-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q3jT2FxGi2tRboya6+KcxEOhtVJYuA104ITPKAVtGWn9PSI36QZOkbPBLeZF3reE Tq+Rosce/Vo4qRsSzTosHg== 0000950124-00-002431.txt : 20000425 0000950124-00-002431.hdr.sgml : 20000425 ACCESSION NUMBER: 0000950124-00-002431 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20000123 FILED AS OF DATE: 20000424 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BORDERS GROUP INC CENTRAL INDEX KEY: 0000940510 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-MISCELLANEOUS SHOPPING GOODS STORES [5940] IRS NUMBER: 383196915 STATE OF INCORPORATION: DE FISCAL YEAR END: 0126 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13740 FILM NUMBER: 607497 BUSINESS ADDRESS: STREET 1: 100 PHOENIX DRIVE CITY: ANN ARBOR STATE: MI ZIP: 48108 BUSINESS PHONE: (734) 477-1100 MAIL ADDRESS: STREET 1: 100 PHOENIX DRIVE CITY: ANN ARBOR STATE: MI ZIP: 48108 10-K 1 FORM 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 23, 2000 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 OF (I.R.S. EMPLOYER 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) SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF CLASS NAME OF EXCHANGE ON WHICH REGISTERED -------------- ------------------------------------ COMMON STOCK NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE 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 [ ] INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [ ] THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT WAS APPROXIMATELY $1,209,396,608 BASED UPON THE CLOSING MARKET PRICE OF $16.00 PER SHARE OF COMMON STOCK ON THE NEW YORK STOCK EXCHANGE AS OF MARCH 29, 2000. NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF MARCH 29, 2000: 78,192,928 DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE MAY 24, 2000 ANNUAL MEETING OF STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III. THE EXHIBIT INDEX IS LOCATED ON PAGE 43 HEREOF. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 BORDERS GROUP, INC. INDEX
PAGE ---- PART I Item 1. Business.................................................... 2 Item 2. Properties.................................................. 8 Item 3. Legal Proceedings........................................... 8 Item 4. Submission of Matters to a Vote of Security Holders......... 9 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 10 Item 6. Selected Financial Data..................................... 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 12 Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................................... 17 Item 8. Financial Statements and Supplementary Data................. 18 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 35 PART III Item 10. Directors and Executive Officers of the Registrant.......... 36 Item 11. Executive Compensation...................................... 38 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 39 Item 13. Certain Relationships and Related Party Transactions........ 39 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................................... 40
1 3 PART I ITEM 1. BUSINESS GENERAL Borders Group, Inc. (the Company), through its subsidiaries, Borders, Inc. (Borders), Walden Book Company, Inc. (Walden), Books etc. and others 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 January 23, 2000, the Company operated 300 superstores primarily under the Borders name, including six in the United Kingdom, and one each in Singapore, Australia and New Zealand. The Company also operated 904 mall-based and other bookstores primarily under the Waldenbooks name and 27 bookstores under the Books etc. name in the United Kingdom. Walden is the largest operator of seasonal kiosks under the Day by Day and All Wound Up names. The Company, through its subsidiary Borders Online, Inc., is also an online retailer of books, music, and video through the operation of its Internet commerce site, Borders.com. BORDERS Borders is a premier operator of book and music superstores, offering customers selection and service that the Company believes to be superior to other book superstore operators. A key element of the Company's strategy is to continue its growth and increase its profitability through the ongoing expansion of its Borders book and music superstore operations. In 1999, the Company opened 46 new domestic Borders book and music superstores. Borders superstore operations achieved annual growth in net sales and EBITDA for the year ended January 23, 2000 of 19.9% and 27.1%, respectively. Borders superstores achieved average sales per square foot of $255 and average sales per superstore of $6.8 million in 1999, each of which the Company believes to be higher than the comparable figures of any publicly reporting book superstore operator. Borders superstores achieved compound annual growth in net sales and EBITDA for the three years ended January 23, 2000 of 23.0% and 40.0%, respectively. Each Borders superstore offers customers a vast assortment of books, superior customer service, value pricing and an inviting and comfortable environment designed to encourage browsing. A Borders superstore typically carries the broadest selection of book titles in its market. Borders superstores carry an average of 150,000 book titles, ranging from 85,000 titles to 170,000 titles, across numerous categories, including many hard-to-find titles. As of January 23, 2000, 276 of the 291 domestic Borders superstores were in a book and music format, which also features an extensive selection of pre-recorded music, with an emphasis on hard-to-find recordings and categories such as jazz, classical and foreign music, and a broad assortment of pre-recorded videotapes and digital video discs, focusing primarily on classic movies and hard-to-find titles. Each book and music superstore carries approximately 50,000 titles of music, 5,500 titles of videotapes and 1,400 titles of digital video discs. Borders superstores average 26,500 square feet in size, including approximately 5,000 square feet devoted to music, approximately 700 square feet devoted to videos and digital video discs and approximately 1,400 square feet devoted to a cafe. Stores opened in fiscal 1999 averaged 24,600 square feet. Each store is distinctive in appearance and architecture and is designed to complement its local surroundings, although Borders utilizes certain standardized specifications to increase the speed and lower the cost of new store openings. 2 4 The number of domestic Borders stores located in each state and the District of Columbia as of January 23, 2000 are listed below:
NUMBER OF STATE STORES ----- --------- Alaska............................ 1 Arizona........................... 6 California........................ 43 Colorado.......................... 4 Connecticut....................... 5 District of Columbia.............. 2 Delaware.......................... 2 Florida........................... 19 Georgia........................... 10 Hawaii............................ 6 Iowa.............................. 2 Idaho............................. 1 Illinois.......................... 17 Indiana........................... 7 Kansas............................ 5 Louisiana......................... 1 Massachusetts..................... 8 Maryland.......................... 7 Maine............................. 2 Michigan.......................... 14 Minnesota......................... 5 Missouri.......................... 4
NUMBER OF STATE STORES ----- --------- North Carolina.................... 6 Nebraska.......................... 2 New Hampshire..................... 2 New Jersey........................ 9 New Mexico........................ 2 Nevada............................ 4 New York.......................... 16 Ohio.............................. 15 Oklahoma.......................... 4 Oregon............................ 5 Pennsylvania...................... 15 Rhode Island...................... 1 South Dakota...................... 1 Tennessee......................... 2 Texas............................. 12 Utah.............................. 3 Virginia.......................... 10 Vermont........................... 1 Washington........................ 5 Wisconsin......................... 4 West Virginia..................... 1
WALDEN Walden is the leading operator of mall-based bookstores in terms of sales and number of stores, offering customers a convenient source for new releases, hardcover and paperback bestsellers, periodicals and a standard selection of other titles. Walden generates cash flow that the Company plans to use toward financing the Company's growth initiatives. Walden had sales for the year ended January 23, 2000 of $989.9 million, and generated EBITDA of $88.2 million. Walden achieved average sales per square foot of $274 and average sales per store of $1.0 million for 1999, both of which are higher than its closest competitor. Walden stores average approximately 3,900 square feet in size and typically carry between 15,000 and 40,000 titles. Walden operates one of the longest-running customer affinity programs in the nation, the Preferred Reader Program. The lessons learned via this program are helping the Company to develop similar customer affinity programs across its other business channels, including Borders superstores and Borders.com. 3 5 The number of Waldenbooks stores located in each state and the District of Columbia as of January 23, 2000 are listed below:
NUMBER OF STATE STORES ----- --------- Alaska............................ 6 Alabama........................... 8 Arkansas.......................... 8 Arizona........................... 11 California........................ 71 Colorado.......................... 14 Connecticut....................... 15 District of Columbia.............. 3 Delaware.......................... 3 Florida........................... 56 Georgia........................... 26 Hawaii............................ 12 Iowa.............................. 13 Idaho............................. 5 Illinois.......................... 40 Indiana........................... 21 Kansas............................ 10 Kentucky.......................... 12 Louisiana......................... 10 Massachusetts..................... 28 Maryland.......................... 24 Maine............................. 2 Michigan.......................... 29 Minnesota......................... 7 Missouri.......................... 21 Mississippi....................... 7
NUMBER OF STATE STORES ----- --------- Montana........................... 4 North Carolina.................... 31 North Dakota...................... 3 Nebraska.......................... 4 New Hampshire..................... 5 New Jersey........................ 26 New Mexico........................ 5 Nevada............................ 4 New York.......................... 48 Ohio.............................. 43 Oklahoma.......................... 14 Oregon............................ 11 Pennsylvania...................... 56 Rhode Island...................... 5 South Carolina.................... 15 South Dakota...................... 2 Tennessee......................... 18 Texas............................. 61 Utah.............................. 4 Virginia.......................... 34 Vermont........................... 4 Washington........................ 18 Wisconsin......................... 16 West Virginia..................... 9 Wyoming........................... 2
In March 1999, Walden acquired for cash the stock of All Wound Up (AWU) for a purchase price totaling $19.7 million. AWU operates kiosks, most of which are seasonal, which sell interactive toys and other novelty merchandise. The acquisition complements Walden's kiosk operations and will allow for continued growth by combining the core competencies of each organization. The acquisition has been accounted for under the purchase method. INTERNATIONAL The Company's international initiative began in 1997 with the acquisition of Books etc. in the United Kingdom and the opening of a superstore in Singapore. Since then, the Company has expanded its international operations to establish a presence in four countries on three continents. The Company opened four international superstores in 1999, and as of January 23, 2000, operated six superstores in the United Kingdom, and one each in Singapore, Australia and New Zealand. International superstores range between 16,000 and 41,000 square feet in size. International superstores tend to be multi-level facilities located in older buildings in urban locations. The Company believes it has a competitive advantage due to the depth of Borders' system-driven assortment and level of service which currently does not exist in the international marketplace. In 1999, international sales increased 39% to $168.2 million and generated EBITDA of $1.7 million. The Company is encouraged by early results with six of the nine superstores producing positive EBITDA in fiscal 1999, and currently four of the top ten highest volume Borders superstores are international stores. 4 6 In February 2000, Borders opened its first bilingual superstore in San Juan, Puerto Rico. This is a significant step for the Company in advancing the Company's global growth strategy, as well as helping Borders build its domestic Spanish language book and music assortment. Books etc. operated 27 stores in the United Kingdom as of January 23, 2000, all of which are small-format stores located primarily in central London or in various airports in the United Kingdom. These stores generally range from 2,000 to 5,000 square feet in size, with the largest being 13,000 square feet, and the smallest being 650 square feet. BORDERS.COM The Company, through its subsidiary, Borders Online, Inc., operates an Internet commerce site, Borders.com. Launched in 1998, Borders.com was the first fully integrated book, music and video e-Commerce site. This site offers customers over 700,000 titles and 10 million book, music and video items in stock and ready for immediate shipping from the Company's state-of-the-art fulfillment and distribution center. In 1999, the site's infrastructure was significantly upgraded and the commerce capability improved. Borders.com is an integral part of the Company's retail convergence strategy. The Company's retail convergence strategy is to enhance the shopping experience by offering products to customers in a variety of channels, whether it be retail stores, the Internet, or special orders. The Company's rollout of Title Sleuth in 2000 is a component of this convergence. Title Sleuth is a free-standing computer kiosk based on Web technology that helps customers locate titles within the store. Customers can utilize the fulfillment center to have special order items delivered to the store. The convergence strategy also provides customer acquisition for Borders.com with low-cost access to 30 million unique retail store customers annually. DISTRIBUTION The Company believes that its centralized distribution system, consisting of 13 distribution facilities worldwide, combined with Borders' use of its proprietary "expert" system to manage inventory, significantly enhances its ability to manage inventory on a store-by-store basis. Inventory is shipped from vendors to one of the Company's distribution centers. Approximately 95% and 70% of the books carried by Borders and Walden, respectively, are processed through the Company's distribution facilities. Approximately 90% of the inventory that arrives from publishers is processed within 48 hours for shipment to the stores. Newly released titles and rush orders are processed within 24 hours. Borders purchases substantially all of its music merchandise directly from manufacturers and utilizes the Company's own distribution center to ship approximately 99% of its music inventory to its stores. The Company utilizes four distribution centers located in Harrisburg, Pennsylvania, Indianapolis, Indiana, Columbus, Ohio and Nashville, Tennessee that provide exclusive service to Borders' stores, one distribution center, also in Nashville, that services Walden stores exclusively, and one distribution facility in Columbus that services the All Wound Up seasonal kiosk operations. In addition, the Company has two distribution facilities located in Mira Loma, California and Ann Arbor, Michigan that service both Borders and Walden. Three international distribution centers located in the United Kingdom, Australia, and Singapore support the Company's growing international business. The Company has a state-of-the-art 200,000 square-foot fulfillment center in Laverne, Tennessee that supports Borders.com and Borders and Walden stores . This facility has over 700,000 titles of books, music and videos in stock and available for immediate shipping. In addition to serving Borders.com customers, the fulfillment center also provides delivery services for store-originated special orders, institutional orders, and call center orders, with the capability to ship direct to the customer or the store. In general, books can be returned to their publishers at cost. Borders and Walden stores return books to the Company's centralized returns center in Nashville, Tennessee to be processed for return to the publishers. In general, Borders can return music and videos to its vendors at cost plus an additional fee to cover handling and processing costs. 5 7 COMPETITION The retail book business is highly competitive. Competition within the retail book industry is fragmented with Borders facing direct competition from other superstores, such as Barnes & Noble, Inc. Walden faces direct competition from the B. Dalton division of Barnes & Noble, Inc., as well as regional chains and superstores. In addition, Borders and Walden compete with each other, as well as other specialty retail stores that offer books in a particular area of specialty, independent single store operators, discount stores, drug stores, warehouse clubs, mail order clubs and mass merchandisers. In the future, Borders and Walden may face additional competition from other categories of retailers entering the retail book market. The music and video businesses are also highly competitive and Borders faces competition from large established music chains, such as Tower Records and the Musicland and Media Play divisions of Musicland Stores Corporation (which also sell videos), established video chains, such as Blockbuster and Suncoast Motion Picture Company (a division of Musicland Stores Corporation), as well as specialty retail stores, video rental stores, discount stores, warehouse clubs and mass merchandisers. In addition, consumers receive television and mail order offers and have access to mail order clubs. The largest mail order clubs are affiliated with major manufacturers of pre-recorded music and may have advantageous marketing relationships with their affiliates. The Internet has emerged as a significant channel for retailing in all media categories that the Company carries. In particular, the retailing of books and music over the Internet is highly competitive. Competitors on the Internet include Amazon.com, Inc., barnesandnoble.com, inc. and others. In addition, the Company faces competition from companies engaged in the business of selling books and music products via electronic means. EMPLOYEES As of January 23, 2000, the Company had a total of approximately 17,000 full-time employees and approximately 13,000 part-time employees. When hiring new employees, the Company considers a number of factors, including education and experience, personality and orientation towards customer service. All new store employees participate in a training program that provides up to two weeks of in-store training in all aspects of customer service and selling, including title searches for in-stock and in-print merchandise, merchandising, sorting, operation of point of sale terminals and store policies and procedures. The Company believes that its relations with its employees are generally excellent. None of the employees of the Company are represented by unions. TRADEMARKS AND SERVICE MARKS Borders(R), Borders Book Shop(R), and Borders Books & Music(R), among other marks, are all registered trademarks and service marks used by Borders. Brentano's(R), Coopersmith's(R), Longmeadow Press(R), Waldenbooks(R), Waldenbooks Preferred Reader(R), Waldenkids(R) and Waldensoftware(R), among other marks, are all registered trademarks and service marks used by Walden. Books etc(R) is a registered trademark and service mark used by Books etc. Borders.com(R) is a registered trademark and service mark used by Borders Online, Inc. The Borders, Walden, Books etc and Borders.com service marks are used as trade names in connection with their business operations. SEASONALITY The Company's business is highly seasonal, with sales generally highest in the fourth quarter and lowest in the first quarter. During 1999, 36.5% of the Company's sales and 99.8% of the Company's operating income were generated in the fourth quarter. The Company's results of operations, including its seasonal kiosks, depend significantly upon the holiday selling season in the fourth quarter; less than satisfactory net sales for such period could have a material adverse effect on the Company's financial condition or results of operations for the year and may not be sufficient to cover any losses which may be incurred in the first three quarters of the year. The Company's expansion program generally is weighted with store openings in the second half of the fiscal year. In the future, changes in the number and timing of store openings, or other factors, may result in different seasonality trends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Seasonality". 