<PAGE> 1
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 July 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)
MICHIGAN 38-3196915
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification 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
-------------- September 5, 1997
-----------------
Common Stock 75,374,560
($.001 par value) -----------------
<PAGE> 2
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 8
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 13
Securityholders
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 14
Signatures
<PAGE> 3
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS ENDED
JULY 27, JULY 28,
1997 1996
---------------- ----------------
<S> <C> <C>
Sales $ 466.3 $ 414.3
Cost of merchandise sold, including
occupancy costs 351.1 316.4
---------------- ----------------
Gross profit 115.2 97.9
Selling, general and administrative expenses 111.1 98.1
Pre-opening expense 1.6 1.6
Goodwill amortization 0.2 0.2
---------------- ----------------
Operating income (loss) 2.3 (2.0)
Interest expense 1.4 1.6
---------------- ----------------
Income (loss) before income tax 0.9 (3.6)
Income tax expense (benefit) 0.4 (1.4)
---------------- ----------------
Net income (loss) $ 0.5 $ (2.2)
================ ================
INCOME (LOSS) PER COMMON SHARE DATA
Income (loss) per common share $ 0.01 $ (0.03)
================ ================
Weighted average common shares
outstanding (in thousands) 82,651 83,550
================ ================
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
(1)
<PAGE> 4
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
26 WEEKS ENDED
JULY 27, JULY 28,
1997 1996
-------------- ---------------
<S> <C> <C>
Sales $ 929.9 $ 818.3
Cost of merchandise sold, including
occupancy costs 701.9 627.3
-------------- ---------------
Gross profit 228.0 191.0
Selling, general and administrative expenses 221.5 194.3
Pre-opening expense 1.9 2.0
Goodwill amortization 0.5 0.5
-------------- ---------------
Operating income (loss) 4.1 (5.8)
Interest expense 2.4 3.5
-------------- ---------------
Income (loss) before income tax 1.7 (9.3)
Income tax expense (benefit) 0.8 (3.6)
-------------- ---------------
Net income (loss) $ 0.9 $ (5.7)
============== ===============
INCOME (LOSS) PER COMMON SHARE DATA
Income (loss) per common share $ 0.01 $ (0.07)
============== ===============
Weighted average common shares
outstanding (in thousands) 82,260 83,712
============== ===============
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
(2)
<PAGE> 5
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
7/27/97 7/28/96 1/26/97
<S> <C> <C> <C>
ASSETS
Current Assets
Cash $ 56.8 $ 35.1 $ 42.6
Merchandise inventories 719.4 628.4 737.5
Accounts receivable and other current
assets 50.5 41.5 66.3
------------- ------------ -------------
Total Current Assets 826.7 705.0 846.4
Property and equipment, net of
accumulated depreciation of $259.6,
$222.6 and $235.1, respectively 307.0 268.6 289.2
Other assets and deferred charges 36.5 38.8 36.9
Goodwill, net of accumulated
amortization of $42.0, $40.9, and
$41.5, respectively (Note 3) 43.9 39.0 38.5
------------- ------------ -------------
$ 1,214.1 $ 1,051.4 $ 1,211.0
============= ============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt and capital lease
obligations due within one year $ 112.0 $ 125.6 $ 30.5
Trade accounts payable 326.7 282.7 350.1
Accrued payroll and other liabilities 174.9 132.1 197.8
Taxes, including income taxes 25.7 3.5 56.1
------------- ------------ -------------
Total Current Liabilities 639.3 543.9 634.5
Long-term debt and capital lease
obligations 5.5 8.8 6.2
Other long-term liabilities 20.3 27.1 24.8
Commitments and contingencies (Note 5) -- -- --
------------- ------------ -------------
Total Liabilities 665.1 579.8 665.5
------------- ------------ -------------
Shares subject to repurchase -- -- 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;
200,000,000 shares authorized;
76,460,353, 75,616,254 and 75,858,016
issued and outstanding at July 27,
1997, July 28, 1996, and January 26,
1997, respectively 0.1 0.1 0.1
