================================================================= BORDERS GROUP BANKRUPTCY NEWS Issue Number 2 ----------------------------------------------------------------- Copyright 2011 (ISSN XXXX-XXXX) February 18, 2011 ----------------------------------------------------------------- Bankruptcy Creditors' Service, Inc. 215-945-7000 FAX 215-945-7001 ----------------------------------------------------------------- BORDERS GROUP BANKRUPTCY NEWS is published by Bankruptcy Creditors' Service, Inc., 572 Fernwood Lane, Fairless Hills, Pennsylvania 19030, on an ad hoc basis (generally every 10 to 20 days) as significant activity occurs in the Debtors' cases. New issues are prepared by Michille Deiparine, Ivy B. Magdadaro and Peter A. Chapman, Editors. Subscription rate is US$45 per issue. Any re-mailing of BORDERS GROUP BANKRUPTCY NEWS is prohibited. ================================================================= IN THIS ISSUE ------------- [00012] BORDERS GETS COURT NOD TO LIQUIDATE 200+ STORES [00013] BORDERS STORE CLOSING SALES TO COMMENCE ON FEB. 19 [00014] BORDERS GETS INTERIM ACCESS TO $400-MIL. IN DIP FINANCING [00015] DEBTORS' MOTION TO OBTAIN $505-MIL. IN DIP FINANCING [00016] DEBTORS' MOTION FOR AUTHORITY TO USE CASH COLLATERAL [00017] DEBTORS' MOTION TO USE EXISTING CASH MANAGEMENT SYSTEM [00018] DEBTOR'S MOTION TO MAINTAIN EXISTING BANK ACCOUNTS [00019] DEBTORS' MOTION TO CONTINUE USING BUSINESS FORMS [00020] DEBTORS' MOTION TO CONTINUE USE OF CORPORATE CREDIT CARDS [00021] DEBTOR'S MOTION TO EXTEND TIME TO COMPLY WITH SEC. 345 [00022] DEBTOR'S MOTION TO CONTINUE INTERCOMPANY TRANSACTIONS [00023] DEBTORS' MOTION TO HONOR PREPETITION EMPLOYEE OBLIGATIONS [00024] DEBTORS' MOTION TO HONOR PREPETITION VENDOR OBLIGATIONS [00025] DEBTORS' MOTION TO HONOR PREPETITION CUSTOMER PROGRAMS [00026] DEBTORS' MOTION TO PAY PREPETITION TAXES [00027] BORDERS' BANKRUPTCY FILING TRIGGERS PAYMENT OBLIGATIONS [00028] BORDERS RECEIVES NOTICE OF STOCK DELISTING FROM NYSE [00029] BORDERS' BANKRUPTCY MAY THWART BILL ACKMAN'S MERGER PLANS [00030] MALL OWNERS SEEK TO APPEAR IN BORDERS' BANKRUPTCY CASE KEY DATE CALENDAR ----------------- 02/16/11 Voluntary Chapter 11 Petition Date 03/18/11 Deadline to Provide Utilities with Adequate Assurance 04/05/11 Deadline to File Schedules of Assets and Liabilities 04/05/11 Deadline to File Statement of Financial Affairs 04/05/11 Deadline to File Lists of Contracts and Leases 05/17/11 Deadline to Remove Actions Pursuant to F.R.B.P. 9027 06/16/11 Expiration of Debtors' Exclusive Plan Proposal Period 06/16/11 Deadline to Make Decisions About Lease Dispositions 08/15/11 Expiration of Debtors' Exclusive Solicitation Period 02/15/13 Deadline for Debtors' Commencement of Avoidance Actions Organizational Meeting to Form Creditors' Committees First Meeting of Creditors under 11 USC Sec. 341 Bar Date for filing Proofs of Claim ----------------------------------------------------------------- [00012] BORDERS GETS COURT NOD TO LIQUIDATE 200+ STORES ----------------------------------------------------------------- [00013] BORDERS STORE CLOSING SALES TO COMMENCE ON FEB. 19 ----------------------------------------------------------------- See prior related entry at [00007] (Borders Group to Close 200+ Stores Under Bankruptcy). Chief Judge Arthur Gonzalez of the U.S. Bankruptcy Court for the Southern District of New York has approved Borders Group Inc.'s previously-disclosed strategic Store Reduction Program to facilitate its reorganization and repositioning. Under the Program, the Company identified 200+ underperforming stores, which comprise 30% of its national store network, that are expected to close in the next several weeks. Borders said that it has entered into agreements with experienced liquidators to conduct an orderly wind down of the 200 underperforming stores that are part of the Reduction Program. Hilco Merchant Resources LLC, SB Capital Group, Tiger Capital Group LLC and Gordon Brothers Group won the bidding to handle the liquidation sales, Borders lawyer Adam Shiff of Kasowitz Benson Torres & Friedman LLP told Judge Arthur Gonzalez at a Feb. 17, 2011 hearing, Bloomberg News reports. Gordon and Hilco, which initially led competing groups, joined forces to make the winning bid after a nine-hour auction that drew 38 bids, according to Bloomberg. The four-member liquidator group combined forces to make a final bid of 85.75% of the value of the store inventory, Dow Jones Newswires notes in a separate report. The new deal translated to Borders getting about $25 million more for the inventories than the original Hilco group stalking horse bid, the news source relates. The store closing sales are expected to begin this Saturday, February 19, 2011, where the liquidators aim to take advantage of the President's Day holiday in the U.S. Borders expects the stores to be closed by the end of April. The Company has also retained DJM Realty, a Gordon Brothers Group Company, to manage the disposition project of approximately 200 underperforming stores. Borders said it will continue to remain fully operational and open for business as usual during this process. The engagement of DJM Realty is subject to bankruptcy court approval. The Company noted in a public statement that the 200 leases that are available for assignment its bankruptcy disposition range from 12,895 to 42,770 square feet and are available in the following locations: Alaska (1), Arkansas (1), Arizona (8), California (35), Colorado (6), Connecticut (6), District of Columbia (2), Florida (16), Georgia (5), Hawaii (2), Illinois (16), Indiana (6), Kansas (2), Kentucky (2), Louisiana (2), Massachusetts (6), Maryland (3), Michigan (4), Minnesota (4), Missouri (6), Montana (1), North Carolina (5), New Hampshire (1), New Jersey (4), New Mexico (2), Nevada (1), New York (9), Ohio (7), Oklahoma (2), Pennsylvania (9), Puerto Rico (2), Tennessee (1), Texas (10), Utah (2), Virginia (5), Washington (2) and Wisconsin (4). "Borders' real estate has begun to create interest among retailers, supermarkets and non-retailer users. The available portfolio offers a unique mix of mid and big box locations with long lease terms and strong retail co-tenants. Numerous properties are located in markets that are very difficult to enter, including northern and southern California, the cities of New York, Chicago, Dallas, Atlanta, Boston and their neighboring suburbs," said Andy Graiser, Co-President of DJM Realty, in press release. In related news, the Company disclosed in a regulatory filing with the U.S. Securities and Exchange Commission that it is unable to estimate the costs expected to be incurred in connection with its store reduction plan, including the amount of any future cash expenditures in connection with its plan. A full-text copy of the Borders Store Closing Sales Order and its accompanying exhibits is available for free at: http://bankrupt.com/misc/Borders_StoreClosingSaleORD.pdf ----------------------------------------------------------------- [00014] BORDERS GETS INTERIM ACCESS TO $400-MIL. IN DIP FINANCING ----------------------------------------------------------------- [00015] DEBTORS' MOTION TO OBTAIN $505-MIL. IN DIP FINANCING ----------------------------------------------------------------- Judge Arthur J. Gonzales of the U.S. Bankruptcy Court for the Southern District of New York has granted Borders Group, Inc. and its debtor affiliates interim access to approximately $400 million of a proposed $505 million debtor-in-possession financing facility led by GE Capital, Restructuring Finance. Borders Group Chief Executive Officer Mike Edwards stated in a public statement, "We are moving quickly right at the outset of the Chapter 11 process to restore stability to our business and protect our enterprise and its brand. We now have financing to pay our vendors and other related parties in a timely fashion for post-petition goods and services, with the funding and related court approvals to operate our business effectively on a day-to- day basis. We look forward to continuing to meet the needs of our customer base and being a preeminent and innovative retailer in this space." Debtors Borders Group Inc. and Borders Inc., as borrowers, are seeking final approval of a first lien new money superpriority priming credit facility with a maximum outstanding principal amount of up to $505 million from a syndicate of lenders. The $505 million DIP Facility consists of a "Working Capital Facility" and a "Term B Facility." A. The Working Capital Facility consists of: (1) a senior secured, superpriority revolving credit facility of up to $410 million; (2) a senior secured, superpriority "first in last out" term loan of up to $20 million; (3) a senior secured, superpriority term loan of up to $55 million; and (4) an additional letter of credit "cash management" facility of up to $20 million. The Revolving Credit Facility includes (i) a $75 million letter of credit subfacility, and (ii) a $50 million swingline subfacility, both to be provided by General Electric Capital Corporation. B. The Term B Facility is a senior secured superpriority term loan in a committed aggregate principal amount equal to the lesser of (i) $55,000,000, or (ii) the amount provided in the applicable DIP Order. All the other Debtors serve as guarantors of the proposed DIP Facility. General Electric Capital Corporation or GECC serves as the Working Capital Facility Administrative Agent. GA Capital LLC serves as the Term B Facility Administrative Agent. The