<PAGE> 1
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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 26, 1998
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)
<TABLE>
<S> <C>
MICHIGAN 38-3196915
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
500 EAST WASHINGTON STREET, ANN ARBOR, MICHIGAN 48104
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(734) 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 [ ]
<TABLE>
<CAPTION>
SHARES OUTSTANDING, AS OF
TITLE OF CLASS JUNE 2, 1998
- --------------------------------------------- ---------------------------------------------
<S> <C>
COMMON STOCK 76,636,344
</TABLE>
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<PAGE> 2
BORDERS GROUP, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements........................................ 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 7
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings........................................... 11
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............................................................. 12
</TABLE>
<PAGE> 3
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS ENDED
----------------------
APRIL 26, APRIL 27,
1998 1997
--------- ---------
<S> <C> <C>
Sales....................................................... $545.3 $463.6
Cost of merchandise sold, including occupancy costs......... 405.5 350.8
------ ------
Gross margin................................................ 139.8 112.8
Selling, general and administrative expenses................ 129.8 110.4
Pre-opening expense......................................... 0.3 0.3
Goodwill amortization....................................... 0.7 0.3
------ ------
Operating income............................................ 9.0 1.8
Interest expense............................................ 2.7 1.0
------ ------
Income before income tax.................................... 6.3 0.8
Income tax expense.......................................... 2.5 0.4
------ ------
Net income.................................................. $ 3.8 $ 0.4
====== ======
EARNINGS PER COMMON SHARE DATA --
Diluted earnings per common share......................... $ 0.05 $ 0.00
====== ======
Diluted weighted average common shares outstanding (in
thousands)............................................. 83,027 81,869
====== ======
Basic earnings per common share........................... $ 0.05 $ 0.01
====== ======
Basic weighted average common shares outstanding (in
thousands)............................................. 75,772 75,836
====== ======
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
1
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BORDERS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS EXCEPT COMMON SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
APRIL 26, APRIL 27, JANUARY 25,
1998 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash...................................................... $ 49.7 $ 33.2 $ 65.1
Merchandise inventories................................... 926.0 750.6 879.1
Accounts receivable and other current assets.............. 68.6 49.4 74.2
-------- -------- --------
Total Current Assets................................. 1,044.3 833.2 1,018.4
Property and equipment, net of accumulated depreciation of
$293.1, $247.7 and $281.5, respectively................... 390.9 291.0 373.7
Other assets and deferred charges........................... 33.1 36.8 33.3
Goodwill, net of accumulated amortization of $43.8, $41.8,
and $43.1, respectively................................... 108.6 38.2 109.5
-------- -------- --------
$1,576.9 $1,199.2 $1,534.9
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt and capital lease obligations due within
one year............................................... $ 224.3 $ 80.5 $ 127.3
Trade accounts payable.................................... 485.2 351.0 480.7
Accrued payroll and other liabilities..................... 179.8 159.3 210.8
Taxes, including income taxes............................. 22.0 17.0 62.6
-------- -------- --------
Total Current Liabilities............................ 911.3 607.8 881.4
Long-term debt and capital lease obligations................ 5.2 5.9 5.2
Other long-term liabilities................................. 51.6 39.7 50.2
Commitments and contingencies (Note 2) -- -- --
-------- -------- --------
Total Liabilities.................................... 968.1 653.4 936.8
-------- -------- --------
Shares subject to repurchase................................ -- 34.1 --
-------- -------- --------
Stockholders' Equity
Common stock; 200,000,000 shares authorized; 76,163,408,
76,018,954 and 75,395,988 issued and outstanding at April
26, 1998, April 27, 1997, and January 25, 1998,
respectively.............................................. 666.3 648.3 661.0
Officers receivables and deferred compensation.............. (5.5) (1.1) (6.3)
Accumulated other comprehensive income...................... (0.1) -- (0.9)
Accumulated deficit......................................... (51.9) (135.5) (55.7)
-------- -------- --------
Total Stockholders' Equity........................... 608.8 511.7 598.1
-------- -------- --------
$1,576.9 $1,199.2 $1,534.9
======== ======== ========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
2