Additional paid-in capital 685.1 671.9 648.0
Officers receivable and deferred
compensation (1.2) (0.9) (0.8)
Accumulated deficit (135.0) (199.5) (135.9)
------------- ------------ -------------
Total stockholders' equity 549.0 471.6 511.4
------------- ------------ -------------
$ 1,214.1 $ 1,051.4 $ 1,211.0
============= ============ =============
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
(3)
<PAGE> 6
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE 26 WEEKS ENDED JULY 27, 1997
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK OFFICERS REC. ADD'L PAID-IN RETAINED EARNINGS TOTAL
SHARES AMOUNT DEFERRED COMP CAPITAL (DEFICIT)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT 1/26/97 75,858,016 $ 0.1 $ (0.8) $ 648.0 $ (135.9) $ 511.4
Net income -- -- -- -- 0.9 0.9
Issuance of common
stock 935,609 -- (0.7) 9.7 -- 9.0
Cancellation of Put
Options:
- -payment of premium -- -- -- (0.8) -- (0.8)
- -Shares subject to
repurchase -- -- -- 34.1 -- 34.1
Repurchase and
retirement of
common stock (333,272) -- -- (5.9) -- (5.9)
Change in receivable
and deferred
compensation -- -- 0.3 -- -- 0.3
---------- --------- ----------- ------------ ------------ ----------------
BALANCE AT 7/27/97 76,460,353 $ 0.1 $ (1.2) $ 685.1 $ (135.0) $ 549.0
========== ========= =========== ============ ============ ================
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
(4)
<PAGE> 7
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
26 WEEKS ENDED
JULY 27, JULY 28,
1997 1996
<S> <C> <C>
CASH PROVIDED BY (USED FOR):
OPERATIONS
Net income (loss) $ 0.9 $ (5.7)
Adjustments to reconcile net loss
to operating cash flows:
Depreciation and goodwill amortization 24.5 19.8
Change in other long-term
assets and liabilities (4.3) (12.0)
Cash provided by (used for) current
assets and current liabilities:
Decrease in inventories 19.3 9.1
Decrease in property held for resale -- 13.5
Decrease in accounts payable (23.4) (22.1)
Decrease in taxes payable (30.9) (10.1)
Other, net (11.6) (16.8)
------------ --------------
Net cash used for operations (25.5) (24.3)
------------ --------------
INVESTING
Proceeds from asset sale -- 0.9
Capital expenditures (41.0) (45.8)
------------ --------------
Net cash used for investing (41.0) (44.9)
------------ --------------
FINANCING
Net funding from credit facility 75.0 65.0
Proceeds from construction funding 7.6
Issuance of common stock 6.4 3.0
Repurchase of Put options (0.8)
Repurchase of common stock (5.9) --
Other, net (1.6) (0.2)
------------ --------------
Net cash provided by financing 80.7 67.8
------------ --------------
NET INCREASE (DECREASE) IN CASH AND
EQUIVALENTS 14.2 (1.4)
Cash and equivalents at beginning of
year 42.6 36.5
------------ --------------
Cash and equivalents at end of period $ 56.8 $ 35.1
============ ==============
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
(5)
<PAGE> 8
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 July 27, 1997, the Company operated 929
mall-based bookstores, 171 book superstores, and 3 music stores throughout the
United States.
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.
During the second quarter, the Company made a cancellation payment of $0.8
pursuant to which all Put Options the Company had previously sold were
canceled. The Company had previously received a $4.5 premium upon the sale
of the Put Options.
(6)
<PAGE> 9
BORDERS GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA)
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 $105.0 at July 27, 1997
and $135.0 at September 5, 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 $131.8
outstanding under the lease facility at July 27, 1997 and $135.5 at September 5,
1997.
NOTE 4 - SUBSEQUENT EVENTS
During August 1997, the Company repurchased and retired approximately
1,100,000 shares of its common stock.
(7)
<PAGE> 10
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 July 27, 1997,
the Company operated 171 book superstores under the Borders name, 929
mall-based and other bookstores primarily under the Waldenbooks name, and 3
stores under the Planet Music name.
