-----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, WdURPL684Sut/c04BAuHOmgFyzi6T4g02VmpragfjxEmemR79xMuJ+xB6QVit56c yJVzF43r1Yq9OLFb+0j4DA== 0000950124-99-002777.txt : 19990428 0000950124-99-002777.hdr.sgml : 19990428 ACCESSION NUMBER: 0000950124-99-002777 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 21 CONFORMED PERIOD OF REPORT: 19990124 FILED AS OF DATE: 19990426 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: 99601288 BUSINESS ADDRESS: STREET 1: 500 E WASHINGTON ST CITY: ANN ARBOR STATE: MI ZIP: 48104 BUSINESS PHONE: 3139131100 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 24, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission File Number 1-13740 ------------------------ BORDERS GROUP, INC. (Exact name of registrant as specified in its charter) MICHIGAN 38-3196915 (STATE OR OTHER JURISDICTION 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 $1,143,052,444 BASED UPON THE CLOSING MARKET PRICE OF $15.00 PER SHARE OF COMMON STOCK ON THE NEW YORK STOCK EXCHANGE AS OF MARCH 22, 1999. NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF MARCH 22, 1999: 77,952,846 DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE MAY 13, 1999 ANNUAL MEETING OF STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III. THE EXHIBIT INDEX IS LOCATED ON PAGE 40 HEREOF. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 BORDERS GROUP, INC. INDEX
PAGE ---- PART I Item 1. Business.................................................... 2 Item 2. Properties.................................................. 6 Item 3. Legal Proceedings........................................... 7 Item 4. Submission of Matters to a Vote of Security Holders......... 7 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 8 Item 6. Selected Financial Data..................................... 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 10 Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................................... 15 Item 8. Financial Statements and Supplementary Data................. 17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 32 PART III Item 10. Directors and Executive Officers of the Registrant.......... 33 Item 11. Executive Compensation...................................... 36 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 36 Item 13. Certain Relationships and Related Party Transactions........ 36 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................................... 37
1 3 PART I ITEM 1. BUSINESS GENERAL Borders Group, Inc. (the Company), through its subsidiaries, Borders, Inc. (Borders), Walden Book Company, Inc. (Walden) and Books etc. 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 March 21, 1999, the Company operated 256 superstores under the Borders name, including one in Singapore, one in Australia, and three in the United Kingdom, 885 mall-based and other bookstores primarily under the Waldenbooks name and 26 bookstores under the Books etc. name in the United Kingdom. The Company also operates an Internet commerce site under the name Borders.com. Borders is one of the nation's largest specialty coffee retailers with cafe operations in nearly all of its superstores. The Company had consolidated net sales of approximately $2.6 billion in 1998 and $2.3 billion in 1997. References herein to years are to fiscal years of the Company which currently end in January of the following calendar year. STORES 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 1998, the Company opened 47 new Borders book and music superstores. Borders superstore operations achieved annual growth in net sales for the year ended January 24, 1999 of 23.7% and attained comparable store sales growth in 1998 of 3.5%. Borders superstores achieved average sales per square foot of $256 and average sales per superstore of $6.9 million in 1998, 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 for the three years ended January 24, 1999 of 31.8%. 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 128,000 book titles, ranging from 85,000 titles to 170,000 titles, across numerous categories, including many hard-to-find titles. As of March 21, 1999, 240 of the 256 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. As of March 21, 1999, 252 of the 256 Borders superstores featured a cafe. Over the past two decades, Borders has developed what it believes is the most sophisticated inventory management system in the retail book industry. The inventory management system includes a centrally controlled "expert" system that uses artificial intelligence principles to forecast sales and recommend inventory levels for each book in each store. Management believes that Borders' inventory management system, which reflects both overall sales trends and local buying patterns, results in higher in-stock positions, a broader selection of book titles, and increased sales per store and sales per square foot, while effectively managing inventory investment to provide Borders stores with a more productive inventory assortment. As a result, management believes this proprietary system has been a principal reason for Borders' superior performance. The Company is adapting certain aspects of the system for use in its mall-based business where appropriate, and believes that over the long term it will enable the Company to offer a more productive assortment of inventory throughout its operations. Borders superstores average 27,000 square feet in size, including approximately 5,300 square feet devoted to music, approximately 700 square feet devoted to videos and digital video discs and approximately 1,400 square feet devoted to the cafe. Stores opened in fiscal 1998 averaged 25,000 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 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, selected children's books and a standard selection of business, cooking, reference and general interest books. Walden has a well established name and reputation and generates cash flow that the Company plans to use toward financing the Company's growth initiatives. Walden stores average approximately 3,300 square feet in size and typically carry between 15,000 and 25,000 titles. In addition to its traditional mall format described above, Walden operates alternative mall-based bookstores utilizing a large format. This addresses the desires of some developers to include a larger format bookstore in malls, including, in many cases, where developers plan to include only one bookstore in a mall, and is designed to take advantage of what management believes is the desire by mall customers in some markets for greater selection and service. The larger format consists of approximately 5,000 to 8,000 square feet and carries between 30,000 and 40,000 titles. As of March 21, 1999, Walden operated 106 of the larger format stores. Walden is the largest operator of seasonal kiosks under the Day by Day, Animal House and Turn of the Century trade names. In March 1999, Walden acquired for cash the stock of All Wound Up (AWU). AWU operates seasonal kiosks 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 will be accounted for under the purchase method and is not material to the results of the Company. Books etc. operated 26 stores in the United Kingdom as of March 21, 1999, 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. The Books etc. philosophy is to offer customers the widest range of quality reading at the best prices, coupled with knowledgeable guidance from experienced store employees. The Company has acquired a 19.9% strategic investment in Paperchase Products Limited (Paperchase), the leading design-oriented retailer of stationery and art materials in the United Kingdom. Paperchase operates 18 stores and concessions in three Books etc. stores and two Borders superstores located in the United Kingdom. The Company plans to test a similar concept in Borders superstores in the United States in the spring of 1999. The investment is not material to the results of the Company and will be accounted for under the cost method. BORDERS.COM The Company, through its subsidiary, Borders Online, Inc., operates an Internet commerce site, Borders.com. This site offers customers over 650,000 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. Since its public debut in May, 1998, Borders.com has garnered high rankings from Internet and industry experts in several recent surveys of the Internet's best websites. The Company plans to leverage the Internet capability of Borders.com to customers in both Borders and Walden stores. Currently, customers can place special orders through employees in Borders stores and have product shipped to the store. The Company plans to extend that capability to allow shipments directly to customers' homes. DISTRIBUTION Borders. Borders believes that its centralized distribution system, 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 Borders' distribution centers, located in Harrisburg, Pennsylvania; Ann Arbor, Michigan; Columbus, Ohio and Indianapolis, Indiana. Walden's distribution centers, discussed below, are also utilized by Borders. Approximately 95% of the books carried by Borders are processed through its distribution facilities. Employees at the distribution facilities label books with proprietary bar code stickers identifying the book title, price and subject area. During the non-holiday selling season, approximately 85% to 90% of the trade 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 3 5 from certain manufacturers and utilizes Borders' own distribution centers to ship a majority of its music inventory to its stores. Walden. Approximately 65% of the number of books carried by Walden's stores are shipped to one of Walden's two distribution centers, located in Mira Loma, California and Nashville, Tennessee. Walden continues to use Ingram, a major book wholesaler, to supplement its distribution centers. Walden also receives some product in stores directly from publishers. United Kingdom. Books etc. and Borders superstores in the United Kingdom are served by a distribution center in Cornwall, England. Books etc. stores in central London also receive a large percentage of their merchandise directly from publishers and wholesalers. Borders.com. In 1998, the Company, through its subsidiary, Borders Fulfillment, Inc., opened its new, state-of-the-art fulfillment center in Nashville, Tennessee. This facility has over 650,000 titles of books, music and videos in stock and available for immediate shipping, and gives the Company a significant competitive advantage in terms of delivery capabilities. 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. 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. Due to the sophistication of its inventory management system, the Company is able to reduce its handling, carrying and freight expenses. In general, Borders can return music and videos to its vendors at cost plus an additional fee to cover handling and processing costs. 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, Books-A-Million, Crown Books and Media Play. Approximately 85% of Borders superstores currently face direct competition from other large format book superstores. 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 specialty retail stores that offer books in a particular area of specialty, independent single store operators, variety discounters, drug stores, warehouse clubs, mail order clubs and mass merchandisers (such as Best Buy). 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, variety discounters, warehouse clubs and mass merchandisers (such as Best Buy), some of which may have greater financial or other resources than the Company. 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 avenue 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., Barnes & Noble, Inc., CDnow, Inc. and others. The Company believes that sales to date on the Internet have negatively affected the Company's sales, but the impact cannot be quantified. Internet sales are expected to continue to have a negative impact on the Company's sales. As discussed above, the Company has its own vehicle for retailing over the Internet and in 1999 will be working to integrate Borders.com with its stores. EMPLOYEES As of March 21, 1999, the Company had a total of approximately 15,600 full-time employees and approximately 11,600 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 4 6 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 good. The Company's employees are not represented by unions except that the employees of two Borders stores have elected to be represented by the United Food and Commercial Workers International Union (UFCW). Agreements have been reached between the Company and the UFCW with respect to these stores. 