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 24, 1999
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.)
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 26, 1999
Common Stock ------------------------
77,322,656
<PAGE>
BORDERS GROUP, INC.
INDEX
Part I - Financial Information
Page
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
Item 3. Quantitative and Qualitative Disclosures about
Market Risk N/A
Part II - Other information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
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 18
Signatures 19
<PAGE>
<TABLE>
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions except common share data)
(Unaudited)
<CAPTION>
13 Weeks Ended
October 24, October 25,
1999 1998
-------------- --------------
<S> <C> <C>
Sales $ 656.3 $ 558.3
Cost of merchandise sold, including
occupancy costs 483.7 412.9
-------------- --------------
Gross margin 172.6 145.4
Selling, general and administrative expenses 167.0 138.5
Pre-opening expense 2.0 3.0
Goodwill amortization 1.0 0.7
-------------- --------------
Operating income 2.6 3.2
Interest expense 5.1 4.6
-------------- --------------
Income (loss) before income tax (2.5) (1.4)
Income tax expense (benefit) (1.0) (0.6)
-------------- --------------
Net income (loss) $ (1.5) $ (0.8)
============== ==============
Earnings per common share data --
Diluted earnings (loss) per common share $ (0.02) $ (0.01)
============== ==============
Diluted weighted average common shares
outstanding (in thousands) 79,853 81,854
============== ==============
Basic earnings (loss) per common share $ (0.02) $ (0.01)
============== ==============
Basic weighted average common shares
outstanding (in thousands) 77,618 76,728
============== ==============
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
(1)
<PAGE>
<TABLE>
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions except common share data)
(Unaudited)
<CAPTION>
39 Weeks Ended
October 24, October 25,
1999 1998
-------------- --------------
<S> <C> <C>
Sales $ 1,906.0 $ 1,649.5
Cost of merchandise sold, including
occupancy costs 1,409.8 1,224.4
-------------- --------------
Gross margin 496.2 425.1
Selling, general and administrative expenses 487.7 398.8
Pre-opening expense 5.6 4.1
Goodwill amortization 2.6 2.1
-------------- --------------
Operating income 0.3 20.1
Interest expense 13.8 11.3
-------------- --------------
Income (loss) before income tax (13.5) 8.8
Income tax expense (benefit) (5.3) 3.4
-------------- --------------
Net income (loss) $ (8.2) $ 5.4
============== ==============
Earnings per common share data --
Diluted earnings (loss) per common share $ (0.10) $ 0.07
============== ==============
Diluted weighted average common shares
outstanding (in thousands) 80,268 82,777
============== ==============
Basic earnings (loss) per common share $ (0.11) $ 0.07
============== ==============
Basic weighted average common shares
outstanding (in thousands) 77,613 76,394
============== ==============
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
(2)
<PAGE>
<TABLE>
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions except per common share data)
(Unaudited)
<CAPTION>
October 24, October 25, January 24,
1999 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash $ 48.8 $ 40.3 $ 42.8
Merchandise inventories 1,241.2 1,128.6 1,019.6
Accounts receivable and other current assets 64.2 70.9 70.9
----------- ----------- -----------
Total Current Assets 1,354.2 1,239.8 1,133.3
Property and equipment, net of accumulated depreciation
of $380.1, $319.8 and $331.6 at October 24, 1999,
October 25, 1998 and January 24, 1999, respectively 532.7 450.3 493.8
Other assets and deferred charges 33.9 32.6 33.5
Goodwill, net of accumulated amortization of $48.6, $45.2,
and $46.0 at October 24, 1999, October 25, 1998 and
January 24, 1999, respectively 122.1 107.9 106.0
----------- ----------- -----------
Total Assets $ 2,042.9 $ 1,830.6 $ 1,766.6
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt and capital lease
obligations due within one year $ 376.2 $ 348.2 $ 134.1
Trade accounts payable 697.3 631.3 607.2
Accrued payroll and other liabilities 181.5 161.5 221.7
Taxes, including income taxes 18.0 3.9 25.8
----------- ----------- -----------
Total Current Liabilities 1,273.0 1,144.9 988.8
