SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 25, 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 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
-------------- May 25, 1999
Common Stock ------------------------
77,560,997
<PAGE> 2
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 10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk N/A
Part II - Other information
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
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 17
Signatures 18
<PAGE> 3
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions except common share data)
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks Ended
April 25, April 26,
1999 1998
------------- -------------
<S> <C> <C>
Sales $ 618.7 $ 545.3
Cost of merchandise sold, including
occupancy costs 457.2 405.5
------------- -------------
Gross margin 161.5 139.8
Selling, general and administrative expenses 162.0 129.8
Pre-opening expense 1.4 0.3
Goodwill amortization 0.7 0.7
------------- -------------
Operating income (loss) (2.6) 9.0
Interest expense 4.1 2.7
------------- -------------
Income (loss) before income tax (6.7) 6.3
Income tax expense (benefit) (2.6) 2.5
------------- -------------
Net income (loss) $ (4.1) $ 3.8
============= =============
Earnings per common share data --
Diluted earnings (loss) per common share $ (0.05) $ 0.05
============= =============
Diluted weighted average common shares
Outstanding (in thousands) 80,317 83,027
============= =============
Basic earnings (loss) per common share $ (0.05) $ 0.05
============= =============
Basic weighted average common shares
outstanding (in thousands) 77,345 75,772
============= =============
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
<PAGE> 4
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions except per common share data)
(Unaudited)
<TABLE>
<CAPTION>
April 25, April 26, January 24,
1999 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Assets
Current Assets
Cash $ 49.0 $ 49.7 $ 42.8
Merchandise inventories 1,032.9 926.0 1,019.6
Accounts receivable and other
current assets 70.6 68.6 70.9
---------- ---------- ----------
Total Current Assets 1,152.5 1,044.3 1,133.3
Property and equipment, net of
accumulated depreciation of $348.9,
$293.1 and $331.6 at April 25,
1999, April 26, 1998 and January
24, 1999, respectively 490.6 390.9 493.8
Other assets and deferred charges 33.6 33.1 33.5
Goodwill, net of accumulated
amortization of $46.7, $43.8, and
$46.0 at April 25, 1999, April 26,
1998 and January 24, 1999,
respectively 122.3 108.6 106.0
---------- ---------- ----------
$1,799.0 $ 1,576.9 $ 1,766.6
========== ========== ==========
Liabilities and Stockholders' Equity
Current Liabilities
Short-term debt and capital lease
obligations due within one year $ 344.6 $ 224.3 $ 134.1
Trade accounts payable 474.5 485.2 607.2
Accrued payroll and other
liabilities 180.8 179.8 221.7
Taxes, including income taxes 17.0 22.0 25.8
---------- ---------- ----------
Total Current Liabilities 1,016.9 911.3 988.8
Long-term debt and capital lease
obligations 7.0 5.2 6.3
Other long-term liabilities 63.0 51.6 56.4
---------- ---------- ----------
Total Liabilities 1,086.9 968.1 1,051.5
---------- ---------- ----------
Stockholders' Equity
Common stock; 200,000,000 shares
authorized; 77,437,259, 76,163,408
and 77,695,124 issued and
outstanding at April 25, 1999,
April 26, 1998, and January 24,
1999, respectively 687.2 666.3 687.3
Officers receivable and deferred
compensation (6.9) (5.5) (7.7)
Accumulated other comprehensive
income (0.5) (0.1) (0.9)
Retained earnings (accumulated
deficit) 32.3 (51.9) 36.4
---------- ---------- ----------
Total Stockholders' Equity 712.1 608.8 715.1
---------- ---------- ----------
$ 1,799.0 $ 1,576.9 $ 1,766.6
========== ========== ==========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial
Statements
<PAGE> 5
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE 13 WEEKS ENDED April 25, 1999
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
Deferred
Compensation Accum.