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 1998, 36.4% of the Company's sales and 88.0% of the Company's operating income were generated in the fourth quarter. The Company's results of operations 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". 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. 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. 32 of Borders' leases for its retail stores 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 5 7 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 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. Borders operated 251 stores in 40 states and the District of Columbia, three stores in the United Kingdom, one store in Singapore and one store in Australia at March 21, 1999. 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 March 21, 1999, the average unexpired term under Borders' existing store leases was 11.5 years prior to the exercise of any options. The Company has leased a portion of its corporate headquarters in Ann Arbor, Michigan and owns the remaining building and improvements. In 1998, the headquarters was significantly expanded and all corporate office personnel were consolidated into the expanded facility. The Company leases all distribution centers. Walden. Walden operated 885 stores in all 50 states and the District of Columbia as of March 21, 1999. Walden leases all of its stores. Walden's store leases generally have an initial term of 10 years. At present, the 6 8 average unexpired term under Walden's existing store leases is approximately 4.5 years. The terms of Walden's mall-based bookstores leases for its leased bookstores open as of March 21, 1999 expire as follows:
LEASE TERMS TO EXPIRE DURING 12 MONTHS NUMBER OF ENDING ON OR ABOUT JANUARY 31 MALL STORES -------------------------------------- ----------- 2000........................................................ 164 2001........................................................ 92 2002........................................................ 84 2003 and later.............................................. 545
Walden leases both of its distribution facilities. Books etc. Books etc. operated 26 stores in the United Kingdom as of March 21, 1999. 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 12.2 years. ITEM 3. LEGAL PROCEEDINGS The Company is from time to time involved in or affected by litigation incidental to the conduct of its respective businesses. The Company believes that no currently pending litigation to which it is a party will have a material adverse effect on its liquidity, financial position or results of operations. In March 1998, the American Booksellers Association ("ABA") and twenty-six independent bookstores filed a lawsuit in the United States District Court for the Northern District of California against the Company and Barnes & Noble Inc. alleging violations of the Robinson-Patman Act, the California Unfair Trade Practice Act and the California Unfair Competition Law. The Complaint seeks injunctive and declaratory relief; unspecified treble damages on behalf of each of the bookstore plaintiffs, and, with respect to the California bookstore plaintiffs, any other damages permitted by California law; disgorgement of money, property and gains wrongfully obtained in connection with the purchase of books for resale, or offered for resale, in California from March 18, 1994 until the action is completed and pre-judgment interest on any amounts awarded in the action, as well as attorney fees and costs. The Company intends to vigorously defend the action. In August 1998, The Intimate Bookshop, Inc. and its owner, Wallace Kuralt, filed a lawsuit in the United States District Court for the Southern District of New York against the Company, Barnes & Noble, Inc., Amazon.com, Inc., certain publishers and others alleging violation of the Robinson-Patman Act and other federal law, New York statutes governing trade practices and common law. An Amended Complaint was subsequently filed eliminating the class action allegations contained in the original Complaint. The Amended Complaint alleges that the named plaintiffs have suffered damages of $11,250,000 or more and requests treble damages on behalf of the named plaintiffs, as well as of injunctive and declaratory relief (including an injunction requiring the closure of all of the defendants' stores within 10 miles of any location where plaintiff either has or had a retail bookstore during the four years preceding the filing of the Complaint, and prohibiting the opening by defendants of any bookstore in such areas for the next 10 years), disgorgement of alleged discriminatory discounts, rebates, deductions and payments, punitive damages, interest, costs, attorneys fees and other relief. Many of the allegations in the Amended Complaint are similar to those contained in the action instituted by the ABA and 26 bookseller plaintiffs against the Company and Barnes & Noble in March of 1998. The Company intends to vigorously defend the action. On November 20, 1998, six independent booksellers instituted an action against the Company and Barnes & Noble in the United States District Court for the Northern District of California asserting claims, and seeking relief, similar to claims made and relief sought in the ABA litigation described above. The Company intends to vigorously defend the action. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 7 9 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 (after the effect of the 2-for-1 stock split, effective, March 1, 1997).
HIGH LOW ---- --- FISCAL QUARTER 1997 First Quarter............................................. $22.82 $18.32 Second Quarter............................................ $26.94 $19.25 Third Quarter............................................. $29.00 $22.31 Fourth Quarter............................................ $31.94 $24.50 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
The Common Stock is traded on the New York Stock Exchange. As of March 22, 1999, the Common Stock was held by 4,506 holders of record. The Company currently intends to retain its earnings to finance future growth and therefore 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 credit facility and the lease facility agreements prohibit the Company from paying any dividends. The Lease Guaranty Agreement between the Company, Borders and Kmart restricts the Company's ability to pay dividends, unless no defaults exist under any indebtedness of the Company and such payments do not exceed the sum of 50% of cumulative consolidated net income since the Company's initial public offering of common stock, which was completed on June 1, 1995, and certain proceeds received from the sale of capital stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources". On November 16, 1998 the Company sold 400,000 shares of Common Stock to Philip M. Pfeffer, former Chief Executive Officer of the Company, for aggregate consideration of $9,300,000, and Mr. Pfeffer received an option with an exercise price of $23.25, the fair market value on the date of grant, for each share purchased. On that date, the Company also issued to Mr. Pfeffer options to purchase 15,610 shares with an exercise price of $23.25 in lieu of salary in the amount of $134,246. These transactions involved an offer solely to Mr. Pfeffer 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. 8 10 ITEM 6. SELECTED FINANCIAL DATA BORDERS GROUP, INC. 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 24, JANUARY 25, JANUARY 26, JANUARY 28, JANUARY 22, 1999 1998 1997 1996(1) 1995 ----------- ----------- ----------- ----------- ----------- (DOLLARS IN MILLIONS EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA Borders Sales.............................. $1,563.5 $1,264.1 $ 958.1 $ 683.5 $ 404.0 Waldenbooks Sales.......................... 941.6 968.2 979.7 1,031.5 1,085.5 Other Sales................................ 85.3 33.7 21.0 34.0 21.5 -------- -------- -------- -------- -------- Total Store Sales.......................... 2,590.4 2,266.0 1,958.8 1,749.0 1,511.0 Borders.com Sales.......................... 4.6 -- -- -- -- -------- -------- -------- -------- -------- Total Sales.............................. $2,595.0 $2,266.0 $1,958.8 $1,749.0 $1,511.0 Operating Income Before Restructuring Provision, Goodwill Writedowns and FAS 121...................................... $ 167.3 $ 138.0 $ 103.1 $ 64.5 $ 50.2 Restructuring Provision.................... -- -- -- -- 6.4 Goodwill Writedowns........................ -- -- -- 201.8 -- FAS 121 Impairment......................... -- -- -- 63.1 -- -------- -------- -------- -------- -------- Operating Income (Loss).................... $ 167.3 $ 138.0 $ 103.1 $ (200.4) $ 43.8 Net Income (Loss).......................... $ 92.1 $ 80.2 $ 57.9 $ (211.1) $ 20.9 Diluted Earnings (Loss) Per Common Share(2)................................. $ 1.12 $ 0.98 $ 0.70 $ (2.94) $ 0.35 Pro Forma Diluted Earnings Per Common Share Before Restructuring Provision, Goodwill Writedowns and FAS 121(2)................ $ 1.12 $ 0.98 $ 0.70 $ 0.43 $ 0.32 BALANCE SHEET DATA Working Capital............................ $ 144.5 $ 137.0 $ 225.1 $ 204.3 $ 258.0 Total Assets............................... $1,766.6 $1,534.9 $1,211.0 $1,052.3 $1,355.9 Short-Term Borrowings...................... $ 131.9 $ 122.5 $ 30.0 $ 60.0 $ -- Long-Term Debt and Capital Lease Obligations, Including Current Portion, and Redeemable Preferred Stock........... $ 8.5 $ 10.0 $ 6.7 $ 8.6 $ 21.1 Shares Subject to Repurchase............... $ -- $ -- $ 34.1 $ -- $ -- Stockholders' Equity....................... $ 715.1 $ 598.1 $ 511.4 $ 472.0 $ 726.3
- ------------------------- (1) The Company's 1995 fiscal year consisted of 53 weeks. (2) Earnings (loss) per common share for the fiscal years ended January 28, 1996 and January 22, 1995 are pro forma and are based on actual common shares outstanding after the Company's initial public offering. 9 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 24, 1999, the Company operated 250 superstores primarily under the Borders name, including 3 in the United Kingdom, 1 in Singapore, and 1 in Australia. The Company also operated 900 mall-based and other bookstores primarily under the Waldenbooks name, and 26 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 1998, 1997, and 1996 consisted of 52 weeks and ended on January 24, 1999, January 25, 1998, and January 26, 1997, 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 24, JANUARY 25, JANUARY 26, 1999 1998 1997 ----------- ----------- ----------- RESULTS OF OPERATIONS Sales....................................................... 100.0% 100.0% 100.0% Cost of merchandise sold (includes occupancy)............... 71.7 72.1 73.4 ----- ----- ----- Gross margin................................................ 28.3 27.9 26.6 Selling, general and administrative expenses................ 21.5 21.4 20.9 Pre-opening expense......................................... 0.3 0.4 0.4 Goodwill amortization....................................... 0.1 -- -- ----- ----- ----- Operating income............................................ 6.4 6.1 5.3 Interest expense............................................ 0.6 0.3 0.4 ----- ----- ----- Income before income tax.................................... 5.8 5.8 4.9 Income tax provision........................................ 2.3 2.3 1.9 ----- ----- ----- Net income.................................................. 3.5% 3.5% 3.0% ----- ----- ----- Store Activity Borders Superstores Beginning number of stores................................ 203 157 116 Openings.................................................. 47 46 41 ----- ----- ----- Ending number of stores................................... 250 203 157 ----- ----- ----- Walden Mall Bookstores Beginning number of stores................................ 923 961 992 Openings.................................................. 16 8 9 Closings.................................................. (39) (46) (40) ----- ----- ----- Ending number of stores................................... 900 923 961 ===== ===== =====
