<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 October 25, 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)
MICHIGAN 38-3196915
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification
organization) No.)
100 Phoenix Drive, Ann Arbor, Michigan 48108
--------------------------------------------
(Address of principal executive offices)
(zip code)
(734) 477-1100
--------------
(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
-------------- November 30, 1998
------------------------
Common Stock 77,085,384
-----------
<PAGE> 2
BORDERS GROUP, INC.
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information
Page
<S> <C> <C>
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
Item 3. Quantitative and Qualitative Disclosures about
Market Risk N/A
Part II - Other information
Item 1. Legal Proceedings 19
Item 2. Changes in Securities N/A
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a vote of N/A
Securityholders
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
<PAGE> 3
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS EXCEPT COMMON SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS ENDED
OCTOBER 25, OCTOBER 26,
1998 1997
------------ ------------
<S> <C> <C>
Sales $ 558.3 $ 477.3
Cost of merchandise sold, including
occupancy costs 412.9 355.1
------------ ------------
Gross margin 145.4 122.2
Selling, general and administrative expenses 138.5 117.9
Pre-opening expense 3.0 1.7
Goodwill amortization 0.7 0.4
------------ ------------
Operating income 3.2 2.2
Interest expense 4.6 1.6
------------ ------------
Income (loss) before income tax (1.4) 0.6
Income tax expense (benefit) (0.6) 0.2
------------ ------------
Net income (loss) $ (0.8) $ 0.4
============ ============
EARNINGS PER COMMON SHARE DATA --
Diluted earnings (loss) per common share $ (0.01) $ --
============ ============
Diluted weighted average common shares
outstanding (in thousands) 81,854 82,361
============ ============
Basic earnings (loss) per common share $ (0.01) $ 0.01
============ ============
Basic weighted average common shares
outstanding (in thousands) 76,728 75,914
============ ============
</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 COMMON SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
39 WEEKS ENDED
OCTOBER 25, OCTOBER 26,
1998 1997
---------- -----------
<S> <C> <C>
Sales $ 1,649.5 $ 1,407.2
Cost of merchandise sold, including
occupancy costs 1,224.4 1,057.0
---------- ----------
Gross margin 425.1 350.2
Selling, general and administrative expenses 398.8 339.4
Pre-opening expense 4.1 3.6
Goodwill amortization 2.1 0.9
---------- ----------
Operating income 20.1 6.3
Interest expense 11.3 4.0
---------- ----------
Income before income tax 8.8 2.3
Income tax expense 3.4 1.0
---------- ----------
Net income $ 5.4 $ 1.3
========== ==========
EARNINGS PER COMMON SHARE DATA --
Diluted earnings per common share $ 0.07 $ 0.02
========== ==========
Diluted weighted average common shares
outstanding (in thousands) 82,777 82,294
========== ==========
Basic earnings per common share $ 0.07 $ 0.02
========== ==========
Basic weighted average common shares
outstanding (in thousands) 76,394 76,012
========== ==========
</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>
10/25/98 10/26/97 1/25/98
<S> <C> <C> <C>
ASSETS
Current Assets
Cash $ 40.3 $ 76.6 $ 65.1
Merchandise inventories 1,128.6 987.8 879.1
Accounts receivable and other current
assets 70.9 54.2 74.2
--------- --------- ---------
Total Current Assets 1,239.8 1,118.6 1,018.4
Property and equipment, net of
accumulated depreciation of $319.8,
$276.2 and $281.5 at October 25, 1998,
October 26, 1997 and January 25, 1998,
