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 28, 1996
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)
DELAWARE 38-3196915
(State or other (I.R.S.
jurisdiction of Employer
incorporation or Identification
organization) No.)
500 East Washington Street, Ann Arbor, Michigan 48104
(Address of principal executive offices)
(zip code)
(313) 913-1100
(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
Common Stock June 6, 1996
($.001 par value) 37,755,748
BORDERS GROUP, INC.
INDEX
Part I - Financial Information
Page
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
Part II - Other Information
Item 1. Legal Proceedings N/A
Item 2. Changes in Securities N/A
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a vote of
Securityholders N/A
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 17
Signatures
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions except per common share data)
(Unaudited)
13 Weeks Ended
April 28, April 23,
1996 1995
------- -------
Sales $ 404.0 $ 353.6
Cost of merchandise sold, including
occupancy costs 310.8 274.4
------ ------
Gross profit 93.2 79.2
Selling, general and administrative expenses 96.2 86.7
Pre-opening expense 0.4 0.7
Goodwill amortization 0.3 1.9
Operating losses of stores identified
for closure -- (1.3)
----- ------
Operating loss (3.7) (8.8)
Interest expense (income) 1.9 (0.1)
----- ------
Loss before income tax (5.6) (8.7)
Income tax benefit (2.2) (3.1)
----- ------
Net loss $ (3.4) $ (5.6)
====== ======
Loss per common share data (Pro forma
for 13 weeks ended April 23, 1995- Note 2):
Loss per common share $(0.08) $(0.13)
====== ======
Weighted average common shares
outstanding (in thousands) 40,917 43,570
====== ======
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions except per common share data)
(Unaudited)
4/28/96 4/23/95 1/28/96
Assets
Current Assets
Cash $ 51.6 $ 45.8 $ 36.5
Merchandise inventories 651.2 545.5 637.5
Accounts receivable and other current
assets 31.2 29.5 37.5
Property held for resale 25.3 13.1 28.7
------- ------- ------
Total current assets 759.3 633.9 740.2
Property and equipment, net of
accumulated depreciation of $178.3,
$173.8 and $179.0, respectively 253.9 257.1 243.5
Other assets and deferred charges 26.7 37.3 29.0
Goodwill, net of accumulated
amortization of $40.7, $38.6, and
$40.4, respectively (Note 3) 39.3 257.6 39.6
------- ------- -------
$1,079.2 $1,185.9 $1,052.3
======= ======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Short-term debt and capital lease
obligations due within one year $ 125.6 $ 4.4 $ 60.5
Trade accounts payable 303.0 238.7 304.8
Accrued payroll and other liabilities 131.9 98.5 157.0
Restructuring reserve 5.5 41.3 7.0
Taxes, including income taxes 4.2 8.7 13.6
------- ------ -------
Total Current Liabilities 570.2 391.6 542.9
Long-term debt and capital lease
obligations 9.2 11.2 8.1
Other long-term liabilities 28.7 57.2 29.3
Commitments and contingencies (Note 5) -- -- --
------- ------ -------
Total Liabilities 608.1 460.0 580.3
Mandatory redeemable Series A
preferred stock; 1,100,000 shares
authorized -- 5.4 ---
------- ------- -------
Shareholders' equity:
Preferred Stock, par value $.001 per
share; 8,900,000 shares authorized;
no shares issued and outstanding -- -- --
Common stock, par value $.001 per
share; 200,000,000 shares authorized;
37,753,944 and 37,658,992 issued and
outstanding at April 28, 1996 and
January 28, 1996 respectively -- -- --
Additional paid-in capital 669.9 708.7 669.2
Officers recievables and deferred
compensation (1.6) -- (3.4)
Retained earnings (deficit) (197.2) 11.8 (193.8)
------- ------- -------
Total stockholders' equity 471.1 720.5 472.0
------- ------- -------
$1,079.2 $1,185.9 $1,052.3
======= ======= =======
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE 13 WEEKS ENDED APRIL 28, 1996
(Dollars in millions)
(Unaudited)
Officers
Receiv. Add'l Retained
Common Stock Deferred Paid-in Earnings
Shares Amount Comp Capital (Deficit) Total
Balance at 1/28/96 37,658,992 $-- $ (3.4) $669.2 $(193.8) $472.0
Net loss -- -- -- -- (3.4) (3.4)
Issuance of common
stock 94,952 -- 0.7 -- 0.7
Payment of receiv.