10 12 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' 3.5% 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 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. FISCAL YEARS ENDED JANUARY 25, 1998 AND JANUARY 26, 1997 Sales for the year ended January 25, 1998 were $2,266.0 million, reflecting a 15.7% increase over the $1,958.8 million in sales achieved in 1996. Both the higher number of Borders superstores and Borders' 8.0% comparable store sales increase contributed to the growth, which was partially offset by store closings at Waldenbooks. The Waldenbooks 0.0% comparable store sales reflects flat mall traffic levels and the impact of increased superstore competition offset by the benefit of new merchandising initiatives. Waldenbooks also experienced a benefit from a larger number of seasonal calendar kiosks introduced in malls with existing Waldenbooks stores. Gross margin as a percent of sales rose from 26.6% in 1996 to 27.9% in 1997. The increase in gross margin percentage primarily reflects improved buying and sales mix resulting in higher initial product margin and tighter control of inventory shrinkage. As a percentage of sales, SG&A for 1997 was 21.4%, or 0.5% higher than the 20.9% of sales in the corresponding period of 1996. The increase is due largely to expenditures on strategic initiatives offset in part by the leveraging of corporate overhead over the Company's expanding sales base. 11 13 Pre-opening expense in 1997 was $7.2 million consistent with 1996 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 Company opened 46 Borders superstores and 8 Waldenbooks mall-based stores in 1997 as compared to 41 Borders superstores and 9 Waldenbooks mall-based stores in 1996. Goodwill amortization was $1.6 million in 1997, as compared to $1.1 million in 1996. The increase in goodwill amortization of $0.5 million is a result of the higher goodwill balance due to the acquisition of Books etc. in October 1997. Operating income was $138.0 million or 6.1% of sales in 1997, as compared to $103.1 million or 5.3% of sales in 1996. Interest expense was $7.2 million in 1997, as compared to $7.0 million in 1996. The increase represents interest on borrowings for the repurchase of common stock, and the acquisition of Books etc. Income tax expense in 1997 was $50.6 million as compared to $38.2 million in 1996. The effective tax rate for both periods differed from the federal statutory rate primarily as a result of non-deductible goodwill amortization. The Company's effective tax rate was 38.7% in 1997, as compared to 39.8% in 1996. The decrease in effective rate is due primarily to the realization of certain state tax benefits. As a result of the foregoing, net income for the year ended January 25, 1998 was $80.2 million, as compared to $57.9 million for the year ended January 26, 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 1998 was $166.2 million, as compared to $147.0 million in 1997. 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 47 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 Australia, Borders.com and the fulfillment center, a new distribution center in Mira Loma, California, and expansion of the home office facility. Capital expenditures in 1998 reflect the opening of 47 new superstores and 16 new Waldenbooks stores. Capital expenditures in 1997 and 1996 reflected the opening of 46 and 41 new Borders superstores, respectively, and 8 and 9 new Waldenbooks stores, respectively. Net cash used for financing in 1998 was $8.7 million, resulting primarily from the repurchase of common stock of $51.7 million offset by net borrowings under the credit facility and the issuance of Company stock under the Company's employee benefit plans. Net cash provided by financing in 1997 was $50.5 million, which resulted from net borrowings under the credit facility, cash received from construction funding, and issuance of stock under employee benefit plans offset by the repurchase of common stock. The Company expects capital expenditures to be approximately $170.0 million in 1999, 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 5 international stores, and 15 new Waldenbooks mall stores in 1999. Average cash requirements for the opening of a domestic prototype Borders books and music superstore are $2.2 million, representing capital expenditures of $1.2 million, inventory requirements, net of related accounts payable, of $0.9 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. 12 14 The Company plans to execute its expansion plans for its Borders superstores principally with funds generated from operations and financing through the lease facility in 1999 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 $64.5 million. During 1998 and 1997, $51.7 million and $61.8 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 operating covenants which limit the Company's ability to incur indebtedness, make acquisitions, dispose of assets, issue or repurchase its common stock in excess of $100.0 million (plus any proceeds and tax benefits resulting from stock option exercises and tax benefits resulting from restricted shares purchased by employees from the Company), pay dividends on its common stock, and require the Company to meet certain financial measures regarding fixed charge coverage, leverage and tangible net worth. The Company 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. There were 31 properties financed through the Lease Facility, with a financed value of $123.9 million at January 24, 1999. Management believes that the rental payments for properties financed through the Lease Facility may be lower than those which the Company could obtain elsewhere due to, among other factors, (i) the lower borrowing rates available to the Company's landlords under the facility, and (ii) the fact 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 of the Company's obligations under the related leases (which would require mutual consent of Kmart and Borders). In the event the Company is required to repurchase all of the underlying mortgage notes, the Company would be obligated to pay approximately $36.6 million. The Company would expect to fund this obligation through its line of credit. Since February 1995, Kmart has failed to maintain investment grade ratings and, therefore, these notes are now subject to put by the holder. To date, the holder has not exercised its right to put the notes. 13 15 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 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
FISCAL 1996 QUARTER ENDED -------------------------------------------- APRIL JULY OCTOBER JANUARY (DOLLARS IN MILLIONS) ----- ---- ------- ------- SALES.................................................... $404.0 $414.3 $413.5 $727.0 Operating income (loss).................................. (3.7) (2.0) (2.9) 111.7 % of full year: Sales.................................................. 20.6% 21.2% 21.1% 37.1% Operating income (loss)................................ (3.6) (1.9) (2.8) 108.3
OTHER MATTERS YEAR 2000 ISSUE The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define a specific year. Absent corrective actions, a computer program that has date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations causing disruptions to various activities and operations. The Company initiated assessments in prior years to identify the work efforts required to assure that systems supporting the business successfully operate beyond the turn of the century. The scope of this work effort encompasses information technology systems, systems utilizing embedded technology, such as microcontrollers, and the readiness of external third parties, such as suppliers and service providers. FINANCIAL AND NON-FINANCIAL INFORMATION TECHNOLOGY SYSTEMS These systems encompass both application software and operating system software. The Company has completed its assessment, renovation, and validation of potential problem areas concerning application software. Implementation (the final stage) of application software based in the Company's distribution centers and headquarters is substantially complete other than application programs required for operation of the sorter in the Company's Nashville distribution center. These programs are expected to be completed by the end of the second quarter unless significant unanticipated remedial action is required, in which case completion is expected in the fourth quarter. Implementation of application software based in the Company's stores is currently more than 80% complete, with 100% completion expected by the end of the second quarter of 1999. 14 16 The assessment of operating system software has been completed. Necessary upgrades of operating system software are expected to be completed by the end of the second quarter of fiscal 1999. EMBEDDED TECHNOLOGY SYSTEMS The Company has completed its assessment of the potential risks associated with embedded technology systems, such as HVAC, elevators and security systems at the Company's stores, distribution centers, and headquarters. This involved inventorying all equipment utilizing embedded technology by vendor and model, and contacting the necessary vendors with regards to the compliance status of each item. Services or equipment provided by non-compliant vendors identified through the assessment process will be upgraded to compliant versions to the extent that the Company cannot correct identified problem areas internally. This step is expected to be completed by the end of the second quarter of fiscal 1999. SUPPLIERS AND SERVICE PROVIDERS The Company relies on numerous third parties to provide merchandise and services. As such, attention has been focused on compliance attainment efforts of vendors. Key parties have been contacted for clarification of their year 2000 plans and their compliance status. Merchandise or services provided by non-compliant vendors identified through the assessment process will be evaluated for potential alternative arrangements. Such arrangements may include less reliance on electronic ordering or sourcing through alternative distribution channels to the extent that merchandise is available through such channels. Notwithstanding the substantive work efforts described above, the Company could potentially experience disruptions to some aspects of its various activities and operations, including those resulting from non-compliant systems utilized by unrelated third party business entities. The Company is in the process of developing business contingency plans in order to attempt to mitigate the extent of potential disruption to business operations. The Company anticipates that development of such contingency plans will be completed by the end of the second quarter of fiscal 1999. The Company will continuously monitor the adequacy of its contingency plans throughout the remainder of fiscal 1999. Costs of addressing the Year 2000 Issue have not been material to date and, based on preliminary information gathered to date from the Company and its vendors, are not currently expected to have a material adverse impact on the Company's financial position, results of operations or cash flows in future periods. However, if the Company or its vendors are unable to resolve such processing issues in a timely manner, it could result in a material financial risk, including loss of revenue, substantial unanticipated costs and service interruptions. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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 borrowings to fixed-rate borrowings. LIBOR is the rate upon which the Company's variable rate debt is principally based. If LIBOR were to increase 1% in 1999 as compared to the end of 1998, the company's interest expense, after considering the effects of its interest rate swap and collar agreements, would increase $0.1 million based on the Company's outstanding debt as of January 24, 1999. 15 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
PAGE ---- Consolidated Statements of Operations for the fiscal years ended January 24, 1999, January 25, 1998 and January 26, 1997...................................................... 17 Consolidated Balance Sheets as of January 24, 1999 and January 25, 1998.......................................... 18 Consolidated Statements of Cash Flows for the fiscal years ended January 24, 1999, January 25, 1998 and January 26, 1997...................................................... 19 Consolidated Statements of Stockholders' Equity for the fiscal years ended January 24, 1999, January 25, 1998, January 26, 1997 and January 28, 1996..................... 20 Notes to Consolidated Financial Statements.................. 21 Report of Independent Accountants........................... 31