respectively 450.3 358.4 373.7
Other assets and deferred charges 32.6 37.5 33.3
Goodwill, net of accumulated
amortization of $45.2, $42.3, and
$43.1 at October 25, 1998, October 26,
1997 and January 25, 1998,
respectively 107.9 107.1 109.5
--------- --------- ---------
$ 1,830.6 $ 1,621.6 $ 1,534.9
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt and capital lease
obligations due within one year $ 348.2 $ 270.8 $ 127.3
Trade accounts payable 631.3 594.0 480.7
Accrued payroll and other liabilities 161.5 173.9 210.8
Taxes, including income taxes 3.9 24.1 62.6
--------- --------- ---------
Total Current Liabilities 1,144.9 1,062.8 881.4
Long-term debt and capital lease
obligations 6.0 5.5 5.2
Other long-term liabilities 53.9 46.5 50.2
Commitments and contingencies (Note 2) -- -- --
--------- --------- ---------
Total Liabilities 1,204.8 1,114.8 936.8
--------- --------- ---------
Stockholders' Equity
Common stock; 200,000,000 shares
authorized; 76,694,375, 75,120,255
and 75,395,988 issued and outstanding
at October 25, 1998, October 26, 1997,
and January 25, 1998, respectively 683.2 654.2 661.0
Officers receivable and deferred
compensation (4.6) (12.8) (6.3)
Accumulated other comprehensive income (2.5) -- (0.9)
Accumulated deficit (50.3) (134.6) (55.7)
--------- --------- ---------
Total Stockholders' Equity 625.8 506.8 598.1
--------- --------- ---------
$ 1,830.6 $ 1,621.6 $ 1,534.9
========= ========= =========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
(3)
<PAGE> 6
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE 39 WEEKS ENDED OCTOBER 25, 1998
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
DEFERRED ACCUMULATED RETAINED
COMPENSATION OTHER EARNINGS
COMMON STOCK 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 -- -- -- -- 5.4 5.4
Issuance of common
stock 2,850,053 63.5 -- -- -- 63.5
Repurchase and retirement
of common stock (1,551,676) (41.3) -- -- -- (41.3)
Currency translation
adjustment -- -- -- (1.6) -- (1.6)
Change in receivable
and deferred compensation -- -- 1.7 -- -- 1.7
----------- ------------ ----------- ----------- ----------- -----------
BALANCE AT 10/25/98 76,694,375 $ 683.2 $ (4.6) $ (2.5) $ (50.3) $ 625.8
=========== ============ =========== =========== =========== ===========
</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>
39 WEEKS ENDED
OCTOBER 25, OCTOBER 26,
1998 1997
<S> <C> <C>
CASH PROVIDED BY (USED FOR):
OPERATIONS
Net income $ 5.4 $ 1.3
Adjustments to reconcile net income
to operating cash flows:
Depreciation and goodwill amortization 45.6 37.8
Change in other long-term
assets and liabilities 5.3 21.2
Cash provided by (used for) current
assets and current liabilities:
(Increase)/Decrease in inventories (249.5) (239.8)
Increase/(Decrease) in accounts payable 150.6 234.5
Increase/(Decrease) in taxes payable (58.7) (35.2)
Increase/(Decrease) in accrued liabilities (46.3) (28.6)
Other, net 0.5 9.2
-------- --------
Net cash provided by (used for) operations (147.1) 0.4
-------- --------
INVESTING
Capital expenditures (120.8) (82.0)
Acquisitions -- (51.0)
-------- --------
Net cash used for investing (120.8) (133.0)
-------- --------
FINANCING
Net funding from credit facility 220.9 224.4
Issuance of common stock 42.0 10.7
Repurchase of common stock (41.3) (61.8)
Other, net 21.5 (6.7)
-------- --------
Net cash provided by financing 243.1 166.6
-------- --------
NET INCREASE (DECREASE) IN CASH AND
EQUIVALENTS (24.8) 34.0
Cash and equivalents at beginning of
year 65.1 42.6
-------- --------
Cash and equivalents at end of period $ 40.3 $ 76.6
======== ========
</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 25, 1998 (the
1997 consolidated financial statements).