and deferred
comp. expense -- -- 1.8 -- -- 1.8
__________ ____ ______ ______ ________ ______
Balance at 4/28/96 37,753,944 $0.0 $(1.6) $669.9 $(197.2) $471.1
========== ==== ====== ====== ======== ======
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
13 Weeks Ended
April 28, April 23,
1996 1995
Cash provided by (used for):
Operations
Net loss $(3.4) $(5.6)
Adjustments to reconcile net loss
to operating cash flows:
Depreciation and goodwill amortization 9.6 11.5
Other non-cash charges --- 1.1
Increase (decrease) in other long-
term assets and liabilities 1.7 1.2
Cash provided by (used for) current
assets and current liabilities:
Increase in inventories (13.7) (18.0)
Decrease in restructuring reserve (1.5) (5.0)
Decrease in property held for resale 3.4 ---
Decrease in accounts payable (1.8) (33.2)
Other, net (29.6) (25.7)
_____ _____
Net cash used for operations (35.3) (73.7)
_____ _____
Investing
Capital expenditures (18.3) (23.0)
_____ _____
Net cash used for investing (18.3) (23.0)
_____ _____
Financing
Net funding from credit facility 65.0 ---
Proceeds from construction funding 3.0 3.6
Issuance of common stock 0.7 ---
Repayment of long-term debt --- (0.3)
Repayment of Kmart borrowing --- (97.8)
_____ _____
Net cash provided by (used for) financing 68.7 (94.5)
_____ _____
Net increase(decrease) in cash and
equivalents 15.1 (191.2)
Cash and equivalents at beginning of year 36.5 237.0
_____ ______
Cash and equivalents at end of period $51.6 $ 45.8
===== ======
See accompanying Notes to Unaudited Condensed
Consolidated Financial Statements.
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
28, 1996 (the 1995 consolidated financial statements).
The Company's fiscal year ends on the Sunday immediately
preceding the last Wednesday in January. At April 28, 1996, the
Company operated a chain of 976 mall-based bookstores, 124 book
superstores, and 9 music stores throughout the United States.
Certain reclassifications of previously reported April 23,
1995 balances have been made to conform with the 1995 change in
reporting presentation.
Note 2 - Public Offering of Common Stock
An initial public offering of the Company's common stock
(the IPO) was completed June 1, 1995. Prior to the IPO, the
Company was a majority-owned subsidiary of Kmart. As a result of
the IPO and a subsequent transaction completed in August 1995,
Kmart no longer holds an interest in the Company's common stock.
See the 1995 consolidated financial statements for further
discussion.
Weighted average shares outstanding are calculated as follows:
Pro-Forma
13 Weeks 13 Weeks
Ended Ended
4/28/96 4/23/95
_______ _______
Shares outstanding at beginning of period 37,659 28,760
Shares sold by the Company in the IPO 12,531
Shares issued upon completion of the IPO 1,405
Shares issued during the period 45
Common stock equivalents 3,213 874
______ ______
Weighted average common shares outstanding 40,917 43,570
====== ======
The pro forma earnings per common share data are based on actual
common shares outstanding after the IPO and assume the IPO took
place at the beginning of fiscal 1995.
Note 3 - Accounting for Goodwill
In the second and fourth quarters of 1995 the Company
recorded pre-tax charges to operations of $201.8 to reflect the
change in the method of evaluating the recoverability of
goodwill. These noncash write-downs in goodwill were the result
of a change in policy by the Company after the IPO to evaluate
the recoverability of goodwill based on a fair value method.
There was no write-down required under this policy in the first
quarter ended April 28, 1996.