16 18 BORDERS GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEAR ENDED ----------------------------------------- JANUARY 24, JANUARY 25, JANUARY 26, 1999 1998 1997 (DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) ----------- ----------- ----------- Sales....................................................... $2,595.0 $2,266.0 $1,958.8 Cost of merchandise sold (includes occupancy)............... 1,859.4 1,634.3 1,437.8 -------- -------- -------- Gross margin................................................ 735.6 631.7 521.0 Selling, general and administrative expenses................ 557.6 484.9 409.6 Pre-opening expense......................................... 7.8 7.2 7.2 Goodwill amortization....................................... 2.9 1.6 1.1 Operating income............................................ 167.3 138.0 103.1 Interest expense............................................ 16.2 7.2 7.0 -------- -------- -------- Income before income tax.................................... 151.1 130.8 96.1 Income tax provision........................................ 59.0 50.6 38.2 -------- -------- -------- Net income.................................................. $ 92.1 $ 80.2 $ 57.9 ======== ======== ======== Earnings per common share data (Note 2) Diluted earnings per common share......................... $1.12 $.98 $.70 ======== ======== ======== Diluted weighted average common shares outstanding (in thousands)............................................. 82,503 82,241 82,554 ======== ======== ======== Basic earnings per common share........................... $1.20 $1.06 $.77 ======== ======== ======== Basic weighted average common shares outstanding (in thousands)............................................. 76,631 75,825 75,575 ======== ======== ========
See accompanying Notes to Consolidated Financial Statements. 17 19 BORDERS GROUP, INC. CONSOLIDATED BALANCE SHEETS
FISCAL YEAR ENDED -------------------------- JANUARY 24, JANUARY 25, 1999 1998 (DOLLARS IN MILLIONS EXCEPT SHARE AMOUNTS) ----------- ----------- ASSETS Current Assets: Cash and cash equivalents................................. $ 42.8 $ 65.1 Merchandise inventories................................... 1,019.6 879.1 Accounts receivable and other current assets.............. 62.9 60.8 Deferred income taxes..................................... 8.0 13.4 -------- -------- Total Current Assets................................... 1,133.3 1,018.4 Property and equipment, net................................. 493.8 373.7 Other assets................................................ 25.1 20.1 Deferred income taxes....................................... 8.4 13.2 Goodwill, net of accumulated amortization of $46.0 and $43.1, respectively....................................... 106.0 109.5 -------- -------- $1,766.6 $1,534.9 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Short-term borrowings and current portion of long-term debt................................................... $ 134.1 $ 127.3 Trade accounts payable.................................... 607.2 480.7 Accrued payroll and other liabilities..................... 221.7 210.8 Taxes, including income taxes............................. 25.8 62.6 -------- -------- Total Current Liabilities.............................. 988.8 881.4 Long-term debt and capital lease obligations................ 6.3 5.2 Other long-term liabilities................................. 56.4 50.2 -------- -------- Total Liabilities...................................... 1,051.5 936.8 -------- -------- Stockholders' Equity: Common stock, 200,000,000 shares authorized; 77,695,124 and 75,395,998 shares issued and outstanding at January 24, 1999 and January 25, 1998, respectively............ 687.3 661.0 Deferred compensation and officer receivables............... (7.7) (6.3) Accumulated other comprehensive income...................... (0.9) (0.9) Retained earnings (accumulated deficit)..................... 36.4 (55.7) -------- -------- Total Stockholders' Equity........................... 715.1 598.1 -------- -------- $1,766.6 $1,534.9 ======== ========
See accompanying Notes to Consolidated Financial Statements. 18 20 BORDERS GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED ----------------------------------------- JANUARY 24, JANUARY 25, JANUARY 26, 1999 1998 1997 (DOLLARS IN MILLIONS) ----------- ----------- ----------- Cash Provided by (used for): Operations Net income................................................ $ 92.1 $ 80.2 $ 57.9 Adjustments to reconcile net income to operating cash flows: Depreciation and amortization.......................... 66.7 54.8 42.9 (Increase) decrease in deferred income taxes........... 10.2 3.9 (6.4) Increase (decrease) in other long-term assets and liabilities.......................................... 1.9 2.3 (2.8) Cash provided by (used for) current assets and current liabilities: Increase in inventories................................ (140.5) (130.4) (100.0) Increase in accounts payable........................... 126.5 121.9 45.3 Increase in taxes payable.............................. 2.9 12.0 44.2 Other -- net........................................... 6.4 2.3 19.9 ------- ------- ------- Net cash provided by operations........................ 166.2 147.0 101.0 ------- ------- ------- Investing Capital expenditures...................................... (179.8) (113.6) (97.2) Proceeds from sale of property and equipment.............. -- -- 4.7 Acquisitions.............................................. -- (61.4) -- Other..................................................... -- -- (0.4) ------- ------- ------- Net cash used for investing............................ (179.8) (175.0) (92.9) ------- ------- ------- Financing Repayment of long-term debt and capital lease obligations............................................ (4.6) (0.9) (2.0) Increase in capital lease obligations..................... 3.0 -- -- Proceeds from sale of put options......................... -- -- 4.5 Repurchase of put option.................................. -- (0.8) -- Proceeds from construction funding........................ 1.3 6.8 19.8 Net funding from (to) credit facility..................... 9.4 85.8 (30.0) Issuance of common stock.................................. 33.9 21.4 5.7 Repurchase of common stock................................ (51.7) (61.8) -- ------- ------- ------- Net cash provided by (used for) financing.............. (8.7) 50.5 (2.0) ------- ------- ------- Net increase (decrease) in cash and equivalents............. (22.3) 22.5 6.1 Cash and equivalents at beginning of year................... 65.1 42.6 36.5 ------- ------- ------- Cash and equivalents at end of year......................... $ 42.8 $ 65.1 $ 42.6 ======= ======= ======= Supplemental Cash Flow Disclosures: Interest paid............................................. $ 16.2 $ 9.8 $ 9.8 Income taxes paid......................................... $ 42.1 $ 40.0 $ 5.9 Common stock issued for business acquisition.............. -- $ 6.5 -- Debt and liabilities assumed in business acquisition...... -- $ 26.9 --
See accompanying Notes to Consolidated Financial Statements. 19 21 BORDERS GROUP, INC. 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 28, 1996....... 75,317,984 $ 669.2 $(3.4) $ -- $(193.8) $472.0 ---------- ------- ----- ----- ------- ------ Net income........................ -- -- -- -- 57.9 57.9 Issuance of Common Stock.......... 540,032 5.8 -- -- -- 5.8 Tax benefit of equity compensation.................... -- 2.7 -- -- -- 2.7 Issuance of put options: Receipt of premium.............. -- 4.5 -- -- -- 4.5 Shares subject to repurchase.... -- (34.1) -- -- -- (34.1) Change in receivables and deferred Compensation.................... -- -- 2.6 -- -- 2.6 ---------- ------- ----- ----- ------- ------ 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..................... -- -- -- (1.4) -- (1.4) Related tax effect................ -- -- -- 0.5 -- 0.5 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 ========== ======= ===== ===== ======= ======
See accompanying Notes to Consolidated Financial Statements. 20 22 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 and Australia. 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), 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 1998, 1997, and 1996 consisted of 52 weeks and ended on January 24, 1999, January 25, 1998, and January 26, 1997, 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 20% for other fixtures and equipment. Amortization of assets under capital lease is included in depreciation expense. Goodwill: Goodwill is amortized over 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 to Borders and Books etc. separately (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 is calculated based upon actual quoted market prices per share and analysts' consensus earnings estimates for these growth companies. This P/E multiple is applied to the earnings for Borders and Books etc. 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 in fair value. Financial Instruments: The recorded values of the Company's financial instruments, which include accounts receivable and accounts payable, 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. 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: Costs associated with the opening of a new store are expensed during the first full fiscal month of the store's operations. When the decision to close a store is made, the Company provides for the future net lease obligation, nonrecoverable investment in fixed assets and other expenses directly related to discontinuance of operations. 21 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED) 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 24, 2000. 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. Reclassifications: Certain prior year amounts have been reclassified to conform to fiscal 1998 presentation. NOTE 2 -- WEIGHTED AVERAGE SHARES OUTSTANDING Weighted average shares outstanding are calculated as follows (thousands):
1998 1997 1996 ---- ---- ---- Weighted-average common shares outstanding -- basic earnings per share................................. 76,631 75,825 75,575 Dilutive effect of employee stock options............ 5,872 6,416 6,979 ------ ------ ------ Weighted-average common shares outstanding -- diluted earnings per share................................. 82,503 82,241 82,554 ====== ====== ======
NOTE 3 -- ACQUISITION Effective October 20, 1997, the Company purchased 100% of the outstanding stock of 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:
1998 1997 ---- ---- Property and equipment: Land...................................................... $ 10.2 $ 10.2 Buildings................................................. 5.7 5.7 Leasehold improvements.................................... 251.9 214.4 Furniture and fixtures.................................... 507.6 404.3 Construction in progress.................................. 50.0 20.6 ------- ------- 825.4 655.2 Less -- accumulated depreciation and amortization........... (331.6) (281.5) ------- ------- Property and equipment, net................................. $ 493.8 $ 373.7 ======= =======
22 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED) NOTE 5 -- INCOME TAXES The income tax provision consists of:
1998 1997 1996 ---- ---- ---- Current: Federal................................................... $40.9 $42.7 $39.5 State and local........................................... 7.9 4.3 4.9 Foreign................................................... -- 0.4 -- Deferred: Restructuring reserve..................................... 0.8 0.6 2.1 FAS 121 impairment........................................ 2.0 2.7 4.4 Deferred compensation..................................... 1.5 (2.5) (1.0) Differences in book and tax depreciation.................. 7.1 5.1 1.9 Inventory valuation differences........................... (0.6) (2.3) (4.1) Other..................................................... (0.6) (0.4) (9.5) ----- ----- ----- Total income tax provision................................ $59.0 $50.6 $38.2 ===== ===== =====