Long-term debt and capital lease obligations 5.7 6.0 6.3
Other long-term liabilities 65.4 53.9 56.4
----------- ----------- -----------
Total Liabilities 1,344.1 1,204.8 1,051.5
----------- ----------- -----------
Stockholders' Equity:
Common stock; 300,000,000 shares authorized;
77,169,700, 76,694,375 and 77,695,124 issued
and outstanding at October 24, 1999, October 25, 1998,
and January 24, 1999, respectively 675.2 683.2 687.3
Officers receivable and deferred compensation (4.7) (4.6) (7.7)
Accumulated other comprehensive income 0.1 (2.5) (0.9)
Retained earnings (accumulated deficit) 28.2 (50.3) 36.4
----------- ----------- -----------
Total Stockholders' Equity 698.8 625.8 715.1
----------- ----------- -----------
Total Liabilities & Stockholders' Equity $ 2,042.9 $ 1,830.6 $ 1,766.6
=========== =========== ===========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
(3)
<PAGE>
<TABLE>
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE 39 WEEKS ENDED OCTOBER 24, 1999
(Dollars in millions)
(Unaudited)
<CAPTION>
Deferred Accumulated
Compensation Other
Common Stock and Officer Comprehensive Retained
Shares Amount Receivables Income Earnings Total
---------- -------- ------------ ------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 24, 1999 77,695,124 $ 687.3 $ (7.7) $ (0.9) $ 36.4 $ 715.1
---------- -------- ------- ------- ------- --------
Net loss -- -- -- -- (8.2) (8.2)
Currency translation
adjustment, net of taxes -- -- -- 1.0 -- 1.0
--------
Comprehensive Income (7.2)
Issuance of common
stock 1,670,478 9.3 -- -- -- 9.3
Repurchase and
retirement of common
stock (2,195,902) (21.4) -- -- -- (21.4)
Change in receivable
and deferred
compensation -- -- 3.0 -- -- 3.0
---------- -------- ------- ------- ------- --------
Balance at October 24, 1999 77,169,700 $ 675.2 $ (4.7) $ 0.1 $ 28.2 $ 698.8
========== ======== ======= ======= ======= ========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
(4)
<PAGE>
<TABLE>
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
<CAPTION>
39 Weeks Ended
October 24, October 25,
1999 1998
------------ -------------
<S> <C> <C>
CASH PROVIDED BY (USED FOR):
OPERATIONS
Net income (loss) $ (8.2) $ 5.4
Adjustments to reconcile net income (loss) to
operating cash flows:
Depreciation and goodwill amortization 60.8 45.6
Change in other long-term assets and liabilities 2.8 5.3
Cash provided by (used for) current assets and
current liabilities:
Increase in inventories (218.6) (249.5)
Increase in accounts payable 90.0 150.6
Decrease in accrued liabilities (38.1) (46.3)
Decrease in taxes payable (7.8) (58.7)
Other, net 7.2 0.5
------------ -------------
Net cash used for operations (111.9) (147.1)
------------ -------------
INVESTING
Capital expenditures (96.2) (120.8)
Acquisitions, net of cash acquired (16.5) --
------------ -------------
Net cash used for investing (112.7) (120.8)
------------ -------------
FINANCING
Net funding from credit facility 242.1 220.9
Issuance of common stock 9.3 42.0
Repurchase of common stock (21.4) (41.3)
Other, net 0.6 21.5
------------ -------------
Net cash provided by financing 230.6 243.1
------------ -------------
Net increase/(decrease) in cash and equivalents 6.0 (24.8)
Cash and equivalents at beginning of year 42.8 65.1
------------ -------------
Cash and equivalents at end of period $ 48.8 $ 40.3
============ =============
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
(5)
<PAGE>
BORDERS GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions except per common share data)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Borders Group, Inc. (the Company) have been prepared in accordance with Rule
10-01 of Regulation S-X and do not include all the information and notes
required by generally accepted accounting principles for complete financial
statements. All adjustments, consisting only of normal recurring adjustments,
have been made which, in the opinion of management, are necessary for a fair
presentation of the results of the interim periods. The results of operations
for such interim periods are not necessarily indicative of results of operations
for a full year. The unaudited condensed consolidated financial statements
should be read in conjunction with the Company's consolidated financial
statements and notes thereto for the fiscal year ended January 24, 1999.