Note 4 - Restructuring Program
In 1993, the Company implemented a restructuring plan
pursuant to which it planned to close 187 underperforming Walden
stores and to combine certain distribution and headquarters
functions of Borders and Walden. The Company recorded a
restructuring charge of $142.8 to provide for the estimated costs
of implementing the plan. The Company recorded an additional
charge of $6.4 in the fourth quarter of 1994 to reflect revised
estimates of the cost of completing the reconstruction plan. As
of January 28, 1996, the store closure program was substantially
complete. For the 13 weeks ended April 28, 1996 $1.5 of cash
expenditures were charged to the restructuring reserve.
Note 5 - Commitments and Contingencies
There are various claims, lawsuits, and actions pending
against the Company and its subsidiaries which are incident to
their operations. It is the opinion of management that the
ultimate resolution of these matters will not have a material
effect on the Company's liquidity, financial position or results
of operations.
During 1994, the Company entered into an agreement in which
leases with respect to four Borders' locations serve as
collateral for certain mortgage pass-through certificates. These
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
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. Kmart has failed to maintain
investment grade ratings and therefore these notes are now
subject to put by the holder. To date the holder has not
exercised its right to put the notes.
In addition to the contingent repurchase obligations
described above, leases relating to two other Borders locations
serve as collateral for certain mortgage pass-thru certificates.
On March 11, 1996 Kmart was required to repurchase the underlying
notes. Kmart has asserted to the Company that it believes that
the Company is required to reimburse Kmart for approximately
$13.2 of payments that it made to repurchase these notes, which
includes the "make whole" premium of approximately $1.5. The
Company and Kmart have agreed, subject to approval of the
Company's lenders, that the Company will purchase the notes from
Kmart for approximately $12.1.
The Company does not believe that the note purchase has a
material effect on the Company's financial position or earnings.
Note 6 - Financing
Credit Facility: The Company has a credit agreement which
provides a $300, five-year working capital facility. Borrowings
under the credit facility bear interest at a base rate or an
increment over LIBOR at the Company's option. The credit
agreement contains operating covenants which limit the Company's
ability to incur indebtedness, make acquisitions, dispose of
assets and issue, repurchase or pay dividends on its common
stock, and require the Company to meet certain financial measures
regarding fixed charge coverage, leverage and tangible net worth.
The Company had borrowings outstanding under the credit facility
of $125.0 at April 28, 1996.
Lease Financing Facility: On November 26, 1995 the Company
entered into a five year, $150 lease financing facility ("the
Facility") to finance new stores and other property through
operating leases. The Facility will provide financing to Lessors
through loans from a third party lender for up to 95% of a
project 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 will be 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. There was $26.4 outstanding under the lease facility at
April 28, 1996.
In February 1996, the Company entered into interest rate
swaps with a total notional amount of $140, which effectively
converted variable rate borrowings to a fixed rate based on 3
month LIBOR. These swap agreements all expire within 12 months
of the date the Company entered into the agreements.
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 superstores and the largest operator of mall-
based bookstores in the United States based upon both sales and
number of stores. At April 28, 1996, the Company operated 124
book superstores under the Borders name, 976 mall-based and other
bookstores primarily under the Waldenbooks name, and 9 stores
under the names Planet Music and CD Superstore.
The Company's first quarter of 1996 and 1995 consisted of
the 13 weeks ended April 28, 1996 and April 23, 1995,
respectively.
Reporting Format. During 1995, the Company changed its reporting
format from prior years to reclassify certain occupancy costs and
exclude buying costs from cost of sales. Previously reported
April 23, 1995 balances have been reclassified to conform to the
revised presentation.