A reconciliation of the federal statutory rate to the Company's effective tax rate follows:
1998 1997 1996 ---- ---- ---- Federal statutory rate...................................... $52.9 $45.8 $33.3 State and local taxes, net of federal tax benefit........... 5.2 3.5 3.0 Goodwill amortization....................................... 0.4 0.4 0.4 Other....................................................... 0.5 0.9 1.5 ----- ----- ----- Total income tax provision.................................. $59.0 $50.6 $38.2 ===== ===== =====
Deferred tax assets and liabilities resulted from the following:
1998 1997 ---- ---- Deferred tax assets: Federal benefit for state deferred taxes.................. $ 1.6 $ 2.0 Accruals and other current liabilities.................... 11.2 13.9 Restructuring reserve..................................... 0.3 1.1 Deferred revenue.......................................... 7.0 7.0 Other long-term liabilities............................... 2.7 2.0 Deferred compensation..................................... 7.4 8.9 Deferred rent............................................. 16.8 14.2 FAS 121 impairment........................................ 7.9 9.9 ----- ----- Total deferred tax assets................................. 54.9 59.0 ----- ----- Deferred tax liabilities: Inventory................................................. 8.6 9.2 Property and equipment.................................... 26.5 19.4 Other..................................................... 3.4 3.8 ----- ----- Total deferred tax liabilities............................ 38.5 32.4 ----- ----- Net deferred tax assets..................................... $16.4 $26.6 ===== =====
23 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED) NOTE 6 -- COMMITMENTS AND CONTINGENCIES There are various claims, lawsuits and actions pending against the Company and its subsidiaries that are incident to their operations. It is the opinion of management that the ultimate resolution of these matters will not have a material effect on the Company's liquidity, financial position or results of operations. During 1994, the Company entered into 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. During December 1996, the Company sold two million put options on the Company's common stock which had exercise prices of $16.75-$17.25 per share and expired on various dates between March 16, 1998 and April 15, 1998. The Company received proceeds of $4.5 upon sale of the puts. During 1997, all two million put options were repurchased from the holders for $0.8. In March 1998, the American Booksellers Association ("ABA") and twenty-six independent bookstores filed a lawsuit in the United States District Court for the Northern District of California against the Company and Barnes & Noble Inc. alleging violations of the Robinson-Patman Act, the California Unfair Trade Practice Act and the California Unfair Competition Law. The Complaint seeks injunctive and declaratory relief; unspecified 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 Company intends to vigorously defend the action. In August 1998, The Intimate Bookshop, Inc. and its owner, Wallace Kuralt, filed a lawsuit in the United States District Court for the Southern District of New York against the Company, Barnes & Noble, Inc., Amazon, Inc., certain publishers and others alleging violation of the Robinson-Patman Act and other federal law, New York statutes governing trade practices and common law. An Amended Complaint was subsequently filed eliminating the class action allegations contained in the original Complaint. The Amended Complaint alleges that the named plaintiffs have suffered damages of $11.3 or more and requests treble damages on behalf of the named plaintiffs, as well as of injunctive and declaratory relief (including an injunction requiring the closure of all of defendants' stores within 10 miles of any location where plaintiff either has or had a retail bookstore during the four years preceding the filing of the Complaint, and prohibiting the opening by defendants of any bookstore in such areas for the next 10 years), disgorgement of alleged discriminatory discounts, rebates, deductions and payments, punitive damages, interest, costs, attorneys fees and other relief. Many of the allegations in the Amended Complaint are similar to those contained in the action instituted by the ABA and 26 bookseller plaintiffs against the Company and Barnes & Noble, Inc. in March of 1998. The Company intends to vigorously defend the action. On November 20, 1998, six independent booksellers instituted an action against the Company and Barnes & Noble, Inc., in the United States District Court for the Northern District of California asserting claims, and seeking relief, similar to claims made and relief sought in the ABA litigation described above. The Company intends to vigorously defend the action. The Company has not included any liability in its financial statements in connection with the lawsuits described above. 24 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED) 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 operating covenants which limit the Company's ability to incur indebtedness, make acquisitions, dispose of assets, issue or repurchase its common stock in excess of $100.0 (plus any proceeds and tax benefits resulting from stock option exercises and tax benefits resulting from restricted shares purchased by employees from the Company), pay dividends on its common stock, and require the Company to meet certain financial measures regarding fixed charge coverage, leverage and tangible net worth. The Company had borrowings outstanding under the Credit Facility of $131.9 at January 24, 1999 and $122.5 at January 25, 1998. The weighted average interest rate in 1998 and 1997 was approximately 6.4% and 6.3%, respectively. The Company's long-term debt obligations consist of capital lease liabilities at January 24, 1999. Scheduled principal payments and capitalized lease obligations as of January 24, 1999 are as follows: 1999 -- $1.9; 2000 -- $1.8; 2001 -- $0.3; 2002 -- $0.3; 2003 -- $0.3; 2004 and, thereafter, -- $4.1. 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 24, 1999 total $222.5 in 1999, $218.8 in 2000, $213.1 in 2001, $203.1 in 2002, $184.4 in 2003, $1,616.2 in all later years and, in the aggregate, total $2,658.1. Rental Expenses: A summary of operating lease rental expense and short-term rentals follows:
1998 1997 1996 ---- ---- ---- Rental Expenses: Minimum rentals..................................... $222.3 $190.3 $163.8 Percentage rentals.................................. 2.3 2.7 3.3 ------ ------ ------ Total............................................ $224.6 $193.0 $167.1 ====== ====== ======
Capitalized Leases: The Company accounts for one store and certain computer equipment under capital leases. At January 24, 1999, the Company's commitments under leases accounted for as capital leases aggregated $8.7. 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. There was $123.9 and $157.9 outstanding under the Lease Facility at January 24, 1999 and January 25, 1998, 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. 25 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED) NOTE 9 -- EMPLOYEE BENEFIT PLANS Employee Savings Plan: Employees of Borders 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 $2.5, $2.5 and $2.8 for 1998, 1997 and 1996, 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 24, 1999, the Company has 32.5 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 16,000 employees. The Company's executive compensation is heavily oriented toward equity incentives that includes a combination of stock and options which require at least some annual out-of-pocket investment in the business on the part of management. 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 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 associates 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. 26 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED) 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 28, 1996............................. 14,704 $ 7.25 Granted................................................... 3,361 16.00 Exercised................................................. 297 5.44 Forfeited................................................. 1,581 9.19 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 Balance exercisable at: January 26, 1997.......................................... 2,278 2.70 January 25, 1998.......................................... 2,791 9.51 January 24, 1999.......................................... 5,365 11.87
The weighted average fair values of options at their grant date where the exercise price equals the market price on the grant date were $11.52, $12.27 and $7.33 in 1998, 1997 and 1996, 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 $72.6, $69.0 and $50.8 in 1998, 1997, and 1996 respectively. Pro forma diluted and basic earnings per share would have been $0.88, $0.84 and $0.62 and $0.95, $0.91, and $0.67 in 1998, 1997 and 1996 respectively. 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:
1998 1997 1996 ---- ---- ---- Risk-Free Interest Rate.................................. 4.2-6.8% 5.5-6.8% 5.5-6.5% Expected Life............................................ 3-10 years 2-10 years 2-10 years Expected Volatility...................................... 33.3-40.7% 33.3-39.0% 33.3-40.0% Expected Dividends....................................... 0% 0% 0%
27 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED) The following table summarizes the information regarding stock options outstanding at January 24, 1999 (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 - --------------- --------- ---------------- ---------------- --------- ---------------- $ 3.06-$ 4.64 461 1.3 $ 4.22 461 $ 4.22 $ 6.86-$11.57 7,049 5.2 8.42 3,483 8.03 $14.25-$17.81 1,492 6.0 16.54 555 17.00 $18.63-$27.50 3,253 8.2 23.29 268 23.81 $28.56-$34.06 6,931 8.4 30.22 598 29.98
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 1996.......................................... 48 $ 9.33 $11.67 1997.......................................... 923 18.09 22.62 1998.......................................... 68 19.52 24.40 Employee Plan 1996.......................................... 196 14.00 16.48 1997.......................................... 157 20.06 23.60 1998.......................................... 115 24.78 29.15
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. 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. As of January 24, 1999 and January 25, 1998, the Company had the following interest rate instruments in effect:
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. Replaced swaps outstanding at January 25, 1998 28 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
JANUARY 25, 1998 ------------------------------------------------- FAIR NOTIONAL STRIKE MARKET AMOUNT RATE PERIOD VALUE -------- ------ ------ ------ Interest Rate Swaps.................... $33.5(a) 7.2% 11/97-11/00 $(0.6) $33.5(a) 7.1% 11/97-11/02 $(0.4) Treasury Lock.......................... $50.0 5.5% 1/98- 8/98 $ 0.7
--------------------------------------- (a) Notional amount is the U.S. Dollar equivalent of 20.0 British Pounds In the first month of fiscal 1999, the Company entered into an interest rate swap with a notional amount of $175.0, which effectively converted variable rate U.S. dollar-denominated borrowings to a fixed rate of 4.6%. This swap agreement expires in 1 or 3 years from the date the Company entered into the agreement, at the option of the counterparty. 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 and online retailing through Borders.com. These operating segments have been aggregated into two reporting segments: stores and Borders.com. Although stores and Borders.com share a number of characteristics, such as the nature of the merchandise sold, the methods of merchandise procurement used, and the type of customer for the merchandise sold, they differ in their method of distributing merchandise to customers. The accounting policies of the segments are the same as those described in the "Summary of Significant Accounting Policies." Segment data includes charges allocating all corporate headquarters costs to each segment. The Company evaluates the performance of its segments and allocates resources to them based on anticipated future contribution.