The Company's second quarters of 1997 and 1996 consisted of the 13 weeks
ended July 27, 1997 and July 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 26 WEEKS ENDED
JULY 27, JULY 28, JULY 27, JULY 28,
1997 1996 1997 1996
--------------------------------------
Sales 100.0% 100.0% 100.0% 100.0%
Cost of merchandise sold,
including occupancy costs 75.3 76.4 75.5 76.7
------- ------ ------- ------
Gross margin 24.7 23.6 24.5 23.3
Selling, general and
administrative expenses 23.8 23.7 23.8 23.7
Pre-opening expense 0.3 0.4 0.2 0.2
Goodwill amortization - - 0.1 0.1
------- ------ ------- ------
Operating income (loss) 0.5 (0.5) 0.4 (0.7)
Interest expense 0.3 0.4 0.3 0.4
------- ------ ------- ------
Income (loss) before income taxes 0.2 (0.9) 0.2 (1.1)
Income tax expense (benefit) 0.1 (0.3) 0.1 (0.4)
------- ------ ------- ------
Net income (loss) 0.1% (0.5%) 0.1% (0.7%)
======= ====== ======= ======
(8)
<PAGE> 11
STORE ACTIVITY
The Company's store activity is summarized below:
QUARTER ENDED YEAR ENDED
JULY 27, JULY 28, JANUARY 26,
1997 1996 1997
------- -------- -----------
Borders Superstores
Beginning number of stores 163 124 116
Openings 8 3 41
------- ------- -----------
Ending number of stores 171 127 157
======= ======= ===========
Walden Mall Bookstores
Beginning number of stores 930 976 992
Openings 4 2 9
Closings (5) (12) (40)
------- ------- -----------
Ending number of stores 929 966 961
======= ======= ===========
13 WEEKS ENDED JULY 27, 1997 AND JULY 28, 1996
Sales in the second quarter of 1997 were $466.3 million, a $52.0 million,
or 12.6%, increase over second quarter 1996 sales of $414.3 million. This
increase reflects a $56.9 million, or 28.2%, increase in Borders' sales
resulting from new store openings and a comparable store sales increase of
7.5%. This increase was offset in part by a decline in Waldenbooks sales of
$7.9 million due to store closings and a 1.8% decrease in comparable store
sales.
Cost of merchandise sold, including occupancy costs, was $351.1 million in
the second quarter of 1997, as compared with $316.4 million in the second
quarter of 1996. Gross margin as a percentage of sales was 24.7% in 1997
versus 23.6% in 1996. Management attributed the 1.1% 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 second
quarter of 1997 were up $13.0 million, or 13.3% over SG&A expenses in the
second quarter of 1996 ($111.1 million versus $98.1 million). As a percentage
of sales, SG&A expenses were 23.8% in 1997 versus 23.7% in the second quarter
of 1996 due to increased spending on strategic initiatives, offset by the
ongoing leveraging of corporate overhead over the Company's expanding sales
base.
(9)
<PAGE> 12
Pre-opening expense in the second quarter of 1997 was $1.6 million,
unchanged from the same 1996 period. 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 4
Waldenbooks mall-based stores in the second quarter of 1997 as compared to 3
Borders superstores and 2 Waldenbooks stores in the second quarter of 1996. The
variance in per store expenses is primarily the result of the timing of store
openings.
Goodwill amortization was $0.2 million in both the second quarter of 1997
and 1996.
Interest expense was $1.4 million in the second quarter of 1997 as
compared to $1.6 million in 1996.
Income tax expense in the second quarter of 1997 was $0.4 million as
compared to a benefit of $1.4 million in 1996.
26 WEEKS ENDED JULY 27, 1997 AND JULY 28, 1996
Sales in the 26 weeks ended July 27, 1997 were $929.9 million, a $111.6
million, or 13.6%, increase over 26 weeks ended July 28, 1996 sales of $818.3
million. This increase reflects a $122.4 million, or 29.4%, increase in
Borders' sales resulting from new store openings and a comparable store sales
increase of 8.4%. This increase was offset in part by a decline in Waldenbooks
sales of $10.8 million due to store closings and a 0.4% decrease in comparable
store sales.