6 8 RELATIONSHIP WITH KMART General. Prior to its initial public offering in May 1995, the Company was a subsidiary of Kmart Corporation (Kmart); Kmart currently owns no shares of common stock of the Company. Kmart and the Company continue to have the following contractual relationships. Tax Allocation and Indemnification Agreement. Prior to the completion of its initial public offering ("the IPO"), the Company was included in the consolidated federal income tax returns of Kmart and filed on a combined basis with Kmart in certain states. Pursuant to a tax allocation and indemnification agreement between the Company and Kmart (the "Tax Allocation Agreement") the Company will remain obligated to pay to Kmart any income taxes the Company would have had to pay if it had filed separate tax returns for the tax period beginning on January 26, 1995, and ending on June 1, 1995, the date of the consummation of the IPO (to the extent that it has not previously paid such amounts to Kmart). In addition, if the tax liability attributable to the Company for any previous tax period during which the Company was included in a consolidated federal income tax return filed by Kmart or a combined state return is adjusted as a result of an action of a taxing authority or a court, then the Company will pay to Kmart the amount of any increase in such liability and Kmart will pay to the Company the amount of any decrease in such liability (in either case together with interest and penalties). The Company's tax liability for previous years will not be affected by any increase or decrease in Kmart's tax liability if such increase or decrease is not directly attributable to the Company. After completion of the IPO, the Company continued to be subject under existing federal regulations to several liability for the consolidated federal income taxes for any tax year in which it was a member of any consolidated group of which Kmart was the common parent. Pursuant to the Tax Allocation Agreement, however, Kmart agreed to indemnify the Company for any federal income tax liability of Kmart or any of its subsidiaries (other than that which is attributable to the Company) that the Company could be required to pay and the Company agreed to indemnify Kmart for any of the Company's separate company taxes. Lease Guaranty Agreement. Borders' leases for 32 of its retail stores and its distribution center in Harrisburg, Pennsylvania have been guaranteed by Kmart, on either a full or limited basis. Limited guarantees generally provide for the release of Kmart's guarantee upon satisfaction by Borders of certain financial requirements specified in the guarantee. Under the terms of a lease guaranty, indemnification and reimbursement agreement entered into upon completion of the IPO (the "Lease Guaranty Agreement"), until termination of all of the lease guarantees, except during such time as the Company achieves and maintains the investment grade status specified in the Lease Guaranty Agreement, the Company will be subject to certain covenants and restrictive covenants under the Lease Guaranty Agreement including restrictions on indebtedness, dividends, mergers and certain liens. Under the terms of the Lease Guaranty Agreement, the underlying leases will be transferable by Borders, subject to a right of first refusal in favor of Kmart with respect to sites within a three-mile radius of a Kmart store and, with respect to all other sites, a right of first offer in favor of Kmart. The Company and Borders are required to indemnify Kmart with respect to (i) any liabilities Kmart may incur under the lease guarantees, except those liabilities arising from the gross negligence or willful misconduct of Kmart, and (ii) any losses incurred by Kmart after taking possession of any particular premises, except to the extent such losses arise solely from the acts or omissions of Kmart. Under the terms of the Lease Guaranty Agreement, in the event of (i) the Company's or Borders' failure to provide any required indemnity, (ii) a knowing and material violation of the limitations on transfers of guaranteed leases set forth in the agreement, (iii) a breach of any of the financial covenants described above or (iv) certain events of bankruptcy, Kmart will have the right to assume any or all of the guaranteed leases and to take possession of all of the premises underlying such guaranteed leases; provided, that in the event of a failure or failures to provide required indemnities, the remedy of taking possession of all of the premises underlying the guaranteed leases may be exercised only if such failures relate to aggregate liability of $10.0 million or more and only if Kmart has provided 100 days' prior written notice. In the event of a failure to provide required indemnities resulting in losses of more than the equivalent of two months rent under a particular lease but less than $10.0 million, Kmart may exercise such remedy of possession as to the premises underlying the guaranteed lease or leases to which the failure to provide the indemnity relates and one additional premise for each such premises to which the failure relates, up to a maximum, in any event, of five additional premises, and thereafter, with respect to such additional premises, Kmart remedies and indemnification rights shall terminate. In the event of a failure to provide required indemnities resulting in liabilities of less than the equivalent of two months rent under a particular 7 9 lease, Kmart may exercise such remedy of possession only as to the premises underlying the guaranteed lease or leases to which the failure to provide the indemnity relates. The Lease Guaranty Agreement will remain in effect until the expiration of all lease guarantees, which the Company believes will be on or after November 2019. FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements as defined by 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, "Cautionary Statement Under the Private Securities Litigation Reform Act of 1995", filed with this Annual Report on Form 10-K identifies the forward-looking statements and describes some, but not all, of the factors that could cause these differences. ITEM 2. PROPERTIES Borders leases all of its stores. Borders' store leases have an average initial term of 15 to 20 years with several five-year renewal options. At January 23, 2000, the average unexpired term under Borders' existing store leases was 11.4 years prior to the exercise of any options. Walden leases all of its stores. Walden's store leases generally have an initial term of 10 years, although in recent years many renewals have been executed for terms less than 10 years. At present, the average unexpired term under Walden's existing store leases is approximately 3.9 years. The terms of Walden's mall-based bookstore leases for its leased bookstores open as of January 23, 2000 expire as follows:
LEASE TERMS TO EXPIRE DURING 12 MONTHS NUMBER OF ENDING ON OR ABOUT JANUARY 31 MALL STORES -------------------------------------- ----------- 2001........................................................ 245 2002........................................................ 91 2003........................................................ 95 2004........................................................ 110 2005........................................................ 103 2006 and later.............................................. 260
Books etc. operated 27 stores in the United Kingdom as of January 23, 2000. Books etc. generally leases its stores under operating leases with terms ranging from 5 to 25 years. The average remaining lease term for Books etc. stores is 11.6 years. The Company has leased a portion of its corporate headquarters in Ann Arbor, Michigan and owns the remaining building and improvements. The Company leases all distribution centers. ITEM 3. LEGAL PROCEEDINGS 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 pre-judgment interest on any amounts awarded in the action, as well as attorney fees and costs. The trial is scheduled for April 9, 2001. The Company intends to vigorously defend the action. In August 1998, The Intimate Bookshop, Inc. ("Intimate") 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., and others alleging violation of the Robinson-Patman Act and other federal laws, New York statutes governing trade practices and common law. In response to Defendants' Motion to Dismiss the Complaint, plaintiff Kuralt withdrew his claims and plaintiff Intimate voluntarily dismissed all but its Robinson-Patman claims. Intimate recently filed a 8 10 Second Amended Complaint limited to allegations of violation of the Robinson-Patman Act. The Second Amended Complaint alleges that Intimate has suffered $11,250,000 or more in damages and requests treble damages, injunctive and declaratory relief, interest, costs, attorneys fees and other unspecified relief. Many of the allegations in the Second 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. The Company intends to vigorously defend the action. In April 2000, two former employees, individually and on behalf of a purported class, filed an action against Borders in the Superior Court of California for the County of San Francisco. The purported class consists of all current and former store management employees of Borders in California who, within the applicable statutes of limitations, were denied payment of overtime compensation in violation of California law. The Complaint alleges that the individual plaintiffs and the purported class members worked hours for which they were entitled to receive, but did not receive, overtime compensation under California law, and that they were classified as "exempt" store management employees but were forced to work more than 50% of their time in non-exempt tasks. The Complaint alleges violations of the California Labor Code, the California Business and Professions Code and conversion. The relief sought includes compensatory and punitive damages, penalties, preliminary and permanent injunctions requiring Borders to pay overtime compensation as required under California and Federal law, prejudgment interest, costs, attorneys fees and such other relief as the Court deems proper. 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 action has been voluntarily dismissed by the plaintiffs without any payment by the Company. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 9 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following table sets forth, for the fiscal quarters indicated, the high and low closing market prices for the Common Stock on the New York Stock Exchange.
HIGH LOW ---- --- FISCAL QUARTER 1998 First Quarter............................................. $34.38 $31.50 Second Quarter............................................ $39.94 $30.69 Third Quarter............................................. $33.00 $18.94 Fourth Quarter............................................ $28.88 $18.31 FISCAL QUARTER 1999 First Quarter............................................. $20.25 $13.56 Second Quarter............................................ $17.50 $14.25 Third Quarter............................................. $14.69 $11.88 Fourth Quarter............................................ $17.88 $12.25
The Common Stock is traded on the New York Stock Exchange. As of March 29, 2000, the Common Stock was held by 4,521 holders of record. The Company has not declared any cash dividends and intends to retain its earnings to finance future growth. Therefore, the Company does not anticipate paying any cash dividends in the foreseeable future. The declaration and payment of dividends, if any, is subject to the discretion of the Board and to certain limitations under the Michigan Business Corporation Act. In addition, the Company's ability to pay dividends is restricted by certain agreements to which the Company is a party. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources". On January 5, 2000, the Company issued to George R. Mrkonic, Vice Chairman of the Company, options to purchase 100,980 shares of common stock with an exercise price of $15.69 in lieu of compensation of $515,000. This transaction involved an offer solely to Mr. Mrkonic pursuant to the terms of his Employment Agreement with 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. 10 12 ITEM 6. SELECTED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Company's consolidated financial statements and the notes thereto.
FISCAL YEAR ENDED ------------------------------------------------------------------- JANUARY 23, JANUARY 24, JANUARY 25, JANUARY 26, JANUARY 28, 2000 1999 1998 1997 1996(1) ----------- ----------- ----------- ----------- ----------- (DOLLARS IN MILLIONS EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA Borders Sales.............................. $1,823.2 $1,521.0 $1,267.4 $ 979.1 $ 717.5 Waldenbooks Sales.......................... 989.9 948.7 970.0 979.7 1,031.5 International Sales........................ 168.2 120.7 28.6 -- -- -------- -------- -------- -------- -------- Total Store Sales.......................... 2,981.3 2,590.4 2,266.0 1,958.8 1,749.0 Borders.com Sales.......................... 17.9 4.6 -- -- -- -------- -------- -------- -------- -------- Total Sales.............................. $2,999.2 $2,595.0 $2,266.0 $1,958.8 $1,749.0 Operating Income Before Goodwill Writedowns and FAS 121.............................. $ 166.2 $ 167.3 $ 138.0 $ 103.1 $ 64.5 Goodwill Writedowns........................ -- -- -- -- 201.8 FAS 121 Impairment......................... -- -- -- -- 63.1 -------- -------- -------- -------- -------- Operating Income (Loss).................... $ 166.2 $ 167.3 $ 138.0 $ 103.1 $ (200.4) Net Income (Loss).......................... $ 90.3 $ 92.1 $ 80.2 $ 57.9 $ (211.1) Diluted Earnings (Loss) Per Common Share(2)................................. $ 1.13 $ 1.12 $ 0.98 $ 0.70 $ (2.94) Pro Forma Diluted Earnings Per Common Share Before Goodwill Writedowns and FAS 121(2)................................... $ 1.13 $ 1.12 $ 0.98 $ 0.70 $ 0.43 BALANCE SHEET DATA Working Capital............................ $ 170.3 $ 144.5 $ 137.0 $ 225.1 $ 204.3 Total Assets............................... $1,914.8 $1,766.6 $1,534.9 $1,211.0 $1,052.3 Short-Term Borrowings...................... $ 133.4 $ 131.9 $ 122.5 $ 30.0 $ 60.0 Long-Term Debt and Capital Lease Obligations, Including Current Portion, and Redeemable Preferred Stock........... $ 18.8 $ 8.5 $ 10.0 $ 6.7 $ 8.6 Shares Subject to Repurchase............... $ -- $ -- $ -- $ 34.1 $ -- Stockholders' Equity....................... $ 802.6 $ 715.1 $ 598.1 $ 511.4 $ 472.0
- ------------------------- (1) The Company's 1995 fiscal year consisted of 53 weeks. (2) Earnings (loss) per common share for the fiscal year ended January 28, 1996 are pro forma and are based on actual common shares outstanding after the Company's initial public offering. 11 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Borders Group, Inc. (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 January 23, 2000, the Company operated 300 superstores primarily under the Borders name, including six in the United Kingdom, and one each in Singapore, Australia and New Zealand. The Company also operated 904 mall-based and other bookstores primarily under the Waldenbooks name, and 27 bookstores under the Books etc. name in the United Kingdom. The Company, through its subsidiary Borders Online, Inc., is also an online retailer of books, music, and video through the operation of its Internet commerce site, Borders.com. The Company's business strategy is to continue its growth and increase its profitability through (i) the continued expansion and refinement of its Borders superstore operation in the United States and internationally, (ii) the continued focus on opportunistic store openings in its mall-based bookstore operations and expansion of its kiosk operations, (iii) the development of web-based commerce technologies which enhance the customer experience both in-store and online, and (iv) realization of synergies and economies of scale through a combination of certain of its books and music operations. The Company's fiscal year ends on the Sunday immediately preceding the last Wednesday in January. Fiscal 1999, 1998, and 1997 each consisted of 52 weeks and ended on January 23, 2000, January 24, 1999, and January 25, 1998, respectively. References herein to years are to the Company's fiscal years. RESULTS OF OPERATIONS The following table presents the Company's statement of operations data, as a percentage of sales, for the three most recent fiscal years.
JANUARY 23, JANUARY 24, JANUARY 25, 2000 1999 1998 ----------- ----------- ----------- RESULTS OF OPERATIONS Sales....................................................... 100.0% 100.0% 100.0% Cost of merchandise sold (includes occupancy)............... 71.6 71.7 72.1 ----- ----- ----- Gross margin................................................ 28.4 28.3 27.9 Selling, general and administrative expenses................ 22.5 21.5 21.4 Pre-opening expense......................................... 0.3 0.3 0.4 Goodwill amortization....................................... 0.1 0.1 -- ----- ----- ----- Operating income............................................ 5.5 6.4 6.1 Interest expense............................................ 0.6 0.6 0.3 ----- ----- ----- Income before income tax.................................... 4.9 5.8 5.8 Income tax provision........................................ 1.9 2.3 2.3 ----- ----- ----- Net income.................................................. 3.0% 3.5% 3.5% ===== ===== ===== STORE ACTIVITY Borders Superstores Beginning number of stores................................ 250 203 157 Openings.................................................. 50 47 46 ----- ----- ----- Ending number of stores................................... 300 250 203 ----- ----- ----- Walden Mall Bookstores Beginning number of stores................................ 900 923 961 Openings.................................................. 39 16 8 Closings.................................................. (35) (39) (46) ----- ----- ----- Ending number of stores................................... 904 900 923 ===== ===== =====
12 14 FISCAL YEARS ENDED JANUARY 23, 2000 AND JANUARY 24, 1999 Store sales for the year ended January 23, 2000 were $2,981.3 million, reflecting a 15.1% increase over the $2,590.4 million in sales achieved in 1998. The higher number of Borders superstores and Borders' 5.4% comparable store sales increase were the primary contributors to the growth in sales. Waldenbooks stores had a 0.7% comparable store sales increase in 1999. Sales for Borders.com were $17.9 million in 1999, an increase of 289% over the $4.6 million in 1998. Gross margin as a percent of sales increased slightly from 28.3% in 1998 to 28.4% in 1999. The increase in gross margin percentage primarily reflects improved inventory shrinkage control and merchandise mix. As a percentage of sales, SG&A for 1999 was 22.5% as compared to the 21.5% of sales in the corresponding period of 1998. The increase is due to continued spending on strategic initiatives, including Borders.com and international, and a one-time charge of $5.5 million related to the resignation of a former executive. Pre-opening expense was $7.8 million in both 1999 and 1998. Pre-opening expense per store varies primarily as a result of differing levels of grand opening advertising, depending on the presence of the Company in the market, and differing levels of labor costs associated with opening the store. The Company opened 50 Borders superstores and 39 Waldenbooks mall-based stores in 1999 as compared to 47 Borders superstores and 16 Waldenbooks mall-based stores in 1998. Goodwill amortization was $3.5 million in 1999, as compared to $2.9 million in 1998. The increase in goodwill amortization of $0.6 million is a result of the acquisition of All Wound Up, a seasonal operator of kiosks selling toys and other novelty merchandise, in March 1999. Operating income decreased to $166.2 million or 5.5% of sales in 1999, as compared to $167.3 million or 6.4% of sales in 1998. The decrease is primarily due to spending on strategic initiatives including Borders.com and international, and a one-time charge of $5.5 million related to the resignation of a former executive. Interest expense was $17.9 million in 1999, as compared to $16.2 million in 1998. The increase represents slightly higher debt levels during the year for the repurchase of common stock and the acquisition of All Wound Up. Income tax expense in 1999 was $58.0 million as compared to $59.0 million in 1998. The effective tax rate for both periods differed from the federal statutory rate primarily as a result of non-deductible goodwill amortization and state income taxes. The Company's effective tax rate was 39.1% in 1999, as compared to 39.0% in 1998. As a result of the foregoing, store net income for the year ended January 23, 2000 was $107.5 million as compared to $102.6 million for the year ended January 24, 1999. Borders.com had a net loss of $17.2 million in 1999, as compared to a net loss of $10.5 million in 1998. On a consolidated basis, net income in 1999 was $90.3 million, as compared to $92.1 million in 1998. FISCAL YEARS ENDED JANUARY 24, 1999 AND JANUARY 25, 1998 Store sales for the year ended January 24, 1999 were $2,590.4 million, reflecting a 14.3% increase over the $2,266.0 million in sales achieved in 1997. Both the higher number of Borders superstores and Borders' 4.4% comparable store sales increase contributed to the growth, which was partially offset by a lower number of Waldenbooks stores and a 1.0% comparable store sales decrease. Comparable store sales at Borders and Waldenbooks were impacted by increased superstore and Internet competition. Sales for Borders.com were $4.6 million in 1998. Gross margin as a percent of sales rose from 27.9% in 1997 to 28.3% in 1998. The increase in gross margin percentage primarily reflects improved inventory shrinkage control and merchandise mix. As a percentage of sales, SG&A for 1998 was 21.5%, or 0.1% higher than the 21.4% of sales in the corresponding period of 1997. The increase is due to increased spending on strategic initiatives, including Borders.com and international, which offset operating leverage in the Company's core business. Pre-opening expense in 1998 was $7.8 million, an increase of $0.6 over the 1997 expense of $7.2 million. Pre-opening expense per store varies primarily as a result of differing levels of grand opening advertising, depending on the presence of the Company in the market, and differing levels of labor costs associated with opening the store. The 13 15 Company opened 47 Borders superstores and 16 Waldenbooks mall-based stores in 1998 as compared to 46 Borders superstores and 8 Waldenbooks mall-based stores in 1997. Goodwill amortization was $2.9 million in 1998, as compared to $1.6 million in 1997. The increase in goodwill amortization of $1.3 million is a result of a full year of amortization relating to the acquisition of Books etc. in October 1997. Operating income improved to $167.3 million or 6.4% of sales in 1998, as compared to $138.0 million or 6.1% of sales in 1997. Interest expense was $16.2 million in 1998, as compared to $7.2 million in 1997. The increase represents interest on borrowings for the repurchase of common stock and the acquisition of Books etc. Income tax expense in 1998 was $59.0 million as compared to $50.6 million in 1997. The effective tax rate for both periods differed from the federal statutory rate primarily as a result of non-deductible goodwill amortization and state income taxes. The Company's effective tax rate was 39.0% in 1998, as compared to 38.7% in 1997. The increase in the effective rate is primarily due to the mix of Borders store openings in higher-taxed states. As a result of the foregoing, store net income for the year ended January 24, 1999 was $102.6 million as compared to $86.2 million for the year ended January 25, 1998. Borders.com had a net loss of $10.5 million in 1998, as compared to a net loss of $6.0 million in 1997. On a consolidated basis, net income in 1998 was $92.1 million, as compared to $80.2 million in 1997. 