1998 1997 1996 ---- ---- ---- Sales: Stores.................................................... $2,590.4 $2,266.0 $1,958.8 Borders.com............................................... 4.6 -- -- -------- -------- -------- Total sales............................................... 2,595.0 2,266.0 1,958.8 ======== ======== ======== Interest expense: Stores.................................................... 13.5 6.9 7.0 Borders.com............................................... 2.7 0.3 -- -------- -------- -------- Total interest expense.................................... 16.2 7.2 7.0 ======== ======== ======== Income tax expense (benefit): Stores.................................................... 65.2 54.3 38.2 Borders.com............................................... (6.2) (3.7) -- -------- -------- -------- Total income tax expense.................................. 59.0 50.6 38.2 ======== ======== ======== Depreciation and amortization expense: Stores.................................................... 64.8 54.8 42.9 Borders.com............................................... 1.9 -- -- -------- -------- -------- Total depreciation and amortization expense............... 66.7 54.8 42.9 ======== ======== ======== Net income (loss): Stores.................................................... 102.6 86.2 57.9 Borders.com............................................... (10.5) (6.0) -- -------- -------- -------- Total net income.......................................... 92.1 80.2 57.9 ======== ======== ========
29 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
1998 1997 ---- ---- Total assets: Stores.................................................... $1,718.4 $1,509.4 Borders.com............................................... 48.2 25.5 -------- -------- Total assets.............................................. 1,766.6 1,534.9 ======== ======== Capital expenditures: Stores.................................................... 168.2 98.7 Borders.com............................................... 11.6 14.9 -------- -------- Total capital expenditures................................ 179.8 113.6 ======== ========
NOTE 13 -- UNAUDITED QUARTERLY FINANCIAL DATA
FISCAL 1998 QUARTER ENDED -------------------------------------- APRIL JULY OCTOBER JANUARY ----- ---- ------- ------- (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) 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 FISCAL 1997 QUARTER ENDED -------------------------------------- APRIL JULY OCTOBER JANUARY ------ ------ ------- ------- SALES....................................................... $463.6 $466.3 $477.3 $858.8 Cost of merchandise sold (includes occupancy)............... 350.8 351.1 355.1 577.3 Operating Income............................................ 1.8 2.3 2.2 131.7 Net Income.................................................. 0.4 0.5 0.4 78.9 Diluted earnings per common share 0.00 0.01 0.00 0.96 Basic earnings per common share............................. 0.01 0.01 0.01 1.05
Earnings per share amounts for each quarter are required to be computed independently and may not equal the amount computed for the total year. 30 32 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 24, 1999 and January 25, 1998, and the results of their operations and their cash flows for each of the three years in the period ended January 24, 1999, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 8, 1999 31 33 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 32 34 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........... 54 Chairman, Chief Executive Officer, President and Director George R. Mrkonic.............. 46 Vice Chairman and Director Bruce A. Quinnell.............. 50 Vice Chairman Vincent E. Altruda............. 49 President, International Thomas D. Carney............... 52 Vice President, General Counsel and Secretary Richard L. Flanagan............ 46 President, Borders Stores Timothy J. Hopkins............. 45 President, Merchandising and Distribution Richard D. Joseph.............. 42 Chairman and Chief Executive Officer, Borders (UK) Ltd. Kenneth E. Scheve.............. 52 Senior Vice President, Chief Financial Officer and Treasurer Ronald S. Staffieri............ 49 President, Waldenbooks Stores Cedric J. Vanzura.............. 35 President, Borders Online, Inc. Kathryn L. Winkelhaus.......... 43 President, Borders Group Stores Peter R. Formanek.............. 55 Director Victor L. Lund................. 51 Director Dr. Edna Greene Medford........ 47 Director Larry Pollock.................. 51 Director Leonard A. Schlesinger......... 46 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 the Chief Executive Officer of the Company until November, 1998, and became President and Chief Executive Officer in April 1999. Prior to the formation of the Company, Mr. DiRomualdo was President and Chief Executive Officer of Borders from January 1989 to February 1994. From February 1994 to August 1994, Mr. DiRomualdo was responsible for overall operations at Borders and Walden. 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. Prior to joining the Company, Mr. Mrkonic served as Executive Vice President, Specialty Retailing Group of Kmart Corporation, where he had overall responsibility for the specialty retailing operations of Kmart including, among others, Borders and Walden, from November 1990 to November 1994. Mr. Mrkonic is also a director of Champion Enterprises, Inc., a manufacturer and seller of manufactured homes and mid-sized buses and Syntel, Inc., a computer software and development company, and Cheap Tickets, Inc., a retail seller of discount tickets for domestic leisure air travel. 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. From September 1987 until October 1992, Mr. Quinnell was Chief Financial Officer of Dollar General Corp., a general merchandise retailer. 33 35 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 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. Richard L. Flanagan has served as President of Borders Stores since February 1997. From February 1994 until February 1997, Mr. Flanagan served as President and Chief Operating Officer of Borders. Prior thereto, Mr. Flanagan served as Chief Financial Officer of Borders from April 1991 to February 1994. From 1987 until April 1991, Mr. Flanagan was Vice President and Chief Financial Officer of Ellwood Group, Inc., a steel manufacturer. 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. 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. Prior to joining the company, Mr. Scheve served as Director -- Internal Audit, Specialty Retailing Group of Kmart Corporation from 1991 through 1994. 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. From 1990 until 1994, Mr. Staffieri served as President and Chief Executive Officer of Kaybee Toy Stores, a division of Melville Corporation, and as a Vice President of Melville Corporation and a member of its Operating Committee. 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. Cedric J. Vanzura has served as President of Borders Online, Inc. since April 1999. Mr. Vanzura served as Senior Vice President of Electronic Commerce and Fulfillment Services from February 1998 to April 1999. From August 1996 to February 1998, Mr. Vanzura served as Vice President, Planning and Finance, and Treasurer. From November 1994 until August 1996. Mr. Vanzura served as Vice President, Group Planning and Resource Management. From May 1994 to November 1994, Mr. Vanzura held the position of Director, Business Development, Specialty Retail Group of Kmart. Prior to joining Kmart, from 1990 to 1994, Mr. Vanzura was a Senior Consultant and then a Manager, Management Consulting, at Deloitte & Touche Management Consulting. 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. Ms. Winkelhaus has held several positions of increasing levels of responsibility in store operations since joining Walden in 1979. 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 drug and personal care products and vitamins, and Gart Sports, Inc., a retailer of sporting goods. 34 36 Victor L. Lund has served as a director of the Company since July, 1997. Mr. Lund has served as Chairman of the Board of American Stores Company, a food and drug retailer, since June 1995 and as its Chief Executive Officer since August 1992. He was President of American Stores Company from August 1992 until June 1995. Mr. Lund also serves as a director of American Stores Company. 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 September, 1998, Mr. Pollock has 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 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. From 1990 through 1993, Mr. Pollock served as President and Chief Operating Officer of Karten's Jewelers, Inc., a New England jewelry chain. 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. Leonard A. Schlesinger has served as a director of the Company since August, 1995. Mr. Schlesinger became Senior Vice President for Development of Brown University and a professor of sociology and public policy in October 1998. Prior to joining Brown University, he served as a faculty member at the Harvard Business School for more than five years, most recently as the George Fisher Baker, Jr. Professor of Business Administration. Mr. Schlesinger serves as a director of The Limited, Inc., a specialty retailer, Pegasystems, Inc., a customer relationship management software company, and GC Companies, Inc., a motion picture exhibition company. 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 and Dr. Medford. 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, Mr. Pollock, and Mr. Schlesinger. COMPENSATION OF DIRECTORS For service as a director during 1998, 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 1999 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 35 37 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 13, 1999 Annual Meeting of Stockholders. 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 13, 1999 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 13, 1999 Annual Meeting of Stockholders. 36 38 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 Restated Articles of Incorporation of Borders Group, Inc. 3.3(6) Bylaws of Borders Group, Inc. 3.4 First Amendment to Bylaws of Borders Group, Inc. 3.5 Second Amendment to Bylaws of Borders Group, Inc. 3.6 Third Amendment to Bylaws of Borders Group, Inc. 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 Second Amendment to the Borders Group, Inc. Stock Option Plan. 10.6 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 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 Second Amendment to the Borders Group, Inc. Employee Stock Purchase Plan. 10.16 Third Amendment to the Borders Group, Inc. Employee Stock Purchase Plan. 10.17(6) Borders Group, Inc. Annual Incentive Bonus Plan. 10.18 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(5) Agreement dated April 19, 1996, between Borders Group, Inc. and Richard L. Flanagan.