The Company's fiscal year ends on the Sunday immediately preceding the last
Wednesday in January. At October 24, 1999, the Company operated 288 superstores
under the Borders name, including one in Singapore, one in Australia, one in New
Zealand, and five in the United Kingdom, 894 mall-based and other bookstores
primarily under the Waldenbooks name and 26 bookstores under the Books etc. name
in the United Kingdom. The Company also operates an Internet commerce site under
the name Borders.com.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
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 (the former parent of the
Company) 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 Credit Facility. 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.
In March 1998, the American Booksellers Association ("ABA") and 26
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 Act. 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.
(6)
<PAGE>
BORDERS GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions except per common share data)
In August 1998, The Intimate Bookshop, Inc. and its owner, Wallace Kuralt,
filed a lawsuit in the United States District Court for the Southern District of
New York against the Company, Barnes & Noble, Inc., Amazon.com, Inc., certain
publishers and others alleging violations 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 $11.25 or more and requests
treble damages [on behalf of the named plaintiffs], as well as 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, Inc. in March of 1998.
Defendants have filed a Motion to Dismiss, which has been briefed and argued. In
response to the Motion to Dismiss, Plaintiffs voluntarily withdrew their state
law claims. The Company intends to vigorously defend the action.
On November 20, 1998, six independent booksellers instituted an action
entitled Rae Richardson et al vs. Barnes & Noble et al, against the Company and
Barnes & 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.
A trial date of April 9, 2001 has been set in the ABA case and a trial date
in the Richardson case has been set for 90 days after the conclusion of the ABA
case trial.
The Company has not included any liability in its financial statements in
connection with the lawsuits described above and has expensed as incurred all
costs to date.
In addition to the matters described above, the Company is from time to time
involved in or affected by other litigation incidental to the conduct of its
businesses. The Company does not believe that any such other litigation will
have a material adverse effect on its liquidity, financial position or results
of operations.
(7)
<PAGE>
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 $425.0 multicurrency credit agreement (the
Credit Facility) which expires in October 2002. Borrowings under the Credit
Facility bear interest at a base rate or an increment over LIBOR at the
Company's option. The Credit Facility 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 $100.0 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 $361.9 as of October 24, 1999 and $131.9 as of January 24, 1999.
Seasonal Facility: The Company has a $130.0 multicurrency seasonal revolving
credit facility (the Seasonal Facility) which expires in July 2000. Borrowings
under the Seasonal Facility bear interest at a base rate or an increment over
LIBOR at the Company's option. The Seasonal Facility contains operating
covenants that are similar to the operating covenants contained in the Credit
Facility described above. The Company had borrowings outstanding under the
Seasonal Facility of $11.7 as of October 24, 1999. There were no borrowings
outstanding as of January 24, 1999.
Lease Financing Facility: The Company has a $250.0 lease financing facility
(the Lease Facility) to finance new stores and other property through operating
leases, which expires in October 2002. The Lease Facility provides financing to
lessors through loans from a third party lender for up to 95% of a project's
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 is 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 $153.2 outstanding under the Lease
Facility as of October 24, 1999 and $123.9 as of January 24, 1999.