The Company's fiscal year ends on the Sunday immediately preceding the
last Wednesday in January. At October 25, 1998, the Company operated 238
superstores under the Borders name, including one in Singapore, one in
Australia, and two in the United Kingdom, 896 mall-based and other bookstores
primarily under the Waldenbooks name and 25 bookstores under the Books etc. name
in the United Kingdom. The Company also operates an e-commerce site under the
name Borders.com.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
In addition to the specific matters described below, 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 other 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 Corporation to maintain required
investment grade ratings or the termination of the guarantee by Kmart
Corporation of the Company's obligations under the related leases (which would
require mutual consent of Kmart Corporation 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 Corporation 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.
(6)
<PAGE> 9
BORDERS GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA)
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 violations 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.
In August 1998, The Intimate Bookshop, Inc. and its owner, Wallace
Kuralt, have filed a lawsuit in the United States District Court for the
Southern District of New York against the Company, Barnes & Noble, Inc., Amazon,
Inc., certain publishers and others alleging violation of the Robinson-Patman
Act and other federal law, New York statutes governing trade practices and
common law. An amended Complaint was subsequently filed eliminating the class
action allegations contained in the original Complaint. The Amended Complaint
alleges that the named plaintiffs have suffered damages of $11,250,000 or more
and requests treble damages on behalf of the named plaintiffs, as well as of
injunctive and declaratory relief (including an injunction requiring the closure
of all of defendants' stores within 10 miles of any location where plaintiff
either has or had a retail bookstore during the four years preceding the filing
of the Complaint, and prohibiting the opening by defendants of any bookstore in
such areas for the next 10 years), disgorgement of alleged discriminatory
discounts, rebates, deductions and payments, punitive damages, interest, costs,
attorneys fees and other relief. Many of the allegations in the Amended
Complaint are similar to those contained in the action instituted by the ABA and
26 bookseller plaintiffs against the Company and Barnes & Noble in March of
1998. The Company intends to vigorously defend the action.
On November 20, 1998, six independent booksellers instituted an action
against the Company and Barnes and Noble in the United States District Court for
the Northern District of California asserting claims, and seeking relief,
similar to claims made and relief sought in the ABA litigation described above.
The Company intends to vigorously defend the action.
The Company has not included any liability in its financial statements
in connection with the lawsuits described above.
(7)
<PAGE> 10
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 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 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 $347.0 at
October 25, 1998, $122.5 at January 25, 1998, and $260.8 at October 26, 1997.
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 $194.6 outstanding under the lease facility
at October 25, 1998, $157.9 at January 25, 1998, and $141.8 at October 26,
1997.
(8)
<PAGE> 11
BORDERS GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA)
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>
Three Months Ended
October 25, October 26,
1998 1997
----------- -----------
<S> <C> <C>
Net earnings (loss) $ (0.8) $ 0.4
Other comprehensive income:
Foreign currency translation adjustments (1.3) -
Related tax effect 0.5 -
----------- -----------
(0.8) -
----------- -----------
Total comprehensive income $ (1.6) $ 0.4
=========== ===========
Nine Months Ended
October 25, October 26,
1998 1997
----------- -----------
Net earnings $ 5.4 $ 1.3
Other comprehensive income:
Foreign currency translation adjustments (2.5) -
Related tax effect 0.9 -
----------- -----------
(1.6) -
----------- -----------
Total comprehensive income $ 3.8 $ 1.3
=========== ===========
</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. 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. This SOP does not
permit restatement of amounts recorded prior to the adoption of the SOP;
however, adoption of this SOP did not have a
(9)
<PAGE> 12
material impact on the Company's financial position, results of operations, or
liquidity in the third quarter of 1998.
(10)
<PAGE> 13
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 October 25, 1998, the
Company operated 238 superstores under the Borders name, including one in
Singapore, one in Australia, and two in the United Kingdom, 896 mall-based and
other bookstores primarily under the Waldenbooks name and 25 bookstores under
the Books etc. name in the United Kingdom. The Company also operates an
e-commerce site under the name Borders.com.
