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 27, 1997
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 jurisdiction (I.R.S. Employer
of 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, 1997
($.001 par value) 76,240,188
----------
<PAGE>
BORDERS GROUP, INC.
INDEX
Part I - Financial Information
Page
Item 1. Financial Statements 1
Item 2. Management's Discussions and Analysis of
Financial Condition and Results of
Operations 7
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 11
Signatures
<PAGE>
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions except per common share data)
(Unaudited)
13 Weeks Ended
April 27, April 28,
1997 1996
------------- -----------------
Sales $ 463.6 $ 404.0
Cost of merchandise sold,
including occupancy costs 350.8 310.8
------------- -----------------
Gross profit 112.8 93.2
Selling, general and
administrative expenses 110.4 96.2
Pre-opening expense 0.3 0.4
Goodwill amortization 0.3 0.3
------------- -----------------
Operating income (loss) 1.8 (3.7)
Interest expense 1.0 1.9
------------- -----------------
Income (loss) before income tax 0.8 (5.6)
Income tax expense (benefit) 0.4 (2.2)
------------- -----------------
Net income (loss) $ 0.4 $ (3.4)
============= =================
Income (loss) per common share
data
Income (loss) per common share $ 0.00 $ (0.04)
============= =================
Weighted average common shares
outstanding (in thousands) 81,868 81,834
============= =================
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
<PAGE>
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions except per common share data)
(Unaudited)
4/27/97 4/28/96 1/26/97
Assets
Current Assets
Cash $ 33.2 $ 51.6 $ 42.6
Merchandise inventories 750.6 651.2 737.5
Accounts receivable and other
current assets 49.4 56.5 66.3
---------- ---------- -----------
Total current assets 833.2 759.3 846.4
Property and equipment, net of
accumulated depreciation of $247.7, 291.0 253.9 289.2
$217.7 and $235.1, respectively
Other assets and deferred charges 36.8 26.7 36.9
Goodwill, net of accumulated
amortization of $41.8, $40.7, and 38.2 39.3 38.5
$41.5, respectively (Note 3)
---------- ---------- -----------
$ 1,199.2 $1,079.2 $ 1,211.0
========== ========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Short-term debt and capital lease
obligations due within one year $ 80.5 $ 125.6 $ 30.5
Trade accounts payable 351.0 303.0 350.0
Accrued payroll and other 174.6 137.4 197.8
liabilities
Taxes, including income taxes 17.0 4.2 56.1
---------- ---------- -----------
Total Current Liabilities 623.1 570.2 634.4
Long-term debt and capital lease
obligations 5.9 9.2 6.2
Other long-term liabilities 24.4 28.7 24.8
Commitments and contingencies (Note 5) -- -- --
---------- ---------- -----------
Total Liabilities 653.4 608.1 665.4
---------- ---------- -----------
Shares subject to repurchase 34.1 -- 34.1
---------- ---------- -----------
Preferred Stock, par value $.001 per
share; 8,900,000 shares authorized; -- -- --
no shares issued and outstanding
Common stock, par value $.001 per
share; 0.1 -- 0.1
200,000,000 shares authorized;
76,018,954, 75,507,888 and
75,858,016
issued and outstanding at April 27,
1997, April 28, 1996, and January
26, 1997, respectively
Additional paid-in capital 648.2 669.9 648.0
Officers receivable and deferred
compensation (1.1) (1.6) (0.8)
Accumulated deficit (135.5) (197.2) (135.9)
---------- ---------- -----------
Total stockholders' equity 511.7 471.1 511.4
---------- ---------- -----------
$ 1,199.2 $ 1,079.2 $ 1,210.9
========== ========== ===========
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements
<PAGE>
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE 13 WEEKS ENDED APRIL 27, 1997
(Dollars in millions)
(Unaudited)
Common Stock Add'l Total
Shares Officers Paid-in Retained
Amount Rec. Capital Earnings
Deferred (Deficit)
Comp
Balance at 1/26/97 75,858,016 $0.1 $(0.8) $648.0 $(135.9) $ 511.4
Net income -- -- -- -- 0.4 0.4
Issuance of common
stock 494,210 -- (0.5) 6.1 -- 5.6
Repurchase of
common (333,272) -- -- (5.9) -- (5.9)
stock and
retirement
Payment of
receivable -- -- 0.2 -- -- 0.2
and deferred
compensation
--------- ----- ------- -------- ------- ---------
Balance at 4/27/97 76,018,954 $0.1 $(1.1) $ 648.2 $(135.5) $ 511.7
========= ===== ======= ======== ======= =========
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
<PAGE>
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
13 Weeks Ended
April 27, April 28,
1997 1996
Cash provided by (used for):
Operations
Net income (loss) $ 0.4 $ (3.4)
Adjustments to reconcile net loss
to operating cash flows:
Depreciation and goodwill amortization 12.0 9.6
Change in other long-term
assets and liabilities (0.4) 1.7
Cash provided by (used for) current
assets and current liabilities:
Increase in inventories (13.1) (13.7)
Decrease in property held for resale -- 3.4
Increase (decrease) in accounts payable 0.9 (1.8)
Other, net (52.8) (31.1)
------------ -----------
Net cash used for operations (53.0) (35.3)
------------ -----------
Investing
Capital expenditures (14.2) (18.3)
------------ -----------
Net cash used for investing (14.2) (18.3)
------------ -----------
Financing
Net funding from credit facility 50.0 65.0