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 continued development of Borders.com. Net cash provided by operations in 1999 was $173.0 million, as compared to $166.2 million in 1998. The current year activity primarily reflects income before non-cash charges for depreciation and amortization offset by cash used for inventories as a result of store expansion at Borders. Inventory net of accounts payable increased primarily due to 50 new Borders stores. Net cash used for investing was primarily for capital expenditures for new stores, including the opening of three superstores in the United Kingdom and one superstore in New Zealand, and continued investment in Borders.com. Capital expenditures in 1999 reflect the opening of 50 new superstores in total and 39 new Waldenbooks stores. Capital expenditures in 1998 reflected the opening of 47 new superstores, 16 new Waldenbooks stores, a new distribution center and expansion of the home office facility. Capital expenditures in 1997 reflected the opening of 46 new Borders superstores and 8 new Waldenbooks stores. Net cash used by financing in 1999 was $15.0 million, resulting primarily from the repurchase of common stock of $25.4 million, partially offset by the issuance of common stock under the Company's employee benefit plans. Net cash used for financing in 1998 was $8.7 million, which resulted from the repurchase of common stock partially offset by the issuance of stock under employee benefit plans. The Company expects capital expenditures to be approximately $180.0 million in 2000, resulting primarily from domestic and international store openings, refurbishment of a number of existing stores, and continued investment in web-based technology. The Company currently plans to open approximately 50 Borders superstores, including approximately 5 to 7 international stores, and 15 new Waldenbooks mall stores in 2000. Average cash requirements for the opening of a domestic prototype Borders books and music superstore are $2.3 million, representing capital expenditures of $1.1 million, inventory requirements, net of related accounts payable, of $1.1 million and $0.1 million of pre-opening costs. Average cash requirements to open a new or expanded Waldenbooks store range from $0.4 million to $0.7 million, depending on the size and format of the store. The Company plans to lease new store locations predominantly under operating leases. Also, the Company expects capital expenditures of approximately $50.0 million related to web-based, retail convergence and other technology, and approximately $27.0 million related to existing store refurbishments. 14 16 The Company plans to execute its expansion plans for its Borders superstores and other strategic initiatives principally with funds generated from operations and financing through the lease facility in 2000 and beyond. In the event that working capital requirements are in excess of operating cash flows and lease financing, the Company may fund such excess with borrowings under the credit facility. The Company believes funds generated from operations, borrowings under the Credit Facility and financing through the Lease Facility will be sufficient to fund its anticipated capital requirements for at least the next two to three years. The Company currently has a share repurchase program in place with remaining authorization to repurchase approximately $62.3 million. During 1999 and 1998, $25.4 million and $51.7 million of common stock was repurchased, respectively. 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 covenants which limit, among other things, the Company's ability to incur indebtedness, grant liens, make acquisitions, merge, declare dividends, dispose of assets, and 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), and require the Company to meet certain financial measures regarding fixed charge coverage, leverage and tangible net worth. The Company is prohibited under the Credit Facility from paying cash dividends on common shares. Effective February 2000, the Company increased the credit available under the Credit Facility to $472.8 million. During 1999, the Company entered into 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 covenants and events of defaults that are similar to those contained in the Credit Facility described above. The Company had no borrowings outstanding under the Seasonal Facility as of January 23, 2000. Effective February 2000, the Company reduced the credit available under the Seasonal Facility to $25.0 million, in accordance with provisions of the agreement. 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 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 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. The Lease Facility contains covenants and events of default that are similar to those contained in the Credit Facility described above. Effective February 2000, the Company decreased the credit available under the Lease Facility to $175.0 million. There were 41 properties financed through the Lease Facility, with a financed value of $162.9 million, at January 23, 2000. 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 that 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. In December, 1998, 17 properties previously financed through the Lease Facility with a total financed value of $70.9 million were permanently financed through operating leases. 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. 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 (the former parent of the Company) 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 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 15 17 through its line of credit. 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 is subject to risk resulting from interest rate fluctuations, as interest on the Company's borrowings is principally based on variable rates. The Company's objective in managing its exposure to interest rate fluctuations is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. The Company primarily utilizes interest rate swaps and collars to achieve this objective, effectively converting a portion of its variable-rate exposures to fixed interest rates. LIBOR is the rate upon which the Company's variable rate debt, and its payments under the Lease Facility, are principally based. If LIBOR were to increase 1% for the full year in 2000 as compared to the end of 1999, the Company's after-tax earnings, after considering the effects of its interest rate swap and collar agreements, would decrease $0.9 million based on the Company's expected average outstanding debt, including its indirect borrowings under the Lease Facility, as of January 23, 2000. OTHER MATTERS Year 2000 Issue The Company experienced no significant disruption to operations or business systems as a result of the transition from 1999 to 2000. The Company does not expect any material subsequent disruption to its operations or business systems from this transition. Subsequent Event Subsequent to the Company's fiscal year-end, the Board of Directors authorized the Company to explore strategic alternatives in order to increase shareholder value. These alternatives could include a recapitalization, a leveraged buyout, or a business combination with another company; however, there is no assurance that any transaction will occur. SEASONALITY The Company's business is highly seasonal, with sales significantly higher and substantially all operating income realized during the fourth quarter, which includes the Christmas selling season.
FISCAL 1999 QUARTER ENDED --------------------------------------------- APRIL JULY OCTOBER JANUARY (DOLLARS IN MILLIONS) ----- ---- ------- ------- SALES................................................... $618.7 $631.0 $656.3 $1,093.2 Operating income (loss)................................. (2.6) 0.3 2.6 165.9 % of full year: Sales................................................. 20.6% 21.0% 21.9% 36.5% Operating income (loss)............................... (1.6) 0.2 1.6 99.8
16 18
FISCAL 1998 QUARTER ENDED -------------------------------------------- APRIL JULY OCTOBER JANUARY (DOLLARS IN MILLIONS) ----- ---- ------- ------- SALES.................................................... $545.3 $546.0 $558.3 $945.4 Operating income......................................... 9.0 7.9 3.2 147.2 % of full year: Sales.................................................. 21.0% 21.1% 21.5% 36.4% Operating income....................................... 5.4 4.7 1.9 88.0
FISCAL 1997 QUARTER ENDED -------------------------------------------- APRIL JULY OCTOBER JANUARY (DOLLARS IN MILLIONS) ----- ---- ------- ------- SALES.................................................... $463.6 $466.3 $477.3 $858.8 Operating income......................................... 1.8 2.3 2.2 131.7 % of full year: Sales.................................................. 20.5% 20.6% 21.0% 37.9% Operating income....................................... 1.3 1.7 1.6 95.4
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 17 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
PAGE ---- Consolidated Statements of Operations for the fiscal years ended January 23, 2000, January 24, 1999 and January 25, 1998...................................................... 19 Consolidated Balance Sheets as of January 23, 2000 and January 24, 1999.......................................... 20 Consolidated Statements of Cash Flows for the fiscal years ended January 23, 2000, January 24, 1999 and January 25, 1998...................................................... 21 Consolidated Statements of Stockholders' Equity for the fiscal years ended January 23, 2000, January 24, 1999 and January 25, 1998.......................................... 22 Notes to Consolidated Financial Statements.................. 23 Report of Independent Accountants........................... 34
18 20 CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEAR ENDED ----------------------------------------- JANUARY 23, JANUARY 24, JANUARY 25, 2000 1999 1998 (DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) ----------- ----------- ----------- Sales....................................................... $2,999.2 $2,595.0 $2,266.0 Cost of merchandise sold (includes occupancy)............... 2,148.2 1,859.4 1,634.3 -------- -------- -------- Gross margin................................................ 851.0 735.6 631.7 Selling, general and administrative expenses................ 673.5 557.6 484.9 Pre-opening expense......................................... 7.8 7.8 7.2 Goodwill amortization....................................... 3.5 2.9 1.6 -------- -------- -------- Operating income............................................ 166.2 167.3 138.0 Interest expense............................................ 17.9 16.2 7.2 -------- -------- -------- Income before income tax.................................... 148.3 151.1 130.8 Income tax provision........................................ 58.0 59.0 50.6 -------- -------- -------- Net income.................................................. $ 90.3 $ 92.1 $ 80.2 ======== ======== ======== Earnings per common share data (Note 2) Diluted earnings per common share......................... $1.13 $1.12 $.98 ======== ======== ======== Diluted weighted average common shares outstanding (in thousands)............................................. 80,218 82,503 82,241 ======== ======== ======== Basic earnings per common share........................... $1.16 $1.20 $1.06 ======== ======== ======== Basic weighted average common shares outstanding (in thousands)............................................. 77,577 76,631 75,825 ======== ======== ========
See accompanying Notes to Consolidated Financial Statements. 19 21 CONSOLIDATED BALANCE SHEETS
FISCAL YEAR ENDED -------------------------- JANUARY 23, JANUARY 24, 2000 1999 (DOLLARS IN MILLIONS EXCEPT SHARE AMOUNTS) ----------- ----------- ASSETS Current Assets: Cash and cash equivalents................................. $ 41.6 $ 42.8 Merchandise inventories................................... 1,077.7 1,019.6 Accounts receivable and other current assets.............. 68.9 62.9 Deferred income taxes..................................... 10.0 8.0 -------- -------- Total Current Assets................................... 1,198.2 1,133.3 Property and equipment, net................................. 558.2 493.8 Other assets................................................ 36.5 25.1 Deferred income taxes....................................... 0.1 8.4 Goodwill, net of accumulated amortization of $49.5 and $46.0, respectively....................................... 121.8 106.0 -------- -------- $1,914.8 $1,766.6 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Short-term borrowings and current portion of long-term debt................................................... $ 136.1 $ 134.1 Trade accounts payable.................................... 580.4 607.2 Accrued payroll and other liabilities..................... 232.2 221.7 Taxes, including income taxes............................. 79.2 25.8 -------- -------- Total Current Liabilities.............................. 1,027.9 988.8 Long-term debt and capital lease obligations................ 16.2 6.3 Other long-term liabilities................................. 68.1 56.4 Commitments and contingencies (Note 6)...................... -- -- -------- -------- Total Liabilities...................................... 1,112.2 1,051.5 -------- -------- Stockholders' Equity Common stock, 200,000,000 shares authorized; 77,687,829 and 77,695,124 shares issued and outstanding at January 23, 2000 and January 24, 1999, respectively............ 679.6 687.3 Deferred compensation and officer receivables............. (3.9) (7.7) Accumulated other comprehensive income.................... 0.2 (0.9) Retained earnings......................................... 126.7 36.4 -------- -------- Total Stockholders' Equity........................... 802.6 715.1 -------- -------- $1,914.8 $1,766.6 ======== ========
See accompanying Notes to Consolidated Financial Statements. 20 22 CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED ----------------------------------------- JANUARY 23, JANUARY 24, JANUARY 25, 2000 1999 1998 (DOLLARS IN MILLIONS) ----------- ----------- ----------- Cash Provided by (used for): Operations Net income................................................ $ 90.3 $ 92.1 $ 80.2 Adjustments to reconcile net income to operating cash flows: Depreciation and amortization.......................... 84.7 66.7 54.8 Decrease in deferred income taxes...................... 6.3 10.2 3.9 Increase in other long-term assets and liabilities..... 6.2 1.9 2.3 Cash provided by (used for) current assets and current liabilities: Increase in inventories................................ (55.1) (140.5) (130.4) Increase (decrease) in accounts payable................ (26.9) 126.5 121.9 Increase in taxes payable.............................. 59.6 2.9 12.0 Other -- net........................................... 7.9 6.4 2.3 ------- ------- ------- Net cash provided by operations........................ 173.0 166.2 147.0 ------- ------- ------- Investing Capital expenditures...................................... (144.7) (179.8) (113.6) Acquisitions.............................................. (14.5) -- (61.4) ------- ------- ------- Net cash used for investing............................ (159.2) (179.8) (175.0) ------- ------- ------- Financing Repayment of long-term debt and capital lease obligations............................................ (1.2) (4.6) (0.9) Increase in capital lease obligations..................... 0.5 3.0 -- Repayment of debt assumed in acquisition.................. (2.0) -- -- Repurchase of put option.................................. -- -- (0.8) Proceeds from construction funding........................ -- 1.3 6.8 Net funding from credit facility.......................... 1.5 9.4 85.8 Issuance of common stock.................................. 11.6 33.9 21.4 Repurchase of common stock................................ (25.4) (51.7) (61.8) ------- ------- ------- Net cash provided by (used for) financing.............. (15.0) (8.7) 50.5 ------- ------- ------- Net increase (decrease) in cash and equivalents............. (1.2) (22.3) 22.5 Cash and equivalents at beginning of year................... 42.8 65.1 42.6 ------- ------- ------- Cash and equivalents at end of year......................... $ 41.6 $ 42.8 $ 65.1 ======= ======= ======= Supplemental Cash Flow Disclosures: Interest paid............................................. $ 18.0 $ 16.2 $ 9.8 Income taxes paid......................................... $ 6.4 $ 42.1 $ 40.0 Common stock issued for business acquisition.............. -- -- $ 6.5 Debt and liabilities assumed in business acquisition...... $ 6.5 -- $ 26.9
See accompanying Notes to Consolidated Financial Statements. 21 23 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
DEFERRED ACCUMULATED RETAINED COMMON STOCK COMPENSATION OTHER EARNINGS ------------------- AND OFFICER COMPREHENSIVE (ACCUMULATED SHARES AMOUNT RECEIVABLES INCOME DEFICIT) TOTAL ------ ------ ------------ ------------- ------------ ----- (DOLLARS IN MILLIONS EXCEPT SHARE AMOUNTS) Balance at January 26, 1997......... 75,858,016 $648.1 $(0.8) $ -- $(135.9) $511.4 ---------- ------ ----- ----- ------- ------ Net income.......................... -- -- -- -- 80.2 80.2 Foreign currency translation adjustments....................... -- -- -- (0.9) -- (0.9) ------ Comprehensive income................ 79.3 Issuance of common stock............ 1,916,844 29.4 (5.5) -- -- 23.9 Repurchase and retirement of common stock............................. (2,518,800) (61.8) -- -- -- (61.8) Tax benefit of equity compensation...................... -- 5.5 -- -- -- 5.5 Cancellation of put options: Payment of premium................ -- (0.8) -- -- -- (0.8) Shares subject to repurchase...... -- 34.1 -- -- -- 34.1 Acquisition......................... 139,938 6.5 -- -- -- 6.5 ---------- ------ ----- ----- ------- ------ Balance at January 25, 1998......... 75,395,998 $661.0 $(6.3) $(0.9) $ (55.7) $598.1 ---------- ------ ----- ----- ------- ------ Net income.......................... -- -- -- -- 92.1 92.1 Issuance of common stock............ 4,171,059 38.3 (6.6) -- -- 31.7 Repurchase and retirement of common stock............................. (1,871,933) (51.7) -- -- -- (51.7) Tax benefit of equity compensation...................... -- 39.7 -- -- -- 39.7 Change in receivables and deferred compensation...................... -- -- 5.2 -- -- 5.2 ---------- ------ ----- ----- ------- ------ Balance at January 24, 1999......... 77,695,124 $687.3 $(7.7) $(0.9) $ 36.4 $715.1 ---------- ------ ----- ----- ------- ------ Net income.......................... -- -- -- -- 90.3 90.3 Foreign currency translation adjustments....................... -- -- -- 1.1 -- 1.1 ------ Comprehensive income................ 91.4 Issuance of common stock............ 2,444,055 11.5 -- -- -- 11.5 Repurchase and retirement of common stock............................. (2,451,350) (25.4) -- -- -- (25.4) Tax benefit of equity compensation...................... -- 6.2 -- -- -- 6.2 Change in receivables and deferred compensation...................... -- -- 3.8 -- -- 3.8 ---------- ------ ----- ----- ------- ------ Balance at January 23, 2000......... 77,687,829 $679.6 $(3.9) $ 0.2 $ 126.7 $802.6 ========== ====== ===== ===== ======= ======