Cost of merchandise sold, including occupancy costs, was $701.9 million in
the 26 weeks ended July 27, 1997, as compared with $627.3 million in the same
1996 period. Gross margin as a percentage of sales was 24.5% in 1997 versus
23.3% 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 26 weeks
ended July 27, 1997 were up $27.2 million, or 14.0% over SG&A expenses in the
same period in 1996 ($221.5 million versus $194.3 million). As a percentage
of sales, SG&A expenses were 23.8% in 1997 versus 23.7% in 1996 due to
increased spending on strategic initiatives, offset by the ongoing leveraging
of corporate overhead over the Company's expanding sales base.
(10)
<PAGE> 13
Pre-opening expense in the 26 week period ended July 28, 1997 was $1.9
million compared to $2.0 in the same 1996 period. The Company opened 14 Borders
superstores and 5 Waldenbooks mall-based stores in 1997 as compared to 11
Borders superstores and 3 Waldenbooks stores in 1996.
Goodwill amortization was $0.5 million in both the 26 week periods ended
July 27, 1997 and July 28, 1996.
Interest expense was $2.4 million in the first 26 weeks of 1997 as
compared to $3.5 million in 1996.
Income tax expense in the 26 week period ended July 27, 1997 was $0.8
million as compared to a benefit of $3.6 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 26 weeks ended July 27, 1997 was
$25.5 million as compared to $24.3 million in the corresponding period in the
prior year. The current year operating cash inflows primarily reflects net
income and non-cash depreciation and amortization expense of $25.4 million
combined with decreasing inventory levels since January 26, 1997. Operating
cash outflows for the period were the result of a decrease in accounts payable
and taxes payable during the period. Overall, the cash used for operations in
the first 26 weeks of 1997 increased slightly from 1996 levels.
Net cash used for investing for the first 26 weeks of 1997 was $41.0
million as compared to $44.9 million in the first 26 weeks of 1996. The
Company opened 14 new superstores and 5 new Waldenbooks stores in the first 26
weeks of 1997 versus 11 new superstores and 3 new Waldenbooks in the first 26
weeks of 1996.
Net cash provided by financing in the first 26 weeks of 1997 was $80.7
million versus $67.8 million in the first 26 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 $105.0 million in
outstanding borrowings under the Credit Facility as of July 27, 1997.
(11)
<PAGE> 14
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 35
properties financed through the lease facility, with a financed value of $131.8
million, at July 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.
(12)
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
The following actions were taken at the Annual Meeting of Stockholders of the
Company held on May 15, 1997, with the votes on such matters being as indicated
below:
1. The following individuals were elected to serve as directors for the
three year terms expiring in 2000:
Name For Authority
---- --- ---------
Withheld
---------
George R. Mrkonic 65,147,506 shares 374,226
Larry Pollock 65,148,786 shares 372,946
2. The proposal to approve the Company's Stock Option Plan was approved and
adopted:
For Against Abstain Broker
--- ------- ------- ------
nonvotes
--------
59,455,135 5,920,307 146,290 -
3. The Amendment to the Company's Stock Option Plan to increase the number
of shares for broad-based grants was approved and adopted:
For Against Abstain Broker
--- ------- ------- ------
nonvotes
--------
36,482,583 20,468,628 191,697 8,378,824
4. The Amendment to the Company's Stock Option Plan to increase the number
of shares available for Compensation Replacement Options was approved and
adopted:
For Against Abstain Broker
--- ------- ------- ------
nonvotes
--------
51,198,382 5,744,779 199,747 8,378,824
5. The Company's Annual Incentive Bonus Plan was approved:
For Against Abstain Broker
--- ------- ------- ------
nonvotes
--------
63,578,737 1,782,777 160,218 -
6. The proposal to change the state of incorporation of the Company from
Delaware to Michigan was approved:
For Against Abstain Broker
--- ------- ------- ------
nonvotes
--------
56,119,543 860,942 162,423 8,378,824
(13)
<PAGE> 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
(a) Exhibits:
10.37 Amendment No. 9 and Consent to Credit Agreement among
Borders Group, Inc., its subsidiaries and Parties thereto
11.1 Statement of Computation of per share earnings
27.0 Financial Data Schedule
(b) Reports on Form 8-K: None
(14)
<PAGE> 17
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: September 9, 1997 By: /s/ George R. Mrkonic
--------------------------
George R. Mrkonic
Vice Chairman and Director
(Principal Financial and
Accounting Officer)
(15)
<PAGE> 18
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.37 Amendment No. 9 and Consent to Credit Agreement
11.1 Statement of Computation of per share earnings
27.0 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.37
AMENDMENT NO. 9 AND CONSENT TO
CREDIT AGREEMENT
THIS AMENDMENT NO. 9 AND CONSENT TO CREDIT AGREEMENT (the "Amendment")
is entered into as of the 28th day of July, 1997 by and between PNC BANK,
NATIONAL ASSOCIATION, as Administrative Agent under the Credit Agreement
described below, on behalf of the Lenders, and BORDERS GROUP, INC., a Delaware
corporation (the "Company"), on behalf of the Borrowers.