Results of Operations
The following table presents the Company's statement of
operations data, as a percentage of sales, for the periods
indicated:
13 Weeks Ended
April 28, April 23,
1996 1995
Sales 100.0% 100.0%
Cost of merchandise sold,
including occupancy costs 76.9 77.6
_____ _____
Gross margin 23.1 22.4
Selling, general and
administrative expenses 23.8 24.6
Pre-opening expense 0.1 0.2
Goodwill amortization and write-down 0.1 0.5
Operating losses of stores
identified for closure (1) -- (0.4)
_____ _____
Operating loss (0.9) (2.5)
Interest expense 0.5 0.0
_____ _____
Loss before income tax (1.4) (2.5)
Income tax benefit 0.5 0.9
_____ _____
Net Loss (0.9)% (1.6)%
===== =====
(1) Operating losses from stores included in the Waldenbooks
restructuring program are charged against the reserve for such
losses in 1995.
Store Activity
The Company's store activity is summarized below:
4/28/96 4/23/95 1/28/96
Borders Superstores
Beginning number of stores 116 75 75
Openings 8 6 41
_____ _____ _____
Ending number of stores 124 81 16
===== ===== =====
Walden Mall Bookstores
Beginning number of stores 992 1,102 1,102
Openings 1 0 5
Closings (17) (49) (115)
_____ _____ _____
Ending number of stores 976 1,053 992
===== ===== =====
CD Superstores/ Planet Music
Superstores:
Beginning number of stores 9 10 10
Openings --- --- 1
_____ _____ _____
Endings 9 10 9
===== ===== =====
13 Weeks Ended April 28, 1996 and April 23, 1995
Sales in the first quarter of 1996 were $404.0 million, a
$50.4 million, or 14.3%, increase over first quarter 1995 sales
of $353.6 million. This increase reflects a $65.3 million, or
49.6%, increase in Borders' sales resulting from new store
openings and a comparable store sales increase of 8.2%. This
increase was offset in part by a decline in Waldenbooks sales of
$14.9 million due to store closings and a 1.5% decrease in
comparable store sales.
Cost of merchandise sold, including occupancy costs, was
$310.8 million in the first quarter of 1996, as compared with
$274.4 million in the first quarter of 1995. Gross margin as a
percentage of sales was 23.1% in the first quarter of 1996 versus
22.4% in the first quarter of 1995. This 0.7% improvement
reflects the impact of consolidated distribution operations,
further leveraging of occupancy costs and reduced depreciation
expense as a result of the 1995 FAS 121 write-down.
Selling, general and administrative ("SG&A") expenses in the
first quarter of 1996 were up $9.5 million, or 10.9%, over SG&A
expenses in the first quarter of 1995 ($96.2 million versus $86.7
million). As a percentage of sales, SG&A expenses fell from
24.6% in the first quarter of 1995 to 23.8% in the first quarter
of 1996. This 0.8% decrease is primarily due to the leveraging of
corporate overhead over the Company's expanding sales base, as
well as headcount and wage savings resulting from the move of the
Waldenbooks headquarters from Stamford, Connecticut to Ann Arbor,
Michigan in the third quarter of 1995 and reduced depreciation
expense as a result of the 1995 adoption of FAS 121.
Pre-opening expense in the first quarter of 1996 was $0.4
million as compared to $0.7 million in 1995. Pre-opening expense
consists principally of grand-opening advertising expense and
store payroll related to the opening, and is expensed in the
first full fiscal month of a store's operations. 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 8 Borders superstores and 1 Waldenbooks mall-
based store in the first quarter of 1996 as compared to 6 Borders
superstores in the first quarter of 1995. The reduction in pre-
opening expense is a result of the timing of the 1996 store
openings. The majority of the expense associated with these
openings will be incurred in the second quarter.
Goodwill amortization was $0.3 million in the first quarter
1996 as compared to $1.9 million in 1995. The decrease in
goodwill amortization is a result of the aforementioned goodwill
write-down taken in 1995.
Interest expense was $1.9 million in 1996 as compared to
income of $0.1 in 1995. The increase is due primarily to
borrowings outstanding during the period ended April 28, 1996
used to fund the Kmart share purchase in the third quarter of
1995 and property held for resale.
Income tax benefit in the first quarter of 1996 was $2.2
million as compared to a benefit of $3.1 million in 1995.
Liquidity and Capital Resources
The Company's principal capital requirements are to fund
working capital needs, the opening of new stores and the
refurbishment and expansion of existing stores.