37 39
EXHIBIT NUMBER DESCRIPTION ------- ----------- 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 1998 Borders Group, Inc. Stock Option Plan. 10.31 Agreement dated November 16, 1998, between Borders Group, Inc. and Robert F. DiRomualdo. 10.32 Agreement dated November 16, 1998, between Borders Group, Inc. and George R. Mrkonic. 10.33 Agreement dated November 16, 1998, between Borders Group, Inc. and Philip M. Pfeffer. 10.34 Participation Agreement dated as of December 1, 1998 by and among Borders Group, Inc., Borders, Inc. and Parties thereto. 10.35 Agreement dated April 20, 1999, between Borders Group, Inc. and Philip M. Pfeffer. 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). (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). 38 40 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/ ROBERT F. DIROMUALDO ------------------------------------ Robert F. DiRomualdo Chairman, Chief Executive Officer and President 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, Chief Executive Officer, April 26, 1999 - --------------------------------------------- President and Director Robert F. DiRomualdo /s/ GEORGE R. MRKONIC Vice Chairman and Director April 26, 1999 - --------------------------------------------- George R. Mrkonic /s/ KENNETH E. SCHEVE Senior Vice President, Chief April 26, 1999 - --------------------------------------------- Financial Officer and Treasurer Kenneth E. Scheve (Principal Financial and Accounting Officer) /s/ PETER R. FORMANEK Director April 26, 1999 - --------------------------------------------- Peter R. Formanek /s/ VICTOR L. LUND Director April 26, 1999 - --------------------------------------------- Victor L. Lund /s/ DR. EDNA GREENE MEDFORD Director April 26, 1999 - --------------------------------------------- Dr. Edna Greene Medford /s/ LARRY POLLOCK Director April 26, 1999 - --------------------------------------------- Larry Pollock /s/ LEONARD A. SCHLESINGER Director April 26, 1999 - --------------------------------------------- Leonard A. Schlesinger
39 41 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 Restated Articles of Incorporation of Borders Group, Inc. 3.3(6) Bylaws of Borders Group, Inc. 3.4 First Amendment to Bylaws of Borders Group, Inc. 3.5 Second Amendment to Bylaws of Borders Group, Inc. 3.6 Third Amendment to Bylaws of Borders Group, Inc. 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 Second Amendment to the Borders Group, Inc. Stock Option Plan. 10.6 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 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 Second Amendment to the Borders Group, Inc. Employee Stock Purchase Plan. 10.16 Third Amendment to the Borders Group, Inc. Employee Stock Purchase Plan. 10.17(6) Borders Group, Inc. Annual Incentive Bonus Plan. 10.18 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(5) Agreement dated April 19, 1996, between Borders Group, Inc. and Richard L. Flanagan. 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.
40 42
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.30 1998 Borders Group, Inc. Stock Option Plan. 10.31 Agreement dated November 16, 1998, between Borders Group, Inc. and Robert F. DiRomualdo. 10.32 Agreement dated November 16, 1998, between Borders Group, Inc. and George R. Mrkonic. 10.33 Agreement dated November 16, 1998, between Borders Group, Inc. and Philip M. Pfeffer. 10.34 Participation Agreement dated as of December 1, 1998 by and among Borders Group, Inc., Borders, Inc. and Parties thereto. 10.35 Agreement dated April 20, 1999, between Borders Group, Inc. and Philip M. Pfeffer. 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). (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 EX-3.1 2 RESTATED ARTICLES OF INCORPORATION BORDERS GROUP 1 EXHIBIT 3.1 RESTATED ARTICLES OF INCORPORATION Pursuant to the provisions of Act 284, Public Acts of 1972, the undersigned corporation executes the following Articles: - -------------------------------------------------------------------------------- 1. The present name of the corporation is: Michigan Borders Group, Inc. 2. The identification number assigned by the Bureau is: 462-982 3. All former names of the corporation are: None 4. The date of filing the original Article of Incorporation was: April 3, 1997 - -------------------------------------------------------------------------------- The following Restated Articles of Incorporation supersede the Articles of Incorporation as amended and shall be the Articles of Incorporation for the corporation: ARTICLE I The name of the corporation is: Borders Group, Inc. ARTICLE II The purpose or purposes for which the corporation is formed is to engage in any activity within the purposes for which corporations may be formed under the Business Corporation Act of Michigan ("MCBA"). ARTICLE III The total authorized shares: Common shares: 300,000.000 Preferred shares: 10,000,000 A statement of all or any of the relative rights, preferences and limitations of the shares of each class is as follows: A. Common Stock 1. Voting Rights. Except as otherwise required by law or by the Articles of Incorporation, each holder of Common Stock shall have one vote for each share of Common Stock held by a holder on all matters voted upon by the holders of Common Stock. 2. Dividends. Subject to the preferential dividend rights, if any, applicable to shares of Preferred Stock and subject to applicable requirements, if any; with respect to the setting aside of sums for purchase, retirement or sinking funds for Preferred Stock, the holders of Common Stock shall be entitled to receive, to the extent permitted by law, such dividends as may be declared from time to time by the Board of Directors in its discretion. 3. Liquidation Rights. In the event of any liquidation, dissolution or winding up of the Corporation, the holders of Common Stock shall be entitled, after payment or provision for payment of the debts and other liabilities of the Corporation and the amounts to which the holders of any Preferred Stock shall be entitled, to share ratably in the remaining net assets of the Corporation. -1- 2 B. Preferred Stock The Board of Directors is expressly authorized at any time, and from time to time, to provide for the issuance of shares of Preferred Stock in one or more series, and for such consideration or considerations as the Board of Directors may determine, with such voting powers, full or limited, or without voting powers, and with such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions providing for the issue thereof adopted by the Board of Directors, all except as otherwise required by law or the Articles of Incorporation, and including, without limiting the generality of the foregoing, the following: 1. The distinctive designation and number of shares comprising such series. 2. The dividend rate or rates on the shares of such series and the relation which such dividends shall bear to the dividends payable on any other class of capital stock or on any other series of Preferred Stock, the terms and conditions upon which and the periods in respect of which dividends shall be payable, whether and upon what conditions such dividends shall be cumulative, and, if cumulative, the date or dates from which dividends shall accumulate. 3. Whether the shares of such series shall be redeemable, and, if redeemable, whether redeemable for cash, property or rights, including securities of any other corporation, at the option of either the holder or the Corporation or upon the happening of a specified event, the limitations and restrictions with respect to such redemption, the time or times when, the price or prices or rate or rates at which, the adjustments with which and the manner in which such shares shall be redeemable, including the manner of selecting shares of such series for redemption if less than all shares are to be redeemed. 4. The rights to which the holders of shares of such series shall be entitled, and the preferences, if any, over any other series (or of any other series over such series), upon the voluntary or involuntary liquidation, dissolution, distribution or winding up of the Corporation, which rights may vary depending on whether such liquidation, dissolution, distribution or winding up is voluntary or involuntary, and, if voluntary, may vary at different dates. 5. Whether the shares of such series shall be subject to the operation of a purchase, retirement or sinking fund, and, if so, whether and upon what conditions such purchase, retirement or sinking fund shall be cumulative or, noncumulative, the extent to which and the manner in which such fund shall be applied to the purchase or redemption of the shares of such series for retirement or to other corporate purposes and the terms and provisions relative to the operation thereof. 6. Whether the shares of such series shall be convertible into or exchangeable for shares of any other class or of any other series of any class of capital stock or other securities of the Corporation, or the securities of any other corporation, or entity, and, if so, convertible or exchangeable, the price or prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same, and any other terms and conditions of such conversion or exchange. 7. The voting powers, full and/or limited, if any, of the shares of such series, and whether and under what conditions, the shares of such series (alone or together with the shares of one or more other series) shall be entitled to vote separately as a single class upon any matter, including, without limitation, the election of one or more additional directors of the Corporation in case of dividend arrearages or other specified events. 8. Whether the issuance of any additional shares such series, or of any shares of any other series, shall be subject to restrictions as to issuance, or as to the powers, preferences or rights of any such other series. 9. Any other preferences, privileges and powers and relative, participating, optional or other special rights, and qualifications, limitations or restrictions of such series, as the Board of Directors may deem advisable and as shall not be inconsistent with the provisions of the Articles of Incorporation. -2- 3 10. All shares of Preferred Stock of any one series shall be of equal rank and identical in all respects, except that shares of any one series issued at different times may differ as to the dates from which dividends thereon, if cumulative, shall be cumulative. C. General Provisions 1. No stockholder shall have any preemptive right to subscribe for additional issues of stock of the Corporation. 