of their time in non-exempt tasks. The Amended Complaint alleges
violations of the California Labor Code and the California Business
and Professions Code. The relief sought includes compensatory and
punitive damages, penalties, preliminary and permanent injunctions
requiring Borders to pay overtime compensation as required under
California and Federal law, prejudgment interest, costs and attorneys
fees and such other relief as the court deems proper. The Company
intends to vigorously defend the action, including again contesting
the certification of the action as a class action.
On October 10, 2000, Edward Michael O'Brien and Saviorg Corporation,
as pro se litigants, instituted an action in the United States
District Court for the Central District of California against Time
Warner, Inc. ("Time Warner"), Warner Music Group ("Warner Music"),
Warner-Electra-Atlantic Corporation ("Warner-Electra"), Warner Bros.
Records, Inc. ("Warner Bros."), Atlantic Recording Corp.
("Atlantic"), Elektra Entertainment Group, Inc. ("Elektra
Entertainment"), Rhino Entertainment Company ("Rhino"), Wal-Mart
Stores, Inc. ("Wal-Mart"), K-Mart Corporation ("K-Mart"), the Company
and Morning Glory Music ("Morning Glory"). The Complaint, which
contains allegations similar to those made in the Markowitz action
described in the Company's Form 10-Q Report for the quarter ended
April 23, 2000, alleges that Warner Music, Warner-Electra, Warner
Bros., Atlantic, Elektra Entertainment, Rhino, Wal-Mart, the Company
and Morning Glory conspired with defendant Time Warner to implement
and maintain Time Warner's minimum advertised pricing policies, and
that those agreements were in restraint of trade and illegally fixed,
raised, maintained and/or stabilized, at artificial noncompetitive
levels, prices for prerecorded music products, including compact
<PAGE>
disks, cassettes and albums. The Complaint asserts that as a result
of these alleged agreements, plaintiffs "and other consumers" were
overcharged by defendants for the prerecorded music products they
purchased. The Complaint further alleges that the purported
agreements constituted illegal monopoly power, illegal tying and
price-fixing and violated Sections 1 and 2 of the Sherman Antitrust
Act, Section 3 of the Clayton Act and certain sections of the
California Business and Professions Code. Plaintiffs seek treble
damages, attorneys' fees, costs and disbursements and such further
relief as the court may deem just and proper. The Company denies the
allegations of wrongdoing and intends to vigorously defend this
litigation.
In addition to the matters described above, the Company is from time to time
involved in or affected by other litigation incidental to the conduct of its
businesses. The Company does not believe that any such other litigation will
have a material adverse effect on its liquidity, financial position or results
of operations.
ITEM 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 October 22, 2000, one report was filed
on Form 8-K under Item 5 - Other Events. This report stated that the
Company had appointed a new auditing firm.
<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: December 5, 2000 By: /s/
---------------------------
Edward W. Wilhelm
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