Working Capital Lenders are comprised of a syndicate of banks and financial institutions, including GECC. The Term B Lenders include Tennenbaum Capital Partners, LLC, Stone Tower Credit Funding I Ltd., GB Merchant Partners, LLC and/or their affiliates, and other lenders. The DIP Financing will be used to (i) finance the working capital needs and for general corporate purposes of the Debtors, (ii) pay the fees, costs and expenses incurred by the Debtors in connection with the Chapter 11 cases, and (iii) refinance the Debtors' Prepetition Credit Facilities. The DIP Facility will mature on the earlier of: (i) one year after the closing date of the DIP Facility, (ii) the effective date of the Plan of Reorganization, or (iii) the date of the sale of all or substantially all of the Debtors' assets. Fees In exchange for providing the DIP Loan, the Debtors agree to pay the DIP Agents and DIP Lenders certain fees: * Facility Fee Letter: The Debtors have agreed to pay: (1) a $250,000 non-refundable annual administration fee to the Working Capital Agent, (2) a $7,500 non-refundable collateral monitoring fee to the Term B Agent, (3) a $2,250,000 non-refundable underwriting fee to the Working Capital Agent, (4) a $7,760,000 non-refundable closing fee to the Working Capital Lead Arranger for the benefit of the DIP Lenders, (5) a $250,000 work deposit fee to the Term B Agent, to be applied to the reimbursement of the Term B Agent's out-of- pocket fees and expenses. * Structuring Fee Letter: A $4.5 million structuring fee will be paid the Working Capital Agent on the Closing Date. * Term B Letter Agreement: The Debtors acknowledge that the Prepetition Term Lenders are entitled to a make-whole payment in the amount of $1,460,000. The Prepetition Term Lenders have agreed to waive that payment upon satisfaction of certain conditions, including (i) entry of a final order approving the payment of the fees set forth in the Facility Fee Letter, (ii) indefeasible payment by the Borrowers of all fees due under the Facility Fee Letter, and (iii) the expiration of the Challenge Period with no Challenge having been filed or commenced. The Debtors have provided or will provide copies of the confidential fee letters to the U.S. Trustee, to the Court, and to the professionals for any official creditors' committee appointed in their Chapter 11 cases. The Debtors seek that this side letter and its contents be kept confidential pursuant to Rule 9018 of the Federal Rules of Bankruptcy Procedure. Interest Rates At the Debtors' option, all outstanding principal balances under the DIP Facility will bear interest at either (a) a fluctuating rate equal to the Base Rate plus the Applicable Margin or (b) LIBOR plus the Applicable Margin. The Base Rate will be a floating rate defined as the highest of (a) the rate last quoted by The Wall Street Journal (or another national publication selected by the Agents) as the U.S. "Prime Rate," (b) the Federal Funds Rate plus 50 basis points. LIBOR will not be less than (a) 150 basis points in respect of the FILO Tranche, and (b) 100 basis points in respect of the Term B Loans. Upon the occurrence and during the continuance of an event of default in the DIP Credit Agreement, an additional default interest rate equal to 2% per annum applies to all outstanding borrowings under the DIP Credit Agreement. Collateral and Priority The obligations of the Debtors under the DIP Facility are secured by a lien covering substantially all of the assets, rights and properties of the Debtors, subject to certain exceptions. The DIP Credit Agreement provides that all DIP obligations will constitute administrative expenses in the Debtors' Chapter 11 bankruptcy cases, with administrative priority and senior secured status under Sections 364(c) and 364(d) of the Bankruptcy Code and, subject to certain exceptions, will have priority over any and all administrative expense claims, unsecured claims and costs and expenses in the Debtors' Chapter 11 cases. Except as set forth, the security interests securing the DIP Facility will be junior to all valid, enforceable, non-avoidable, perfected security interests in existence as of the Petition Date that are permitted under the Debtors' Prepetition Credit Facilities and senior to the Prepetition Facilities under applicable law as of the Petition Date and otherwise reasonably acceptable to DIP Agents. The superpriority administrative expense claims to be granted to the DIP Lenders with respect to the DIP Obligations will be subject to the "Carve-Out." Carve-Out The Carve-Out refers to: (i) all fees required to be paid to the Clerk of the Bankruptcy Court and to the Office of the U.S. Trustee pursuant to 28 U.S.C. Section 1930(a); (ii) upon a Termination Declaration Date, the sum of $4,000,000, which amount may be used subject to the terms of the applicable DIP Order to pay any fees or expenses of the bankruptcy professionals of the Debtors and any statutory committees appointed in the Debtors' cases; (iii) any accrued and unpaid fees and expenses of the Debtors' and the Committee's professionals incurred prior to the receipt of the Carve-Out Trigger Notice; and (iv) any professional fees and documented out-of-pocket expenses of a chapter 7 trustee under Section 726(b) of the Bankruptcy Code up to a maximum amount of $100,000 in the aggregate. Events of Default The DIP Credit Agreement provides for certain customary events of default, including events of default resulting from non-payment of principal, interest or other amounts when due, material breaches of the Debtors' representations and warranties, material breaches by the Debtors of their covenants in the DIP Credit Agreement or ancillary loan documents, cross-defaults under other agreements or instruments, the entry of material judgments against the Debtors, or the invalidity of the subordination provisions contained in the DIP Credit Agreement. The DIP Credit Agreement also includes events of default that may arise from the Debtors' failure to meet certain specified milestones in the Debtors' Chapter 11 cases, including milestones with respect to the Debtors' acceptance or rejection of real estate lease, the implementation of the Debtors' store reduction plan and minimum borrowing availability. Upon the occurrence of an event of default, the DIP Credit Agreement provides that all principal, interest and other amounts due will become immediately due and payable, either automatically or at the election of specified lenders. A full-text copy of the DIP Credit Agreement is available for free at http://bankrupt.com/misc/Borders_DIPCreditAgrmnt.pdf A full-text copy of the Interim DIP Order is available for free at http://bankrupt.com/misc/Borders_InterimDIPOrder.pdf Final Hearing The Court is scheduled to convene a hearing on the final approval of the Debtors' DIP Facility on March 15, 2011, at 10:00 a.m. Parties-in-interest have until March 8, 2011, at 4:00 p.m. Eastern Time, to written objections to the Debtors' request. The Debtors are directed to serve a final hearing notice -- to include a copy of the Interim DIP Order and the DIP Motion -- to notice parties no later than February 25, 2011. ----------------------------------------------------------------- [00016] DEBTORS' MOTION FOR AUTHORITY TO USE CASH COLLATERAL ----------------------------------------------------------------- See prior related entry at [00015] (Debtors' Motion to Obtain $505-Mil. in DIP Financing.) The Debtors have sought and obtained a Court order allowing them to use of their Cash Collateral on an interim basis, in accordance with a prepared budget. A copy of the Budget prepared by the Debtors in relation to their Cash Collateral Use covering the period from February 14 to June 4, 2011, is available for free at: http://bankrupt.com/misc/Borders_BdgetFeb14toJun4.pdf The Debtors assert that they require the use of the Cash Collateral to fund their day-to-day operations. The Debtors aver that absence access to the Cash Collateral could bring their businesses to an immediate halt, with damaging consequences for their estates and creditors. The Cash Collateral refers to cash owned by the Debtors, which secure obligations to prepetition lenders under certain Prepetition Credit Agreements they are parties to. The Debtors' Prepetition Credit Agreements refer to a prepetition restated revolver agreement and a prepetition term loan agreement the Debtors executed on March 10, 2010, with certain lender parties: * The Prepetition Revolver Facility provides up to $970.5 million in loans, with Bank of America, N.A., serving as administrative agent. Bank of America, N.A. and General Electric Capital Corporation are the co-collateral agents; Wells Fargo Retail Finance, LLC and General Electric Capital Corporation are co-syndication agents; and JPMorgan Chase Bank, N.A. is the documentation agent for the Prepetition Revolver Agreement. As of the Petition Date, approximately $196.05 million was outstanding under the Prepetition Revolver. * The Prepetition Term Loan Facility comprised of an $80 million tranche and a $10 million tranche, with GA Capital LLC serving as administrative agent. As of the Petition Date, approximately $48.6 million is outstanding under the $80 million tranche, which matures on March 31, 2014. No amounts are outstanding under the $10 million tranche. The Prepetition Revolver is secured by a first priority security interest in substantially all of the Debtors' inventory, accounts receivable, cash and cash equivalents and other, a first