The Company's third quarters of 1998 and 1997 consisted of the 13 weeks
ended October 25, 1998 and October 26, 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 39 WEEKS ENDED
OCTOBER 25, OCTOBER 26, OCTOBER 25, OCTOBER 26,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of merchandise sold,
including
occupancy costs 74.0 74.4 74.3 75.1
----------- ----------- ----------- ----------
Gross margin 26.0 25.6 25.7 24.9
Selling, general and
administrative
expenses 24.8 24.7 24.2 24.1
Pre-opening expense 0.5 0.4 0.2 0.3
Goodwill amortization 0.1 0.1 0.1 0.1
----------- ----------- ----------- ----------
Operating income 0.6 0.4 1.2 0.4
Interest expense 0.8 0.3 0.7 0.2
----------- ----------- ----------- ----------
Income (loss) before income taxes (0.2) 0.1 0.5 0.2
Income tax expense (benefit) (0.1) - 0.2 0.1
----------- ----------- ----------- ----------
Net income (loss) (0.1) % 0.1 % 0.3 % 0.1 %
=========== =========== =========== ==========
</TABLE>
(11)
<PAGE> 14
STORE ACTIVITY
The Company's store activity is summarized below:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED YEAR ENDED
OCTOBER 25, OCTOBER 26, OCTOBER 25, OCTOBER 26, JANUARY 25,
1998 1997 1998 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BORDERS SUPERSTORES
Beginning number of stores 213 171 203 157 157
Openings 25 18 35 32 46
------ ------ ------ ------ ------
Ending number of stores 238 189 238 189 203
====== ====== ====== ====== ======
WALDEN MALL BOOKSTORES
Beginning number of stores 899 929 923 961 961
Openings 5 2 10 7 8
Closings (8) (4) (37) (41) (46)
------ ------ ------ ------ ------
Ending number of stores 896 927 896 927 923
====== ====== ====== ====== ======
</TABLE>
13 WEEKS ENDED OCTOBER 25, 1998 AND OCTOBER 26, 1997
Sales in the third quarter of 1998 were $558.3 million, an $81.0
million, or 17.0%, increase over third quarter 1997 sales of $477.3 million.
This increase reflects a $68.7 million, or 24.5%, increase in Borders' sales
resulting from new store openings and a comparable store sales increase of 3.6%.
This increase was offset in part by a decline in Walden sales of $6.8 million
due to store closings and a comparable store sales decrease of 1.5%. An
unplanned distribution center backlog during the startup of the new west coast
facility, which has subsequently been resolved, negatively impacted comparative
sales during the quarter by 50 basis points at Borders and 90 basis points at
Walden.
Cost of merchandise sold, including occupancy costs, was $412.9 million
in the third quarter of 1998, as compared with $355.1 million in the third
quarter of 1997. Gross margin as a percentage of sales was 26.0% in 1998 versus
25.6% in 1997. The 0.4% increase in gross margin primarily reflects tighter
control of inventory shrinkage.
Selling, general and administrative ("SG&A") expenses in the third
quarter of 1998 were up $20.6 million, or 17.5%, over SG&A expenses in the third
quarter of 1997 ($138.5 million versus $117.9 million). As a percentage of
sales, SG&A expenses were 24.8% in 1998 versus 24.7% in the third quarter of
1997. The 0.1% increase in SG&A expenses is due to increased spending on
strategic initiatives.
(12)
<PAGE> 15
Pre-opening expense in the third quarter of 1998 was $3.0 million
versus $1.7 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 25 Borders
superstores and 5 Walden stores in the third quarter of 1998 as compared to 18
Borders superstores and 2 Walden stores in the third quarter of 1997.
Goodwill amortization was $0.7 million in the third quarter of 1998
versus $0.4 million from the same period in 1997. The increase of $0.3 is a
result of the higher goodwill balance due to the acquisition of Books etc. in
October 1997.
Interest expense was $4.6 million in the third quarter of 1998 as
compared to $1.6 million in 1997. The increase of $3.0 million is primarily
related to interest on borrowings for the repurchase of common stock and the
acquisition of Books etc.