(8)
<PAGE>
BORDERS GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions except per common share data)
NOTE 4 - SEGMENT INFORMATION
The Company is organized based upon the following operating segments:
domestic Borders stores, international Borders and Books etc. stores, Walden
stores, and online retailing. These operating segments have been aggregated into
two reporting segments: stores and online retailing. Although stores and online
retailing share a number of economic characteristics, such as the nature of the
merchandise sold, the methods of merchandise procurement used, and the type of
customer for the merchandise sold, they differ in their method of distributing
merchandise to customers.
Segment data includes charges allocating all corporate-headquarters costs to
each segment. The Company evaluates the performance of its segments and
allocates resources to them based on anticipated future contribution.
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
October 24, October 25, October 24, October 25,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales:
Stores $ 652.2 $ 556.9 $1,895.4 $1,647.5
Borders.com 4.1 1.4 10.6 2.0
----------- ----------- ----------- -----------
Total sales $ 656.3 $ 558.3 $1,906.0 $1,649.5
=========== =========== =========== ===========
Net income (loss):
Stores $ 2.4 $ 2.1 $ 3.4 $ 12.2
Borders.com (3.9) (2.9) (11.6) (6.8)
----------- ----------- ----------- -----------
Total net income (loss) $ (1.5) $ (0.8) $ (8.2) $ 5.4
=========== =========== =========== ===========
October 24, October 25,
1999 1998
---------- -----------
Total assets:
Stores $1,990.5 $1,785.7
Borders.com 52.4 44.9
---------- -----------
Total assets $2,042.9 $1,830.6
========== ===========
</TABLE>
(9)
<PAGE>
BORDERS GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions except per common share data)
NOTE 5 - ACCOUNTING POLICIES
Effective January 24, 1999, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position (SOP) 98-5, "Reporting on
the Costs of Start-Up Activities". This SOP requires store pre-opening costs to
be expensed as incurred. The Company had expensed store pre-opening costs in the
first fiscal month of a store's operations. 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 material impact on the Company's financial position, results
of operations, or liquidity in the first three quarters of 1999.
In the first quarter of 1999, the Company shortened the estimated depreciable
lives of certain categories of personal computer equipment to three years and
extended the estimated depreciable lives of certain store fixtures up to ten
years. The Company believes that these changes better reflect the useful lives
of these assets. The Company accounted for this change as a change in estimate;
accordingly, the Company will utilize the new depreciable lives prospectively.
These changes did not have a material impact on the Company's financial position
or results of operations in the first three quarters of 1999, and are not
expected to have a material impact for the full year.
(10)
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company, through its subsidiaries, is the second largest operator of book
and music superstores and the largest operator of mall-based bookstores in the
world based upon both sales and number of stores. At October 24, 1999, the
Company operated 288 superstores under the Borders name, including one in
Singapore, one in Australia, one in New Zealand, and five in the United Kingdom,
894 mall-based and other bookstores primarily under the Waldenbooks name and 26
bookstores under the Books etc. name in the United Kingdom. The Company also
operates an Internet commerce site under the name Borders.com. Borders is also
one of the nation's largest specialty coffee retailers with cafe operations in
nearly all of its superstores.
The Company's third quarters of 1999 and 1998 consisted of the 13 weeks ended
October 24, 1999 and October 25, 1998, respectively.
Results of Operations
The following table presents the Company's statement of operations data, as a
percentage of sales, for the periods indicated (data for the 39 weeks ended
October 24, 1999 excludes the non-recurring charge related to Mr.