WITNESSETH:
WHEREAS, the Borrowers, the Lenders, the Administrative Agent and the
Syndication Agent have entered into that certain Credit Agreement dated as of
March 28, 1995 (as heretofore amended, the "Agreement"; terms defined in the
Agreement, as amended hereby, which are used herein shall have the same
meanings as are set forth in the Agreement for such terms unless otherwise
defined herein);
WHEREAS, the Borrowers have requested that the Lenders amend certain
provisions of the Agreement and consent to certain actions of the Borrowers,
and the Lenders are willing to do so on the terms and subject to the conditions
hereinafter set forth; and
WHEREAS, pursuant to Section 12.01 of the Agreement, the Administrative
Agent, with the written consent of the Required Lenders, may enter into certain
prescribed amendments to the Agreement on behalf of the Lenders, and the
Company may enter into amendments of the Agreement on behalf of the Borrowers;
NOW, THEREFORE, in consideration of the premises set forth above, the
terms and conditions contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the Lenders and the Borrowers hereby agree as follows:
1. Amendments to Agreement. Subject to the satisfaction of the conditions
precedent set forth in Section 3 below, the Agreement is amended as follows:
a. Section 1.01 of the Agreement is amended by deleting the definition
of "Company" and inserting in lieu thereof the following in proper alphabetical
sequence:
"Company shall mean Borders Group, Inc., a corporation
organized and existing under the laws of the State of
Michigan, and its permitted successors and assigns."
b. Section 1.01 of the Agreement is amended by deleting the definition
of "Repurchase Amount" and inserting in lieu thereof the following in proper
alphabetical sequence:
<PAGE> 2
"Repurchase Amount" shall mean (a) $50,000,000 plus (b) the
aggregate amount paid to the Company (whether in cash or in
shares of the Company's stock), from time to time and at any time
since May 1, 1995, by officers, employees or directors of the
Company or any of its Subsidiaries in connection with the exercise
of options to purchase shares of the Company's stock, plus (c) the
tax benefit (as reasonably estimated by the Company at a rate not
to exceed the then highest Federal, state and local corporate tax
rate) resulting from the exercise of such options or resulting from
the lapse of restrictions on (and vesting of rights in) certain shares
of the Company's stock subject to the Management Stock Purchase
Plan from time to time and at any time since May 1, 1995, as such
Repurchase Amount may be reduced by the Company pursuant to
Section 2.03(d). For purposes of calculating the Repurchase
Amount, to the extent shares of the Company's stock are delivered
to the Company in payment of the exercise price of options, or in
payment of taxes associated with the exercise of options or the
vesting of restricted shares, such delivered shares are deemed to be
repurchased by the Company at fair market value (as defined in the
Company's stock option plan) on the date of delivery to the
Company. Such delivered share repurchases will serve to reduce
the available Repurchase Amount.
c. Clause (xii) of the definition of "Permitted Liens" in Section 1.01 of
the Agreement is hereby deleted and replaced in its entirety by the following:
"(xii) Liens on assets of the Company and its Subsidiaries so long
as any Indebtedness secured thereby is permitted under the terms of
Section 8.02(a), and the aggregate fair market value of all property
secured by such Liens does not at any time exceed $15,000,000;"
d. Effective as of June 27, 1997, Section 2.09 of the Agreement is hereby
amended by deleting the term "$10,000,000" and replacing it with the term
"$20,000,000".