Income tax benefit in the third quarter of 1998 was $0.6 million as
compared to income tax expense of $0.2 million in 1997.
39 WEEKS ENDED OCTOBER 25, 1998 AND OCTOBER 26, 1997
Sales in the 39 weeks ended October 25, 1998 were $1,649.5 million, a
$242.3 million, or 17.2%, increase over 39 weeks ended October 26, 1997 sales of
$1,407.2 million. This increase reflects a $209.9 million, or 25.8%, 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 $20.0 million due to store closings and a comparable store sales decrease of
1.6%.
Cost of merchandise sold, including occupancy costs, was $1,224.4
million in the 39 weeks ended October 25, 1998, as compared with $1,057.0
million in the same 1997 period. Gross margin as a percentage of sales was 25.7%
in 1998 versus 24.9% in 1997. The 0.8% 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 39 weeks
ended October 25, 1998 were up $59.4 million, or 17.5%, over SG&A expenses in
the same period in 1997 ($398.8 million versus $339.4 million). As a percentage
of sales, SG&A expenses were 24.2% in 1998 versus 24.1% in 1997. The 0.1%
increase in SG&A expenses is due to increased spending on strategic initiatives
which offset operating leverage in the Company's core business.
(13)
<PAGE> 16
Pre-opening expense in the 39 weeks ended October 25, 1998 was $4.1
million versus $3.6 million in the same period in 1997. The Company opened 35
Borders superstores and 10 Walden stores in 1998 as compared to 32 Borders
superstores and 7 Walden stores in 1997.
Goodwill amortization was $2.1 million in the 39 weeks ended October
25, 1998 versus $0.9 million in the same period in 1997. The increase of $1.2 is
a result of the higher goodwill balance due to the acquisition of Books etc. in
October 1997.
Interest expense was $11.3 million in the 39 weeks ended October 25,
1998 as compared to $4.0 million in 1997. The increase of $7.3 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 39 weeks ended October 25, 1998 was $3.4
million as compared to $1.0 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 39 weeks ended October 25, 1998
was $147.1 million as compared to net cash provided by operations of $0.4
million in the corresponding period in the prior year. The current year
operating cash inflows primarily reflect net income, non-cash depreciation and
amortization expense of $45.6 million, and a $150.6 million increase in accounts
payable. Operating cash outflows for the period were primarily the result of
inventory purchases, and decreases in taxes payable and accrued liabilities
during the period.
Net cash used for investing for the first 39 weeks of 1998 was $120.8
million as compared to $133.0 million in the first 39 weeks of 1997, and
primarily represents capital expenditures for new stores, existing store
refurbishments, the addition of the new Nashville fulfillment center, and the
new west coast distribution center.
Net cash provided by financing in the first 39 weeks of 1998 was $243.1
million versus $166.6 million in the first 39 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.
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.
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 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
(14)
<PAGE> 17
tangible net worth. The Company had borrowings outstanding under the credit
facility of $347.0 at October 25, 1998, $122.5 at January 25, 1998, and
$260.0 at October 26, 1997.
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 48 properties financed through the lease facility, with
a financed value of $194.6 million, at October 25, 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 Corporation to maintain required
investment grade ratings or the termination of the guarantee by Kmart
Corporation of the Company's obligations under the related leases (which would
require mutual consent of Kmart Corporation and the Company). 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 Corporation 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 October 25, 1998, the aggregate
limit on repurchases under the program was approximately $158.3 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 October 25, 1998, the Company had repurchased $103.2 million of common stock
under this program.
(15)
<PAGE> 18
OTHER MATTERS
YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define a specific year. Absent corrective
actions, a computer program that has date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
system failures or miscalculations causing disruptions to various activities and
operations.
The Company initiated assessments in prior years to identify the work
efforts required to assure that systems supporting the business successfully
operate beyond the turn of the century. The scope of this work effort
encompasses information technology systems, systems utilizing embedded
technology, such as microcontrollers, and the readiness of external third
parties, such as suppliers and service providers.