priority pledge of equity interests in certain Debtor subsidiaries, and a second priority security interest in equity interests in certain Debtor subsidiaries. The Prepetition Term Loan Facility is secured by a first priority security interest in the Borders Group, Inc.'s ownership interests in certain subsidiaries and the fixed assets of the Debtors, and by a second priority security interest in all of the other Prepetition Collateral. Until the Debtors' obligations under the Prepetition Credit Facilities are paid in full, those claims are determined to be fully secured claims. Thus, to provide adequate protection to the Prepetition Lenders' interest in the Prepetition Collateral, which include the Cash Collateral, the Debtors agree to entitle the Prepetition Lenders to: (a) adequate protection liens on all assets of the Debtors; (b) an adequate protection superpriority administrative claim under Section 507(b) of the Bankruptcy Code, subject only to the Carve Out and the superpriority administrative claims of the secured parties under the DIP Facility; and (c) a funded indemnity reserve in an amount of up to $500,000 with respect to the Prepetition Revolver Facility and $300,000 with respect to the Prepetition Term Loan Facility. A hearing has been set for March 15, 2011, for the Court's final consideration of the Debtors' cash collateral use. ----------------------------------------------------------------- [00017] DEBTORS' MOTION TO USE EXISTING CASH MANAGEMENT SYSTEM ----------------------------------------------------------------- In the ordinary course of business, the Debtors use a cash management system, which is similar to those utilized by other large retail companies that operate in numerous locations and across multiple distribution channels, to efficiently collect, transfer, and disburse funds generated by their business operations. This encompasses the transfer of funds and the incurrence of obligations by and among the Debtors. The Debtors accurately record those collections, transfers, and disbursements as they are made. The Debtors' Cash Management System works on this manner: (A) Cash Collection The Debtors generate revenue primarily from two principal selling channels: (i) their stores located throughout the United States and Puerto Rico; and (ii) the Internet, including e-books, through their primary website, http://www.Borders.com and physical goods via mail delivery. Additional cash is generated through franchise agreements and other marketing partnerships. The monies generated from these sources are deposited at the end of each business day into these types of deposit accounts: -- Store Depository Accounts. The Debtors generate the majority of their revenue at individual stores. The Debtors maintain about 99 depository accounts with various banking institutions in which individual stores deposit funds from cash and check sales. -- Lockbox Accounts. The Debtors have two lockbox accounts, one with PNC Bank and another with Bank of America, N.A., that serves as the depository for various accounts receivable belonging to the Debtors, including payments and royalties received by the Debtors from their (i) various franchises, and (ii) marketing partnerships. (B) Cash Concentration At the end of each business day, funds from the Cash Accounts are transferred, through a variety of mechanisms, into the Debtors' central depository account with PNC Bank. Specifically, funds are transferred into the Primary Concentration Account: -- Store Depository Accounts. The funds from cash and check sales are deposited directly into a Store Depository Account. On a daily basis, the Debtors create a debit automated clearing house file based upon a poll of the Store Depository Accounts and the funds are transferred into a Secondary Concentration Account. All the individual stores' credit card sales are transferred via wire transfer directly into a Secondary Concentration Account -- Concentration Accounts. The Concentration Accounts are the focal point of the Cash Management System. The Debtors utilize these accounts to collect their funds from Store Depository Accounts and credit card sales, and fund payroll accounts, insurance accounts and accounts payable accounts. The Concentration Accounts consist of: * Primary Concentration Account. The majority of the Debtors' cash flows through to one Concentration Account maintained by Debtor Borders Group, Inc. at PNC Bank. The Debtors use the Primary Concentration Account to receive daily transfers of funds from secondary concentration accounts maintained by the Debtors' operating subsidiaries and to fund the Debtors' various disbursement accounts from which the Debtors make disbursements by check or wire transfer to satisfy a variety of obligations, including outstanding payables and payroll obligations. * Secondary Concentration Accounts. On a daily basis, the Debtors transfer cash and check sale funds from individual Store Depository Accounts, e-commerce revenues and funds received through franchise payments into several Concentration Accounts maintained by the Debtors at PNC Bank and Bank of America. * Borders, Inc. Secondary Concentration Account. On a daily basis, the Debtors transfer stores' funds via cash and check sales from Borders Store Depository Accounts into a Concentration Account held at Bank of America. Credit card sales are wired via credit card processors directly into the Borders, Inc. Secondary Concentration Account with PNC Bank. On a daily basis, the Debtors transfer funds from the Borders, Inc. Secondary Concentration Account with Bank of America to the Primary Concentration Account, to fund day-to-day operations like accounts payable, payroll, insurance and other expenses. The Borders, Inc. PNC Bank Secondary Concentration Account is a zero balance account, as cash is swept automatically by PNC Bank to the Primary Concentration Account. * The Waldenbooks Secondary Concentration Accounts. On a daily basis, the Debtors transfer stores' funds via cash and check sales from Waldenbooks Store Depository Accounts into a concentration account held at Bank of America. Credit card sales are wired via credit card processors into a separate concentration account held at Bank of America, N.A. On a daily basis, the Debtors transfer funds from the Waldenbooks Cash/Check Secondary Concentration Accounts to the Primary Concentration Account. The Waldenbooks Cash/Check Secondary Concentration Account is a zero balance account. Funds from the Waldenbooks Credit Card Secondary Concentration Account are transferred to the Primary Concentration Account via wire transfer upon Waldenbooks is a unit of Borders, Inc. reaching a preset balance threshold of up to $500,000. * The Borders Direct. LLC Secondary Concentration Account. On a daily basis, the Debtors transfer funds received through e-commerce sales into a Concentration Account held at PNC Bank. On a daily basis, the Debtors transfer funds from the Borders Direct, LLC Secondary Concentration Account to the Primary Concentration Account. The Borders Direct, LLC Secondary Concentration Account is a zero balance account. * The Borders International Services Co. Secondary Concentration Account. The Debtors transfer funds received through franchise payments and international services into a Concentration Account held at PNC Bank. The Debtors transfer funds from the Borders International Services Co. Secondary Concentration Account to the Primary Concentration Account. The Borders International Services Co. Secondary Concentration Account is a zero balance account. -- Lockbox Account. Each business day, funds are collected from the Lockbox Accounts and deposited in the Primary Concentration Account. (C) Cash Disbursements The Debtors transfer funds from the Primary Concentration Account to these disbursement accounts: -- Payroll Accounts. The Debtors maintain eight accounts at PNC Bank and Banco Popular in order to fund, on an as needed basis, the payroll for their employees. The payroll accounts are funded directly from the Primary Concentration Account via wire transfer and are zero balance accounts. -- Accounts Payable Accounts. The Debtors maintain eight accounts at PNC Bank to satisfy, on an as needed basis, outstanding payables owed to vendors and service providers in connection with the operation of their businesses. The Accounts Payable Accounts are funded directly from the Primary Concentration Account via wire transfer and are zero balance accounts. The Debtors also transfer funds, on an as-needed basis via direct transfer, from the Borders, Inc. Secondary Concentration Account to other accounts, including various insurance accounts: -- Travelers Insurance Account. The Debtors maintain this account for payments related to various current insurance policies, including their general liability and workers' compensation insurance policies. -- Liberty Mutual Insurance Account. The Debtors maintain this account for payments related to current insurance policies held with Liberty Mutual Insurance Company. -- General Liability Insurance Account. The Debtors maintain this account with PNC Bank to provide necessary payments to Helmsman Management Services LLC for workers compensation. This account is funded from the Borders, Inc. Secondary Concentration Account on an as needed basis via direct wire transfer. Each business day, any cash in excess of $200,000 in the Primary Concentration Account is automatically transferred to the Blackrock Provident Temp Fund investment account for