Proceeds from construction funding 7.7 3.0
Issuance of common stock 6.0 0.7
Repurchase of common stock (5.9) --
------------ -----------
Net cash provided by financing 57.8 68.7
------------ -----------
Net increase (decrease) in cash and
equivalents (9.4) 15.1
Cash and equivalents at beginning of
year 42.6 36.5
------------ -----------
Cash and equivalents at end of period $ 33.2 $ 51.6
============ ===========
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements
<PAGE>
BORDERS GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions except per common share data)
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Borders Group, Inc. (the Company) have been prepared in accordance with Rule
10-01 of Regulation S-X and do not include all the information and notes
required by generally accepted accounting principles for complete financial
statements. All adjustments, consisting only of normal recurring adjustments,
have been made which, in the opinion of management, are necessary for a fair
presentation of the results of the interim periods. The results of operations
for such interim periods are not necessarily indicative of results of operations
for a full year. The unaudited condensed consolidated financial statements
should be read in conjunction with the Company's consolidated financial
statements and notes thereto for the fiscal year ended January 26, 1997 ( the
1996 consolidated financial statements).
The Company's fiscal year ends on the Sunday immediately preceding the
last Wednesday in January. At April 27, 1997, the Company operated a chain of
930 mall-based bookstores, 163 book superstores, and 3 music stores throughout
the United States.
<PAGE>
BORDERS GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions except per common share data)
Note 2 - 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 rights to put the notes.
The Company does not believe that the note purchase, if required, will
have a material effect on the Company's financial position or earnings.
Note 3 - 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 or
repurchase, in excess of $50 million, its common stock, 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 $80.0 at April 27, 1997
and $135.0 at June 6, 1997.
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 $114.6 outstanding under the lease
facility at April 27, 1997 and $119.0 at June 6, 1997.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company, through its subsidiaries, is the second largest operator of
book superstores and the largest operator of mall-based bookstores in the United
States based upon both sales and number of stores. At April 27, 1997, the
Company operated 163 book superstores under the Borders name, 930 mall-based and
other bookstores primarily under the Waldenbooks name, and 3 stores under the
Planet Music name.
The Company's first quarter of 1997 and 1996 consisted of the 13 weeks
ended April 27, 1997 and April 28, 1996, respectively.
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 27, April 28,
1997 1996
----------- -----------
Sales 100.0% 100.0%
Cost of merchandise sold,
including occupancy costs 75.7 76.9
----------- -----------
Gross margin 24.3 23.1
Selling, general and
administrative expenses 23.8 23.8
Pre-opening expense 0.1 0.1
Goodwill amortization 0.1 0.1
----------- -----------
Operating income (loss) 0.4 (0.9 )
Interest expense 0.2 0.5
----------- -----------
Income (loss) before income tax 0.2 (1.4 )
Income tax (benefit) 0.1 0.5
----------- -----------
Net income (loss) 0.1% (0.9%)
=========== ===========
<PAGE>
Store Activity
The Company's store activity is summarized below:
Quarter Ended Year Ended
April 27, April 28, January
1997 1996 26, 1997
----------- ----------- ------------
Borders Superstores
Beginning number of stores 157 116 116
Openings 6 8 41
----------- ----------- ------------
Ending number of stores 163 124 157
=========== =========== ============
Walden Mall Bookstores
Beginning number of stores 961 992 992
Openings 1 1 9
Closings (32) (17) (40)
----------- ----------- ------------
Ending number of stores 930 976 961
=========== =========== ============
13 Weeks Ended April 27, 1997 and April 28, 1996
Sales in the first quarter of 1997 were $463.6 million, a $59.6 million,
or 14.8%, increase over first quarter 1996 sales of $404.0 million. This
increase reflects a $62.5 million, or 30.7%, increase in Borders' sales
resulting from new store openings and a comparable store sales increase of 9.5%.
This increase was offset in part by a decline in Waldenbooks sales of $2.9
million due to store closings offset by a 1.1% increase in comparable store
sales.
Cost of merchandise sold, including occupancy costs, was $350.8 million in
the first quarter of 1997, as compared with $310.8 million in the first quarter
of 1996. Gross margin as a percentage of sales was 24.3% in 1997 versus 23.1% in
1996. Management attributed the 1.2% increase in gross margin to a number of
factors, including continued improvements in distribution and inventory
shrinkage results, improved merchandise mix management, and a decline in
occupancy expense as a percentage of sales due to both the continued maturation
of the Borders stores and the continued shift in sales base from mall stores to
superstores.