e. Schedule 6.01(a) of the Agreement is hereby deleted and replaced by
Schedule 6.01(a) attached hereto.
f. Clause (i) of Section 8.02(e) of the Agreement is hereby deleted and
replaced in its entirety by the following:
"(i) the Company may make open market repurchases of shares of its
common stock, and it may receive shares of its common stock as
payment of the exercise price of options, or as payment of taxes
2
<PAGE> 3
asscociated with the exercise of options or the vesting of restricted
shares, which such delivered shares are deemed to be repurchased by the
Company at fair market value (as defined in the Company's stock option
plan) on the date of delivery to the Company, so long as the aggregate
amount paid by the Company with respect to all such repurchases
(including all such deemed repurchases) does not at any time exceed the
Repurchase Amount in effect from time to time and no Event of Default or
Potential Default has occurred and is continuing or would result
therefrom;"
g. Section 8.03(b) of the Agreement is hereby amended by deleting the
term "(i)" therein and by deleting the following language:
"and (ii) confirming the Company's calculations with respect to the
certificate to be delivered pursuant to Section 8.03(c) with respect to
such financial statements to the extent permitted under generally
accepted auditing standards."
2. Consent. Subject to the satisfaction of the conditions precedent
specified in Section 3 below, notwithstanding Sections 8.01(a), 8.02(f) and
8.02(h) of the Agreement, the Lenders and the Agents hereby consent to the
merger of the Company with and into a Wholly-Owned Subsidiary incorporated
under the laws of the State of Michigan.
3. Conditions of Effectiveness. The amendments to the Agreement contained
in Section 1(a) and Section 1(e) and the consent contained in Section 2 (such
amendments and consent are referred to herein as the "Reincorporation
Amendments") shall become effective when and only when each of the conditions
specified in clauses a. and b. below has been satisfied, and the amendments to
the Agreement contained in Section 1(b), 1(c), 1(d), 1(f) and 1(g) (such
amendments are referred to herein as the "Other Amendments") shall become
effective when and only when each of the conditions specified in clauses a. and
b. (other than clauses (4) and (5) thereof) below has been satisfied:
a. no Event of Default or Potential Default shall have occurred and be
continuing on the date hereof or on the date the Amendment becomes effective
and the representations and warranties made in the Agreement and in Section 4
hereof shall be true and correct on the date hereof and on the date the
Amendment becomes effective and the Borrowers shall have delivered to the
Administrative Agent for the benefit of each Lender an officer's certificate to
both such effects executed by an Authorized Officer so as to confirm the
foregoing both before and after the merger described in Section 2 above;
b. the Administrative Agent shall have received for the benefit of each
Lender all of the following documents, each document being in form and
substance satisfactory to the Administrative Agent:
3
<PAGE> 4
(1) written Approval Memos from the Required Banks;
(2) this Amendment, duly executed by the Company;
(3) the officer's certificate referenced in clause a. above;
(4) copies of the Certificate of Incorporation, the By-Laws and
Good Standing Certificate in respect of New Co. from the Secretary of
State of the State of Michigan;
(5) copies of the Merger Agreement and related Articles and
Certificates of Merger and such confirmation as may be deemed necessary
by the Administrative Agent that such Articles and Certificates have
been filed as necessary with the States of Michigan and Delaware, and
the merger described in Section 2 above is effective; and
(6) such instruments, agreements, opinions of Thomas D. Carney,
General Counsel of the Borrowers, and other items as the Administrative
Agent may request.
4. Representation and Warranties. Each of the Borrowers represents and
warrants as follows: (i) it has all necessary power and authority to execute
and deliver this Amendment and to perform its obligations hereunder; (ii) the
execution, delivery and performance of this Amendment have been duly authorized
by it; (iii) this Amendment and the Agreement, as amended hereby, constitute
the legal, valid and binding obligations of such Borrower and are enforceable
against such Borrower in accordance with their terms; and (iv) the approval,
execution, delivery and performance of the terms hereof and of the Agreement,
as amended hereby, do not violate any contractual provision to which it is a
party or by which it is or its properties are bound or any Law applicable to
it.