overnight investment. The overnight investments are transferred back to the Primary Concentration Account for immediate use the next business day, allowing the Debtors to gain maximum interest from the end-of-day balance in the Primary Concentration Account. The Blackrock Investment Account funds are invested principally in money market instruments, which include certificates of deposit, notes, bonds, debentures, commercial paper, interests in bank loans to companies, bankers' acceptances, and fully-collateralized repurchase agreements. On average, the balance transferred daily to and from the Primary Concentration Account is approximately $15.3 million, and the amount in the Blackrock Investment Account ranges from $3 million to 5 million. In sum, the Debtors maintain 135 cash-alone bank accounts. On the average, about $58.3 million flows into the Debtors' integrated Cash Management System on a weekly basis to service cash received and costs incurred related to their retail stores, online marketplace, digital distribution, physical distribution centers, and corporate headquarters. The Debtors maintain each of the Bank Accounts at financial institutions insured by the Federal Deposit Insurance Corporation. A diagram illustrating the flow of funds through the Cash Management System is available for free at: http://bankrupt.com/misc/Borders_CashMgtSystem.pdf David M. Friedman, Esq., at Kasowitz, Benson, Torres & Friedman LLP, in New York, tells the Court that the Cash Management System constitutes an ordinary course and essential business practice providing significant benefits to the Debtors, including the ability to (i) control corporate funds; (ii) ensure the maximum availability of funds when and where necessary; and (iii) reduce administrative expenses by facilitating the movement of funds and the development of more timely and accurate account balance information. Mr. Friedman further notes that the use of a centralized Cash Management System reduces interest expenses by enabling the Debtors and the non-Debtor Borders/JGE Joint Venture LLC -- the Detroit JV -- to utilize funds within the system rather than relying upon short-term borrowing to fund the Debtors' and JGE Joint Venture LLC's cash requirements. Any disruption in the operation of the Cash Management System could have a severe and adverse impact upon the value and ongoing operations of the Debtors and the Detroit JV, he stresses. More importantly, because the Debtors transact business through distribution channels that generate revenue from customer sales, it would be extremely difficult and expensive to establish and maintain a different cash management system, he emphasizes. Accordingly, the Debtors sought and obtained an interim order from the Court allowing them to continue using the existing Cash Management System. The Debtors are directed to maintain records of each and every transfer within the Cash Management System occurring on or after the Petition Date to the same extent maintained prior to the Petition Date. In connection with the operation of the Cash Management System, the Debtors incur periodic service charges and other fees to the Banks for the maintenance of the Cash Management System, which average about $175,000 per month, Mr. Friedman discloses. Accordingly, the Debtors sought and obtained the Court's permission on an interim basis to: (i) pay undisputed prepetition amounts outstanding, if any, owed to the Banks as Service Charges for the maintenance of the Cash Management System; and (ii) reimburse the Banks for any claims arising, or charge backs of deposits made, before or after the Petition Date in connection with customer checks or other deposits into the Bank Accounts that have been dishonored or returned for any reason, together with any fees and costs in connection therewith, to the same extent the Debtors were responsible prior to the Petition Date, with any obligations to have administrative priority in accordance with Section 503 of the Bankruptcy Code, unless and except to the extent those obligations are secured. Pursuant to Section 364(a) of the Bankruptcy Code, the Debtors are also authorized, in connection with the ordinary operation of their Cash Management System, to obtain unsecured credit and incur unsecured debt in the ordinary course of business without notice and a hearing, with any postpetition obligations incurred by the Debtors to the Banks to have administrative priority in accordance with Section 503, unless and except to the extent those obligations are secured. The Court also authorized the Debtors, on an interim basis, to conduct transactions by debt, wire or ACH payments and other similar methods without interruption and in the ordinary course of business. The Court will consider final approval of the Cash Management Motion on March 15, 2011. The Debtors are directed to immediately serve a copy of the Interim Cash Management Order on the Banks. ----------------------------------------------------------------- [00018] DEBTOR'S MOTION TO MAINTAIN EXISTING BANK ACCOUNTS ----------------------------------------------------------------- In connection with their Cash Management System, the Debtors maintained about 135 bank accounts, a schedule of which is available for free at: http://bankrupt.com/misc/Borders_BankAccounts.pdf The U.S. Trustee Chapter 11 Guidelines for the Southern District of New York mandates, upon the filing of a bankruptcy proceeding, the closure of the Debtors' prepetition bank accounts, the opening of new accounts and the immediate printing of new checks with a "Debtor in Possession" designation on them. David M. Friedman, Esq., at Kasowitz, Benson, Torres & Friedman LLP, in New York, stresses that the Debtors' operations would be immediately and irreparably harmed by the disruption, confusion, delay, and costs that would most certainly result if they were required to comply with those U.S. Trustee Guidelines. All parties-in-interest, including employees, vendors, and customers, he asserts, will be best served by preserving business continuity and avoiding the disruption and delay to the Debtors' collection and disbursement procedures that would necessarily result from closing the Bank Accounts and opening new accounts. Accordingly, the Debtors sought and obtained interim Court permission to: (i) designate, maintain, and continue to use any or all of their existing Bank Accounts in the names and with the account numbers existing immediately before the Petition Date; (ii) deposit funds into and withdraw funds from those accounts by all usual means including, without limitation, checks, wire transfers, automated transfers, and other debits; and (iii) treat the prepetition Bank Accounts for all purposes as debtor-in-possession accounts; provided, however, that nothing contained in the order will authorize any Bank to honor or pay any check issued or dated before the Petition Date, except as otherwise provided by order of the Court. The Court further ruled that any Bank may rely on the representations of the Debtors with respect to whether any check or other transfer drawn or issued by the Debtors before the Petition Date should be honored pursuant to an order of the Court, and that Bank will not have any liability to any party for relying on those representations by the Debtors. To the extent not inconsistent with the Bankruptcy Code or other orders of the Court in the Debtors' Chapter 11 cases, nothing will alter or limit the rights of Bank of America, N.A. to discontinue the service and administration of any Bank Accounts held at Bank of America, N.A. in accordance with existing account agreements entered by Bank of America and the Debtors at the time of the establishment of those accounts, the Court clarified. The continued use of any Bank Accounts with Bank of America is conditioned upon the provision of a certain standby letter of credit naming Bank of America as beneficiary pursuant to the terms described in the Debtors' DIP Financing Motion, the Court noted. The Court will consider final approval of the Bank Accounts Motion on March 15, 2011. The Debtors are also directed to immediately serve a copy of the Interim Banks Accounts Order on the Banks. ----------------------------------------------------------------- [00019] DEBTORS' MOTION TO CONTINUE USING BUSINESS FORMS ----------------------------------------------------------------- The Debtors sought and obtained an interim order from the Court allowing it to continue using their correspondence and business forms, including, but not limited to, purchase orders, multi-copy checks, letterhead, envelopes, promotional materials, and other business forms, substantially in the forms existing immediately before the Petition Date, without reference to their status as debtors-in-possession. The Debtors will, as soon as reasonably practicable mark "Debtor in Possession" on their existing checks instead of having new checks printed with that marking. The Debtors stressed that if they are not permitted to continue to use their existing Business Forms, the resulting prejudice will include significant disruption of their ordinary financial affairs and business operations; delay in the administration of their Chapter 11 estates; and additional cost to the estates to print new business forms. The Court will consider final approval of the Business Forms Motion on March 15, 2011. ----------------------------------------------------------------- [00020] DEBTORS' MOTION TO CONTINUE USE OF CORPORATE CREDIT CARDS ----------------------------------------------------------------- In the ordinary course of business, the Debtors customarily pay for a variety of their expenses, including employees' business- related expenses incurred in performing their employment obligations and small accounts payable at the individual store level with company credit cards. The Business Expenses are billed directly to the Debtors via the employees' corporate Bank of America Visa credit cards. About 779 Purchase Cards have been issued and are utilized for charging expenses for goods and services purchased for, or incidental to, the Debtors' business. On the average, the Debtors spend about $12 million per month with Purchase Cards. David M. Friedman, Esq., at Kasowitz, Benson, Torres & Friedman LLP, in New York, asserts that it is essential to the sustained operation of the Debtors' business that they be permitted to continue paying for Business Expenses incurred on the Purchase Cards after the Petition Date. If the Debtors were required to cease utilizing the Purchase Cards, it would unnecessarily disrupt their business operations, as well as create additional costs to be borne by the Debtors and their creditors, he points out. Accordingly, the Debtors sought and obtained the Court's permission on an interim basis to continue to use the Purchase Cards as part of the Cash Management System. The Court will consider final approval of the Debtors' request on March 15, 2011. ---------------------------------------------------------------- [00021] DEBTOR'S MOTION TO EXTEND TIME TO COMPLY WITH SEC. 345 ----------------------------------------------------------------- Section 345 of the Bankruptcy Code governs a debtor's deposit and investment of cash during a Chapter 11 case and authorizes deposits or investments of money "as will yield the maximum reasonable net return on such money, taking into account the safety of such deposit or investment." For deposits or investments that are not "insured or guaranteed by the United States or by a department, agency, or instrumentality of the United States or backed by the full faith and credit of the United States," Section 345(b) requires the Debtors' estates to obtain from the entity with which the money is deposited or invested a bond in favor of the United States that is secured by the undertaking of an adequate corporate surety, unless the Court for cause orders otherwise. David M. Friedman, Esq., at Kasowitz, Benson, Torres & Friedman LLP, in New York, related that Borders Group, Inc.'s investment guidelines are conservative and are tailored to provide the utmost safety for its cash while maximizing the return within the confines of a money market account. While the vast majority of the Debtors' bank accounts have deposits less than $250,000 thus satisfying the requirements of Section 345, the Debtors estimate that as of January 19, 2011, about three of the Bank Accounts contain deposits in excess of $250,000, he disclosed. Of the three accounts, one Bank Account is located at an institution other than those designated as authorized depositories by the Office of the United States Trustee for Region 2 pursuant to the U.S. Trustee Chapter 11 Guidelines for the Southern District of New York, he added. Mr. Friedman further noted that except for the Blackrock Investment Account, the Bank Accounts located at Banks that are not designated as authorized depositories pursuant to the U.S. Trustee Guidelines, however, have average daily balances offer less than $250,000 at any given time, and, thus, do not represent bank accounts with significant deposits for purposes of the Debtors' Cash Management System. Indeed, the Debtors believe that the Blackrock Investment Account provides sufficient protection for their cash and that it would be in the best interest of their estates to continue to follow this practice for the investment of cash. Accordingly, at the Debtors' request, the Court granted the Debtors 45 days to either comply with the Section 345(b) requirement, or to seek appropriate relief from the Court, through and including May 3, 2011. The extension is without prejudice to the Debtors' right to request a further extension of the Extension Period or the waiver of the requirements of Section 345(b) in the Debtors' Chapter 11 cases; provided that to the extent that a Bank Account that satisfies the requirements of Section 345 ceases to satisfy those requirements, the Debtors will, with respect to that Bank Account, have 21 days to either come into compliance with Section 345(b) or to make other arrangements as agreed with the U.S. Trustee. The Debtors believe that any funds held in the Bank Accounts, including the Store Depository Accounts, which may exceed the amounts insured by the FDIC, are secure and that obtaining bonds to secure these funds, as required by section 345(b), is unnecessary in the context of their Chapter 11 cases. During the extension period, the Debtors will make arrangements with the U.S. Trustee to determine what modifications to current investment practices, if any, would be appropriate under the circumstances. If, pursuant to discussions with the U.S. Trustee, it will become necessary to modify the manner in which they maintain their cash, the Debtors will seek Court permission to make those modifications. Mr. Friedman insisted that "cause" exists under Section 345(b) to waive this requirement because, among other considerations, (i) the Debtors' Banks are subject to supervision by banking regulators; (ii) the Debtors retain the right to remove funds held at the Banks and establish new bank accounts as needed; (iii) the costs associated with satisfying the requirements of section 345 are burdensome; (iv) the process of satisfying those requirements would lead to needless inefficiencies in the management of the Debtors' business; and (v) the funds in many of these accounts are transferred on a regular basis into the Primary Concentration Account, and, thus, their balances are routinely reduced. Moreover, a bond secured by the undertaking of a corporate surety would be prohibitively expensive, if that bond were available at all, he pointed out. The Court will consider final approval of the Debtors' request on March 15, 2011. ----------------------------------------------------------------- [00022] DEBTOR'S MOTION TO CONTINUE INTERCOMPANY TRANSACTIONS ----------------------------------------------------------------- The Debtors sought and obtained the Court's authority, on an interim basis, to continue to honor and make payments with respect to intercompany transactions in their existing cash management system. David M. Friedman, Esq., at Kasowitz, Benson, Torres & Friedman LLP, in New York, told the Court that the Cash Management System allows the Debtors and its non-Debtor affiliates to function as a unified enterprise, and to achieve value through consolidating various brands. Without the continued interrelationship among BGI and its affiliates, including the JGE Joint Venture LLC, this value will be diminished to the detriment of all parties-in- interest, he asserted. The Court will consider final approval of the Debtors' request on March 15, 2011. ----------------------------------------------------------------- [00023] DEBTORS' MOTION TO HONOR PREPETITION EMPLOYEE OBLIGATIONS ----------------------------------------------------------------- The Debtors employ about 18,100 employees, of whom 6,100 are full-time employees, 11,400 are part-time employees, and 600 are contingent employees who are required to work one shift per month and usually do so at special events. About 16,340 employees are paid on an hourly basis and 1,760 employees are paid a fixed salary. In the ordinary course of business, the Debtors incur payroll and various other obligations for their Employees and provide other benefits to their Employees for the performance of services, namely: (A) Compensation Obligations. The Debtors' average monthly gross payroll based on the last 12 months is $26 million per month. As of the Petition Date, the accrued and unpaid prepetition salaries and wages total about $9 million and that about $50,000 in payroll checks from previous pay periods are outstanding and have not been cashed by Employees and former Employees. (B) Payroll Tax Obligations. In connection with the salaries and wages paid to Employees, the Debtors are required by law to withhold from their Employees' wages amounts related to federal, state, and local income taxes, as well as social security and Medicare taxes and to remit the same to the applicable taxing authorities. (C) Garnishment Obligations. In the ordinary course of processing the Employees' payroll, the Debtors may be required by law, in certain circumstances, to withhold certain amounts for garnishments such as tax levies, child support, and other court-ordered garnishments. (D) Supplemental Workforce Obligations. In the ordinary course of business, the Debtors utilize the services of certain employment agencies to engage a supplemental workforce to work for the Debtors, primarily in their distribution centers and in various information technology and administrative support functions. (E) Independent Contractors Obligations. Like the Supplemental Workforce, the number of Independent Contractors is in constant flux to meet the Debtors' business needs. (F) Business Expenses. The Debtors customarily pay for a variety of their Employees' business-related expenses incurred in performing their employment obligations. (G) Incentive