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BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE 13 WEEKS ENDED APRIL 26, 1998
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
DEFERRED ACCUMULATED RETAINED
COMMON STOCK COMPENSATION OTHER EARNINGS
-------------------- AND OFFICERS COMPREHENSIVE (ACCUMULATED
SHARES AMOUNT RECEIVABLES INCOME DEFICIT) TOTAL
------ ------ ------------ ------------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT 1/25/98........... 75,395,998 $661.0 $(6.3) $(0.9) $(55.7) $598.1
Net income................... -- -- -- -- 3.8 3.8
Issuance of common stock..... 767,410 5.3 -- -- -- 5.3
Currency translation
adjustment................. -- -- -- 0.8 -- 0.8
Change in receivables and
deferred compensation...... -- -- 0.8 -- -- 0.8
---------- ------ ----- ----- ------ ------
BALANCE AT 4/26/98........... 76,163,408 $666.3 $(5.5) $(0.1) $(51.9) $608.8
========== ====== ===== ===== ====== ======
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
3
<PAGE> 6
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS ENDED
----------------------
APRIL 26, APRIL 27,
1998 1997
--------- ---------
<S> <C> <C>
CASH PROVIDED BY (USED FOR):
OPERATIONS
Net income.................................................. $ 3.8 $ 0.4
Adjustments to reconcile net income to operating cash flows:
Depreciation and goodwill amortization.................... 15.5 12.0
Change in other long-term assets and liabilities.......... 1.6 14.9
Cash provided by (used for) current assets and current
liabilities:
Increase in inventories................................ (46.9) (13.1)
Increase in accounts payable........................... 4.5 0.9
Other, net............................................. (63.2) (68.1)
------ ------
Net cash used for operations................................ (84.7) (53.0)
------ ------
INVESTING
Capital expenditures........................................ (32.0) (14.2)
------ ------
Net cash used for investing................................. (32.0) (14.2)
------ ------
FINANCING
Net funding from credit facility............................ 97.0 50.0
Issuance of common stock.................................... 3.4 6.0
Repurchase of common stock.................................. -- (5.9)
Other, net.................................................. 0.9 7.7
------ ------
Net cash provided by financing.............................. 101.3 57.8
------ ------
NET DECREASE IN CASH AND EQUIVALENTS........................ (15.4) (9.4)
Cash and equivalents at beginning of year................... 65.1 42.6
------ ------
Cash and equivalents at end of period....................... $ 49.7 $ 33.2
====== ======
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4
<PAGE> 7
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 25, 1998 (the
1997 consolidated financial statements).
The Company's fiscal year ends on the Sunday immediately preceding the last
Wednesday in January. At April 26, 1998, the Company operated 206 superstores
under the Borders name, including one in Singapore, 903 mall-based and other
bookstores primarily under the Waldenbooks name and in the United Kingdom, 24
bookstores under the Books etc. name.
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. Since February 1995, 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, would have a
material effect on the Company's financial position or earnings.
In March 1998, the American Booksellers Association ("ABA") and twenty-six
independent bookstores filed a lawsuit in the United States District Court for
the Northern District of California against the Company and Barnes & Noble Inc.
alleging that the defendants receive from publishers more favorable pricing and
other terms of sale than are available to plaintiffs in violation of the
Robinson-Patman Act, the California Unfair Trade Practice Act and the California
Unfair Competition Law. The Complaint seeks injunctive and declaratory relief;
treble damages on behalf of each of the bookstore plaintiffs, and, with respect
to the California bookstore plaintiffs, any other damages permitted by
California law; disgorgement of money, property and gains wrongfully obtained in
connection with the purchase of books for resale, or offered for resale, in
California from March 18,1994 until the action is completed and prejudgement
interest on any amounts awarded in the action, as well as attorney fees and
costs. The Company intends to vigorously defend the action. The plaintiffs have
not specified the amount of their monetary claims and the Company is not able to
estimate the amount of such claims at this time.
5
<PAGE> 8
BORDERS GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- FINANCING
Credit Facility: The Company has a multicurrency credit agreement which
provides a $425.0, 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, issue or repurchase its common stock in excess of $100 million (plus any
proceeds and tax benefits resulting from stock option exercises and tax benefits
resulting from the vesting of restricted shares purchased by employees from the
Company), 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 $223.8 at April 26, 1998 and $122.5 at January 25, 1998.
Lease Financing Facility: The Company has a five-year, $250.0 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 $180.6 outstanding under the lease facility
at April 26, 1998 and $157.9 at January 25, 1998.