FINANCIAL AND NON-FINANCIAL INFORMATION TECHNOLOGY SYSTEMS
These systems encompass both application software and operating system
software. The Company has completed its assessment and virtually all
renovation of potential problem areas concerning application software,
and is currently validating the results. Validation and implementation
(the final stage) of application software is expected to be
substantially completed by the end of fiscal 1998. The assessment of
operating system software is currently underway; this assessment, as
well as validation and implementation, is expected to be completed by
the end of the second quarter of fiscal 1999.
EMBEDDED TECHNOLOGY SYSTEMS
The Company plans to complete its assessment of the potential risks
associated with embedded technology systems, such as HVAC, elevators
and security systems at the Company's stores, distribution centers, and
headquarters by the end of fiscal 1998. This involves inventorying all
equipment utilizing embedded technology by vendor and model, and
contacting the necessary vendors with regards to the compliance status
of each item. Services or equipment provided by non-compliant vendors
identified through the assessment process will be upgraded to compliant
versions. This step is expected to be completed by the end of the
second quarter of fiscal 1999.
SUPPLIERS AND SERVICE PROVIDERS
The Company relies on numerous third parties to provide merchandise and
services. As such, attention has been focused on compliance attainment
efforts of vendors. Key parties have been contacted for clarification
of their year 2000 plans and their compliance status. Merchandise or
services provided by non-compliant vendors identified through the
assessment process will be evaluated for potential alternative
arrangements. Such arrangements may include less reliance on electronic
ordering or sourcing through alternative distribution channels to the
extent that merchandise is available through such channels.
Notwithstanding the substantive work efforts described above, the
Company could potentially experience disruptions to some aspects of its
(16)
<PAGE> 19
various activities and operations, including those resulting from non-compliant
systems utilized by unrelated third party business entities. The Company is
beginning the process of developing business contingency plans in order to
attempt to mitigate the extent of potential disruption to business operations.
The Company anticipates that development of such contingency plans will be
completed by the end of the second quarter of fiscal 1999.
Costs of addressing the Year 2000 Issue have not been material to date
and, based on preliminary information gathered to date from the Company and its
vendors, 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 or its vendors are unable to resolve such
processing issues in a timely manner, it could result in a material financial
risk, including loss of revenue, substantial unanticipated costs and service
interruptions.
OTHER
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 violations 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.
In August 1998, The Intimate Bookshop, Inc. and its owner, Wallace
Kuralt, have filed a lawsuit in the United States District Court for the
Southern District of New York against the Company, Barnes & Noble, Inc., Amazon,
Inc., certain publishers and others alleging violation of the Robinson-Patman
Act and other federal law, New York statutes governing trade practices and
common law. An Amended Complaint was subsequently filed eliminating the class
action allegations contained in the original Complaint. The Amended Complaint
alleges that the named plantiffs have suffered damages of $11,250,000 or more
and requests treble damages on behalf of the named plaintiffs, as well as of
injunctive and declaratory relief (including an injunction requiring the closure
of all of defendants' stores within 10 miles of any location where plaintiff
either has or had a retail bookstore during the four years preceding the filing
of the Complaint, and prohibiting the opening by defendants of any bookstore in
such areas for the next 10 years), disgorgement of alleged discriminatory
discounts, rebates, deductions and payments, punitive damages, interest, costs,
attorneys fees and other relief. Many of the allegations in the Amended
Complaint are similar to those contained in the action instituted by the ABA and
26 bookseller plaintiffs against the Company and Barnes & Noble in March 1998.
The Company intends to vigorously defend the action.
On November 20, 1998, six independent booksellers instituted an action
against the Company and Barnes and Noble in the United States District Court for
the Northern District of California asserting claims, and seeking relief,
similar to claims made and relief sought in the ABA litigation described above.
The Company intends to vigorously defend the action.
