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 April 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
-------------- May 19, 2000
Common Stock ------------
78,377,611
<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 9
Item 3. Quantitative and Qualitative Disclosures about
Market Risk N/A
Part II - Other information
Item 1. Legal Proceedings 13
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 14
Signatures 15
<PAGE>
<TABLE>
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions except common share data)
(Unaudited)
<CAPTION>
13 Weeks Ended
April 23, April 25,
2000 1999
--------------- ---------------
<S> <C> <C>
Sales $ 680.9 $ 618.7
Cost of merchandise sold, including
occupancy costs 505.4 457.2
--------------- ---------------
Gross margin 175.5 161.5
Selling, general and administrative
expenses 172.1 162.0
Pre-opening expense 1.2 1.4
Goodwill amortization 0.9 0.7
--------------- ---------------
Operating income (loss) 1.3 (2.6)
Interest expense 2.8 4.1
--------------- ---------------
Loss before income tax (1.5) (6.7)
Income tax benefit (0.6) (2.6)
--------------- ---------------
Net loss $ (0.9) $ (4.1)
=============== ===============
Earnings per common share data --
Diluted loss per common share $ (0.01) $ (0.05)
=============== ===============
Diluted weighted average common shares
outstanding (in thousands) 80,158 80,317
=============== ===============
Basic loss per common share $ (0.01) $ (0.05)
=============== ===============
Basic weighted average common shares
outstanding (in thousands) 77,961 77,345
=============== ===============
</TABLE>
<PAGE>
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
<TABLE>
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions except per common share data)
(Unaudited)
<CAPTION>
April 23, April 25, January 23,
2000 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash $ 74.7 $ 49.0 $ 41.6
Merchandise inventories 1,105.9 1,032.9 1,077.7
Accounts receivable and other current
assets 64.5 70.6 78.9
---------- ---------- ----------
Total Current Assets 1,245.1 1,152.5 1,198.2
Property and equipment, net of
accumulated depreciation of $413.9,
$348.9 and $395.4 at April 23, 2000,
April 25, 1999 and January 23, 2000,
respectively 548.1 490.6 558.2
Other assets and deferred charges 35.9 33.6 36.6
Goodwill, net of accumulated amortization
of $50.4, $46.7 and $49.5 at April 23,
2000, April 25, 1999 and January 23,
2000, respectively 116.7 122.3 121.8
---------- ---------- ----------
Total Assets $ 1,945.8 $ 1,799.0 $ 1,914.8
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt and capital lease
obligations due within one year $ 291.9 $ 344.6 $ 136.1
Trade accounts payable 537.0 474.5 580.4
Accrued payroll and other liabilities 191.1 180.8 232.2
Taxes, including income taxes 36.1 17.0 79.2
---------- ---------- ----------
Total Current Liabilities 1,056.1 1,016.9 1,027.9
Long-term debt and capital lease
obligations 15.9 7.0 16.2
Other long-term liabilities 67.6 63.0 68.1
---------- ---------- ----------
Total Liabilities 1,139.6 1,086.9 1,112.2
---------- ---------- ----------
Stockholders' Equity:
Common stock; 300,000,000 shares
authorized; 78,172,779, 77,437,259 and
77,687,829 issued and outstanding at
April 23, 2000, April 25, 1999, and
January 23, 2000, respectively 684.9 687.2 679.6
Officers receivable and deferred
compensation (1.3) (6.9) (3.9)
Accumulated other comprehensive income (3.2) (0.5) 0.2
Retained earnings 125.8 32.3 126.7
---------- ---------- ----------
Total Stockholders' Equity 806.2 712.1 802.6
---------- ---------- ----------
Total Liabilities & Stockholders'
Equity $ 1,945.8 $ 1,799.0 $ 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 13 WEEKS ENDED APRIL 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 -- -- -- -- (0.9) (0.9)
Currency translation
adjustment -- -- -- (3.4) -- (3.4)
--------
Comprehensive income (4.3)
Issuance of common
stock 492,849 5.4 -- -- -- 5.4
Repurchase and retirement
of common stock (7,899) (0.1) -- -- -- (0.1)
Change in receivable and
deferred compensation -- -- 2.6 -- -- 2.6
---------- -------- ------------ -------------- -------- ---------
Balance at April 23, 2000 78,172,779 $ 684.9 $ (1.3) $ (3.2) $ 125.8 $ 806.2
========== ======== ============ ============== ======== =========
</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>
13 Weeks Ended
April 23, April 25,
2000 1999
------------ -------------
<S> <C> <C>
Cash provided by (used for):
Operations
Net loss $ (0.9) $ (4.1)
Adjustments to reconcile net loss to operating
cash flows:
Depreciation and goodwill amortization 23.0 20.6
Change in other long-term assets and liabilities 1.2 2.0
Cash provided by (used for) current assets and
current liabilities:
Increase in inventories (30.2) (10.3)
Decrease in accounts payable (42.5) (132.8)