Pfeffer's departure):
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
October 24, October 25, October 24, October 25,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of merchandise sold, including
occupancy costs 73.7 74.0 74.0 74.3
----------- ----------- ----------- -----------
Gross margin 26.3 26.0 26.0 25.7
Selling, general and administrative
expenses 25.5 24.8 25.3 24.2
Pre-opening expense 0.3 0.5 0.3 0.2
Goodwill amortization 0.1 0.1 0.1 0.1
----------- ----------- ----------- -----------
Operating income 0.4 0.6 0.3 1.2
Interest expense 0.8 0.8 0.7 0.7
----------- ----------- ----------- -----------
Income (loss) before income taxes (0.4) (0.2) (0.4) 0.5
Income tax expense (benefit) (0.2) (0.1) (0.2) 0.2
----------- ----------- ----------- -----------
Net income (loss) (0.2)% (0.1)% (0.2)% 0.3%
=========== =========== =========== ===========
</TABLE>
(11)
<PAGE>
Store Activity
The Company's store activity is summarized below:
<TABLE>
<CAPTION>
Year
13 Weeks Ended 39 Weeks Ended Ended
October 24, October 25, October 24, October 25, January 24,
1999 1998 1999 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Borders Superstores
Beginning number of
stores 274 213 250 203 203
Openings 14 25 38 35 47
----------- ----------- ----------- ----------- -----------
Ending number of stores 288 238 288 238 250
=========== =========== =========== =========== ===========
Walden Mall Bookstores
Beginning number of
scores 888 899 900 923 923
Openings 8 5 24 10 16
Closings (2) (8) (30) (37) (39)
----------- ----------- ----------- ----------- -----------
Ending number of stores 894 896 894 896 900
=========== =========== =========== =========== ===========
</TABLE>
13 Weeks Ended October 24, 1999 and October 25, 1998
Store sales in the third quarter of 1999 were $652.2 million, a $95.3
million, or 17.1%, increase over third quarter 1998 sales of $556.9 million.
Borders' sales increased $85.5 million, or 24.5%, due to new store openings and
a comparable store sales increase of 6.6%. Walden sales increased $9.7 million
due to a comparable store sales increase of 2.1% and the sales of recently
acquired All Wound Up, offset by the lower number of stores. Borders.com sales
were $4.1 million versus $1.4 million for the same period last year.
Gross margin as a percentage of sales was 26.3% in 1999 versus 26.0% in the
third quarter of 1998. The increase primarily reflects improvements in
distribution efficiency and occupancy leverage.
As a percentage of sales, SG&A expense was 25.5% in 1999 versus 24.8% in the
third quarter of 1998. The increase in SG&A is largely related to increased
spending on Borders.com, continued investment in international superstores and
start-up expenses of All Wound Up.
Pre-opening expense in the third quarter of 1999 was $2.0 million versus $3.0
million from the same period in 1998. Pre-opening expense consists principally
of grand-opening advertising expense and store payroll related to the opening,
and is expensed as incurred. 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 14
Borders superstores and 8 Walden stores in the third quarter of 1999 as compared
to 25 Borders superstores and 5 Walden stores in the third quarter of 1998.
Goodwill amortization was $1.0 million in the third quarter of 1999 versus
$0.7 million from the third quarter of 1998. The increase in goodwill
amortization is due to the acquisition of All Wound Up in 1999.
(12)
<PAGE>
Interest expense was $5.1 million in the third quarter of 1999 as compared to
$4.6 million in 1998. The increase of $0.5 million is primarily related to
interest on borrowings to fund the opening of domestic and international
superstores, the repurchase of the Company's common stock, and the acquisition
of All Wound Up.
Income tax benefit in the third quarter of 1999 was $1.0 million versus
$0.6 million in 1998.
39 Weeks Ended October 24, 1999 and October 25, 1998
Store sales in the 39 weeks ended October 24, 1999 were $1,895.4 million, a
$247.9 million, or 15.0%, increase over store sales for the 39 weeks ended
October 25, 1998 of $1,647.5 million. Borders' sales increased $244.2 million,
or 23.8%, due to new store openings and a comparable store sales increase of
5.0%. Walden sales increased $2.6 million due to the sales of recently acquired
All Wound Up, offset by the lower number of stores and a comparable store sales
decrease of 0.7%. Borders.com sales were $4.1 million versus $1.4 million for
the same period last year.
Gross margin as a percentage of sales was 26.0% for the 39 weeks ended
October 24, 1999 versus 25.7% for the same period in 1998. The increase
primarily reflects improvements in distribution efficiency and occupancy
leverage.