and Other
Common Stock 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 -- -- -- -- (4.1) (4.1)
Currency translation
adjustment, net of
taxes -- -- -- 0.4 -- 0.4
-------
Comprehensive Income (3.7)
Issuance of common
stock 483,187 5.6 -- -- -- 5.6
Repurchase and
retirement of common
stock (741,052) (5.7) -- -- -- (5.7)
Change in receivable
and deferred
compensation -- -- 0.8 -- -- 0.8
---------- ------ ---------- ----------- ------ -------
Balance at
April 25, 1999 77,437,259 $687.2 $ (6.9) $ (0.5) $ 32.3 $ 712.1
========== ====== ========== =========== ====== =======
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
<PAGE> 6
BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks Ended
April 25, April 26,
1999 1998
---------- -----------
<S> <C> <C>
Cash provided by (used for):
Operations
Net income (loss) $ (4.1) $ 3.8
Adjustments to reconcile net income (loss)
to operating cash flows:
Depreciation and goodwill amortization 20.6 15.5
Change in other long-term
Assets and liabilities 2.0 1.6
Cash provided by (used for) current
Assets and current liabilities:
Increase in inventories (10.3) (46.9)
Increase (decrease) in accounts payable (132.8) 4.5
Decrease in accrued liabilities (41.0) (27.9)
Decrease in taxes payable (8.8) (40.6)
Other, net 0.8 5.3
---------- -----------
Net cash used for operations (173.6) (84.7)
---------- -----------
Investing
Capital expenditures (15.5) (32.0)
Acquisitions, net of cash acquired (16.5) --
---------- -----------
Net cash used for investing (32.0) (32.0)
---------- -----------
Financing
Net funding from credit facility 210.5 97.0
Issuance of common stock 5.6 3.4
Repurchase of common stock (5.7) --
Other, net 1.4 0.9
---------- -----------
Net cash provided by financing 211.8 101.3
---------- -----------
Net increase/(decrease) in cash and
equivalents 6.2 (15.4)
Cash and equivalents at beginning of year 42.8 65.1
---------- -----------
Cash and equivalents at end of period $ 49.0 $ 49.7
========== ===========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements
<PAGE> 7
BORDERS GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions except per common share data)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Borders Group, Inc. (the Company) have been prepared in accordance with Rule
10-01 of Regulation S-X and do not include all the information and notes
required by generally accepted accounting principles for complete financial
statements. All adjustments, consisting only of normal recurring adjustments,
have been made which, in the opinion of management, are necessary for a fair
presentation of the results of the interim periods. The results of operations
for such interim periods are not necessarily indicative of results of operations
for a full year. The unaudited condensed consolidated financial statements
should be read in conjunction with the Company's consolidated financial
statements and notes thereto for the fiscal year ended January 24, 1999 (the
1998 consolidated financial statements).
The Company's fiscal year ends on the Sunday immediately preceding the last
Wednesday in January. At April 25, 1999, the Company operated 262 superstores
under the Borders name, including one in Singapore, one in Australia, and three
in the United Kingdom, 886 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.
<PAGE> 8
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 has filed a Motion to Dismiss the action and a hearing on the
Motion is scheduled for July 30, 1999. 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 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. Counsel for the plaintiffs
has requested informally to add approximately 20 additional as yet unidentified
plaintiffs, and the Company has asked for information relating to such request.
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 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 litigation incidental to the conduct of its
businesses. The Company does not believe that any such incidental litigation
will have a material adverse effect on its liquidity, financial position or
results of operations.
<PAGE> 9
BORDERS GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions except per common share data)
NOTE 3 - FINANCING
Credit Facility: The Company has a $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 $342.1 at April 25, 1999 and $131.9 at 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 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 $137.9 outstanding under the Lease
Facility at April 25, 1999 and $123.9 at January 24, 1999.
NOTE 4 - COMPREHENSIVE INCOME
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 consists solely of net
income and foreign currency translation adjustments pursuant to FAS No. 52,
"Foreign Currency Translation", as follows:
<TABLE>
<CAPTION>
13 Weeks Ended
April 25, April 26,
1999 1998
---------- ----------
<S> <C> <C>
Net income (loss) $ (4.1) $ 3.8
Other comprehensive income:
Foreign currency
translation adjustments 0.6 1.3
Related tax effect (0.2) (0.5)
---------- ----------
0.4 0.8
---------- ----------
Total comprehensive income $ (3.7) $ 4.6
========== ==========
</TABLE>
<PAGE> 10
BORDERS GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions except per common share data)
NOTE 5 - 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
April 25, April 26,
1999 1998
----------- ----------
<S> <C> <C>
Sales:
Stores $ 615.5 $ 545.3
Borders.com 3.2 -
----------- ----------
Total sales $ 618.7 $ 545.3
=========== ==========
Net income (loss):
Stores $ 0.2 $ 5.0
Borders.com (4.3) (1.2)
----------- ----------
Total net income (loss) $ (4.1) $ 3.8
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
April 25, April 26,
1999 1998
----------- ----------
<S> <C> <C>
Total assets:
Stores $ 1,748.7 $ 1,543.6
Borders.com 50.3 33.3
----------- ----------
Total assets $ 1,799.0 $ 1,576.9
=========== ==========
</TABLE>
<PAGE> 11
BORDERS GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions except per common share data)
NOTE 6 - CHANGES IN ACCOUNTING PRINCIPLES
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 quarter 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 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 quarter of 1999 and are
not expected to have a material impact for the full year.