See accompanying Notes to Consolidated Financial Statements. 22 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business: Borders Group, Inc. (the Company), through its subsidiaries, operates book and music superstores, mall-based bookstores and other bookstores in the United States, United Kingdom, Singapore, Australia and New Zealand. The Company, through its subsidiary Borders Online, Inc., is also an online retailer of books, music, and video through the operation of its Internet commerce site, Borders.com. The Company owns all of the outstanding stock of Borders, Inc. (Borders), Walden Book Company, Inc. (Walden), Borders (UK) Limited (formerly Books etc.) and Borders Online, Inc. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fiscal Year: The Company's fiscal year ends on the Sunday immediately preceding the last Wednesday in January. Fiscal 1999, 1998, and 1997 each consisted of 52 weeks and ended on January 23, 2000, January 24, 1999, and January 25, 1998, respectively. Cash and Equivalents: Cash and equivalents include short-term investments with original maturities of 90 days or less. Inventories: Merchandise inventories are valued on a first-in, first-out (FIFO) basis at the lower of cost or market using the retail inventory method. The Company includes certain distribution and other expenses in its inventory costs. Property and Equipment: Property and equipment are recorded at cost, including capitalized interest, and depreciated over their estimated useful lives on a straight-line basis for financial statement purposes and on accelerated methods for income tax purposes. Most store properties are leased and improvements are amortized over the term of the lease, generally over 5 to 20 years. Other annual rates used in computing depreciation for financial statement purposes are 2% to 3% for buildings and 10% to 33% for other fixtures and equipment. Amortization of assets under capital leases is included in depreciation expense. During fiscal 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 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 during fiscal 1999. The carrying value of long-lived assets and certain identifiable intangible assets are evaluated whenever changes in circumstances indicate the carrying amount of such assets may not be recoverable. Goodwill: Goodwill is amortized over 20-40 years on a straight-line basis. The Company evaluates the recoverability of goodwill using a fair value methodology on a quarterly basis. This methodology is applied separately to each of the businesses for which the Company has recorded goodwill. In determining the fair value, the median price/earnings (P/E) multiple for similar growth retail companies, or the median earnings before depreciation and amortization, interest and taxes (EBITDA) multiple for mature companies, is calculated based upon actual quoted market prices per share and analysts' consensus earnings estimates for these companies. The applicable multiple is applied to earnings or EBITDA to arrive at an overall fair value of the respective companies. The Company evaluates any indicated impairment as temporary or permanent, and records appropriate charges (if any) to operations for permanent impairments. 23 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED) Financial Instruments: The recorded values of the Company's financial instruments, which include accounts receivable, accounts payable, and indebtedness, approximate their fair values. The Company has entered into interest rate swap and collar agreements to reduce the impact of changes in interest rates on its variable-rate debt and amounts outstanding under the Lease Facility. The net cash amounts paid or received by the Company resulting from these agreements are recognized as an adjustment to interest expense in the period to which the amounts paid or received relate. Pre-Opening and Closing Costs: In fiscal 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," which 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 fiscal 1999. When the decision to close a store is made, the Company provides for the future net lease obligation and other expenses directly related to discontinuance of operations. Preferred Reader Program: Walden sells memberships in its Preferred Reader Program, which offers members discounts on purchases and other benefits. Membership fees are deferred and recognized over the 12-month membership period. Equity-Based Compensation: The Company accounts for equity-based compensation under the guidance of APB No. 25. See Note 10 for discussion of the pro forma net income calculated under FAS 123. New Accounting Guidance: In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting For Derivative Instruments and Hedging Activities" (FAS 133), which the Company is required to adopt effective January 29, 2001. Changes in derivative fair values will either be recognized in earnings as offsets to the changes in fair value of related hedged assets, liabilities and firm commitments or, for forecasted transactions, deferred and recorded as a component of other stockholders' equity until the hedged transactions occur and are recognized in earnings. The ineffective portion of a hedging derivative's change in fair value will be immediately recognized in earnings. The Company does not believe the effect of adopting FAS 133 will be material to its financial position or results of operations. Reclassifications: Certain prior year amounts have been reclassified to conform to fiscal 1999 presentation. NOTE 2 -- WEIGHTED AVERAGE SHARES OUTSTANDING Weighted average shares outstanding are calculated as follows (thousands):
1999 1998 1997 ---- ---- ---- Weighted average common shares outstanding -- basic earnings per share................................. 77,577 76,631 75,825 Dilutive effect of employee stock options............ 2,641 5,872 6,416 ------ ------ ------ Weighted average common shares outstanding -- diluted earnings per share................................. 80,218 82,503 82,241 ====== ====== ======
Unexercised employee stock options to purchase 10.2 million, 9.1 million and 7.6 million common shares as of January 23, 2000, January 24, 1999, and January 25, 1998, respectively, were not included in the weighted average shares outstanding calculation because to do so would have been antidilutive. 24 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED) NOTE 3 -- ACQUISITIONS In March 1999, the Company purchased All Wound Up, a seasonal retailer of interactive toys and novelty merchandise for a purchase price of $19.7 (excluding debt repayment), allocated primarily to fixed assets, inventory and goodwill of $19.7. The acquisition has been accounted for as a purchase. Effective October 20, 1997, the Company purchased 100% of the outstanding stock of Borders (UK) Limited (formerly Books etc.), a London-based retailer of books and associated products for a purchase price of $71.1, allocated primarily to fixed assets, inventory and goodwill of $64.1. At the time of acquisition, Books etc. operated 23 stores in the United Kingdom. The acquisition has been accounted for as a purchase. This transaction did not have a material impact on earnings in 1997. NOTE 4 -- PROPERTY AND EQUIPMENT Property and equipment consists of the following:
1999 1998 ---- ---- Property and equipment: Land...................................................... $ 10.2 $ 10.2 Buildings................................................. 5.3 5.7 Leasehold improvements.................................... 307.8 251.9 Furniture and fixtures.................................... 593.9 507.6 Construction in progress.................................. 36.4 50.0 ------- ------- 953.6 825.4 Less -- accumulated depreciation and amortization........... (395.4) (331.6) ------- ------- Property and equipment, net................................. $ 558.2 $ 493.8 ======= =======
NOTE 5 -- INCOME TAXES The income tax provision consists of:
1999 1998 1997 ---- ---- ---- Current: Federal................................................... $44.5 $40.9 $42.7 State and local........................................... 7.0 7.9 4.3 Foreign................................................... 0.2 -- 0.4 Deferred: Federal................................................... 9.1 11.7 3.2 State and local........................................... 0.7 -- -- Foreign................................................... (3.5) (1.5) -- ----- ----- ----- Total income tax provision................................ $58.0 $59.0 $50.6 ===== ===== =====
A reconciliation of the federal statutory rate to the Company's effective tax rate follows:
1999 1998 1997 ---- ---- ---- Federal statutory rate...................................... $51.9 $52.9 $45.8 State and local taxes, net of federal tax benefit........... 5.0 5.2 3.5 Other....................................................... 1.1 0.9 1.3 ----- ----- ----- Total income tax provision.................................. $58.0 $59.0 $50.6 ===== ===== =====
25 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED) Deferred tax assets and liabilities resulted from the following:
1999 1998 ---- ---- Deferred tax assets: Federal benefit for state deferred taxes.................. $ 0.9 $ 1.6 Accruals and other current liabilities.................... 8.6 11.2 Deferred revenue.......................................... 7.0 7.0 Other long-term liabilities............................... 2.6 1.5 Deferred compensation..................................... 8.1 7.4 Deferred rent............................................. 19.4 16.8 Net operating losses...................................... 5.0 1.5 FAS 121 impairment........................................ 6.3 7.9 ----- ----- Total deferred tax assets................................. 57.9 54.9 ----- ----- Deferred tax liabilities: Inventory................................................. 9.1 8.6 Property and equipment.................................... 35.3 26.5 Other..................................................... 3.4 3.4 ----- ----- Total deferred tax liabilities............................ 47.8 38.5 ----- ----- Net deferred tax assets..................................... $10.1 $16.4 ===== =====
The Company has tax net operating loss carryforwards in foreign jurisdictions totaling $16.3 as of January 23, 2000, $5.7 as of January 24, 1999 and $1.2 as of January 25, 1998. These losses have an indefinite carryforward period. NOTE 6 -- 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. 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 the 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. 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 prejudgment interest on any amounts awarded in the action, as well as attorney fees and costs. The trial is scheduled for April 9, 2001. The Company intends to vigorously defend the action. In August 1998, The Intimate Bookshop, Inc. ("Intimate") 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., and others alleging violation of the Robinson-Patman Act and other federal laws, New York statutes governing trade 26 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED) practices and common law. In response to Defendants' Motion to Dismiss the Complaint, plaintiff Kuralt withdrew his claims and plaintiff Intimate voluntarily dismissed all but its Robinson-Patman claims. Intimate recently filed a Second Amended Complaint limited to allegations of violation of the Robinson-Patman Act. The Second Amended Complaint alleges that Intimate has suffered $11.3 million or more in damages and requests treble damages, injunctive and declaratory relief, interest, costs, attorneys fees and other unspecified relief. Many of the allegations in the Second 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, 1998. 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 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. NOTE 7 -- DEBT 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 covenants which limit, among other things, the Company's ability to incur indebtedness, grant liens, make acquisitions, merge, declare dividends, dispose of assets, and issue or repurchase its common stock in excess of $100.0 (plus any proceeds and tax benefits resulting from stock option exercises and tax benefits resulting from restricted shares purchased by employees from the Company), and require the Company to meet certain financial measures regarding fixed charge coverage, leverage and tangible net worth. The Company is prohibited under the Credit Facility from paying cash dividends on common shares. Effective February 2000, the Company increased the credit available under the Credit Facility to $472.8. The Company had borrowings outstanding under the Credit Facility of $133.4 at January 23, 2000 and $131.9 at January 24, 1999. The weighted average interest rate in 1999 and 1998 was approximately 5.7% and 6.4%, respectively. During 1999, the Company entered into 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 covenants and events of default that are similar to those contained in the Credit Facility described above. The Company had no borrowings outstanding under the Seasonal Facility as of January 23, 2000. Effective February 2000, the Company reduced the credit available under the Seasonal Facility to $25.0, in accordance with provisions of the agreement. The Company's long-term debt obligations consist of capital lease liabilities at January 23, 2000. Scheduled principal payments of capitalized lease obligations as of January 23, 2000 are as follows: 2000 -- $2.6; 2001 -- $0.6; 2002 -- $11.4; 2003 -- $0.2; 2004 -- $0.2; 2005 and, thereafter, -- $3.9. NOTE 8 -- LEASES Operating Leases: The Company conducts operations primarily in leased facilities. Store leases are generally for terms of 5 to 20 years. Borders' leases generally contain multiple three to five-year renewal options which allow Borders the option to extend the life of the leases up to 25 years beyond the initial noncancellable term. Walden's leases generally do not contain renewal options. Certain leases provide for additional rental payments based on a percentage of sales in excess of a specified base. Also, certain leases provide for the payment by the Company of executory costs (taxes, maintenance and insurance). Lease Commitments: Future minimum lease payments under operating leases at January 23, 2000 total $235.8 in 2000, $228.1 in 2001, $216.9 in 2002, $198.2 in 2003, $180.1 in 2004, $1,582.1 in all later years and, in the aggregate, total $2,641.2. 27 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED) Rental Expenses: A summary of operating lease rental expense and short-term rentals follows:
1999 1998 1997 ---- ---- ---- Rental Expenses: Minimum rentals..................................... $257.1 $222.3 $190.3 Percentage rentals.................................. 2.0 2.3 2.7 ------ ------ ------ $259.1 $224.6 $193.0 ====== ====== ======
Capitalized Leases: The Company accounts for three stores and certain computer equipment under capital leases. At January 23, 2000, the Company's commitments under leases accounted for as capital leases aggregated $18.9. 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 guarantees 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. The Lease Facility contains covenants and events of default that are similar to those contained in the Credit Facility described above. Effective February 2000, the Company decreased the credit available under the Lease Facility to $175.0. There was $162.9 and $123.9 outstanding under the Lease Facility at January 23, 2000 and January 24, 1999, respectively. In December, 1998, 17 properties previously financed through the Lease Facility with a total financed value of $70.9 were permanently financed through operating leases. NOTE 9 -- EMPLOYEE BENEFIT PLAN Employee Savings Plan: Employees of the Company who meet certain requirements as to age and service are eligible to participate in the Company's Savings Plan. The Company's expense related to this plan was $2.9, $2.5 and $2.5 for 1999, 1998 and 1997, respectively. NOTE 10 -- STOCK-BASED BENEFIT PLANS Stock Option Plans: The Company has various stock option plans pursuant to which the Company may grant options to purchase its common stock. The exercise price of options granted under these plans will generally not be less than the fair value per share of the Company's common stock at the date of grant with vesting periods up to six years from grant date and maximum option terms up to ten years from grant date. At January 23, 2000, the Company has 34.5 million shares authorized for the grant of stock options under these plans. The Company has established a compensation philosophy that is designed to foster a performance-oriented ownership culture. The stock option plans are an integral part of the Company's employee ownership culture and compensation program. Options have been granted under the plans to all full-time employees of the Company and its subsidiaries with 30 days or more of service, consisting of approximately 17,000 employees. The Company's executive compensation is heavily oriented toward equity incentives that includes a combination of stock and options. Restrictions on the equity incentives promote a long-term focus on the part of management and maximize retention of personnel. Management believes the equity incentives have been integral to its success in meeting operating objectives and reducing employee turnover. Stock Purchase Plans: The Company has a management stock purchase plan (the Management Plan) and an employee stock purchase plan (the Employee Plan). Under the Management Plan, the Company's senior management personnel are required to use 20%, and may use up to 100%, of their annual incentive bonuses to purchase restricted shares of the Company's common stock, at a 20% discount from the fair value of the same number of 28 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED) unrestricted shares of common stock. Restricted shares of common stock purchased under the Management Plan will generally be restricted from sale or transfer for three years from date of purchase. The Employee Plan allows the Company's employees not covered under the Management Plan to purchase shares of the Company's common stock at a 15% discount from their fair market value. The Company recognizes compensation expense for the discount on restricted shares of common stock purchased under the Management Plan. Such discounts are recognized as expense on a straight-line basis over the three-year period during which the shares are restricted from sale or transfer. The Company is not required to record compensation expense with respect to shares purchased under the Employee Plan. A summary of the information relative to the Company's stock option plans follows:
WEIGHTED NUMBER AVERAGE OF SHARES EXERCISE PRICE --------- -------------- (NUMBER OF SHARES IN THOUSANDS) STOCK OPTIONS Outstanding at January 26, 1997............................. 16,187 $ 8.92 Granted................................................... 8,304 27.99 Exercised................................................. 1,800 3.43 Forfeited................................................. 1,394 12.63 Outstanding at January 25, 1998............................. 21,297 16.58 Granted................................................... 3,549 27.17 Exercised................................................. 3,759 9.57 Forfeited................................................. 1,901 22.51 Outstanding at January 24, 1999............................. 19,186 19.36 Granted................................................... 5,468 14.49 Exercised................................................. 2,181 7.53 Forfeited................................................. 3,909 21.24 Outstanding at January 23, 2000............................. 18,564 18.89 Balance exercisable at: January 25, 1998.......................................... 2,791 9.51 January 24, 1999.......................................... 5,365 11.87 January 23, 2000.......................................... 4,639 14.26
The weighted average fair values of options at their grant date where the exercise price equals the market price on the grant date were $5.84, $11.52 and $12.27 in 1999, 1998 and 1997, respectively. As permitted, the Company has adopted the disclosure-only option of Financial Accounting Standards Board Statement No. 123, "Accounting for Stock Based Compensation" (FAS 123). The pro forma net income had the Company adopted the fair-value accounting provisions of FAS 123 would have been $68.3, $72.6 and $69.0 in 1999, 1998, and 1997 respectively. Pro forma diluted and basic earnings per share would have been $0.85, $0.88 and $0.84 and $0.88, $0.95, and $0.91 in 1999, 1998 and 1997 respectively. 29 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED) The Black-Scholes option valuation model was used to calculate the fair market value of the options at the grant date for the purpose of disclosures required by FAS 123. The following assumptions were used in the calculation:
1999 1998 1997 ---- ---- ---- Risk-Free Interest Rate.................................. 4.9-6.7% 4.2-6.8% 5.5-6.8% Expected Life............................................ 3-10 years 3-10 years 2-10 years Expected Volatility...................................... 33.3-40.3% 33.3-40.7% 33.3-39.0% Expected Dividends....................................... 0% 0% 0%
The following table summarizes the information regarding stock options outstanding at January 23, 2000 (number of shares in thousands):
OUTSTANDING EXERCISABLE ----------------------------------------------- ---------------------------- RANGE OF NUMBER OF WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE EXERCISE PRICES SHARES REMAINING LIFE EXERCISE PRICE SHARES EXERCISE PRICE - --------------- --------- ---------------- ---------------- --------- ---------------- $ 3.54-$ 4.63 280 0.4 $ 4.35 280 $ 4.35 $ 6.86-$ 9.88 4,402 5.2 8.58 2,525 8.49 $10.56-$13.63 1,295 9.0 12.95 29 10.80 $13.81-$17.03 3,750 8.8 14.62 327 15.84 $17.13-$20.44 1,427 6.4 17.63 361 17.42 $21.00-$27.25 1,453 7.0 24.15 343 24.25 $27.50-$34.06 5,957 7.3 30.17 774 30.25
A summary of the information relative to the Company's stock purchase plans follows:
NUMBER OF WEIGHTED AVERAGE WEIGHTED AVERAGE SHARES PURCHASE PRICE AT GRANT DATE FMV --------- ---------------- ----------------- (NUMBER OF SHARES IN THOUSANDS) STOCK ISSUED UNDER STOCK PURCHASE PLANS Management Plan 1997.......................................... 923 $18.09 $22.62 1998.......................................... 68 19.52 24.40 1999.......................................... 106 10.91 13.64 Employee Plan 1997.......................................... 157 20.06 23.60 1998.......................................... 115 24.78 29.15 1999.......................................... 118 12.79 15.05
NOTE 11 -- FINANCIAL INSTRUMENTS The Company enters into interest rate swap and collar agreements to reduce the impact of changes in interest rates on its variable-rate debt and amounts outstanding under the Lease Facility. The swap agreements are contracts to exchange variable-rate for fixed-interest payments periodically over the life of the agreements without the exchange of the underlying notional amounts. The collar agreements are contracts to effectively limit the variability of interest on a portion of the Company's variable-rate debt. The notional amounts of these agreements are used to measure interest paid or received and do not represent the amount of exposure to credit loss. 30 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED) As of January 23, 2000 and January 24, 1999, the Company had the following interest rate instruments in effect:
JANUARY 23, 2000 ----------------------------------------------------- FAIR NOTIONAL STRIKE MARKET AMOUNT RATE PERIOD VALUE -------- ------ ------ ------ Interest Rate Swaps.............. $175.0 4.6% 1/99-1/00 $ 0.1 $ 33.0(a) 6.6% 9/98-9/03 $ 0.3 $ 33.0(a) 6.9% 9/98-9/03 $ 0.2 Interest Rate Collar............. $100.0 4.1%-5.5% 1/99-12/00 $ 0.7
--------------------------------------- (a) Notional amount is the U.S. Dollar equivalent of 20.0 British Pounds.