Decrease in accrued liabilities (40.3) (41.0)
Decrease in taxes payable (43.3) (8.8)
Other, net 14.1 0.8
------------ -------------
Net cash used for operations (118.9) (173.6)
Investing
Capital expenditures (15.6) (15.5)
Acquisitions, net of cash acquired -- (16.5)
------------ -------------
Net cash used for investing (15.6) (32.0)
Financing
Net funding from credit facility 160.1 210.5
Issuance of common stock 5.4 5.6
Repurchase of common stock (0.1) (5.7)
Other, net 1.9 1.4
------------ -------------
Net cash provided by financing 167.3 211.8
Effect of exchange rates on cash and equivalents 0.3 --
------------ -------------
Net increase in cash and equivalents 33.1 6.2
Cash and equivalents at beginning of year 41.6 42.8
------------ -------------
Cash and equivalents at end of period $ 74.7 $ 49.0
============ =============
</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 April 23, 2000, the Company operated 309 superstores
under the Borders name, including eight in the United Kingdom, and one each in
Singapore, Australia and New Zealand. The Company also operated 887 mall-based
and other bookstores primarily under the Waldenbooks name, and 28 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.
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. 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
$289.6 as of April 23, 2000 and $133.4 as of January 23, 2000.
Seasonal Facility: The Company has a $25.0 multicurrency seasonal revolving
credit facility (the Seasonal Facility) which expires in July, 2000. Borrowings
under the Seasonal Facility bear interest at a base rate or an increment over
LIBOR at the Company's option. The Seasonal Facility contains covenants and
events of default that are similar to those contained in the Credit Facility
described above. The Company had no borrowings outstanding under the Seasonal
Facility as of April 23, 2000 and 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 $165.9 outstanding under the Lease Facility as of April 23,
2000 and $162.9 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.
13 Weeks Ended
April 23, April 25,
2000 1999
---------- ----------
Sales:
Borders $ 447.0 $ 392.0
Walden 185.3 188.5
International 43.3 35.0
---------- ----------
Total stores 675.6 615.5
Borders.com 5.3 3.2
---------- ----------
$ 680.9 $ 618.7
========== ==========
Net income (loss):
Borders $ 8.3 $ 5.1
Walden (0.3) 3.1
International (3.5) (2.4)
Other (0.8) (5.6)
---------- ----------
Total stores 3.7 0.2
Borders.com (4.6) (4.3)
---------- ----------
$ (0.9) $ (4.1)
========== ==========
April 23, April 25,
2000 1999
---------- ----------
Total assets:
Borders $1,158.6 $1,062.5
Walden 426.6 441.6
International 200.5 164.0
Other 104.1 80.6
---------- ----------
Total stores 1,889.8 1,748.7
Borders.com 56.0 50.3
---------- ----------
$1,945.8 $1,799.0
========== ==========
<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 April 23, 2000, the
Company operated 309 superstores under the Borders name, including eight in the
United Kingdom, and one each in Singapore, Australia and New Zealand. The
Company also operated 887 mall-based and other bookstores primarily under the
Waldenbooks name, and 28 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 first quarters of 2000 and 1999 consisted of the 13 weeks
ended April 23, 2000 and April 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 13 weeks ended
April 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
April 23, April 25,
2000 1999
--------- ---------
<S> <C> <C>
Sales 100.0% 100.0%
Cost of merchandise sold, including
occupancy costs 74.2 73.9
--------- ---------
Gross margin 25.8 26.1
Selling, general and administrative
expenses 25.3 25.3
Pre-opening expense 0.2 0.2
Goodwill amortization 0.1 0.1
--------- ---------
Operating income 0.2 0.5
Interest expense 0.4 0.7
--------- ---------
Loss before income taxes (0.2) (0.2)
Income tax benefit (0.1) (0.1)
========== =========
Net loss (0.1)% (0.1)%
========== =========
</TABLE>
<PAGE>
Store Activity
The Company's store activity is summarized below:
<TABLE>
<CAPTION>
Year
13 Weeks Ended Ended
April 23, April 25, January 23,
2000 1999 2000
--------- --------- ----------
<S> <C> <C> <C>
BORDERS SUPERSTORES
Beginning number of
stores 300 250 250
Openings 9 12 50
--------- --------- ----------
Ending number of stores 309 262 300
========= ========= ==========
WALDEN MALL BOOKSTORES
Beginning number of
stores 904 900 900
Openings -- 8 39
Closings (17) (22) (35)
--------- --------- ----------
Ending number of stores 887 886 904
========= ========= ==========
</TABLE>
13 Weeks Ended April 23, 2000 and April 25, 1999
Store sales in the first quarter of 2000 were $675.6 million, a $60.1
million, or 9.8%, increase over first quarter 1999 sales of $615.5 million.