Net cash used for operations for the 13 weeks ended April
28, 1996 was $35.3 million as compared to $73.7 million in the
corresponding period in the prior year. The current year
activity primarily reflects a net loss of $3.4 million combined
with an increase in inventories of $13.7 million and a decrease
in payables of $1.8 million, partially offset by a decrease of
$3.4 million of property held for resale. The decrease in cash
used for operations as compared to the prior year is primarily
attributable to the increase in accounts payable over the prior
year representing a higher level of vendor funded inventory
purchases. Other operating cash flow primarily represent
decreases in accrued liabilities and other non-trade accounts
payable. The Company expects to complete the sale of properties
included in property held for resale in the second quarter of
1996.
Net cash used for investing for the first 13 weeks of 1996
was $18.3 million as compared to $23.0 million in the first 13
weeks of 1995. The Company opened 8 new superstores and 1 new
Waldenbooks store in the first 13 weeks of 1996 versus 6 new
superstores in the first 13 weeks of 1995. The decrease is due
primarily to the use of the company's lease facility to construct
developer financed store locations.
Net cash provided by financing in the first 13 weeks of 1996
was $68.7 million versus cash used for financing of $94.5 million
in the first 13 weeks of 1995. Net cash provided by financing in
1996 resulted primarily from net borrowings under the credit
facility.
The Company anticipates that planned closings of Waldenbooks
stores will decrease Waldenbooks' annual working capital
requirements. On a consolidated basis, the Company expects its
working capital requirements to increase as a result of its
expansion program for its Borders books and music superstores.
In 1995 the Company entered into a $300 million, five-year
working capital line of credit, with a syndicate of banks. The
Company had $125.0 million in outstanding borrowings under the
Credit Facility as of April 28, 1996
On November 26, 1995 the Company entered into a five year
$150 million lease financing facility to finance new stores and
other property through operating leases. The lease facility will
provide financing to Lessors through loans from a first party
lender for up to 95% of a project 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 first party lender. The principal amount guaranteed
will be 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. There were 7 properties financed
through the lease facility, with a financed value of $26.4
million, at April 28, 1996.
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. These
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
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. Kmart has failed to maintain
investment grade ratings and therefore these notes are now
subject to put by the holder. To date the holder has not
exercised its right to put the notes. The Company would expect
to fund this obligation through its line of credit.
In addition to the contingent repurchase obligations
described above, leases relating to two other Borders locations
serve as collateral for certain mortgage pass-thru certificates.
On March 11, 1996 Kmart Corporation was required, to
repurchase the underlying notes. Kmart has asserted to the
Company that it believes that the Company is required to
reimburse Kmart for approximately $13.2 million of payments that
it made to repurchase these notes, which includes a "make whole"
premium of approximately $1.5 million. The Company and Kmart have
agreed, subject to approval of the Company's lenders, that the
Company will purchase the notes from Kmart for approximately $12.1
million.
The Company does not believe that the note purchase has a
material effect on the Company's financial position or earnings.
PART II - OTHER INFORMATION
Item 6. Exhibits and reports on form 8-K
Exhibits:
(a) Exhibits: 11.1 Statement of Computation of per share earnings
27 Financial data schedule for 13 weeks ended April 28, 1996
(b) Reports on Form 8-K: None
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 10, 1996 By: /S/ George R. Mrkonic
-----------------------
George R. Mrkonic
Vice Chairman and President
(Principal Financial and
Accounting Officer)
Exhibit 11.1
Statement of Computation of Per Share Earnings
(dollars in millions except per share data)
For the 13-weeks Ended
April 28, 1996
Primary Earnings per Common Share:
Net loss $ (3.4)
Pro forma weighted
average shares
outstanding (000's) 40,917
--------
Primary E.P.S. $ (0.08)
Fully Diluted Earnings per Common Share:
Net Loss $ (3.4)
Pro forma weighted
average shares
outstanding (000's) 41,936
-------
Fully Diluted E.P.S. $ (0.08)
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