JANUARY 24, 1999 ----------------------------------------------------- FAIR NOTIONAL STRIKE MARKET AMOUNT RATE PERIOD VALUE -------- ------ ------ ------ Interest Rate Swaps.............. $ 33.1(a) 6.6% 9/98- 9/03 $(2.1) $ 33.1(a) 6.9% 9/98- 9/03 $(1.6) Interest Rate Collar............. $100.0 4.1%-5.5% 1/99-12/00 $ 0.1
--------------------------------------- (a) Notional amount is the U.S. Dollar equivalent of 20.0 British Pounds. In the first month of fiscal 2000, the Company entered into interest rate swaps with notional amounts of $75.0 and $50.0, which effectively converted variable-rate U.S. dollar-denominated borrowings to fixed rates of 5.7% and 6.0%, respectively. These swap agreements expire within one to three years from the date the Company entered into the agreements. NOTE 12 -- SEGMENT INFORMATION The Company is organized based upon the following operating segments: domestic Borders stores, international Borders and Books etc. stores, Walden stores, online retailing through Borders.com, and other (consisting of interest expense and certain corporate governance costs). 31 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED) The accounting policies of the segments are the same as those described in the "Summary of Significant Accounting Policies." Segment data includes charges allocating certain corporate headquarters costs to each segment. Transactions between segments, consisting principally of inventory transfers, are recorded primarily at cost. The Company evaluates the performance of its segments and allocates resources to them based on anticipated future contribution.
1999 1998 1997 ---- ---- ---- Sales: Borders................................................... $1,823.2 $1,521.0 $1,267.4 Walden.................................................... 989.9 948.7 970.0 International............................................. 168.2 120.7 28.6 -------- -------- -------- Total stores.............................................. 2,981.3 2,590.4 2,266.0 -------- -------- -------- Borders.com............................................... 17.9 4.6 -- -------- -------- -------- $2,999.2 $2,595.0 $2,266.0 ======== ======== ======== Interest expense: (income): Borders................................................... $ 16.4 $ 16.5 $ 14.3 Walden.................................................... (21.0) (18.9) (15.2) International............................................. 8.9 7.4 1.6 Other..................................................... 9.2 8.5 6.2 -------- -------- -------- Total stores.............................................. 13.5 13.5 6.9 -------- -------- -------- Borders.com............................................... 4.4 2.7 0.3 -------- -------- -------- $ 17.9 $ 16.2 $ 7.2 ======== ======== ======== Income tax expense (benefit): Borders................................................... $ 48.4 $ 34.6 $ 22.1 Walden.................................................... 32.3 36.8 36.3 International............................................. (5.8) (3.8) (0.1) Other..................................................... (6.7) (2.4) (4.0) -------- -------- -------- Total stores.............................................. 68.2 65.2 54.3 -------- -------- -------- Borders.com............................................... (10.2) (6.2) (3.7) -------- -------- -------- $ 58.0 $ 59.0 $ 50.6 ======== ======== ======== Depreciation and amortization expense: Borders................................................... $ 47.3 $ 42.3 $ 36.8 Walden.................................................... 25.1 18.8 17.0 International............................................. 6.5 3.5 0.7 Other..................................................... 0.3 0.2 0.3 -------- -------- -------- Total stores.............................................. 79.2 64.8 54.8 -------- -------- -------- Borders.com............................................... 5.5 1.9 -- -------- -------- -------- $ 84.7 $ 66.7 $ 54.8 ======== ======== ======== Net income (loss): Borders................................................... $ 72.9 $ 52.1 $ 33.7 Walden.................................................... 51.8 61.0 60.5 International............................................. (7.9) (3.2) (0.3) Other..................................................... (9.3) (7.3) (7.7) -------- -------- -------- Total stores.............................................. 107.5 102.6 86.2 -------- -------- -------- Borders.com............................................... (17.2) (10.5) (6.0) -------- -------- -------- $ 90.3 $ 92.1 $ 80.2 ======== ======== ========
32 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
1999 1998 ---- ---- Total assets: Borders................................................... $1,136.7 $1,040.9 Walden.................................................... 447.7 450.0 International............................................. 200.9 161.4 Other..................................................... 72.5 66.1 -------- -------- Total stores........................................... 1,857.9 1,718.4 -------- -------- Borders.com............................................... 57.0 48.2 -------- -------- $1,914.8 $1,766.6 ======== ======== Capital expenditures: Borders................................................... $ 64.1 $ 73.0 Walden.................................................... 27.7 23.6 International............................................. 24.4 32.8 Other..................................................... 17.1 38.8 -------- -------- Total stores........................................... 133.3 168.2 -------- -------- Borders.com............................................... 11.4 11.6 -------- -------- $ 144.7 $ 179.8 ======== ========
Total assets for the "Other" operating segment includes certain corporate headquarters asset balances which have not been allocated to the other segments; however, depreciation expense associated with such assets has been allocated to the other segments. Long-lived assets by geographic area are as follows:
1999 1998 1997 ---- ---- ---- Long-lived assets: Domestic.................................................. $567.9 $510.8 $426.5 International............................................. 148.7 122.5 90.0 ------ ------ ------ $716.6 $633.3 $516.5 ====== ====== ======
NOTE 13 -- UNAUDITED QUARTERLY FINANCIAL DATA
FISCAL 1999 QUARTER ENDED --------------------------------------- APRIL JULY OCTOBER JANUARY ----- ---- ------- ------- (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) Sales...................................................... $618.7 $631.0 $656.3 $1,093.2 Cost of merchandise sold (includes occupancy).............. 457.2 468.9 483.7 738.4 Operating income (loss).................................... (2.6) 0.3 2.6 165.9 Net income (loss).......................................... (4.1) (2.6) (1.5) 98.5 Diluted earnings (loss) per common share................... (0.05) (0.03) (0.02) 1.23 Basic earnings (loss) per common share..................... (0.05) (0.03) (0.02) 1.27
FISCAL 1998 QUARTER ENDED --------------------------------------- APRIL JULY OCTOBER JANUARY ----- ---- ------- ------- Sales...................................................... $545.3 $546.0 $558.3 $ 945.4 Cost of merchandise sold (includes occupancy).............. 405.5 406.1 412.9 634.9 Operating income........................................... 9.0 7.9 3.2 147.2 Net income (loss).......................................... 3.8 2.4 (0.8) 86.7 Diluted earnings (loss) per common share................... 0.05 0.03 (0.01) 1.06 Basic earnings (loss) per common share..................... 0.05 0.03 (0.01) 1.13
Earnings per share amounts for each quarter are required to be computed independently and may not equal the amount computed for the total year. 33 35 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of Borders Group, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of cash flows and of stockholders' equity present fairly, in all material respects, the financial position of Borders Group, Inc. and its subsidiaries at January 23, 2000 and January 24, 1999, and the results of their operations and their cash flows for each of the three years in the period ended January 23, 2000, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Bloomfield Hills, Michigan March 6, 2000 34 36 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 35 37 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is certain information regarding the directors and executive officers of the Company:
NAME AGE POSITION ---- --- -------- Robert F. DiRomualdo................. 55 Chairman and Director George R. Mrkonic.................... 47 Vice Chairman and Director Gregory P. Josefowicz................ 47 President, Chief Executive Officer and Director Bruce A. Quinnell.................... 51 Vice Chairman Vincent E. Altruda................... 50 President, International Thomas D. Carney..................... 53 Vice President, General Counsel and Secretary Tamara L. Heim....................... 42 President, Borders Stores and Borders Online, Inc. Timothy J. Hopkins................... 46 President, Merchandising and Distribution Richard D. Joseph.................... 42 Chairman and Chief Executive Officer, Borders (UK) Ltd. Kenneth E. Scheve.................... 53 Senior Vice President, Chief Financial Officer and Treasurer Ronald S. Staffieri.................. 50 President, Waldenbooks Stores Kathryn L. Winkelhaus................ 43 President, Borders Group Stores Peter R. Formanek.................... 56 Director Victor L. Lund....................... 52 Director Dr. Edna Greene Medford.............. 48 Director Larry Pollock........................ 52 Director Beth M. Pritchard.................... 52 Director
The Company's Certificate provides, among other things, that Directors will be elected annually for one year terms. Directors hold office until their successors are elected and qualified. Robert F. DiRomualdo has served as the Chairman and a director of the Company since its formation in August 1994. Mr. DiRomualdo also served as Chief Executive Officer of the Company from August 1994 until November 1998, and as President and Chief Executive Officer from April 1999 until November 1999. George R. Mrkonic has served as the Vice Chairman of the Company since December 1994, and a director since its formation in August 1994. He has also served as President of the Company from December 1994 until January 1997. Mr. Mrkonic is also a director of Champion Enterprises, Inc., a manufacturer and seller of manufactured homes, Syntel, Inc., a computer software and development company, and Cheap Tickets, Inc., a retail seller of discount tickets for domestic leisure air travel. Gregory P. Josefowicz has served as President, Chief Executive Officer and director of the Company since November 1999. For more than five years prior to joining the Company, he served in a variety of executive positions with Jewel-Osco, a food and drug retailer that is currently a division of Albertson's, Inc., most recently as President. Mr. Josefowicz also serves as a director of Ryerson Tull, Inc., a distributor and processor of metals. Bruce A. Quinnell has served as Vice Chairman of the Company since April 1999. Mr. Quinnell served as President and Chief Operating Officer of the Company from February 1997 to April 1999. Mr. Quinnell served as President and Chief Operating Officer of Walden from November 1994 to February 1997. From January 1994 to November 1994, Mr. Quinnell held the position of Executive Vice President and Chief Operating Officer of Walden. Prior to joining Walden, Mr. Quinnell was Executive Vice President, Finance and Administration for PACE Membership Warehouse, Inc., a former subsidiary of Kmart, from October 1992 to January 1994. Mr. Quinnell is also a director of Hot Topic, Inc., a retailer of music-licensed and music-related merchandise and apparel. Vincent E. Altruda has served as President of the Company's international operations since December 1997. From February 1997 through December 1997, Mr. Altruda served as Senior Vice President of Borders Store 36 38 Development. From February 1995 through February 1997, Mr. Altruda served as Senior Vice President of Borders Store Operations. From December 1992 through February 1995, Mr. Altruda served as Vice President of Borders Store Operations. Thomas D. Carney has been Vice President, General Counsel and Secretary of the Company since December 1994. For more than five years prior to joining the Company, Mr. Carney was a Partner at the law firm of Dickinson, Wright, Moon, Van Dusen & Freeman in Detroit, Michigan. Tamara L. Heim has served as President of Borders Stores and Borders Online, Inc. since January 2000. From February 1999 to January 2000, Ms. Heim served as Senior Vice President of Sales and Marketing for Borders. Ms. Heim served as a Territorial Vice President of Borders from December 1996 to February 1999. Since 1980, Ms. Heim held several key positions of increasing responsibility for Federated Department Stores, and served as Regional Vice President and Director of Stores for Rich's Lazarus Goldsmith, a division of Federated Department Stores, prior to joining the Company. Timothy J. Hopkins has served as President of Merchandising and Distribution since February 1997. From 1995 to February 1997, Mr. Hopkins served as Sr. Vice President, Merchandising and Marketing for Walden. Prior to joining the company, Mr. Hopkins served as Vice President, International and also Vice President, Merchandising with QVC Network from 1992 through 1995. Richard D. Joseph is the Chairman and Chief Executive Officer of Borders (UK) Ltd. and served in executive positions with Books etc. since he co-founded the company in 1981. Mr. Joseph has announced his intention to resign as an executive officer of the Company. Kenneth E. Scheve has served as Senior Vice President, Chief Financial Officer and Treasurer of Borders Group Inc. since February 1997. From 1994 through February 1997, Mr. Scheve served as Vice President, Finance for Walden. Ronald S. Staffieri has served as President of Waldenbooks Stores since April 1999. Mr. Staffieri served as Chief Administrative Officer of the Company from January 1998 to April 1999. From July 1997 to January 1998, Mr. Staffieri served as President of Borders Outlet. Prior to joining the Company Mr. Staffieri was President and Chief Executive Officer of Lil' Things, a chain of children's superstores, from 1994 until January of 1997. In June of 1997, Lil' Things filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code and the business was liquidated in December of 1997. Kathryn L. Winkelhaus has served as President of Borders Group Stores since April 1999. Ms. Winkelhaus served as President of Waldenbooks Stores from February 1997 to April 1999. From 1992 through 1997, Ms. Winkelhaus served as Sr. Vice President, Store Operations for Walden. Peter R. Formanek has served as a director of the Company since August 1995. Mr. Formanek was co-founder of AutoZone Inc., a retailer of aftermarket automotive parts, and served as President and Chief Operating Officer of AutoZone, Inc. from 1986 until his retirement in May 1994. He currently is a director of The Perrigo Company, a manufacturer of store brand over-the-counter medicines and vitamins, and Gart Sports Company, a retailer of sporting goods. Victor L. Lund has served as a director of the Company since July 1997. Mr. Lund has served as Vice Chairman of Albertson's, Inc., a food and drug retailer, since June 1999. Mr. Lund served as Chairman of the Board of American Stores Company from June 1995 until its acquisition by Albertson's in June 1999, and as its Chief Executive Officer since August 1992. Mr. Lund also serves as a director of Service Corporation International, a provider of death care services. Dr. Edna Greene Medford became a director of the Company in September 1998. Dr. Medford is an Associate Professor of History and a former Director of the Undergraduate Program in History at Howard University. Larry Pollock has served as a director of the Company since August 1995. Since January 2000, Mr. Pollock has served as President and Chief Operating Officer of Cole National Corporation, which operates retail vision and gift stores. From September 1998 until June 1999, Mr. Pollock served as President and Chief Executive Officer of HomePlace, Inc., a chain of home furnishings and housewares superstores, which he joined in January of 1997 as 37 39 Executive Vice President and Chief Operating Officer. From 1994 until 1996, he served as the President, Chief Operating Officer and a director of Zale Corporation, a jewelry retailer. Mr. Pollock is a partner of Independent Group L.P., a privately-held radio broadcasting company based in Cleveland, Ohio. In January of 1998, HomePlace, Inc. filed a voluntary petition in the United States Bankruptcy Court for the District of Delaware for reorganization under Chapter 11 of the Bankruptcy Code. Beth M. Pritchard has served as a director of the Company since March 2000. Ms. Pritchard has served as President and Chief Executive Officer of Bath & Body Works, a division of Intimate Brands, Inc. since 1993. Officers of the Company are elected on an annual basis and serve at the discretion of the Board of Directors. COMMITTEES The Audit Committee was established for the purpose of reviewing and making recommendations regarding the Company's employment of independent accountants, the annual audit of the Company's financial statements and the Company's internal controls, accounting practices and policies. The current members of the Audit Committee are Mr. Lund, Dr. Medford and Ms. Pritchard. The Compensation Committee was established for the purpose of making recommendations to the Board of Directors regarding the nature and amount of compensation for executive officers of the Company. The Compensation Committee also administers certain of the Company's employee benefit plans. The current members of the Compensation Committee are Mr. Formanek and Mr. Pollock. COMPENSATION OF DIRECTORS For service as a director during 1999, each director who is not an employee of the Company received 2,000 restricted shares of Common Stock (the "Restricted Shares") paid at the beginning of the relevant calendar year, subject to a maximum value of $75,000. The restrictions on such Restricted Shares will generally lapse one year from the date of grant. On the date of each of the Company's Annual Meetings, each eligible director receives an option to purchase 5,000 shares of common stock of the Company. The exercise price of options granted under the Plan is the fair market value on the date of grant. To be eligible to receive option grants at the Annual Meetings to be held in 2000 and thereafter, a director generally must have held at least 20,000 shares of common stock, for the one-year period prior to the date of the meeting. Each option vests and becomes exercisable on the third anniversary of the date of grant except that (i) an option is forfeited in its entirety if the director ceases, at any time prior to his or her exercise of the option, to hold the minimum number of shares that he or she was required to hold for the one year period prior to the grant to be eligible therefor; (ii) all outstanding options vest and become immediately exercisable in the event of a change in control of the Company, and (iii) all options held by a director who has served as a director for six years or more vest and become immediately exercisable as of the date upon which he or she ceases to serve as a director. An option may be exercised only during the period that the optionee serves as a director of the Company or within three months after termination of such service and only if it is vested and has not expired at the time of termination. However, if the director ceases to serve as such as a result of death or if the individual has served as a director of the Company for more than 10 years, such three month period is extended to three years. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 is incorporated herein by reference to the information under the caption "Executive Compensation" in the Proxy Statement for the Company's May 24, 2000 Annual Meeting of Stockholders. 38 40 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item 12 is incorporated herein by reference to the information under the heading "Beneficial Ownership of Common Stock" in the Proxy Statement for the Company's May 24, 2000 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS The information required by this Item 13 is incorporated herein by reference to the information under the headings "Settlement Agreement" and "Certain Transactions and Indebtedness of Management" in the Proxy Statement for the Company's May 24, 2000 Annual Meeting of Stockholders. 39 41 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following exhibits are filed herewith unless otherwise indicated:
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.1(6) Agreement and plan of Merger dated as of April 8, 1997 between Michigan Borders Group, Inc. and Borders Group, Inc. 3.1(11) Restated Articles of Incorporation of Borders Group, Inc. 3.2(12) Bylaws of Borders Group, Inc., including the First, Second and Third Amendments thereto 10.1(1) Stockholder Agreement dated as of February 17, 1995, between Borders Group, Inc. and Kmart Corporation 10.2(5) Form of Severance Agreement 10.3(6) Borders Group, Inc. Stock Option Plan 10.4(8) First Amendment to the Borders Group, Inc. Stock Option Plan 10.5(11) Second Amendment to the Borders Group, Inc. Stock Option Plan 10.6(11) Third Amendment to the Borders Group, Inc. Stock Option Plan 10.7(3) Tax Allocation Agreement dated May 24, 1995 between Borders Group, Inc. and Kmart Corporation 10.8(3) Lease Guaranty Agreement dated May 24, 1995 between Borders Group, Inc. and Kmart Corporation 10.9(2) Borders Group, Inc. Management Stock Purchase Plan 10.10(8) First Amendment to the Borders Group, Inc. Management Stock Purchase Plan 10.11(9) Second Amendment to the Borders Group, Inc. Management Stock Purchase Plan 10.12(11) Third Amendment to the Borders Group, Inc. Management Stock Purchase Plan 10.13(2) Borders Group, Inc. Employee Stock Purchase Plan 10.14(4) First Amendment to the Borders Group, Inc. Employee Stock Purchase Plan 10.15(11) Second Amendment to the Borders Group, Inc. Employee Stock Purchase Plan 10.16(11) Third Amendment to the Borders Group, Inc. Employee Stock Purchase Plan 10.17(6) Borders Group, Inc. Annual Incentive Bonus Plan 10.18(11) First Amendment to the Borders Group, Inc. Annual Incentive Plan 10.19(2) Borders Group, Inc. Director Stock Plan 10.20(9) First Amendment to the Borders Group, Inc. Director Stock Plan 10.21(9) Second Amendment to the Borders Group, Inc. Director Stock Plan 10.22(7) Amended and Restated Multicurrency Credit Agreement among Borders Group, Inc., its subsidiaries and Parties thereto 10.23(7) Amended and Restated Participation Agreement among Borders Group, Inc., its subsidiaries and Parties thereto 10.24(7) Appendix A to Participation Agreement among Borders Group, Inc., its subsidiaries and Parties thereto 10.25(7) Amended and Restated Credit Agreement among Borders Group, Inc., its subsidiaries and Parties thereto 10.26(7) Amended and Restated Guarantee Credit Agreement among Borders Group, Inc., its subsidiaries and Parties thereto 10.27(13) Omnibus Amendment No. 1 to Amended and Restated Guarantee Credit Agreement among Borders Group, Inc., its subsidiaries and Parties thereto 10.28(5) Agreement dated April 19, 1996, between Borders Group, Inc. and Bruce A. Quinnell 10.29(10) Borders Group, Inc. Stock Option Plan for International Employees 10.30(11) 1998 Borders Group, Inc. Stock Option Plan 10.31 Agreement dated January 24, 2000, between Borders Group, Inc. and Robert F. DiRomualdo 10.32 Agreement dated January 24, 2000, between Borders Group, Inc. and George R. Mrkonic
40 42
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.33 Agreement dated November 15, 1999, between Borders Group, Inc. and Gregory P. Josefowicz 10.34(11) Participation Agreement dated as of December 1, 1998 by and among Borders Group, Inc., Borders, Inc. and Parties thereto 10.35(11) Agreement dated April 20, 1999, between Borders Group, Inc. and Philip M. Pfeffer 10.36(13) Multicurrency Revolving Credit Facility Credit Agreement dated July 9, 1999 among Borders Group, Inc., its subsidiaries and Parties thereto 10.37(14) Amendment No. 1 to 1998 Borders Group, Inc. Stock Option Plan 10.38 Amended Schedule 1.01(B) to the Amended and Restated Multicurrency Credit Agreement among Borders Group, Inc., its subsidiaries and Parties thereto 10.39 Amended Schedule II to the Amended and Restated Credit Agreement among Borders Group, Inc., its subsidiaries and Parties thereto 18.1(3) Letter of PricewaterhouseCoopers LLP dated July 17, 1995. 21.1 Subsidiaries of Registrant 23.1 Consent of PricewaterhouseCoopers LLP 27 Financial Data Schedule 99.1 Cautionary Statement under the Private Securities Litigation Reform Act of 1995 -- "Safe Harbor" for Forward-Looking Statements
- ------------------------- (1) Incorporated by reference from the Company's Registration Statement on Form S-4 (File No. 33-90016). (2) Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 33-90918). (3) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended April 23, 1995 (File No. 1-13740). (4) Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 33-80643). (5) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended January 28, 1996 (File No. 1-13740). (6) Incorporated by reference from the Company's Proxy Statement dated April 9, 1997 of Borders Group, Inc. (File No. 1-13740). (7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended October 26, 1997 (File No. 1-13740). (8) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended October 22, 1995 (File No. 1-13740). (9) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended January 25, 1998 (File No. 1-13740). (10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended July 26, 1998 (File No. 1-13740). (11) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended January 24, 1999 (File No. 1-13740). (12) Incorporated by reference from the Company's Registration Statement on Form S-3 (File No. 333-80669). (13) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended July 25, 1999 (File No. 1-13740). (14) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended October 24, 1999 (File No. 1-13740). (b) Financial Statement Schedules: All financial statement schedules are omitted as they are not applicable or the required information is included in the consolidated financial statements of the Registrant. (c) Reports on Form 8-K: One report was filed on Form 8-K under Item 5 -- Other Events which stated the time and place of the Company's Annual Meeting of Stockholders. This report was dated and filed on March 5, 1999 (File No. 1-13740). 41 43 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BORDERS GROUP, INC. (Registrant) BY: /s/ GREGORY P. JOSEFOWICZ ------------------------------------ Gregory P. Josefowicz President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
NAME TITLE DATE ---- ----- ---- /s/ ROBERT F. DIROMUALDO Chairman and Director April 24, 1999 - --------------------------------------------- Robert F. DiRomualdo /s/ GEORGE R. MRKONIC Vice Chairman and Director April 24, 1999 - --------------------------------------------- George R. Mrkonic /s/ GREGORY P. JOSEFOWICZ President and Chief Executive April 24, 1999 - --------------------------------------------- Officer Gregory P. Josefowicz /s/ KENNETH E. SCHEVE Senior Vice President, Chief April 24, 1999 - --------------------------------------------- Financial Officer and Treasurer Kenneth E. Scheve (Principal Financial and Accounting Officer) /s/ PETER R. FORMANEK Director April 24, 1999 - --------------------------------------------- Peter R. Formanek /s/ VICTOR L. LUND Director April 24, 1999 - --------------------------------------------- Victor L. Lund /s/ DR. EDNA GREENE MEDFORD Director April 24, 1999 - --------------------------------------------- Dr. Edna Greene Medford /s/ LARRY POLLOCK Director April 24, 1999 - --------------------------------------------- Larry Pollock /s/ BETH M. PRITCHARD Director April 24, 1999 - --------------------------------------------- Beth M. Pritchard
42 44 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.1(6) Agreement and plan of Merger dated as of April 8, 1997 between Michigan Borders Group, Inc. and Borders Group, Inc. 3.1(11) Restated Articles of Incorporation of Borders Group, Inc. 3.2(12) Bylaws of Borders Group, Inc., including the First, Second and Third Amendments thereto. 10.1(1) Stockholder Agreement dated as of February 17, 1995, between Borders Group, Inc. and Kmart Corporation. 10.2(5) Form of Severance Agreement. 10.3(6) Borders Group, Inc. Stock Option Plan. 10.4(8) First Amendment to the Borders Group, Inc. Stock Option Plan. 10.5(11) Second Amendment to the Borders Group, Inc. Stock Option Plan. 10.6(11) Third Amendment to the Borders Group, Inc. Stock Option Plan. 10.7(3) Tax Allocation Agreement dated May 24, 1995 between Borders Group, Inc. and Kmart Corporation. 10.8(3) Lease Guaranty Agreement dated May 24, 1995 between Borders Group, Inc. and Kmart Corporation. 10.9(2) Borders Group, Inc. Management Stock Purchase Plan. 10.10(8) First Amendment to the Borders Group, Inc. Management Stock Purchase Plan. 10.11(9) Second Amendment to the Borders Group, Inc. Management Stock Purchase Plan. 10.12(11) Third Amendment to the Borders Group, Inc. Management Stock Purchase Plan. 10.13(2) Borders Group, Inc. Employee Stock Purchase Plan. 10.14(4) First Amendment to the Borders Group, Inc. Employee Stock Purchase Plan. 10.15(11) Second Amendment to the Borders Group, Inc. Employee Stock Purchase Plan. 10.16(11) Third Amendment to the Borders Group, Inc. Employee Stock Purchase Plan. 10.17(6) Borders Group, Inc. Annual Incentive Bonus Plan. 10.18(11) First Amendment to the Borders Group, Inc. Annual Incentive Plan. 10.19(2) Borders Group, Inc. Director Stock Plan. 10.20(9) First Amendment to the Borders Group, Inc. Director Stock Plan. 10.21(9) Second Amendment to the Borders Group, Inc. Director Stock Plan. 10.22(7) Amended and Restated Multicurrency Credit Agreement among Borders Group, Inc., its subsidiaries and Parties thereto. 10.23(7) Amended and Restated Participation Agreement among Borders Group, Inc., its subsidiaries and Parties thereto. 10.24(7) Appendix A to Participation Agreement among Borders Group, Inc., its subsidiaries and Parties thereto. 10.25(7) Amended and Restated Credit Agreement among Borders Group, Inc., its subsidiaries and Parties thereto. 10.26(7) Amended and Restated Guarantee Credit Agreement among Borders Group, Inc., its subsidiaries and Parties thereto. 10.27(13) Omnibus Amendment No. 1 to Amended and Restated Guarantee Credit Agreement among Borders Group, Inc., its subsidiaries and Parties thereto. 10.28(5) Agreement dated April 19, 1996, between Borders Group, Inc. and Bruce A. Quinnell. 10.29(10) Borders Group, Inc. Stock Option Plan for International Employees. 10.30(11) 1998 Borders Group, Inc. Stock Option Plan. 10.31 Agreement dated January 24, 2000, between Borders Group, Inc. and Robert F. DiRomualdo. 10.32 Agreement dated January 24, 2000, between Borders Group, Inc. and George R. Mrkonic. 10.33 Agreement dated November 15, 1999, between Borders Group, Inc. and Gregory P. Josefowicz.
43 45
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.34(11) Participation Agreement dated as of December 1, 1998 by and among Borders Group, Inc., Borders, Inc. and Parties thereto. 10.35(11) Agreement dated April 20, 1999, between Borders Group, Inc. and Philip M. Pfeffer. 10.36(13) Multicurrency Revolving Credit Facility Credit Agreement dated July 9, 1999 among Borders Group, Inc., its subsidiaries and Parties thereto. 10.37(14) Amendment No. 1 to 1998 Borders Group, Inc. Stock Option Plan. 10.38 Amended Schedule 1.01(B) to the Amended and Restated Multicurrency Credit Agreement among Borders Group, Inc., its subsidiaries and Parties thereto. 10.39 Amended Schedule II to the Amended and Restated Credit Agreement among Borders Group, Inc., its subsidiaries and Parties thereto. 18.1(3) Letter of PricewaterhouseCoopers LLP dated July 17, 1995. 21.1 Subsidiaries of Registrant. 23.1 Consent of PricewaterhouseCoopers LLP. 27 Financial Data Schedule. 99.1 Cautionary Statement under the Private Securities Litigation Reform Act of 1995 -- 'Safe Harbor' for Forward-Looking Statements.
- ------------------------- (1) Incorporated by reference from the Company's Registration Statement on Form S-4 (File No. 33-90016). (2) Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 33-90918). (3) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended April 23, 1995 (File No. 1-13740). (4) Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 33-80643). (5) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended January 28, 1996 (File No. 1-13740). (6) Incorporated by reference from the Company's Proxy Statement dated April 9, 1997 of Borders Group, Inc. (File No. 1-13740). (7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended October 26, 1997 (File No. 1-13740). (8) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended October 22, 1995 (File No. 1-13740). (9) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended January 25, 1998 (File No. 1-13740). (10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended July 26, 1998 (File No. 1-13740). (11) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended January 24, 1999 (File No. 1-13740). (12) Incorporated by reference from the Company's Registration Statement on Form S-3 (File No. 333-80669). (13) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended July 25, 1999 (File No. 1-13740). (14) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended October 24, 1999 (File No. 1-13740). (b) Financial Statement Schedules: All financial statement schedules are omitted as they are not applicable or the required information is included in the consolidated financial statements of the Registrant. (c) Reports on Form 8-K: None 44 EX-10.31 2 EXHIBIT 10.31 1 EXHIBIT 10.31 January 24, 2000 ROBERT DiROMUALDO Dear Bob: This letter will confirm our agreement concerning your employment with Borders Group, Inc. ("BGI"). 1. During the term of this Agreement, you will be the Chairman of BGI and, subject to your election by the shareholders, a director of BGI. You will report to the Board of Directors of BGI (the "Board"). 2. Subject to Section 6 and Section 12: (i) for fiscal 2000, your salary will be $257,500 and you will have a "stretch" bonus opportunity of $257,500 (the "Fiscal 2000 Bonus"); and (ii) you will receive the Fiscal 2000 Bonus if BGI meets plan for the year. 3. You shall have authority consistent with your position and shall have such duties consistent with your position as shall be assigned to you by the Board from time to time. Such duties shall involve approximately 50% of your time commitment as a full-time employee. 4. You may participate in the savings and welfare programs of BGI in accordance with their respective terms in the same manner as other senior executives of BGI. 5. The term of this Agreement shall be from January 24, 2000 through January 27, 2001. Subsequent to the expiration of the term, it is anticipated that you will continue to serve as a director of BGI, subject to your annual election by the shareholders of BGI. Continuance of employment after the term of this Agreement shall be subject to the mutual agreement of you and BGI. 6. Subject to Section 12, during the term of this Agreement, your position with BGI may be terminated by BGI only for "Cause" by written notice given to you after action by a majority of the members of the Board of Directors of BGI and only within ninety days after the occurrence of BGI learning of one of the following events: (a) Your conviction of a felony, or of a misdemeanor involving the money or property of BGI or any subsidiary; (b) You shall have willfully engaged in misconduct that materially damages or injures the reputation of BGI or any subsidiary; (c) You shall have breached the noncompetition provisions of this Agreement and such breach is not cured within 7 days after notice thereof from BGI; or 2 (d) Any willful and material breach of the confidentiality provisions of this Agreement. For purposes of this Section 6, no act or failure to act, on your part shall be deemed to be "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that such act or omission was in the best interest of BGI. In the event that BGI breaches this Agreement and either (i) your employment is terminated by BGI without Cause prior to the expiration of the term, or (ii) you voluntarily terminate your employment following any such breach which is not cured by BGI within 30 days after BGI's receipt of written notice from you describing the breach, you shall continue to receive (i) the salary and bonus that you were receiving at the time of termination for the balance of the term (including, without limitation the Fiscal 2000 Bonus), and (ii) the benefits that you would have received had such breach not occurred, including, but not limited to, the continued vesting of stock options and MSPP shares through the balance of the term. In the event that any aspect of clause (ii) is inconsistent with the terms of the relevant plan, BGI shall provide the same benefits outside of such plan. You shall not be obligated to seek other employment to mitigate damages and BGI's obligations hereunder shall not be reduced by any compensation that you may earn from other employment or self-employment. 7. You will be entitled to reimbursement for travel (at full coach rate) and entertainment and other business expenses incurred on BGI's behalf in accordance with BGI's policy upon submission of vouchers and documentation relating thereto in accordance with BGI procedures. 8. You agree that during the Restricted Period neither you nor your Affiliates will (i) Compete with BGI in the Restricted Area or (ii) directly or indirectly (whether as owner, principal, employee, partner, lender or venturer with or consultant to any person, firm, partnership, corporation or other entity): (A) cause or seek to cause any of BGI's suppliers, purchasing agents or customers to cease transacting business with BGI; or (B) cause or seek to cause any of BGI's prospective suppliers, purchasing agents or customers not to transact business with BGI. For purposes of this Agreement: (i) The term "Affiliate" means any corporation, person or entity which, directly or indirectly, through one or more intermediaries, you control or is under common control with you; (ii) The term "Company" means BGI and its subsidiaries. (iii) The term "Compete" means to manage, operate, control or participate in, or have any ownership interests in or make loans to, or aid or advise as an employee, consultant or otherwise, whether directly or indirectly, any business (whether an individual, sole proprietorship, partnership, corporation, firm, joint venture, trust or other entity) which is engaged in, directly or indirectly, the retail 9including internet) or wholesale book business or in a business where principal business is the retail or wholesale sale of video cassettes, videotapes, musical records, compact discs or audio cassettes; provided, however, that you may (i) own equity securities in Kmart or any subsidiary of Kmart and (ii) own up to 1% of a corporation where equity securities are listed for trading on a national securities exchange; 3 (iv) The term "Restricted Period" means the period from the date hereof through December 31, 2002, provided, that in the event that you breach the covenant not to Compete set forth above, such breach shall suspend and toll the running of the Restricted Period from the date of such breach until such time as such violation ceases; and (v) The term "Restricted Area" means anywhere in North America or any other country in which BGI is doing business at the time of your termination of employment. Nothing in this Section 8 shall be deemed to prohibit you or any of your Affiliates from owning shares of BGI. 9. You agree that you and your Affiliates will maintain in strict confidence and will not, directly or indirectly, divulge, transmit, publish, release or otherwise use or cause to be used in any manner to Compete with or that is contrary to the interests of BGI, any confidential information relating to BGI's systems, operations, processes, computer programs and data bases, records, development data and reports, store designs, quality control specifications, cost analysis, flow charts, know-how, customer lists, supplier lists, marketing data, personnel data, or any other information of like nature. You acknowledge that all information regarding BGI compiled or obtained by, or furnished to, you in connection with your employment or association with BGI is confidential information and BGI's exclusive property. Upon demand by BGI, you will surrender to BGI all original and facsimile records, documents and data in your possession pertaining to BGI. The foregoing covenant of confidentiality has no temporal, geographical or territorial limitation. Notwithstanding the foregoing, this provision does not apply to the extent, and only to the extent, such information: (a) is clearly obtainable in the public domain; (b) becomes obtainable in the public domain, through no fault of yours; (c) was not acquired by you in connection with your employment or affiliation with BGI; (d) was not acquired by you from BGI or its representatives; (e) is required to be disclosed by rule of law or by order of a court or governmental body or agency; or (f) is reasonably necessary to be disclosed to defend yourself or assert your rights in connection with any proceeding to which BGI or its affiliates is a party. 