NOTE 4 -- CHANGES IN ACCOUNTING PRINCIPLES
Effective January 26, 1998, the Company adopted Statement of Financial
Accounting Standards (FAS) No. 130, "Reporting Comprehensive Income." This
statement requires that all items recognized under accounting standards as
components of comprehensive income be reported in an annual financial statement
that is displayed with the same prominence as other annual financial statements.
This statement also requires that an entity classify items of other
comprehensive income by their nature in an annual financial statement.
Comprehensive income includes all changes in equity during a period except those
resulting from investments by or distributions to shareholders. For the Company,
comprehensive income for all periods presented consisted solely of net earnings
and foreign currency translation adjustments pursuant to FAS No. 52, "Foreign
Currency Translation," as follows:
<TABLE>
<CAPTION>
APRIL 26, APRIL 27,
1998 1997
--------- ---------
<S> <C> <C>
Net earnings................................................ $ 3.8 $0.4
Other comprehensive income:
Foreign currency translation adjustments.................. 1.3 --
Related tax effect........................................ (0.5) --
----- ----
0.8 --
----- ----
Total comprehensive income.................................. $ 4.6 $0.4
===== ====
</TABLE>
Effective January 26, 1998, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position (SOP) 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use." This SOP
provides guidance on when costs incurred for internal-use computer software are
and are not capitalized, and requires prospective adoption. Costs incurred as
part of the preliminary project stage or post-implementation/operation stage of
computer software development must be expensed as incurred. Costs incurred as
part of the application development stage of computer software development must
be capitalized. Adoption of this SOP did not have a material impact on the
Company's financial position or results of operations for the first quarter.
6
<PAGE> 9
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 world
based upon both sales and number of stores. At April 26, 1998, the Company
operated 206 superstores under the Borders name, including one in Singapore, 903
mall-based and other bookstores primarily under the Waldenbooks name and in the
United Kingdom, 24 bookstores under the Books etc. name.
The Company's first quarters of 1998 and 1997 consisted of the 13 weeks
ended April 26, 1998 and April 27, 1997, respectively.
RESULTS OF OPERATIONS
The following table presents the Company's statement of operations data, as
a percentage of sales, for the periods indicated:
<TABLE>
<CAPTION>
13 WEEKS ENDED
----------------------
APRIL 26, APRIL 27,
1998 1997
--------- ---------
<S> <C> <C>
Sales....................................................... 100.0% 100.0%
Cost of merchandise sold, including occupancy costs......... 74.4 75.7
----- -----
Gross margin................................................ 25.6 24.3
Selling, general and administrative expenses................ 23.8 23.8
Pre-opening expense......................................... -- 0.1
Goodwill amortization....................................... 0.1 0.1
----- -----
Operating income............................................ 1.7 0.4
Interest expense............................................ 0.5 0.2
----- -----
Income before income taxes.................................. 1.2 0.2
Income tax expense.......................................... 0.5 0.1
----- -----
Net income.................................................. 0.7% 0.1%
===== =====
</TABLE>
STORE ACTIVITY
The Company's store activity is summarized below:
<TABLE>
<CAPTION>
YEAR
QUARTER ENDED ENDED
--------------------- -----------
APRIL 26, APRIL 27, JANUARY 25,
1998 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
BORDERS SUPERSTORES
Beginning number of stores.................................. 203 157 157
Openings.................................................... 3 6 46
--- --- ---
Ending number of stores..................................... 206 163 203
=== === ===
WALDEN MALL BOOKSTORES
Beginning number of stores.................................. 923 961 961
Openings.................................................... 4 1 8
Closings.................................................... (24) (32) (46)
--- --- ---
Ending number of stores..................................... 903 930 923
=== === ===
</TABLE>
7
<PAGE> 10
13 WEEKS ENDED APRIL 26, 1998 AND APRIL 27, 1997
Sales in the first quarter of 1998 were $545.3 million, an $81.7 million,
or 17.6%, increase over first quarter 1997 sales of $463.6 million. This
increase reflects a $71.5 million, or 27.1%, increase in Borders' sales
resulting from new store openings and a comparable store sales increase of 4.5%.
This increase was offset in part by a decline in Walden sales of $5.6 million
due to store closings and a comparable store sales decrease of 0.9%.