As a percentage of sales, SG&A expense (excluding the non-recurring pre-tax
charge of $5.5 million related to Mr. Pfeffer's departure) was 25.3% in for the
39 weeks ended October 24, 1999 versus 24.2% for the same period a year ago. The
increase in SG&A is largely related to increased spending on Borders.com,
continued investment in international superstores and start-up expenses of All
Wound Up.
Pre-opening expense in the 39 weeks ended October 24, 1999 was $5.6 million
versus $4.1 million from the same period in 1998. Pre-opening expense consists
principally of grand-opening advertising expense and store payroll related to
the opening, and is expensed as incurred. 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 38 Borders superstores and 24 Walden stores in the 39 weeks ended
October 24, 1999 as compared to 35 Borders superstores and 10 Walden stores in
the 39 weeks ended October 25, 1998.
Goodwill amortization was $2.6 million in the 39 weeks ended October 24, 1999
versus $2.1 million for the same period in 1998. The increase in goodwill
amortization is due to the acquisition of All Would Up in 1999.
Interest expense was $13.8 million in the 39 weeks ended October 24, 1999 as
compared to $11.3 million in 1998. The increase of $2.5 million is primarily
related to interest on borrowings to fund the opening of domestic and
international superstores, the repurchase of the Company's common stock, and the
acquisition of All Wound Up.
Income tax benefit (excluding the non-recurring charge related to Mr.
Pfeffers's departure) for the 39 weeks ended October 24, 1999 was $3.2 million
as compared to income tax expense of $3.4 million in 1998.
In the first quarter of fiscal 1999, Philip M. Pfeffer resigned as Chief
Executive Officer and director of the Company. The Company took a one-time
charge of $3.4 million ($5.5 million pre-tax) relating to Mr. Pfeffer's
departure in the first quarter.
Liquidity and Capital Resources
The Company's principal capital requirements are to fund working capital
needs, the opening of new stores, the refurbishment and expansion of existing
stores and its Borders.com business.
Net cash used for operations for the 39 weeks ended October 24, 1999 was
$111.9 million as compared to $147.1 million in the corresponding period in the
prior year. Cash from operations for the period primarily reflects operating
results net of non-cash depreciation and amortization expense, and an 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.
(13)
<PAGE>
Net cash used for investing for the first 39 weeks of 1999 was $112.7 million
as compared to $120.8 million in the first 39 weeks of 1998, and primarily
represents capital expenditures for new stores and the acquisition of All Wound
Up.
Net cash provided by financing in the first 39 weeks of 1999 was $230.6
million versus $243.1 million in the first 39 weeks of 1998. Net cash provided
by financing resulted primarily from net borrowings under the credit facility.
On a consolidated basis, the Company expects its capital requirements to
increase as a result of its expansion program for its Borders superstores (both
domestic and international) and Borders.com investment.
The Company has a $425.0 million multicurrency credit agreement (the Credit
Facility) which expires in October 2002. Borrowings under the Credit Facility
bear interest at a base rate or an increment over LIBOR at the Company's option.
The Credit Facility 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 $100.0 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 $361.9 million as of
October 24, 1999 and $131.9 million as of January 24, 1999.
The Company has a $130.0 million multicurrency seasonal revolving credit
facility (the Seasonal Facility) which expires in July 2000. Borrowings under
the Seasonal Facility bear interest at a base rate or an increment over LIBOR at
the Company's option. The Seasonal Facility contains operating covenants that
are similar to the operating covenants contained in the Credit Facility
described above. The Company had borrowings outstanding under the Seasonal
Facility of $11.7 million as of October 24, 1999. There were no borrowings
outstanding as of January 24, 1999.
The Company has a $250.0 million lease financing facility (the Lease
Facility) to finance new stores and other property through operating leases,
which expires in October 2002. 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 40 properties financed through the Lease Facility, with a financed
value of $153.2 million, as of October 24, 1999. 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 (the former parent of the
Company) 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 Credit Facility. 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.