Obligations. The Debtors have customarily maintained discretionary bonus and incentive programs for their Employees designed to encourage exceptional Employee performance for the benefit of the Debtors' business. Under the Debtors' incentive program for retail store management whereby eligible employees may receive up to $25,000 per quarter, the Debtors pay bonuses under the Field Bonus Plan for 30 to 40 Employees for the fourth quarter of 2010 during the interim period. The Debtors also estimate that they will pay bonuses under a Shrink Bonus Plan to 890 employees for the fiscal year ended January 29, 2011, totaling $2.5 million, during the interim period. The Debtors further estimate paying about $6,000 to 41 distribution center managers that are eligible for a monthly bonus under a Distribution Center Management Bonus. In addition, about 840 Employees are eligible for weekly incentives and payout of those bonuses is about $55,000 per pay period. (H) Severance Payments. The Debtors maintain a discretionary pay plan for all Employees who are not party to a separate severance agreement with them, or an individual employment agreement with them that provides for severance benefits. As of the Petition Date, about 529 Employees who held titles junior to Vice President were receiving Severance Payments. (I) Employee Benefit Plans. In the ordinary course of business, the Debtors have established various benefit plans and policies for their Employees that can be divided into health plans, welfare plans, vacation time, employee savings and retirement plans and other benefit plans. The Debtors relate that they incurred these accrued and unpaid amounts under the Employee Obligations as of the Petition Date: Obligations Unpaid Amount ----------- ------------- Incentive Obligations $2,561,000 Severance Payments 1,200,000 Payroll Obligations 1,100,000 Business Expenses 375,000 Supplemental Workforce Obligations 361,324 Garnishment obligations 57,000 Compensation Obligations 11,725 Employee Benefit Plans 777,775 The Business Expenses is composed of (i) $365,000 for total unpaid prepetition Business Expenses owed to Employees or Bank of America, N.A. for the Employees' purchase cards, and (ii) $10,000 of Employees' own funds subject to reimbursement. David M. Friedman, Esq., at Kasowitz, Benson, Torres & Friedman LLP, in New York, asserts that the Debtors' retail store employees are the public "face" of their business -- those employees are responsible for ensuring that customers receive the product and service they have come to expect from the Borders brand. The Debtors' business also crucially depends on their Employees who assist with information technology, product distribution to their stores and online customers, development and maintenance of their website and digital delivery services, and corporate management of their operations, he adds. Accordingly, the Debtors sought and obtained an interim order from the Court allowing them to: (i) pay or otherwise honor all Employee Obligations, and all costs and expenses incident to those obligations and all programs related that come due prior to the final hearing, including those Employee Obligations that (i) were or are due and payable and relate to the period prior to the Petition Date, and (ii) are or become due and payable or relate to the period after the Petition Date, except that the Debtors will not pay any Director Obligations prior to the final hearing on the Employee Obligations Motion; and (ii) maintain and continue to honor their practices, programs, and policies for their Employees with respect to the Employee Obligations as they were in effect as of the Petition Date, provided that no Employee will be paid an amount exceeding $11,725 in accrued and unpaid prepetition wages or salaries. The Debtors are authorized to pay, in their sole discretion, compensation owed to the Supplemental Workforce through the Agencies. The Debtors are also authorized to pay, in their sole discretion, compensation owed to Independent Contractors, up to the amount of $11,725 per Independent Contractor. Moreover, the Debtors are permitted to replace any prepetition checks or electronic transfers relating to the Employee Obligations that may be dishonored or rejected. The Court also permits applicable banks and financial institutions at which the Debtors maintain other accounts, at the Debtors' instruction, to receive, honor, process, and pay, to the extent of funds on deposit, any and all checks or electronic funds transfers to the extent that those checks or transfers relate to any of the Employee Obligations. The Debtors are authorized to pay any and all costs and other obligations in connection with maintaining or paying third parties to maintain, administer, and provide record-keeping relating to the Employee Obligations that they may have outstanding as of the Petition Date, and to continue so paying, in the ordinary course of business. The Debtors' requests to pay severance to former employees, pay certain incentive bonuses, and satisfy the $365,000 to Bank of America are adjourned until the final hearing on the Employee Obligations Motion. The Court will convene a hearing to consider final approval on the Employee Obligations Motion on March 15, 2011. Objections are due no later than March 8, 2011. ----------------------------------------------------------------- [00024] DEBTORS' MOTION TO HONOR PREPETITION VENDOR OBLIGATIONS ----------------------------------------------------------------- An integral component of the Debtors' retail operations is the efficient flow of inventory to their distribution centers, stores and customers. Accordingly, the Debtors rely heavily on numerous common carriers, movers, shippers, warehousemen, customs brokers and certain other third-party vendors and service providers to ship, transport, store, move through customs and deliver inventory through established distribution networks. The Distribution Network Vendors maintain possession of books and other inventory vital to the Debtors' operations. As of the Petition Date, many of the Distribution Network Vendors had claims for storage, transportation and related services previously provided to the Debtors. For the period from February 1, 2010 through January 31, 2011, the Debtors' average payments for, or related to, Distribution Network Vendor Claims aggregate about $5.2 million per month. Although it is difficult to estimate with precision the Distribution Network Vendor Claims outstanding at any given moment, the Debtors believe that the amount of outstanding prepetition Distribution Network Vendor Claims owed to the Distribution Network Vendors exceed $4 million as of the Petition Date. David M. Friedman, Esq., at Kasowitz, Benson, Torres & Friedman LLP, in New York, tells the Court that if the Debtors fail to pay the Distribution Network Vendor Claims, many of the Distribution Network Vendors may stop providing essential services to the Debtors. Even if suitable alternatives to the existing Distribution Network Vendors are available, the time necessary to identify replacement providers and integrate them into the Debtors' operations likely would cause a significant disruption to the Debtors' operations, he emphasizes. During any transition period, the Debtors would lose access to valuable inventory held by the Distribution Network Vendors, he adds. Mr. Friedman further notes that the Distribution Network Vendors may also be able to assert state law possessory liens against the Debtors' property they hold or control. Because the perfection and maintenance of the liens held by the Distribution Network Vendors in most cases is dependent upon possession, it is anticipated that the Distribution Network Vendors will refuse to deliver or release the Debtors' inventory before the Distribution Network Vendor Claims have been satisfied and their liens extinguished, he points out. A material disruption of that kind in the operation of the Debtors' distribution network and inventory availability system would delay the shipment of inventory to the Debtors' distribution centers, stores and customers, he asserts. Accordingly, the Debtors sought and obtained the Court's authority to make payments in the interim period of: (i) all valid, undisputed Distribution Network Vendor Claims that are past due or become during the interim period; and (ii) miscellaneous lien claims, whether relating to the period before or after the Petition Date, as the Debtors' determine to be necessary or appropriate to obtain the release of retail inventory or liens against real or personal property of the Debtors. The Debtors retain third party vendor Interstate Freight, Inc., as a vital component to their ability to manage, process and pay the Distribution Network Vendor invoices. Inability to pay and employ Interstate Freight could cause a serious disruption in the Debtors' shipments of inventory to the Debtors' distribution centers, stores, and customers that could last for up to three to four weeks, Mr. Friedman stresses. The Debtors paid Interstate Freight a processing fee of $0.64/invoice in 2010. As of the Petition Date, the Debtors owe about $5,000 to Interstate Freight. Accordingly, the Court authorized the Debtors to pay all prepetition accrued but unpaid service and administrative fees due to Interstate Freight, and to continue those payments to Interstate Freight in the ordinary course of business. The Court authorizes and directs all banks and other financial institutions on