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company, through its subsidiaries, is the second largest operator of book
superstores and the largest operator of mall-based bookstores in the world based
upon both sales and number of stores. At April 25, 1999, the Company operated
262 superstores under the Borders name, including one in Singapore, one in
Australia, and three in the United Kingdom, 886 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 one of the nation's largest specialty coffee
retailers with cafe operations in nearly all of its superstores.
The Company's first quarters of 1999 and 1998 consisted of the 13 weeks ended
April 25, 1999 and April 26, 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 13 weeks ended
April 25, 1999 exclude the non-recurring charge related to Mr. Pfeffer's
departure):
<TABLE>
<CAPTION>
13 Weeks Ended
April 25, April 26,
1999 1998
------------ ------------
<S> <C> <C>
Sales 100.0 % 100.0 %
Cost of merchandise sold,
including occupancy costs 73.9 74.4
------------ ------------
Gross margin 26.1 25.6
Selling, general and
administrative expenses 25.3 23.8
Pre-opening expense 0.2 -
Goodwill amortization 0.1 0.1
------------ ------------
Operating income 0.5 1.7
Interest expense 0.7 0.5
------------ ------------
Income before income taxes (0.2) 1.2
Income tax expense (0.1) 0.5
------------ ------------
Net income (loss) (0.1) % 0.7 %
============ ============
</TABLE>
<PAGE> 13
Store Activity
The Company's store activity is summarized below:
<TABLE>
<CAPTION>
Year
Quarter Ended Ended
April 25, April 26, January 24,
1999 1998 1999
----------- ------------ -----------
<S> <C> <C> <C>
Borders Superstores
Beginning number of stores 250 203 203
Openings 12 3 47
----------- ------------ -----------
Ending number of stores 262 206 250
=========== ============ ===========
Walden Mall Bookstores
Beginning number of stores 900 923 923
Openings 8 4 16
Closings (22) (24) (39)
----------- ------------ -----------
Ending number of stores 886 903 900
=========== ============ ===========
</TABLE>
13 Weeks Ended April 25, 1999 and April 26, 1998
Store sales in the first quarter of 1999 were $615.5 million, a $70.2 million,
or 12.9%, increase over first quarter 1998 sales of $545.3 million. This
increase reflects a $74.4 million, or 22.2%, increase in Borders' sales
resulting from new store openings and a comparable store sales increase of 3.3%.
This increase was partially offset by a decline in Walden sales of $5.2 million
due to a lower number of stores and a comparable store sales decrease of 2.3%.
Gross margin as a percentage of sales was 26.1% in 1999 versus 25.6% in the
first quarter of 1998. The increase primarily reflects a higher mix of Borders
stores which have a lower percentage occupancy cost.
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 1999
versus 23.8% in the first quarter of 1998. The increase in SG&A is largely
related to Borders.com expenses and international initiatives.
Pre-opening expense in the first quarter of 1999 was $1.4 million versus $0.3
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 12
Borders superstores and 8 Walden stores in the first quarter of 1999 as compared
to 3 Borders superstores and 4 Walden stores in the first quarter of 1998.
<PAGE> 14
Goodwill amortization was $0.7 million in the first quarter of 1999, unchanged
from the same period in 1998.
Interest expense was $4.1 million in the first quarter of 1999 as compared to
$2.7 million in 1998. The increase of $1.4 million is primarily related to
interest on borrowings to fund the repurchase of common stock and the opening of
domestic and international superstores.
Income tax benefit (excluding the non-recurring charge related to Mr.
Pfeffer's departure) in the first quarter of 1999 was $0.5 million as compared
to income tax expense of $2.5 million in 1998.
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 13 weeks ended April 25, 1999 was $173.6
million as compared to $84.7 million in the corresponding period in the prior
year. The current year operating cash inflows primarily reflects operating
results, net of non-cash depreciation and amortization expense of $20.6 million.