Borders domestic superstore sales increased $55.0 million, or 14.0%, due
primarily to new store openings. Borders comparable store sales increased 2.3%
during the quarter. Walden sales decreased $3.2 million due to the fewer number
of stores and a comparable store sales decrease of 3.0%. Borders.com sales
increased 65.6% to $5.3 million versus $3.2 million for the same period last
year.
Gross margin as a percentage of sales was 25.8% in 2000 versus 26.1% in the
first quarter 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
25.3% in the first quarter of 2000 and 1999.
Pre-opening expense in the first quarter of 2000 was $1.2 million versus
$1.4 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 9 Borders superstores and did not open any Walden stores in the
first quarter of 2000 as compared to 12 Borders superstores and 8 Walden stores
in the first quarter of 1999.
Goodwill amortization was $0.9 million in the first quarter of 2000 versus
$0.7 million from the first quarter of 1999. The increase in goodwill
amortization is due to the acquisition of All Wound Up.
<PAGE>
Interest expense was $2.8 million in the first quarter of 2000 as compared
to $4.1 million in 1999. The decrease of $1.3 million is primarily due to lower
debt levels during the quarter versus a year ago.
Income tax benefit in the first quarter of 2000 was $0.6 million versus
$0.5 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.
Net cash used for operations for the 13 weeks ended April 23, 2000 was
$118.9 million as compared to $173.6 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 13 weeks of 2000 was $15.6
million as compared to $32.0 million in the first 13 weeks of 1999, and
primarily represents capital expenditures for new stores.
Net cash provided by financing in the first 13 weeks of 2000 was $167.3
million versus $211.8 million in the first 13 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.
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 $289.6 as of April 23, 2000 and $133.4
as of January 23, 2000.
The Company has a $25.0 multicurrency seasonal revolving credit facility
(the Seasonal Facility) which expires in July, 2000. Borrowings under the
Seasonal Facility bear interest at a base rate or an increment over LIBOR at the
Company's option. The Seasonal Facility contains covenants and events of default
that are similar to those contained in the Credit Facility described above. The
Company had no borrowings outstanding under the Seasonal Facility as of April
23, 2000 and 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 42 and 41 properties financed through the Lease Facility, with a
financed value of $165.9 and $162.9 million, as of April 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.
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 April 23, 2000. During the 13 weeks ended April 23, 2000, the
Company repurchased $0.1 million of its common stock.
OTHER MATTERS
STRATEGIC ALTERNATIVES
During the first quarter, the Board of Directors authorized the Company to
explore strategic alternatives in order to increase shareholder value. These
alternatives could include a recapitalization, a leveraged buyout, or a business
combination with another company; however, there is no assurance that any
transaction will occur.
YEAR 2000 ISSUE
The Company has experienced no significant disruptions to operations of
business systems to date as a result of the transition form 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 describes three 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.
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.
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.
<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 April 23, 2000, one report was filed on
Form 8-K under Item 5 - Other Events. This report stated the Company had
retained the investment banking firm of Merrill Lynch & Co., Inc. for the
purpose of exploring strategic options for the Company. This report was
dated and filed on March 3, 2000.
<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: June 7, 2000 By: /s/
--------------------
Kenneth E. Scheve
Senior Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