10. The restrictive covenants contained herein shall be construed as independent of the other provisions of this Agreement, and the existence of any claim or cause of action that you may have, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by BGI of any of the restrictive covenants contained herein. 11. You acknowledge that if you breach any of the restrictive covenants contained herein, the injuries that will be suffered by BGI will be irreparable, and BGI will not have an adequate remedy at law. You therefore, agree that in the event of such a breach, BGI shall be entitled to relief by way of injunction from any court of proper jurisdiction, in addition to all other rights that BGI may have at law, in equity, or otherwise. 12. In the event of your death, Disability or a Change in Control of BGI, all of your outstanding options and restricted shares will vest as provided in the applicable plan. In event of the occurrence of any such events: (i) your employment shall thereupon terminate; (ii) no other payments will be due to you except that, in the event of a Change in Control, the Fiscal 2000 Bonus shall be paid to you, in whole or in part, in accordance with the terms of the Borders Group, Inc. Annual Incentive Bonus Plan; and (iii) the noncompete provisions set forth herein 4 shall remain in effect until December 31, 2002. "Change in Control" shall have the meaning set forth in the Borders Group, Inc. Stock Option Plan. "Disability" shall mean that you are unable to perform your duties and responsibilities by reason of a specific mental or physical illness or injury and such inability shall have existed for an aggregate of at least 180 days in the twelve-month period. Any question as to the existence of a Disability as to which you and BGI cannot agree shall be determined in writing by a qualified independent physician mutually acceptable to you and BGI. If you and BGI cannot agree as to a qualified independent physician, each shall appoint such a physician and those two physicians shall select a third who shall make such determination in writing. Such determination of Disability shall be delivered to BGI and to you and shall be final and conclusive for all purposes of this agreement. 13. You shall not be entitled to any severance or other payment upon your employment termination, either prior to or after the expiration of the term of this Agreement, regardless of the reason for the termination, except that, subject to Section 12, if, prior to the expiration of the term, either your employment is terminated by BGI without Cause or you voluntarily resign following a breach of this Agreement by BGI which is not cured within the time specified in Section 6, you shall receive the payments/benefits described in Section 6 as your sole and exclusive remedy. 14. All provisions of this Agreement are intended to be severable. In the event any provision or restriction contained herein is held to be invalid or unenforceable in any respect, in whole or in part, such finding shall in no way affect the validity or enforceability of any other provisions of this Agreement. The parties hereto further agree that any such invalid or unenforceable provision shall be deemed modified so that it shall be enforced to the greatest extent permissible under law, and to the extent that any court of competent jurisdiction determines any restriction herein to be overly broad or unenforceable, such court is hereby empowered and authorized to limit such restriction so that it is enforceable for the longest duration of time and largest geographical area possible. 15. Any dispute that may exist respecting (i) the interpretation or application of any provision of the agreement (including, without limitation, the provisions of this Section) or (ii) your entitlement to payments or other benefits after termination of your employment shall be resolved by arbitration in Detroit, Michigan in accordance with the rules of the American Arbitration Association and judgment on the award may be entered in any court having jurisdiction. If your position in any such dispute is sustained in the arbitration, BGI will pay or reimburse you for your expenses in connection with the resolution of such dispute (including, without limitation, counsel fees and disbursements and other charges). 16. This Agreement shall be effective as of January 24, 2000. 5 Please confirm your agreement by signing below and retain one copy for your records. Sincerely, BORDERS GROUP, INC. By: /s/ GREGORY P. JOSEFOWICZ ---------------------------- Gregory P. Josefowicz Agreed: /s/ ROBERT F. DiROMUALDO - ----------------------------------- Robert F. DiRomualdo EX-10.32 3 EXHIBIT 10.32 1 EXHIBHI 10.32 January 24, 2000 GEORGE R. MRKONIC Dear George: This letter will confirm our agreement concerning your employment with Borders Group, Inc. ("BGI"). 1. During the term of this Agreement, you will be the Vice-Chairman of BGI and, subject to your election by the shareholders, a member of the Board of Directors of BGI (the "Board"). You will report to the Chairman of the Board and your place of employment shall be in Ann Arbor, Michigan. 2. Subject to Section 6 and Section 12, for fiscal 2000, your salary will be $257,500 and your "stretch" bonus opportunity will be $257,500. Pursuant to your agreement with the Compensation Committee of the Board, all of your salary and bonus will be paid in compensation replacement options. 3. You shall have authority consistent with your position and shall have such duties consistent with your position as shall be assigned to you by the Board from time to time. Such duties shall involve approximately 50% of your time commitment as a full-time employee. 4. You may participate in the savings and welfare programs of BGI in accordance with their respective terms in the same manner as other senior executives of BGI. 5. The term of this Agreement shall be from January 24, 2000 through January 27, 2001. Subsequent to the expiration of the term, it is anticipated that you will continue to serve as a director of BGI, subject to your annual election by the shareholders of BGI. Continuance of employment after the term of this Agreement shall be subject to the mutual agreement of you and BGI. 6. Subject to Section 12, during the term of this Agreement, your position with BGI may be terminated by BGI only for "Cause" by written notice given to you after action by a majority of the members of the Board of Directors of BGI and only within ninety days after the occurrence of BGI learning of one of the following events: (a) Your conviction of a felony, or of a misdemeanor involving the money or property of BGI or any subsidiary; (b) You shall have willfully engaged in misconduct that materially damages or injures the reputation of BGI or any subsidiary; (c) You shall have breached the noncompetition provisions of this Agreement and such breach is not cured within 7 days after 2 notice thereof from BGI; or (d) Any willful and material breach of the confidentiality provisions of this Agreement. For purposes of this Section 6, no act or failure to act, on your part shall be deemed to be "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that such act or omission was in the best interest of BGI. In the event that BGI breaches this Agreement and either (i) your employment is terminated by BGI without Cause prior to the expiration of the term, or (ii) you voluntarily terminate your employment following any such breach which is not cured by BGI within 30 days after BGI's receipt of written notice from you describing the breach, you shall continue to receive the benefits that you would have received had such breach not occurred, including, but not limited to, the continued vesting of stock options and MSPP shares through the balance of the term and the extended exercise period for vested options and options that vest during the balance of the term as described in Section 16 below whether or not you shall have satisfied the ten year service requirement as of the date of such termination. In the event that any aspect of the foregoing is inconsistent with the terms of the relevant plan, BGI shall provide the same benefits outside of such plan. You shall not be obligated to seek other employment to mitigate damages and BGI's obligations hereunder shall not be reduced by any compensation that you may earn from other employment or self-employment. 7. You will be entitled to reimbursement for travel (at full coach rate) and entertainment and other business expenses incurred on BGI's behalf in accordance with BGI's policy upon submission of vouchers and documentation relating thereto in accordance with BGI procedures. 8. You agree that during the Restricted Period neither you nor your Affiliates will (i) Compete with BGI in the Restricted Area or (ii) directly or indirectly (whether as owner, principal, employee, partner, lender or venturer with or consultant to any person, firm, partnership, corporation or other entity): (A) cause or seek to cause any of BGI's suppliers, purchasing agents or customers to cease transacting business with BGI; or (B) cause or seek to cause any of BGI's prospective suppliers, purchasing agents or customers not to transact business with BGI. For purposes of this Agreement: (i) The term "Affiliate" means any corporation, person or entity which, directly or indirectly, through one or more intermediaries, you control or is under common control with you; (ii) The term "Company" means BGI and its subsidiaries. (iii) The term "Compete" means to manage, operate, control or participate in, or have any ownership interests in or make loans to, or aid or advise as an employee, consultant or otherwise, whether directly or indirectly, any business (whether an individual, sole proprietorship, partnership, corporation, firm, joint venture, trust or other entity) which is engaged in, directly or indirectly, the retail (including internet) or wholesale book business or in a business where principal business is the retail or wholesale sale of video cassettes, videotapes, musical records, compact discs or audio cassettes; provided, however, that you 3 may (i) own equity securities in Kmart or any subsidiary of Kmart and (ii) own up to 1% of a corporation where equity securities are listed for trading on a national securities exchange; (iv) The term "Restricted Period" means the period from the date hereof through December 31, 2002, provided, that in the event that you breach the covenant not to Compete set forth above, such breach shall suspend and toll the running of the Restricted Period from the date of such breach until such time as such violation ceases; and (v) The term "Restricted Area" means anywhere in North America or any other country in which BGI is doing business at the time of your termination of employment. Nothing in this Section 8 shall be deemed to prohibit you or any of your Affiliates from owning shares of BGI. 9. You agree that you and your Affiliates will maintain in strict confidence and will not, directly or indirectly, divulge, transmit, publish, release or otherwise use or cause to be used in any manner to Compete with or that is contrary to the interests of BGI, any confidential information relating to BGI's systems, operations, processes, computer programs and data bases, records, development data and reports, store designs, quality control specifications, cost analysis, flow charts, know-how, customer lists, supplier lists, marketing data, personnel data, or any other information of like nature. You acknowledge that all information regarding BGI compiled or obtained by, or furnished to, you in connection with your employment or association with BGI is confidential information and BGI's exclusive property. Upon demand by BGI, you will surrender to BGI all original and facsimile records, documents and data in your possession pertaining to BGI. The foregoing covenant of confidentiality has no temporal, geographical or territorial limitation. Notwithstanding the foregoing, this provision does not apply to the extent, and only to the extent, such information: (a) is clearly obtainable in the public domain; (b) becomes obtainable in the public domain, through no fault of yours; (c) was not acquired by you in connection with your employment or affiliation with BGI; (d) was not acquired by you from BGI or its representatives; (e) is required to be disclosed by rule of law or by order of a court or governmental body or agency; or (f) is reasonably necessary to be disclosed to defend yourself or assert your rights in connection with any proceeding to which BGI or its affiliates is a party. 10. The restrictive covenants contained herein shall be construed as independent of the other provisions of this Agreement, and the existence of any claim or cause of action that you may have, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by BGI of any of the restrictive covenants contained herein. 11. You acknowledge that if you breach any of the restrictive covenants contained herein, the injuries that will be suffered by BGI will be irreparable, and BGI will not have an adequate remedy at law. You therefore, agree that in the event of such a breach, BGI shall be entitled to relief by way of injunction from any court of proper jurisdiction, in addition to all other rights that BGI may have at law, in equity, or otherwise. 12. In the event of your death, Disability or a Change in Control of BGI, all of your outstanding options and restricted shares will vest as provided in the applicable plan. In event of the occurrence of any such events: (i) your employment shall thereupon terminate; (ii) no other 4 payments will be due to you; and (iii) the noncompete provisions set forth herein shall remain in effect until December 31, 2002. "Change in Control" shall have the meaning set forth in the Borders Group, Inc. Stock Option Plan. "Disability" shall mean that you are unable to perform your duties and responsibilities by reason of a specific mental or physical illness or injury and such inability shall have existed for an aggregate of at least 180 days in the twelve-month period. Any question as to the existence of a Disability as to which you and BGI cannot agree shall be determined in writing by a qualified independent physician mutually acceptable to you and BGI. If you and BGI cannot agree as to a qualified independent physician, each shall appoint such a physician and those two physicians shall select a third who shall make such determination in writing. Such determination of Disability shall be delivered to BGI and to you and shall be final and conclusive for all purposes of this agreement. 13. You shall not be entitled to any severance or other payment upon your employment termination, either prior to or after the expiration of the term of this Agreement, regardless of the reason for the termination, except that, subject to Section 12, if, prior to the expiration of the term, either your employment is terminated by BGI without Cause or you voluntarily resign following a breach of this Agreement by BGI which is not cured within the time specified in Section 6, you shall receive the payments/benefits described in Section 6 as your sole and exclusive remedy. 14. All provisions of this Agreement are intended to be severable. In the event any provision or restriction contained herein is held to be invalid or unenforceable in any respect, in whole or in part, such finding shall in no way affect the validity or enforceability of any other provisions of this Agreement. The parties hereto further agree that any such invalid or unenforceable provision shall be deemed modified so that it shall be enforced to the greatest extent permissible under law, and to the extent that any court of competent jurisdiction determines any restriction herein to be overly broad or unenforceable, such court is hereby empowered and authorized to limit such restriction so that it is enforceable for the longest duration of time and largest geographical area possible. 15. Any dispute that may exist respecting (i) the interpretation or application of any provision of the agreement (including, without limitation, the provisions of this Section) or (ii) your entitlement to payments or other benefits after termination of your employment shall be resolved by arbitration in Detroit, Michigan in accordance with the rules of the American Arbitration Association and judgment on the award may be entered in any court having jurisdiction. If your position in any such dispute is sustained in the arbitration, BGI will pay or reimburse you for your expenses in connection with the resolution of such dispute (including, without limitation, counsel fees and disbursements and other charges). 16. BGI hereby confirms that, assuming that you remain employed by BGI through November 4, 2000, you will have served for ten (10) years with BGI and Kmart Corporation. Therefore, under the terms of the Borders Group, Inc. Stock Option Plan, you will have three years after your employment termination date to exercise options that are vested on your employment termination date. 17. This Agreement shall be effective as of January 24, 2000. 5 Please confirm your agreement by signing below and retain one copy for your records. Sincerely, BORDERS GROUP, INC. By: /s/ GREGORY P. JOSEFOWICZ -------------------------- Gregory P. Josefowicz Agreed: /s/ GEORGE R. MRKONIC - ----------------------- George R. Mrkonic EX-10.33 4 EXHIBIT 10.33 1 EXHIBIT 10.33 November 15, 1999 Dear Greg: This letter sets forth the terms of our agreement concerning your employment with Borders Group, Inc. (the "Company") and payments that may be due you in the event of termination of your employment. 1. You will serve as President and Chief Executive Officer of the Company and, subject to your annual election by the shareholders, a member of the Board of Directors. You will commence employment on November 15, 1999, and will report to the Chairman of the Board of Directors of the Company. 2. Your office will be at the Company's Corporate Office in Ann Arbor, Michigan. The Company will reimburse you for relocation expenses in accordance with its Relocation Policy, a copy of which has been provided to you. We will provide temporary housing for you in Ann Arbor until next summer, when your family plans on moving to Ann Arbor, and will reimburse you for the cost of weekend travel between Chicago and Ann Arbor in the interim. This will confirm that our Relocation Policy includes reimbursement for your wife's trips to Ann Arbor to look for housing, as well as for the closing costs relating to your purchase of a home in the Ann Arbor area. 3. Your base salary will be $650,000 per year. In addition, to account for the ABS retention amount that you have "earned" to date, you will receive, on your employment commencement date, a cash payment of $200,000. 