Selling, general and administrative ("SG&A") expenses in the first quarter
of 1997 were up $14.2 million, or 14.8% over SG&A expenses in the first quarter
of 1996 ($110.4 million versus $96.2 million). As a percentage of sales, SG&A
expenses were unchanged due to the ongoing leveraging of corporate overhead over
the Company's expanding sales base, offset by increased spending on strategic
initiatives.
<PAGE>
Pre-opening expense in the first quarter of 1997 was $0.3 million as
compared to $0.4 million in 1996. 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 6 Borders superstores and 1
Waldenbooks mall-based store in the first quarter of 1997 as compared to 8
Borders superstores and 1 Waldenbooks store in the first quarter of 1996.
Goodwill amortization was $0.3 million in both the first quarter of 1997
and 1996.
Interest expense was $1.0 million in the first quarter of 1997 as compared
to $1.9 million in 1996.
Income tax expense in the first quarter of 1997 was $0.4 million as
compared to a benefit of $2.2 million in 1996.
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 27, 1997 was
$53.0 million as compared to $35.3 million in the corresponding period in the
prior year. The current year activity primarily reflects net income of $0.4
million combined with a decrease in other current liabilities of $52.8 million
and an increase in inventories of $13.1 million. The increase in cash used for
operations as compared to the prior year is primarily attributable to decreases
in taxes payable, accrued liabilities, and other non-trade accounts payable.
Net cash used for investing for the first 13 weeks of 1997 was $14.2
million as compared to $18.3 million in the first 13 weeks of 1996. The Company
opened 6 new superstores and 1 new Waldenbooks store in the first 13 weeks of
1997 versus 8 new superstores and 1 new Waldenbooks in the first 13 weeks of
1996.
Net cash provided by financing in the first 13 weeks of 1997 was $57.8
million versus $68.7 million in the first 13 weeks of 1996. Net cash provided by
financing resulted primarily from net borrowings under the credit facility and
proceeds from construction funding.
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 $80.0 million in
outstanding borrowings under the Credit Facility as of April 27, 1997.
<PAGE>
On November 26, 1995, the Company entered into a five year, $150 million
lease financing facility ("the Lease Facility") to finance new stores and other
property through operating leases. The Lease 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 guarantees
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 were 32 properties financed through the
lease facility, with a financed value of $114.6 million, at April 27, 1997.
Management believes that the rental payments for properties financed through the
lease facility may be lower than those which the Company could obtain elsewhere
due to, among other factors, (i) the lower borrowing rates available to the
Company's landlords under the facility, and (ii) the fact the rental payments
for properties financed through the facility do not include amortization of the
principal amounts of the landlords' indebtedness related to the properties.
Rental payments relating to such properties will be adjusted when permanent
financing is obtained to reflect the interest rates available at the time of the
refinancing and the amortization of principal.
During 1994, the Company entered into agreements in which leases with
respect to four Borders' locations serve as collateral for certain mortgage
pass-through certificates. The mortgage pass-through certificates include a
provision requiring the Company to repurchase the underlying mortgage notes in
certain events, including the failure by the Company to make payments of rent
under the related leases, the failure by Kmart to maintain required investment
grade ratings or the termination of the guarantee by Kmart of the Company's
obligations under the related leases (which would require mutual consent of
Kmart and Borders). In the event the Company is required to repurchase all of
the underlying mortgage notes, the Company would be obligated to pay
approximately $36.6 million. The Company would expect to fund this obligation
through its line of credit. 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 does not believe that the note purchase, if required, will
have a material effect on the Company's financial position or earnings.
<PAGE>
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
27.0 Financial Data Schedule
(b) Reports on Form 8-K: None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
BORDERS GROUP, INC.
(Registrant)
Date: June 11 , 1997 By: /s/
------ -------------
George R. Mrkonic
Vice Chairman and Director
(Principal Financial and
Accounting Officer)
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
REPORT (dollars in millions except per share data) EXHIBIT 11.1
PRIMARY EARNINGS PER COMMON SHARE: 13 WEEKS ENDED
April 27, 1997
Net Income $ 0.4
Weighted average
shares outstanding (000's) 81,868
Primary E.P.S. $ 0.00
FULLY DILUTED EARNINGS PER COMMON SHARE:
Net Income $ 0.4
Weighted average
shares outstanding (000's) 81,974
Fully Diluted E.P.S. $ 0.00
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<PERIOD-TYPE> 3-MOS
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<PERIOD-END> APR-27-1997
<CASH> 33
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<ALLOWANCES> 0
<INVENTORY> 751
<CURRENT-ASSETS> 833
<PP&E> 543
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0
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<OTHER-SE> 512
<TOTAL-LIABILITY-AND-EQUITY> 1199
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