(17)
<PAGE> 20
FORWARD-LOOKING STATEMENTS
This document includes forward-looking statements, as defined in the
Private Securities Litigation Reform Act of 1995, including statements regarding
the Company's performance, liquidity, the adequacy of its capital resources, and
the Company's Year 2000 compliance. 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. Therefore, while management
believes that there is a reasonable basis for the forward-looking statements,
undue reliance should not be placed on those statements. Important factors that
could cause actual results to differ materially from those in the
forward-looking statements are discussed below.
YEAR 2000 COMPLIANCE
The scope of this issue is difficult to predict with any degree of
certainty, and there can be no assurance that the Company, its vendors,
banks, public utilities and others whose goods or services support the
Company's operations, will successfully complete every phase of the
Year 2000 conversion in a timely manner. The Company's ability to
achieve Year 2000 compliance, as well its current estimates of the cost
and impact of the Year 2000 issue are based upon certain assumptions,
including the continued availability of necessary resources, the
adequacy of its validation procedures, timely modifications to the
Company's plans that may become necessary, the readiness of third
parties on whom the Company depends and other factors. Failure of any
of those assumptions could result in a material financial risk,
including loss of revenue, substantial unanticipated costs and service
interruptions.
OTHER FACTORS
Other 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 adverse
litigation results; 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; changes in
foreign currency exchange rates; and the continued ability of the
Company to locate and develop suitable sites for its superstore
expansion program.
The above list of factors is not all-inclusive, and the Company does
not undertake to revise any forward-looking statement to reflect events or
circumstances that occur after the date the statement is made.
(18)
<PAGE> 21
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 violations 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.
In August 1998, The Intimate Bookshop, Inc. and its owner, Wallace
Kuralt, have filed a lawsuit in the United States District Court for the
Southern District of New York against the Company, Barnes & Noble, Inc., Amazon,
Inc., certain publishers and others alleging violation of the Robinson-Patman
Act and other federal law, New York statutes governing trade practices and
common law. An Amended Complaint was subsequently filed eliminating the class
action allegations contained in the original Complaint. The Amended Complaint
alleges that the named plaintiffs have suffered damages of $11,250,000 or more
and requests treble damages on behalf of the named plaintiffs as well as of
injunctive and declaratory relief (including an injuction requiring the closure
of all of defendants' stores within 10 miles of any location where plaintiff
either has or had a retail bookstore during the four years preceding the filing
of the Complaint, and prohibiting the opening by defendants of any bookstore in
such areas for the next 10 years), disgorgement of alleged discriminatory
discounts, rebates, deductions and payments, punitive damages, interest, costs,
attorneys fees and other relief. Many of the allegations in the Amended
Complaint are similar to those contained in the action instituted by the ABA and
26 bookseller plaintiffs against the Company and Barnes & Noble in March of
1998. The Company intends to vigorously defend the action.
On November 20, 1998, six independent booksellers instituted an action
against the Company and Barnes and Noble in the United States District Court for
the Northern District of California asserting claims, and seeking relief,
similar to claims made and relief sought in the ABA litigation described above.
The Company intends to vigorously defend the action.
(19)
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
(a) Exhibits:
27.0 Financial Data Schedule
(20)
<PAGE> 23
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: December 9, 1998 By: /s/ Kenneth E. Scheve
-------------------------------
Kenneth E. Scheve
Senior Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
(21)
<PAGE> 24
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-24-1999
<PERIOD-START> JUN-27-1998
<PERIOD-END> OCT-25-1998
<CASH> 40
<SECURITIES> 0
<RECEIVABLES> 71
<ALLOWANCES> 0
<INVENTORY> 1,129
<CURRENT-ASSETS> 1,240
<PP&E> 770
<DEPRECIATION> 320
<TOTAL-ASSETS> 1,831
<CURRENT-LIABILITIES> 1,145
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 626
<TOTAL-LIABILITY-AND-EQUITY> 1,831
<SALES> 558
<TOTAL-REVENUES> 558
<CGS> 413
<TOTAL-COSTS> 413
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> (1)
<INCOME-TAX> (1)
<INCOME-CONTINUING> (1)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