4. You will be eligible for a "stretch" bonus of $650,000 per year if the Company meets plan for the applicable year. Your bonus for fiscal 1999 will be prorated based upon the percentage of fiscal 1999 during which you are employed by the Company. 5. You will be granted the following stock options under the Borders Group, Inc. Stock Option Plan (the "Stock Option Plan") on November 15, 1999: a. an option for 275,000 shares; and b. an option for each share that you purchase pursuant to paragraph 6 below. These options will have an exercise price equal to the fair market value on the date of grant (i.e., the closing price on November 12, 1999), and will have 100% "cliff" vesting after three years. The options described in paragraph 5a will have a term of 10 years and those described in paragraph 5b will have a term of 5 years. In addition, recommendations will be made to the Compensation Committee that you receive annual grants of 60,000 shares per year commencing one year following your employment commencement date, subject to the availability of sufficient shares under the Stock Option Plan for your grant and those of other officers of the Company. Unless you otherwise agree, the recommendations to the Compensation Committee will be that these options have (i) an 2 exercise price equal to the fair market value on the date of grant; (ii) 100% "cliff" vesting after three years; and (iii) a term of 10 years. 6. You may utilize up to $1,000,000 to purchase restricted shares in accordance with the Company's Management Stock Purchase Plan. The purchase price for these shares will be 80% of the fair market value on your employment commencement date (with fair market value being defined as the closing price on November 12, 1999), and the shares will be restricted for three years. If your employment terminates prior to the expiration of the restriction period, your pay out will be in accordance with the terms of the Plan. 7. You will participate in the Company's Savings Plan and medical, dental and other welfare plans on the same basis as other salaried employees, and will be entitled to four weeks of paid vacation. 8. You will not serve as a director of any other company or institution except with the approval of the Chairman of the Board of the Company. 9. If your position with the Company is terminated at any time by the Company for a reason other than for Cause or Disability (as hereinafter set forth in paragraph 10 or 11), or if you terminate your position with the Company at any time for Good Reason (as set forth in paragraph 12), you will be entitled to a severance payment equal to two times the sum of (i) your annual base salary at the time of termination plus (ii) the on-plan (i.e., "stretch") bonus targeted for you for the fiscal year in which termination occurred. This payment will be made in equal monthly installments during the twenty-four month period (the "Severance Period") commencing with the month following termination. You shall have no obligation to seek other employment during the first 12 months of the Severance Period (the "Initial Severance Period") and the obligation to make severance payments to you during the Initial Severance Period will not be affected by any compensation that you may receive during such period. You agree that you will use reasonable efforts to seek other employment during the balance of the Severance Period (the "Remaining Severance Period") and that, to the extent that you earn cash compensation from other employment during the Remaining Severance Period, the obligation to make payments to you during the Remaining Severance Period shall be correspondingly reduced; provided, however, that the decision whether to enter into other employment during either the Initial Severance Period or the Remaining Severance Period shall be solely yours. Except for benefits that may be due you under any of the Company's benefit plans providing benefits after termination of employment in accordance with the terms of such plan, the payments provided for herein during the Severance Period shall be the exclusive payments due to you for any reason in the event your employment with the Company is terminated, and you shall not otherwise be entitled to any payments or benefits. 10. Your position with the Company may be terminated by the Company for "Cause" only by written notice given to you after action by a majority of the members of the Board of Directors of the Company and only within ninety days after the later of the occurrence of the Company learning of one of the following events: (a) Your conviction of a felony, or of a misdemeanor involving the money or property of the Company or any subsidiary; (b) Your willful an continued failure without proper cause to substantially perform the duties and responsibilities of your position or to comply in all material respects with the material written policies or directives of the Company, which failure shall not be 3 remedied within twenty-one days after written notice thereof from the Company to you; (c) You shall have willfully engaged in misconduct that materially damages or injures the reputation of the Company or any subsidiary; or (d) You shall have been guilty of gross negligence in the performance of your duties and responsibilities. For purposes of this paragraph 10, no act or failure to act, on your part shall be deemed to be "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that such act or omission was in the best interest of the Company. 11. Your position with the Company shall be terminated by the Company for "Disability" if you shall be unable to perform your duties and responsibilities by reason of a specific mental or physical illness or injury and such inability shall have existed for an aggregate of at least 180 days in the twelve month period. Any question as to the existence of a Disability as to which you and the Company cannot agree shall be determined in writing by a qualified independent physician mutually acceptable to you and the Company. If you and the Company cannot agree as to a qualified independent physician, each shall appoint such a physician and those two physicians shall select a third who shall make such determination in writing. The determination of Disability made in writing to the Company and you shall be final and conclusive for all purposes of this agreement. 12. Your position with the Company may be terminated by you for "Good Reason" only if you give written notice of such termination to the Company within 90 days after the occurrence of any one of the following events: (a) At any time during the term of your employment with the Company your base salary, your bonus and incentive compensation potential and benefits are in the aggregate, less favorable than that provided to other senior executives of the Company or its subsidiaries or your rate of base compensation, or the basis on which your incentive compensation is awarded, is changed without your consent in a manner adverse to you other than for Cause; provided, however, that there shall be no obligation to increase your rate of base compensation or to pay you minimum bonuses except those specifically agreed to by the Company in writing (as long as the method of determining your entitlement to bonuses is not changed in a manner adverse to you); (b) Your authority or responsibilities are significantly diminished without your consent or you are required to report to any person other than the Chairman of the Board of Directors of the Company or the Board, other than for Cause or unless you become Disabled; (c) Your being required, without your consent, to perform your duties at a location other than the Company's principal executive offices in Ann Arbor, Michigan (other than as a result of normal business travel requirements); (d) A Change in Control of the Company, as defined in the Stock Option Plan; or 4 (e) Any failure of the Board to nominate you, or of the shareholders to elect you, to serve as a director of the Company. 13. Any dispute that may exist respecting (i) the interpretation or application of any provision of the agreement (including, without limitation, the provisions of this paragraph) or (ii) your entitlement to payments or other benefits after termination of your employment shall be resolved by arbitration in Detroit, Michigan in accordance with the rules of the American Arbitration Association and judgment on the award may be entered in any court having jurisdiction. If your position in any such dispute is sustained in the arbitration, the Company will pay or reimburse you for your expenses in connection with the resolution of such dispute (including, without limitation, counsel fees and disbursements and other charges). Please confirm your agreement by signing below and retain one copy for your records. Sincerely, BORDERS GROUP, INC. By: /s/ ROBERT F. DiROMUALDO ------------------------- Robert F. DiRomualdo Agreed: /s/ GREGORY P. JOSEFOWICZ - ------------------------------------- Gregory P. Josefowicz EX-10.38 5 AMENDED SCHEUDLE 1.01(B) 1 EXHIBIT 10.38 SCHEDULE 1.01(B) (AMENDED AS OF FEBRUARY 22, 2000) COMMITMENTS OF LENDERS
ADDRESS FOR AMOUNT OF RATABLE NAME OF LENDER NOTICES COMMITMENT SHARE* - -------------- ------- ---------- ------ PNC Bank, National National Corporate Banking-Chicago $43,188,888.69 9.1347% Association Office One South Wacker Drive, Suite 2980 Chicago, IL 60606 FAX # (312) 338-5620 Phone # (312) 338-5626 Attn: Mr. Peter F. Stack The First National Bank 14th Floor, Suite 0086 $42,814,814.84 9.0556% of Chicago One First National Plaza Chicago, IL 60670 FAX # (312) 732-1117 Phone # (312) 732-4644 Attn: Debora K. Oberling Bankers Trust Company 130 Liberty Street, 34th Floor $ 30,314,814.84 6.4117% New York, NY 10006 FAX # (212) 250-7218 Phone # (212) 250-8789 Attn: Pam Divino First Union National 1345 Chestnut Street $ 45,740,740.76 9.6744% Bank Philadelphia, PA 19101 FAX# (215) 973-7820 Phone # (215) 973-2318 Attn: Ms. Anne Marie Fitzsimmons Fleet National Bank One Federal Street, OF0320 $ 28,148,148.17 5.9535% Boston, MA 02110-2010 FAX # (617) 434-6685 Phone # (617) 434-3830 Attn: Ms. Kathleen Dimock KeyBank National 127 Public Square $ 28,148,148.17 5.9535% Association Cleveland, OH 44114-1306 FAX # (216) 689-4981 Phone # (216) 689-3589 Attn: Mr. Thomas Crandell Comerica Bank One Detroit Center $28,148,148.17 5.9535% 500 Woodward Ave. Mail Code 3268-9th Floor Detroit, MI 49226-3289 FAX # (313) 222-9514 Phone # (313) 222-5060 Attn: Mr. David C. Bird
2 SCHEDULE 1.01(B)
Morgan Guaranty Trust c/o J.P. Morgan & Company, Inc. $ 21,111,111.12 4.4651% Company of New York 22nd Floor 60 Wall Street New York, NY 10260 FAX # (212) 648-5018 Phone # (212) 648-1265 Attn: Mr. Dennis Wilczek Union Bank of 350 California Street--6th Floor $ 21,111,111.12 4.4651% California, N.A. San Francisco, CA 94104-1402 FAX # (415) 705-7085 Phone # (415) 705-7021 Attn: Mr. Timothy P. Streb Bank of Scotland 565 Fifth Avenue $ 20,000,000.00 4.23% New York, NY 10017 FAX # (212) 682-5720 Phone # (212) 450-0816 Attn: Karim McLean Banque Nationale de Suite 500 $ 17,592,592.60 3.7209% Paris 209 South LaSalle Street Chicago, IL 60604 FAX # (312) 977-1380 Phone # (312) 977-2248 Attn: Mr. Philip Langheirn SunTrust Bank, Atlanta 303 Peachtree Street, NE. $ 17,592,592.60 3.7209% 3rd Floor Atlanta, GA 30308 FAX# (404) 658-4905 Phone # (404) 724-3932 Attn: Mr. William Humphries Bank Boston, N.A. 100 Federal Street $ 17,592,592.60 3.7209% Boston, MA 02110 FAX # (617) 434-6685 Phone # (617) 434-3930 Attn: Ms. Kathleen Dimock Fortis (USA) Finance 520 Madison Avenue $ 15,000,000.00 3.1725% LLC New York, NY 10022 FAX# (212) 750-9503 Phone# (212) 419-8708 Attn: Mr. Edward Matthews
*Ratable Shares used for calculating "Required Lenders," but not for loan operation purposes, such as fundings and payments. 2 3 SCHEDULE 1.01(B) Hibernia National Bank l2th Floor $ 14,074,074.08 2.9767% 313 Carondelet Street New Orleans, LA 70130 FAX # (504) 533-5344 Phone # (504) 533-2738 Attn: Mr. Troy Villafarra The Northern Trust Company Floor B-11 $ 10,555,555.56 2.2325% 50 South LaSalle Street Chicago, IL 60675 FAX # (312) 630-6062 Phone # (312) 557-1356 Attn: Ms. Tracy Toulouse The Bank of New York One Wall Street, 8th Floor $ 10,555,555.56 2.2325% New York, NY 10286 FAX # (212) 635-1483, 1481 Phone # (212) 635-1019 Attn: Mr. William Barum Mercantile Bank l2th Floor $ 10,555,555.56 2.2325% 721 Locust Street St. Louis, MO 63101 FAX # (314) 425-2203 Phone # (314) 425-2459 Attn: Mr. Steve Reese The Dai-Ichi Kangyo 10 S. Wacker Drive - 26th Floor $ 9,444,444.44 1.9975% Bank, Ltd.--Chicago Chicago, IL 60606 Branch FAX # (312) 876-2011 Phone # (312) 715-6361 Attn: Mr. Michael Pleasants First Hawaiian Bank 999 Bishop Street - 11th Floor $ 10,555,555.56 2.2325% Honolulu, HI 96813 FAX # (808) 525-6372 Phone # (808) 525-6289 Attn: Mr. Charles Jenkins Bank One, National 14th Floor, Suite 0086 $ 10,555,555.56 2.2325% Association One First National Plaza Chicago, IL 60670 FAX # (312) 732-1117 Phone # (312) 732-4644 Attn: Debora K. Oberling
*Ratable Shares used for calculating "Required Lenders," but not for loan operation purposes, such as fundings and payments. 3 4 SCHEDULE 1.01(B) GE Capital Corporation 201 High Ridge Road $ 9,444,444.44 1.9975% Stamford, CT 06927 FAX # (203) 602-8335 Phone # (203) 316-7739 Attn: Mr. Robert Obolewicz Wachovia Bank 28th Floor $ 10,555,555.56 2.2325% 191 Peachtree Street Atlanta, GA 30303 FAX # (404) 332-6898 Phone # (404) 332-4036 Attn: Ms. Katie S. Proctor TOTAL $472,800,000.00 100%
*Ratable Shares used for calculating "Required Lenders," but not for loan operation purposes, such as fundings and payments. 4 EX-10.39 6 AMENDED SCHEDULE II 1 EXHIBIT 10.39 SCHEDULE II (AMENDED AS OF FEBRUARY 22, 2000) COMMITMENTS OF LENDERS
ADDRESS FOR AMOUNT OF RATABLE NAME OF LENDER NOTICES COMMITMENT SHARE* - -------------- ------- ---------- ------ PNC Bank, National National Corporate Banking--Chicago $ 18,666,666.65 10.67% Association Office One South Wacker Drive, Suite #2980 Chicago, IL 60606 FAX # (312) 338-5620 Phone # (312) 338-5626 Attn: Mr. Peter F. Stack The First National Bank 14th Floor, Suite 0086 $ 18,537,037.04 10.59% of Chicago One First National Plaza Chicago, IL 60670 FAX # (312) 732-1117 Phone # (312) 732-4644 Attn: Debora K. Oberling Bankers Trust Company 130 Liberty Street, 34th Floor $ 18,537,037.04 10.59% New York, NY 10006 FAX # (212) 250-7218 Phone # (212) 250-8789 Attn: Ms. Pam Divino First Union National 1345 Chestnut Street $ 16,851,851.85 9.63% Bank Philadelphia, PA 19101 FAX # (215) 973-7820 Phone # (215) 973-2318 Attn: Ms. Anne Marie Fitzsimmons Fleet National Bank 100 Federal Street $ 10,370,370.37 5.92% Boston, MA 02110 FAX # (617) 434-6685 Phone # (617) 434-3830 Attn: Ms. Kathleen Dimock KeyBank National 127 Public Square $ 10,370,370.37 5.92% Association Cleveland, OH 44114-1306 FAX # (216) 689-4981 Phone # (216) 689-3589 Attn: Mr. Thomas Crandell Comerica Bank One Detroit Center $ 10,370,370.37 5.92% 500 Woodward Ave. Mail Code 3268-9th Floor Detroit, MI 48226-3289 FAX # (313) 222-9514 Phone # (313) 222-5060 Attn: Mr. David C. Bird
2 SCHEDULE II Morgan Guaranty Trust c/o J.P. Morgan & Company, Inc. $ 7,777,777.78 4.44% Company of New York 22nd Floor 60 Wall Street New York, NY 10260 FAX # (212) 648-5018 Phone # (212) 648-1265 Attn: Mr. Dennis Wilczek Union Bank of 350 California Street $ 7,777,777.78 4.44% California, N.A. 6th Floor San Francisco, CA 94104-1402 FAX # (415) 705-7085 Phone # (415) 705-7021 Attn: Mr. Timothy P. Streb Banque Nationale de Suite 500 $ 6,481,481.48 3.70% Paris 209 South LaSalle Street Chicago, IL 60604 FAX # (312) 977-1380 Phone # (312) 977-2248 Attn: Ms. Philip Langheim SunTrust Bank, Atlanta 303 Peachtree Street, N.E. $ 6,481,481.48 3.70% 3rd Floor Atlanta, GA 30308 FAX # (404) 658-4905 Phone # (404) 724-3931 Attn: Mr. William Humphries Bank Boston, N.A. 100 Federal Street $ 6,481,481.48 3.70% Boston, MA 02110 FAX # (617) 434-6685 Phone # (617) 434-3830 Attn: Ms. Kathleen Dimock Hibernia National Bank 12th Floor $ 5,185,185.19 2.96% 313 Carondelet Street New Orleans, LA 70130 FAX # (504) 533-5344 Phone # (504) 533-2738 Attn: Mr. Troy Villafarra The Northern Trust Floor B-11 $ 3,888,888.89 2.22% Company 50 South LaSalle Street Chicago, IL 60675 FAX # (312) 630-6062 Phone # (312) 557-1356 Attn: Mr. Tracy Toulouse
*Ratable Shares used for calculating "Required Lenders," but not for loan operation purposes, such as fundings and payments. 2 3 SCHEDULE II The Bank of New York One Wall Street, 8th Floor $ 3,888,888.89 2.22% New York, NY 10286 FAX # (212) 635-1483, 1481 Phone # (212) 635-1019 Attn: Mr. William Barum Mercantile Bank l2th Floor $ 3,888,888.89 2.22% 721 Locust Street St. Louis, MO 63101 FAX # (314) 425-2203 Phone # (314) 425-2459 Attn: Mr. Steve Reese The Dai-Ichi Kangyo 10 S. Wacker Drive $ 3,888,888.89 2.22% Bank, Ltd.--Chicago 26th Floor Branch Chicago, IL 60606 FAX # (312) 876-2011 Phone # (312) 715-6361 Attn: Mr. Michael Pleasants First Hawaiian Bank 999 Bishop Street $ 3,888,888.89 2.22% 11th Floor Honolulu, HI 96813 FAX # (808) 525-6372 Phone # (808) 525-6289 Attn: Mr. Charles Jenkins Bank One, National 14th Floor, Suite 0086 $ 3,888,888.89 2.22% Association One First National Plaza Chicago, IL 60670 FAX # (312) 732-1117 Phone # (312) 732-4644 Attn: Debora K. Oberling GE Capital Corporation 201 High Ridge Road $ 3,888,888.89 2.22% Stamford, CT 06927 FAX # (203) 602-8335 Phone # (203) 316-7739 Attn: Mr. Robert Obolewicz Wachovia Bank 28th Floor $ 3,888,888.89 2.22% 191 Peachtree Street Atlanta, GA 30303 FAX # (404) 332-6898 Phone # (404) 332-4036 Attn: Ms. Katie S. Proctor TOTAL $ 175,000,000.00 100%
*Ratable Shares used for calculating "Required Lenders," but not for loan operation purposes, such as fundings and payments. 3 EX-21.1 7 SUBSIDIARIES OF BORDERS GROUP, INC. 1 EXHIBIT 21.1 Subsidiaries of Borders Group, Inc. SUBSIDIARY STATE OF INCORPORATION - ---------- ---------------------- Borders, Inc. Colorado Borders Fulfillment, Inc. Delaware Borders Online, Inc. Delaware Borders Outlet, Inc. Colorado Borders Properties, Inc. Delaware Planet Music, Inc. North Carolina Niche Marketing Limited, Inc. Ohio d/b/a All Wound Up! Ohio The Library, Ltd. Missouri Walden Book Company, Inc. Colorado Waldenbooks Properties, Inc. Delaware Books (UK) Limited formerly Books etc. Limited U.K. Borders New Zealand Limited New Zealand Borders PTE. Limited Singapore Borders Australia PTY, Limited Australia BGI U.K. Limited U.K. BGP U.K. Limited U.K. Paperchase Products Limited * U.K. * BGI owns 19.9% with an option to acquire the remaining shares. EX-23.1 8 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-79559), Form S-8 (No. 333-88805) and Form S-3 (No. 333-80669) of Borders Group, Inc. of our report dated March 6, 2000, relating to the financial statements, which appears in this Annual Report on Form 10-K. PRICEWATERHOUSECOOPERS LLP Bloomfield Hills, Michigan April 24, 2000 EX-27 9 FINANCIAL DATA SCHEDULE
5 1,000,000 12-MOS JAN-23-2000 JAN-25-1999 JAN-23-2000 42 0 69 0 1,078 1,198 954 395 1,915 1,028 0 0 0 0 803 1,915 2,999 2,999 2,148 2,148 0 0 18 148 58 90 0 0 0 90 1.16 1.13
EX-99.1 10 FORWARD-LOOKING STATEMENTS 1 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," "intends," "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, future financial performance (including sales and earnings guidance), strategic alternatives, marketing and expansion plans 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 may from time to time include 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; 1 2 - the performance of the Company's 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 informational technology systems 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. 2 -----END PRIVACY-ENHANCED MESSAGE-----