Cost of merchandise sold, including occupancy costs, was $405.5 million in
the first quarter of 1998, as compared with $350.8 million in the first quarter
of 1997. Gross margin as a percentage of sales was 25.6% in 1998 versus 24.3% in
1997. The 1.3% increase in gross margin primarily reflects buying improvements
resulting in a higher initial product margin, and tighter control of inventory
shrinkage.
Selling, general and administrative ("SG&A") expenses in the first quarter
of 1998 were up $19.4 million, or 17.6%, over SG&A expenses in the first quarter
of 1997 ($129.8 million versus $110.4 million). As a percentage of sales, SG&A
expenses were 23.8% in 1998, consistent with 23.8% in the first quarter of 1997
due to increased spending on strategic initiatives which offset operating
leverage in the Company's core business.
Pre-opening expense in the first quarter of 1998 was $0.3 million versus
$0.3 million from the same period in 1997. 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 3 Borders
superstores and 4 Walden stores in the first quarter of 1998 as compared to 6
Borders superstores and 1 Walden store in the first quarter of 1997.
Goodwill amortization was $0.7 million in the first quarter of 1998 versus
$0.3 million from the same period in 1997. The increase of $0.4 is a result of
the higher goodwill balance due to the acquisition of Books etc. in October
1997.
Interest expense was $2.7 million in the first quarter of 1998 as compared
to $1.0 million in 1997. The increase of $1.7 million is primarily related to
interest on borrowings for the repurchase of common stock and the acquisition of
Books etc.
Income tax expense in the first quarter of 1998 was $2.5 million as
compared to $0.4 million in 1997.
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 26, 1998 was
$84.7 million as compared to $53.0 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 $15.5 million.
Operating cash outflows for the period were primarily the result of inventory
purchases and a decrease in taxes payable during the period.
Net cash used for investing for the first 13 weeks of 1998 was $32.0
million as compared to $14.2 million in the first 13 weeks of 1997, and
primarily represents capital expenditures for new stores and the addition of the
new fulfillment center in Nashville.
Net cash provided by financing in the first 13 weeks of 1998 was $101.3
million versus $57.8 million in the first 13 weeks of 1997. Net cash provided by
financing resulted primarily from net borrowings under the credit facility.
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 and international expansion programs.
8
<PAGE> 11
The Company believes funds generated from operations, borrowings under the
credit facility and financing through the lease facility will be sufficient to
fund its anticipated capital requirements for at least two to three years.
The Company has a multicurrency credit agreement which provides a $425.0
million, 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, issue or repurchase its common stock in excess of $100 million (plus any
proceeds and tax benefits resulting from stock option exercises and tax benefits
resulting from the vesting of restricted shares purchased by employees from the
Company), 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 $223.8 at April 26, 1998 and $122.5 at January 25, 1998.
The Company has a five year, $250.0 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 45 properties financed through the lease facility, with
a financed value of $180.6 million, at April 26, 1998. 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. Since February 1995, 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, would have a
material effect on the Company's financial position or earnings.
The Company currently has a program in place to repurchase its common stock
up to a limit of $100 million plus the aggregate exercise price of options that
are exercised from time to time and the aggregate tax benefits to the Company
from the exercise of options and the vesting of restricted shares purchased by
employees from the Company. As of April 26, 1998, the aggregate limit on
repurchases under the program was approximately $113.6 million. It is the
Company's intention to repurchase its common stock through a combination of
market purchases, share withholding to pay taxes associated with the exercise of
options and the vesting of restricted shares, and the acceptance of previously
owned shares to pay such taxes or the exercise price of options. As of April 26,
1998, the Company had repurchased $61.8 million of common stock under this
program. No shares are repurchased during the first quarter of 1998. Subsequent
to the first quarter of 1998, $25.2 million of common stock was repurchased
under the program.
9
<PAGE> 12
OTHER MATTERS
The Company is currently working to resolve the potential impact of the
year 2000 on the processing of date-sensitive information by the Company's
computerized information systems. The year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failures. Based on
preliminary information, costs of addressing potential problems are not
currently expected to have a material adverse impact on the Company's financial
position, results of operations or cash flows in future periods. However, if the
Company, its customers or vendors are unable to resolve such processing issues
in a timely manner, it could result in a material financial risk. Accordingly,
the Company plans to devote the necessary resources to resolve all significant
year 2000 issues in a timely manner; however, there can be no guarantees that
the systems of other companies on which the Company relies will be converted in
a timely manner.