5. Reference to the Effect on the Agreement.
a. Subject to satisfaction of the conditions precedent set forth in
Section 3 hereof: (i) each reference in the Agreement to "this Agreement,"
"hereunder," "hereof," "herein" or words of like import shall mean and be a
reference to the Agreement as amended hereby and (ii) each reference to the
Agreement in all other Loan Documents shall mean and be a reference to the
Agreement, as amended hereby.
b. Except as specifically amended above, the Agreement, and all other
Loan Documents shall remain in full force and effect and are hereby ratified and
confirmed.
4
<PAGE> 5
c. The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as an amendment to any
provision of the Agreement nor a waiver of any right, power or remedy of any
Lender or Agent, nor constitute a waiver of, or consent to any departure from,
any provision of the Agreement or any other Loan Document.
6. Governing Law. This Amendment shall be governed by and construed in
accordance with the internal laws (as opposed to conflicts of law provisions)
of the State of Illinois.
7. Headings. Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
8. Counterparts. This Amendment may be executed by one or more of the
parties to this Amendment on any number of separate counterparts and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument. Delivery of a duly executed counterpart copy of this Amendment may
be made by telecopy.
9. Expenses. The Borrowers will upon demand pay to each of the Agents the
amount of any and all expenses, including the reasonable fees and expenses of
each Agent's attorneys (which attorneys may be an Agent's employees to the
extent agreed to in advance by Borrowers) which any such Agent may incur in
connection with the preparation, negotiation and enforcement of this Amendment
and each of the agreements, instruments and other documents to be delivered to
the Agents or the Lenders in connection herewith.
[Signature pages to follow]
5
<PAGE> 6
AMENDMENT NO. 9
IN WITNESS WHEREOF, this Amendment has been duly executed as of the day
and year first above written.
PNC BANK, NATIONAL ASSOCIATION, as
Administrative Agent acting on behalf of the Lenders
pursuant to Section 12.01 of the Agreement
By: /s/ Peter F. Stack
-----------------------------------------
Peter F. Stack
Title: Assistant Vice President
-----------------------------------------
BORDERS GROUP, INC., acting on behalf of the
Borrowers pursuant to Section 12.01 of the
Agreement
By: /s/ George R. Mrkonic
-----------------------------------------
George R. Mrkonic
Title: President
-----------------------------------------
6
<PAGE> 1
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
EXHIBIT 11.1 TO FORM 10-Q REPORT
(dollars in millions except per share data)
<TABLE>
<CAPTION>
PRIMARY EARNINGS PER COMMON SHARE: 13 WEEKS ENDED 26 WEEKS ENDED
July 27, 1997 July 27, 1997
<S> <C> <C> <C> <C>
Net Income $ 0.5 $ 0.9
Weighted average
shares outstanding (000's) 82,651 82,260
------------- ------------
Primary E.P.S. $ 0.01 $ 0.01
========== ========
FULLY DILUTED EARNINGS PER COMMON SHARE:
Net Income $ 0.5 $ 0.9
Weighted average
shares outstanding (000's) 83,139 82,557
------------- ------------
Fully Diluted E.P.S. $ 0.01 $ 0.01
========== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-25-1997
<PERIOD-START> APR-28-1997
<PERIOD-END> JUL-27-1997
<CASH> 57
<SECURITIES> 0
<RECEIVABLES> 50
<ALLOWANCES> 0
<INVENTORY> 719
<CURRENT-ASSETS> 827
<PP&E> 567
<DEPRECIATION> 260
<TOTAL-ASSETS> 1,214
<CURRENT-LIABILITIES> 639
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 549
<TOTAL-LIABILITY-AND-EQUITY> 1,214
<SALES> 466
<TOTAL-REVENUES> 466
<CGS> 351
<TOTAL-COSTS> 351
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> 1
<INCOME-TAX> 0
<INCOME-CONTINUING> 1
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