Operating cash outflows for the period were primarily the result of inventory
purchases and a decrease in accounts payable during the period.
Net cash used for investing for the first 13 weeks of 1999 was $32.0 million
as compared to $32.0 million in the first 13 weeks of 1998, and primarily
represents capital expenditures for new stores and the acquisition of All Wound
Up, an operator of seasonal kiosks.
Net cash provided by financing in the first 13 weeks of 1999 was $211.8
million versus $101.3 million in the first 13 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 anticipates the need for additional seasonal borrowing capacity
above and beyond the capacity of the Credit Facility and Lease Facility to fund
its anticipated capital requirements. The Company expects to have such
additional capacity in place by the end of the second quarter.
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 $342.1 at April 25, 1999 and
$131.9 at January 24, 1999.
<PAGE> 15
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 39 properties financed through the Lease Facility, with a financed
value of $137.9 million, at April 25, 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.
The Company currently has a share repurchase program in place with remaining
authorization to repurchase approximately $65.8 million of its common stock.
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.
<PAGE> 16
Financial and Non-Financial Information Technology Systems These systems
encompass both application software and operating system software. The
Company has completed its assessment, renovation, and validation of
potential problem areas concerning application software. Implementation
(the final stage) of application software based in the Company's stores,
distribution centers and headquarters is complete. The Borders.com system
was designed with Year 2000 compliant data structures. Testing to verify
that Year 2000 standards within Borders.com have been maintained is
expected to be completed by the end of the second quarter. The assessment
and renovation of operating system software has been completed. Validation
and implementation of operating system software modifications are expected
to be completed by the end of the second quarter of fiscal 1999.
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. Services or equipment provided by
non-compliant vendors identified through the assessment process will be
upgraded to compliant versions to the extent that the Company cannot
correct identified problem areas internally. 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 various
activities and operations, including those resulting from non-compliant systems
utilized by unrelated third party business entities. The Company is in 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. 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.
<PAGE> 17
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.
<PAGE> 18
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, as follows: (i) the Company has filed a Motion to Dismiss
the lawsuit filed in the United States District Court for the Southern District
of New York by the Intimate Bookshop, Inc., and a hearing on the Company's
motion is scheduled for July 30, 1999; and (ii) counsel for the plaintiffs in
Rae Richardson et al Vs Barnes & Noble et al, the action instituted by six
independent booksellers in the United States District Court for the Northern
District of California, has requested informally to add approximately 20
additional as yet unidentified plaintiffs, and the Company has asked for
information relating to such request.
In addition to the matters described above, the Company is from time to time
involved in or affected by litigation incidental to the conduct of its
businesses. The Company does not believe that any such incidental 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 February 1, 1999, the Company issued: (i) options to Mr. DiRomualdo to
purchase 125,763 shares with an exercise price of $17.125 in lieu of salary and
bonus in the aggregate amount of $686,666; and (ii) options to Mr. Mrkonic to
purchase 94,332 shares with an exercise price of $17.235 in lieu of salary and
bonus in the aggregate amount of $515,000. These transactions involved an offer
solely to executive officers 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.
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
(a) Exhibits:
27.0 Financial Data Schedule
99.1 Cautionary Statement under the Private Securities Litigation
Reform Act of 1995 - "Safe Harbor" for Forward-Looking
Statements.
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
BORDERS GROUP, INC.
-------------------
(Registrant)
Date: June 8, 1999 By: /S/
-----------------------
Kenneth E. Scheve
Senior Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-23-2000
<PERIOD-START> JAN-25-1999
<PERIOD-END> APR-25-1999
<CASH> 49
<SECURITIES> 0
<RECEIVABLES> 71
<ALLOWANCES> 0
<INVENTORY> 1,033
<CURRENT-ASSETS> 1,153
<PP&E> 840
<DEPRECIATION> 349
<TOTAL-ASSETS> 1,799
<CURRENT-LIABILITIES> 1,017
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 712
<TOTAL-LIABILITY-AND-EQUITY> 1,799
<SALES> 619
<TOTAL-REVENUES> 619
<CGS> 457
<TOTAL-COSTS> 457
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4
<INCOME-PRETAX> (7)
<INCOME-TAX> (3)
<INCOME-CONTINUING> (4)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4)
<EPS-BASIC> (.05)
<EPS-DILUTED> (.05)
</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" 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 to differ from 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, which includes the need for additional seasonal borrowing
capacity
- - 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.