In March 1998, the American Booksellers Association ("ABA") and twenty-six
independent bookstores filed a lawsuit in the United States District Court for
the Northern District of California against the Company and Barnes & Noble Inc.
alleging that the defendants receive from publishers more favorable pricing and
other terms of sale than are available to plaintiffs in violation of the
Robinson-Patman Act, the California Unfair Trade Practice Act and the California
Unfair Competition Law. The Complaint seeks injunctive and declaratory relief;
treble damages on behalf of each of the bookstore plaintiffs, and, with respect
to the California bookstore plaintiffs, any other damages permitted by
California law; disgorgement of money, property and gains wrongfully obtained in
connection with the purchase of books for resale, or offered for resale, in
California from March 18,1994 until the action is completed and prejudgement
interest on any amounts awarded in the action, as well as attorney fees and
costs. The Company intends to vigorously defend the action. The plaintiffs have
not specified the amount of their monetary claims and the Company is not able to
estimate the amount of such claims at this time.
SAFE HARBOR STATEMENT
Certain of the statements set forth above are forward looking statements
within the meaning of the Securities Exchange Act of 1934. Such statements are
based upon management's estimates, assumptions and projections and are subject
to risks and uncertainties that could cause actual results to differ materially
from those set forth in the forward looking statements. Factors that could cause
actual results to differ materially from those in the forward looking statements
include, among other things, consumer demand for the Company's products, which
is believed to be related to overall consumer spending patterns and, with
respect to the mall business, overall mall traffic; an unexpected increase in
competition; higher than anticipated interest, occupancy, labor, distribution
and inventory shrinkage costs; unanticipated work stoppages; higher than
anticipated costs associated with the closing of underperforming stores;
unanticipated increases in the cost of the merchandise sold by the Company; the
performance of the Company's new strategic initiatives, including the Internet
and international expansion; the stability and capacity of the Company's
information systems; unanticipated costs or problems relating to the Company's
Year 2000 compliance; changes in foreign currency exchange rates; and the
continued ability of the Company to locate and develop suitable sites for its
superstore expansion program.
10
<PAGE> 13
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is from time to time involved in or affected by litigation
incidental to the conduct of its respective businesses. The Company believes
that no currently pending litigation to which it is a party will have a material
adverse effect on its liquidity, financial position or results of operations.
In March 1998, the American Booksellers Association ("ABA") and twenty-six
independent bookstores filed a lawsuit in the United States District Court for
the Northern District of California against the Company and Barnes & Noble Inc.
alleging that the defendants receive from publishers more favorable pricing and
other terms of sale than are available to plaintiffs in violation of the
Robinson-Patman Act, the California Unfair Trade Practice Act and the California
Unfair Competition Law. The Complaint seeks injunctive and declaratory relief;
treble damages on behalf of each of the bookstore plaintiffs, and, with respect
to the California bookstore plaintiffs, any other damages permitted by
California law; disgorgement of money, property and gains wrongfully obtained in
connection with the purchase of books for resale, or offered for resale, in
California from March 18, 1994 until the action is completed and pre-judgment
interest on any amounts awarded in the action, as well as attorney fees and
costs. The Company intends to vigorously defend the action. The plaintiffs have
not specified the amount of their monetary claims and the Company is not able to
estimate the amount of such claims at this time.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
(a) Exhibits:
27.0 Financial Data Schedule
(b) Reports on Form 8-K: none
11
<PAGE> 14
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, 1998 By: /s/ KENNETH E. SCHEVE
------------------------------------
Kenneth E. Scheve
Senior Vice President and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
12
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-24-1999
<PERIOD-START> JAN-26-1998
<PERIOD-END> APR-26-1998
<CASH> 50
<SECURITIES> 0
<RECEIVABLES> 68
<ALLOWANCES> 0
<INVENTORY> 926
<CURRENT-ASSETS> 1,044
<PP&E> 684
<DEPRECIATION> 293
<TOTAL-ASSETS> 1,577
<CURRENT-LIABILITIES> 911
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 609
<TOTAL-LIABILITY-AND-EQUITY> 1,577
<SALES> 545
<TOTAL-REVENUES> 545
<CGS> 406
<TOTAL-COSTS> 406
<OTHER-EXPENSES> 131
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> 6
<INCOME-TAX> 2
<INCOME-CONTINUING> 4
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