(14)
<PAGE>
The Company currently has a share repurchase program in place with remaining
authorization to repurchase approximately $59.8 million of its common stock as
of October 24, 1999. During the 13 and 39 weeks ended October 24, 1999, the
Company repurchased $14.0 million and $21.4 million of its common stock,
respectively.
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. Assessment, renovation, and implementation of modifications
concerning critical application software and operating system software is
complete. The assessment of non-critical application and operating system
software is also complete. Renovation and implementation of modifications
concerning non-critical software will be completed in December. The
Borders.com system was designed with Year 2000 compliant data structures,
and verification that Year 2000 standards have been maintained within
Borders.com critical applications is complete.
EMBEDDED TECHNOLOGY SYSTEMS
The Company has completed 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.
This involved inventorying all equipment utilizing embedded technology by
vendor and model, and contacting the necessary vendors with regards to the
compliance status of each item. Confirmation of Year 2000 compliance for
all HVAC, elevators and security systems at the Company's stores,
distribution centers, and headquarters has been received from all vendors.
The Company has completed the assessment, renovation, and implementation
of modifications concerning critical PC and server-related equipment. The
assessment and renovation of the remaining non-critical PC and
server-related equipment is complete, and the implementation of
modifications concerning the remaining non-critical PC and server-related
equipment will be completed in December.
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.
(15)
<PAGE>
Notwithstanding the substantive work efforts described above, the Company
could potentially experience disruptions to some aspects of its various
activities and operations, including those resulting from non-compliant systems
utilized by unrelated third party business entities. The Company has developed
the major elements of business contingency plans in order to attempt to mitigate
the extent of potential disruption to business operations. The contingency plans
address the following: 1) transition coverage before, during, and after the year
2000 begins, 2) alternative processes to be used in the event of any system
failures, 3) pro-active and preventative actions to mitigate the effect of
mission-critical system failures, and 4) the establishment of a specialized Year
2000 Problem Management Center. Detailed procedures and full documentation of
these plans are complete. The Company will continuously monitor the adequacy of
its contingency plans throughout the remainder 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.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements as
defined in the Private Securities Litigation Reform Act of 1995. Forward-looking
statements reflect management's current expectations and are inherently
uncertain. The Company's actual results may differ significantly from
management's expectations. Exhibit 99.1 to this report, "Cautionary Statement
under the Private Securities Litigation Reform Act of 1995", identifies the
forward-looking statements and describes some, but not all, of the factors that
could cause these differences.
(16)
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company's Form 10-K Annual Report for the fiscal year ended January 24,
1999 describes three pending lawsuits against the Company asserting anti-trust
and other claims. An adverse judgment against the Company in any of these
matters could have a material adverse effect on the Company. There have not been
any material developments in these matters during the fiscal quarter covered by
this Report except that: (i) the motion of the plaintiffs in Rae Richardson et
al vs. Barnes & Noble et al to add approximately 75 plaintiffs to the action has
been denied; and (ii) a trial date of April 9, 2001 has been set in the ABA case
and a trial date in the Richardson case has been set for 90 days after the
conclusion of the ABA case trial.
In addition to the matters described above, the Company is from time to time
involved in or affected by other litigation incidental to the conduct of its
businesses. The Company does not believe that any such other litigation will
have a material adverse effect on its liquidity, financial position or results
of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 29, 1999, the Company issued options to Mr. DiRomualdo to purchase
69,063 shares with an exercise price of $14.1875 in lieu of salary and bonus in
the aggregate amount of $262,439. This transaction involved an offer solely to
an executive officer of the Company. Reliance was placed by the Company upon the
exemption from registration under Section 4(2) of the Securities Act of 1933,
which exempts transactions by an issuer not involving a public offering.
(17)
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
(a) Exhibits:
10.38 Amendment No. 1 to 1998 Borders Group, Inc. Stock Option
Plan.