which checks are drawn or electronic funds are transferred with respect to Distribution Network Vendor Claims or Miscellaneous Lien Claims to receive, process, honor, and pay, to the extent of funds on deposit, any and those checks or electronic transfers, whether such checks or transfers were issued before or after the Petition Date, upon the receipt by each Bank of such notice of authorization without further order of the Court. The Debtors are also authorized to replace any prepetition checks or electronic transfers relating to the Distribution Network Vendor Claims or Miscellaneous Lien Claims that may be dishonored or rejected. The Court will convene a hearing to consider final approval of the Vendor Obligations Motion on March 15, 2011. ----------------------------------------------------------------- [00025] DEBTORS' MOTION TO HONOR PREPETITION CUSTOMER PROGRAMS ----------------------------------------------------------------- The Debtors engage in certain marketing and sales practices that are generally targeted to develop and sustain positive reputations for their stores and merchandise in the marketplace; and designed to attract new customers to their stores and to enhance store loyalty and sales among their existing customer base. In line with this, the Debtors maintain various customer programs, which include a rewards program, discount programs, and credit card processing programs. (A) Rewards Program. The Debtors have established a rewards program, which allows holders of rewards club cards to earn points or rewards for each qualifying purchase. Membership in Borders Rewards is free, and about 42 million members were enrolled as of the Petition Date. Borders Rewards cardholders receive $5 of merchandise credit for each $150 spent on qualifying purchases in each calendar year, or for each $100 spent after the first reward in a calendar year has been earned. The Debtors also introduced a Borders Rewards Program, which is paid membership program that offers, in exchange for a $20 membership fee for each rolling 12 months of membership, in addition to all of the Borders Rewards benefits: a 40% discount on hard cover best sellers; a 20% discount on select hard covers; 10% off essentially all other merchandise; and free shipping for Borders.com Purchases. As of the Petition Date, about 1.2 million customers had paid for membership in Borders Rewards Plus. Since January 31, 2009, Borders Rewards and Borders Rewards Plus have collectively added about 12 million new members. (B) Gift Cards. The Debtors issue Borders gift cards in a variety of denominations. Gift Cards typically are issued in exchange for cash, and are redeemable by purchasers or recipients in exchange for the Debtors' merchandise. As of the Debtors' fiscal year-end on January 29, 2011, the aggregate amount on Gift Cards outstanding was about $275,045,213. Taking breakage into account, the amount of traditionally unredeemed Gift Cards, the Debtors estimate that only $113,114,505 of this amount will be redeemed. (C) Return Policies. The Debtors traditionally have maintained merchandise return, refund, replace and exchange policies. Merchandise purchased from the Debtors' stores generally may be returned to the Debtors' stores for a full refund, issued in the same form as the original purchase, within 30 days of purchase when accompanied by an original sales receipt. If the returned merchandise is accompanied by a gift receipt, the Debtors allow their customers 60 days to return merchandise to their stores and issue a refund in the form of a Gift Card. As to their online store, the Debtors give their online customers 30 days to return merchandise. Certain items, including out-of-print items, magazines and items marked final sale or non-returnable item are not subject to the refund policies. (D) Credit Card Processing Agreements. The Debtors are party to processing agreements with four merchants that enable the Debtors to accept credit cards as payment for their merchandise. The Processing Agreements are essential to the Debtors' business as they allow the Debtors' customers the flexibility to purchase merchandise on credit. The Debtors also utilize the services of two processors which facilitate credit card payments by means of front end fraud detection before the payments are accepted. The Debtors estimate that as of the Petition Date, about $300 in fees to the process are accrued and unpaid, most of which are to be paid within two or three days after the Petition Date. The Debtors also obligated to refund to the merchant processors the purchase price of the returned merchandise plus certain adjustments. (E) Employee and Airport Discounts. A 33% shopping discount on most store and kiosk items, and for most orders placed at Borders.com is granted to all employees that are classified as having regular status employment. The Debtors also provide all of their employees that complete Borders Rewards program training with membership in Borders Rewards Plus, which effectively raises the employee discount to 40% for such employees. With respect to the Debtors' Borders- branded airport stores, all those stores offer 10% discounts to airport employees. Most of these discounts are contractually required by the airport stores' leases. (F) Quality Discount Program. All customers of the Debtors are eligible for quantity discounts on the purchase of 10 or more copies of the same item, based on the following schedule: 10% off for 10 to 19 copies of a single paperback title; 15% off for 10 to 19 copies of a single hard cover title; 15% off for 20 or 29 copies of a single title; 20% off for 30 or more copies of a single title. (G) Educator Discount Program. Teachers, librarians, or homeschoolers for students in preschool through 12th grade who can show proof of employment are eligible for a 25% Educator Discount Card applicable on purchases of books and music for use in the classroom or for classroom preparation. Several times a year, the Debtors extend the discount to Educator Discount Card holders' personal purchases. About 510,000 educators held Educator Discount Cards as of the Petition Date. (H) Business and Educator Services Discount. The Debtors maintain a discount program specifically for business or educational purchasers. Individuals may apply through their organization for either a (i) deferred billing account card, or (ii) discount card. Either card permits the member organization to receive a discount of up to 25% towards the purchase of books and music at any of the Debtors' Borders branded outlets. As of the Petition Date, there were about 5,400 individual and organizational members of the Business and Educator Services Program with deferred billing accounts. (I) Coupons and Promotional Codes. The Debtors commonly offer discount coupons, promotional codes and various rebate promotions. The Debtors' failure to honor the Debtors' Coupons could result in a loss of goodwill and jeopardize customer loyalty. Accordingly, the Debtors sought and obtained the Court's permission to continue their Customer Programs in the ordinary course of business, and pay and honor all obligations under those Customer Programs. The Debtors are authorized to pay all accrued but unpaid fees due to Processors, and to continue to pay Processors' fees in the ordinary course of business. The Debtors are also permitted to pay all Chargeback obligations, and to continue to pay Chargebacks in the ordinary course of business. The Debtors' banks are authorized to receive, process, honor, and pay all checks drawn or direct deposit and funds transfer instructions made relating to the Customer Programs. ----------------------------------------------------------------- [00026] DEBTORS' MOTION TO PAY PREPETITION TAXES ----------------------------------------------------------------- In the ordinary course of business, the Debtors incur taxes and assessments that can be classified as (i) Sales and Use Taxes; (ii) Import Taxes; (iii) Franchise and Income Taxes; (iv) Real and Personal Property Taxes; and (v) Business License Assessments, Annual Report Taxes and other charges and assessments. The Debtors estimate that the total amount of Prepetition Taxes and Assessments owing to the various taxing authorities as of the Petition Date is approximately $38,379,871. The Debtors specifically estimate $33,079,871 in Taxes and Assessments payable as of their fiscal year ending on January 29, 2011, comprised of: Kind of Tax Amount Payable ----------- -------------- Sales and Use Taxes $16,530,000 Real and Personal Property Taxes 15,103,560 Franchise and Income Taxes 1,034,137 Business License Assessments 406,221 Import Taxes 5,953 The Debtors incurred Sales Taxes of $16.2 million for the United States and about $320,000 for Puerto Rico. The Debtors estimate about $10,000 in Use Taxes payable as of January 29, 2011. To facilitate remission of the Import Taxes, the Debtors utilize the services of DB Shandker. As of the Petition Date, the Debtors estimate that there are no prepetition amounts owing to DB on account of those services. The Debtors further estimate that, as of January 29, 2011, (i) $13,786,744 in Real Property Taxes for the United States and $38,000 for Puerto Rico, and (ii) $828,816 in Personal Property Taxes for the United States and $450,000 for Puerto Rico were payable. Including the Debtors' obligations under various permitting and licensing requirements and miscellaneous business permits, the amount payable associated with those various licenses, permits