27.0 Financial Data Schedule.
99.1 Cautionary Statement under the Private Securities Litigation
Reform Act of 1995 - "Safe Harbor" for Forward-Looking
Statements.
(18)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
BORDERS GROUP, INC.
-------------------
(Registrant)
Date: December 8, 1999 By: /s/
---------------------------
Kenneth E. Scheve
Senior Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
(19)
FIRST AMENDMENT TO THE 1998 BORDERS GROUP, INC.
STOCK OPTION PLAN
Section 3 of the Borders Group, Inc. 1998 Stock Option Plan (the "Plan") is
hereby amended to read in its entirety as follows, effective as of September 30,
1999:
"3. Shares. The number of Shares which shall be reserved for
issuance under the Plan shall not exceed 4,000,000, subject to
adjustment in accordance with the provisions of Section 6 hereof.
Shares to be optioned or issued under the Plan may be either
authorized and unissued shares or issued shares which shall have been
reacquired by the Company. In the event that any outstanding option or
portion thereof expires or is cancelled, surrendered or terminated for
any reason, the Shares allocable to the unexercised portion of such
option may again be subjected to an option or be issued under the
Plan."
Except as herein amended, the Plan shall remain in full force and effect.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-23-2000
<PERIOD-START> JUL-26-1999
<PERIOD-END> OCT-24-1999
<CASH> 49
<SECURITIES> 0
<RECEIVABLES> 64
<ALLOWANCES> 0
<INVENTORY> 1,241
<CURRENT-ASSETS> 1,354
<PP&E> 913
<DEPRECIATION> 380
<TOTAL-ASSETS> 2,043
<CURRENT-LIABILITIES> 1,273
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 699
<TOTAL-LIABILITY-AND-EQUITY> 2,043
<SALES> 656
<TOTAL-REVENUES> 656
<CGS> 484
<TOTAL-COSTS> 484
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> (3)
<INCOME-TAX> (1)
<INCOME-CONTINUING> (2)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2)
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
</TABLE>
BORDERS GROUP, INC.
Exhibit 99.1
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995 - "SAFE HARBOR" FOR FORWARD-LOOKING STATEMENTS
This report and other written reports and oral statements made from time to time
by Borders Group, Inc. (the "Company") may contain so-called "forward-looking"
statements, all of which are subject to risks and uncertainties. One can
identify these forward-looking statements by their use of words such as
"expects", "believes", "anticipates", "plans", "will", "estimates", "forecasts",
"guidance", "opinion", "projects", "initiatives", "goals" and other words of
similar meaning. One can also identify them by the fact that they do not relate
strictly to historical or current facts. These statements are likely to address
the Company's growth strategy, financial performance (including sales and
earnings guidance), marketing and expansion plans, Y2K compliance and similar
matters. One must carefully consider any such statement and should understand
that many factors could cause actual results and plans to differ from those
included in the Company's forward-looking statements. These factors include
inaccurate assumptions and a broad variety of risks and uncertainties, including
some that are known and some that are not. No forward-looking statement can be
guaranteed and actual future results may vary materially. Although it is not
possible to predict or identify all such factors, they may include the
following:
- - consumer demand for the Company's products, which is believed to be related
to a number of factors, including overall consumer spending patterns,
weather conditions and with respect to the mall business, overall mall
traffic
- - an unexpected increase in competition, including Internet competition and
competition resulting from electronic or other alternative methods of
delivery of books, music, and other products to consumers, or unanticipated
margin or other disadvantages relative to our competitors
- - the continued availability of adequate capital to fund the Company's
operations
- - higher than anticipated interest, occupancy, labor, distribution and
inventory shrinkage costs
- - unanticipated adverse litigation expenses or 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
- - unanticipated costs or problems relating to the Company's Year 2000
compliance or systems enhancements required for the operations of the
Company
- - changes in foreign currency exchange rates
- - and the continued ability of the Company to locate and develop suitable
sites for its superstore expansion program and kiosk programs.
The Company does not undertake any obligation to update forward-looking
statements.