and other assessments as of January 29, 2011 was $256,221 for the U.S. and $150,000 for Puerto Rico. The Debtors from time to time undergo audits and reviews conducted by the various Taxing Authorities. As of the Petition Date, the Debtors have one completed audit for Sales Taxes with a resulting liability of $18,000, exclusive of interest, which is payable in addition to the amount of Sales Taxes the Debtors estimated. Between January 29, 2011 and the Petition Date, the Debtors have paid $1.5 million due and owing to certain taxing authorities. However, the Taxes and Assessments have accrued at a rate of about $400,000 per day since January 29, 2011, leading to the total estimate of $38,379,871. To facilitate remission of Sales Taxes for Borders Direct, LLC, the Debtors utilize the services of Avalara, Inc. Avalara pays Borders Direct, LLC' Sales Taxes and in turn Borders Direct LLC reimburses Avalara for those taxes remitted. The Debtors estimate that as of the Petition Date, about $310 in those fees are accrued and unpaid. To facilitate remission of the Personal Property Taxes, the Debtors utilize the services of Smart Business Advisory & Consulting, LLC. The Debtors estimate that as of the Petition Date, about $40,000 in those fees are accrued and unpaid. The Debtors operate 642 retail stores across 48 states, Puerto Rico, and the District of Columbia, and any disputes that could impact their ability to conduct business in a particular jurisdiction could have a wide-ranging and adverse effect on their business. Against this backdrop, the Debtors sought and obtained the Court's permission on an interim basis to: (A) pay all prepetition Taxes and Assessments to all taxing authorities that are (i) determined presently to be owed or assessed, or (ii) are determined to be owed and assessed at any time after entry of the Interim Tax Order but prior to a final hearing of the Taxes Motion, including, without limitation, through the issuance of postpetition checks and electronic fund transfers; and (B) make payments due and owing to third party administrators in connection with those Taxes and Assessments and to continue those payments in the ordinary course of business. The Banks are authorized and directed to receive, honor, process, and pay, to the extent of funds on deposit, any and all checks or electronic transfers drawn on the Debtors' Bank Accounts relating to the Taxes and Assessments, including those checks or electronic transfers that have not cleared the Banks as of the Petition Date. The Debtors are also authorized to replace any prepetition checks or electronic transfers relating to the Taxes and Assessments that may be dishonored or rejected. The Debtors aver that payment of the prepetition Taxes and Assessments is critical to their continued and uninterrupted operations. Non-payment of those obligations may cause Taxing Authorities to take precipitous action, including filing liens, preventing the Debtors from conducting business in the applicable jurisdictions, and seeking to lift the automatic stay, David M. Friedman, Esq., at Kasowitz, Benson, Torres & Friedman LLP, relates. Failing to pay those Taxes and Assessments could also trigger governmental action in the form of increased audits, he adds. The Debtors are directed to serve a copy of the Interim Tax Order on the Taxing Authorities, a list of which is available for free at http://bankrupt.com/misc/Borders_TaxingAuthorities.pdf The Court will convene a final hearing on the Taxes Motion on March 15, 2011. ----------------------------------------------------------------- [00027] BORDERS' BANKRUPTCY FILING TRIGGERS PAYMENT OBLIGATIONS ----------------------------------------------------------------- In a regulatory filing with the U.S. Securities and Exchange Commission, Borders Group, Inc. acknowledged that the filing of its Chapter 11 petition constituted an event of default under its pre-bankruptcy Credit Agreement and Term Loan Agreement with certain lenders. Borders Executive Vice President and Chief Financial Officer Scott Henry relates that the Credit Agreement and Term Loan Agreement each provide that as a result of the filing of the Chapter 11 petitions, all principal, interest and other amounts due thereunder will become immediately due and payable. The Debtors believe that any efforts to enforce those payment obligations under the Prepetition Credit Agreement and Prepetition Term Loan Agreement have been stayed in accordance with the automatic stay provisions of the Bankruptcy Code as a result of the filing of the Chapter 11 Petitions. ----------------------------------------------------------------- [00028] BORDERS RECEIVES NOTICE OF STOCK DELISTING FROM NYSE ----------------------------------------------------------------- Borders Group, Inc. informed the U.S. Securities and Exchange Commission that it received a notice on February 16, 2011, that the New York Stock Exchange, Inc. had determined that the listing of the Company's common stock should be suspended immediately as a result of the bankruptcy filing of the Company and certain of its affiliates. As previously reported, NYSE Regulation, Inc. notified the Company on February 3, 2011 that the Company was not in compliance with the continued listing standard of the NYSE requiring a minimum average closing price of $1.00 per share over a consecutive 30-trading day period. Borders Executive Vice President and Chief Financial Officer Scott Henry relates that the last day that the Company's common stock traded on the NYSE was February 15, 2011. The Company does not intend to take further action to appeal the NYSE's decision, he says. It is thus expected that the Company's common stock will be delisted after the completion of the NYSE's application for delisting filed with the SEC, he notes. ----------------------------------------------------------------- [00029] BORDERS' BANKRUPTCY MAY THWART BILL ACKMAN'S MERGER PLANS ----------------------------------------------------------------- Borders Group, Inc.'s Chapter 11 filing on February 16, 2011, may be a major obstacle to William Ackman's vision to merge the bankrupt bookstore company with Barnes & Noble Inc., according to analysts, Matthew Townsend of Bloomberg News reported. Bloomberg disclosed that Mr. Ackman offered to help Borders to fund an all-cash acquisition of Barnes & Noble in December 2010, at $16 a share, valuing the chain at about $960 million. Barnes & Noble declined to respond at that time, the report disclosed. According to Peter Wahlstrom, an analyst at Chicago-based Morningstar Investment Services, Barnes & Noble will avoid a Borders purchase because the chain does not have an appealing digital reading business or much attractive real estate, Bloomberg related. Instead, Barnes & Noble may seek to benefit from the more than $500 million in sales Borders' collapse will free up, Bloomberg noted. Mr. Wahlstrom also noted, Bloomberg reported, that Barnes & Noble has not expressed an interest to expand the number of its stores and is focused on the digital reading. Barnes & Noble is closing stores, cutting its number by 10% over the last four years, Bloomberg stated. Mr. Ackman owns a 15% stake in Borders by virtue of his being a managing member of Pershing Square Capital Management, L.P. Pershing, on the other hand, owns a 31.3% stake in Borders. Mr. Ackman's stake in Borders might be wiped out in bankruptcy. According to Bloomberg, Mr. Ackman stated that this month he lost $125 million on his Borders stake. ----------------------------------------------------------------- [00030] MALL OWNERS SEEK TO APPEAR IN BORDERS' BANKRUPTCY CASE ----------------------------------------------------------------- Simon Property Group, Inc. and GGP Limited Partnership, as direct and indirect owner of landlord or managing agent for certain malls of General Growth Properties, Inc., filed separate notices of appearance and requests for copies of all notices and pleadings in Borders Group, Inc.'s Chapter 11 case. Simon and GGP are landlords of Borders. Specifically, GGP disclosed that it is a landlord for these Borders-owned stores, representing 5% of Borders' total store count: Property Tenant Name -------- ----------- Alderwood Borders Books & Music Bayshore Mall Borders Books & Music Boise Towne Square Borders Books & Music Chapel Hills Mall Borders Books & Music Mall of Louisiana Borders Books & Music Northridge Fashion Center Borders Books & Music Park City Center Borders Books & Music Park Meadows Borders Books & Music Park Place Borders Books & Music Pinnacle Hills Promenade Borders Books & Music Providence Place Borders Books & Music Southland Center MI Borders Books & Music Southwest Plaza Borders Books & Music Stonestown Galleria Borders Books & Music Village of Merrick Park Borders Books & Music West Oaks Mall Borders Books & Music Salem Center Borders Express Silver City Galleria Borders Express Staten Island Mall Phase I Borders Express Steeplegate Mall Borders Express The Mall in Columbia Borders Express Three Rivers Mall Borders Express Valley Plaza Mall CA Borders Express White Marsh Mall Borders Express Chapel Hills Mall Borders, Inc. Pine Ridge Mall Borders, Inc. The Boulevard Mall Borders, Inc. The Boulevard Mall Borders, Inc. Colony Square Mall Waldenbooks Eastridge Mall WY Waldenbooks Lakeside Mall Waldenbooks Oxmoor Center Waldenbooks Pine Ridge Mall Waldenbooks Washington Park Mall Waldenbooks Westwood Mall Waldenbooks Woodbridge Center Waldenbooks *** End of Issue No. 2 ***