2. Shares of any class or series of capital stock redeemed, converted, exchanged, purchased, retired or surrendered to the Corporation, or which have been issued and reacquired in any manner shall, upon compliance with any applicable provisions of the MBCA, be given the status of authorized and unissued shares of the same class undesignated as to series. ARTICLE IV 1 The address of the current registered office is: 500 East Washington Street Ann Arbor MICHIGAN 48104 2 The mailing address of the registered office, if different than above: Same 3 The name of the resident agent at the registered office is: Thomas D. Carney ARTICLE V The following provisions are inserted for the management of the business and the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of its directors and stockholders: (1) The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. In addition to the powers and authority expressly conferred upon them by statute or by these Articles of Incorporation or the By-laws of the Corporation, the directors are empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, subject to the provisions of the MBCA, these Articles of Incorporation and any By-laws adopted by the stockholders; provided, however, that no By-laws hereafter adopted by the stockholders shall invalidate any prior act of the directors that would have been valid if such By-laws had not been adopted. (2) (2) The number of directors of the Corporation shall be as from time to time fixed by, or in the manner provided in, the By-laws of the Corporation. The directors of the Corporation need not be elected by written ballot unless the By-laws so provide. (3) Special meetings of stockholders of the Corporation may be called only by the Chief Executive Officer or by the Board of Directors acting pursuant to a resolution adopted by a majority of the Whole Board. For purposes of these Articles of Incorporation, the term "Whole Board" shall mean the exact number of directors determined from time to time by resolution adopted by the affirmative vote of a majority of the directors then in office. (4) Meetings of stockholders may be held within or without the State of Michigan, as the By-laws may provide. The books of the Corporation may be kept (subject to any provision contained in the MBCA) outside the State of Michigan at such place or places as may be designated from time to time by the Board of Directors or in the By-laws of the Corporation. -3- 4 ARTICLE VI The Board of Directors is expressly empowered to adopt, amend or repeal By-laws of the Corporation. Any adoption, amendment or repeal of the By-laws of the Corporation by the Board of Directors shall require the approval of a majority of the Whole Board. The stockholders shall also have power to adopt, amend or repeal the By-laws of the Corporation. ARTICLE VII A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability for (i) any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) a violation of Section 551 (1) of the MBCA or (iv) any transaction from which the director derived an improper personal benefit. If the MBCA is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the MBCA, as so amended. Any repeal or modification of the foregoing paragraph by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification. ARTICLE VIII 1. The Corporation shall indemnify its directors and officers to the fullest extent authorized or permitted by the MBCA, as the same exists or may hereafter be amended, and such right to indemnification shall continue as to a person who has ceased to be a director or officer of the Corporation and shall inure to the benefit of his or her heirs, personal representatives, executors and administrators; provided, however, that, except for proceedings to enforce rights to indemnification, the Corporation shall not be obligated to indemnity any director or officer (or his or her heirs, personal representatives, executors or administrators) in connection with a proceeding (or part thereof) initiated by such person unless such proceeding (or part thereof) was authorized at consented to by the Board of Directors of the Corporation. 2. The right to indemnification conferred in this Article VIII shall include the right to be paid by the Corporation the expenses (including attorneys' fees) incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, that, if the MBCA requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including without limitation, service to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such indemnitee is not entitled to be indemnified or such expenses under this Article VIII or otherwise. The rights to indemnification and to the advancement of expenses conferred in this Article VIII shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the indemnitee's heirs, personal representatives, executors and administrators. 3. The Corporation may, to the extent authorized from time to time by the Board of Directors, provide rights to indemnification and to the advancement of expenses to employees and agents of the Corporation who are not directors or officers similar to those conferred in this Article VIII to directors and officers of the Corporation. 4. The rights to indemnification and to the advancement of expenses conferred in this Article VIII shall extend to the directors and officers of any predecessor corporation to the Corporation and shall not be exclusive of any other right which any person may have or hereafter acquire under the Articles of Incorporation, the By-laws, any statute, agreement, vote of stockholders or disinterested directors, or otherwise. -4- 5 5. Any repeal or modification, of this Article VIII by the stockholders of the Corporation shall not adversely affect any rights to indemnification and advancement of expenses of a director or officer of the Corporation existing pursuant to this Article VIII with respect to any acts or omissions occurring prior to such repeal or modification. ARTICLE IX The Corporation reserves the right to amend, alter, change or repeal any provision contained in these Articles of Incorporation, in the manner now or hereafter prescribed by the laws of the State of Michigan and all rights conferred upon stockholders herein are granted subject to this reservation. ARTICLE X The Corporation expressly elects not to be governed by Section 780 of the MBCA as to business combinations with interested stockholders. -5- EX-3.4 3 FIRST AMENDMENT TO BYLAWS OF BORDERS GROUP, INC. 1 EXHIBIT 3.4 CERTIFIED AMENDMENT TO THE BY-LAWS OF BORDERS GROUP, INC. The undersigned, the duly elected Secretary of Borders Group, Inc. (the "Company"), hereby certifies that the second sentence of Section 1 of Article V of the By-Laws of the Company was hereby amended on November 11, 1998 to read as follows: "The Board of Directors, in its discretion, also may choose a Chairman of the Board (who must be a director), a Chief Executive Officer, a Vice Chairman of the Board, and one or more Vice Presidents, Assistant Secretaries, Assistant Treasurers and other officers." /s/ Thomas D. Carney --------------------------- Thomas D. Carney Secretary EX-3.5 4 SECOND AMENDMENT TO BYLAWS OF BORDERS GROUP, INC. 1 EXHIBIT 3.5 CERTIFIED SECOND AMENDMENT TO THE BY-LAWS OF BORDERS GROUP, INC. The undersigned, the duly elected Secretary of Borders Group, Inc. (the "Company") hereby certifies that Section 8 of Article II of the By-Laws has been amended to read as set forth below and Section 9 of the Article II of the By-Laws has been deleted, effective for meetings of stockholders after the 1999 Annual Meeting of Stockholders: SECTION 8. Notice of Stockholder Business and Nominations. (A) Annual Meetings of Stockholders. (1) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (a) pursuant to the Corporation's notice of meeting, (b) by or at the direction of the Board of Directors or (c) by any stockholder of the Corporation who was a stockholder of record at the time of giving of notice provided for in this By-Law, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this By-Law. (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of this By-Law, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such other business must be a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 90th day nor earlier than the close of business on the 120th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, 2 if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (ii) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this By-Law to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement naming all the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least 100 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this By-Law shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation. (B) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (a) by or at the direction of the Board of Directors or (b) by any stockholders for the Corporation who is a stockholder of record at the time of giving of notice provided for in this By-Law, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this By-Law. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporation's notice of meeting, if the stockholder's notice required by paragraph (A)(2) of this By-Law shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the 120th day prior to such special meeting and not later than the close of business on the later of the 90th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described above. (C) General. (1) Only such persons who are nominated in accordance with the procedures set forth in this By-Law shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this By-Law. Except as otherwise provided by law, [the Certificate of Incorporation or the By-Laws of the Corporation,] the Chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made, or proposed, as the case may be, in accordance with the procedures set forth in 3 this By-Law and, if any proposed nomination or business in not in compliance with this By-Law, to declare that such defective proposal or nomination shall be disregarded. (2) For purposes of this Law "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14, or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this By-Law, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this By-Law. Nothing in this By-Law shall be deemed to affect any rights of (i) stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (ii) the holders of any series of Preferred Stock to elect directors under specified circumstances. /s/ Thomas D. Carney ------------------------------- Thomas D. Carney Secretary EX-3.6 5 THIRD AMENDMENT TO BYLAWS BORDERS GROUP, INC. 1 EXHIBIT 3.6 CERTIFIED THIRD AMENDMENT TO THE BY-LAWS OF BORDERS GROUP, INC. The undersigned, the duly elected Secretary of Borders Group, Inc. (the "Company"), hereby certifies that the second sentence of Section 1 of the Article V of the By-Laws of the Company has been amended to read as follows: "The Board of Directors, in its discretion, may also choose a Chairman of the Board (who must be a director), one or more Vice Chairmen of the Board (who need not be directors), and one or more Vice Presidents, Assistant Secretaries, Assistant Treasurers and other officers." /s/ Thomas D. Carney ---------------------------- Thomas D. Carney Secretary EX-10.5 6 SECOND AMENDMENT TO STOCK OPTION PLAN 1 EXHIBIT 10.5 SECOND AMENDMENT TO THE BORDERS GROUP, INC. STOCK OPTION PLAN Section 5 (d) of the Borders Group, Inc. Stock Option Plan (the "Plan") is hereby amended to read as follows effective as of the date hereof: (d) Nontransferability. Except as otherwise provided in Section 4(g)(3) hereof, no option or any rights with respect thereto shall be subject to any debts or liabilities of an optionee, nor be assignable or transferable except by will or the laws of descent and distribution, nor be exercisable during the optionee's lifetime other than by him or her, nor shall Shares be issued to or in the name of one other than the optionee; provided, however, that (i) an option may after the death or Disability of an optionee be exercised pursuant to paragraph (iv) of Section 5(b); (ii)any Shares issued to an optionee hereunder may at the request of the optionee be issued in the name of the optionee and one other person, as joint tenants with right of survivorship and not as tenants in common, or in the name of a trust for the benefit of the optionee or for the benefit of the optionee and others; and (iii) if so provided in a Share Option Agreement executed by the optionee and approved by the Committee, the option and rights covered by such Agreement may be transferred without consideration to an immediate family member(s) or to a trust for the benefit of such family member(s), in which event the transferee(s) must agree in writing to accept the terms and conditions of such option and such option shall not be covered under Rule 16(b)-3 of the Exchange Act. BORDERS GROUP, INC. December 13, 1995 By: /s/ George R. Mrkonic ------------------------- George R. Mrkonic EX-10.6 7 THIRD AMENDMENT TO STOCK OPTION PLAN 1 EXHIBIT 10.6 THIRD AMENDMENT TO THE BORDERS GROUP INC. STOCK OPTION PLAN The Borders Group, Inc. Stock Option (the "Plan") is hereby amended as follows effective as of the date hereof, subject to shareholder approval to the extent provided in the Amendment: 1. The first three sentences of Section 3 of the Plan are hereby replaced with the following: "The number of Shares which shall be reserved for grant under the Plan shall not exceed the sum of: (i) 22,000,000 Shares, (ii) 5,850,000 Shares if the proposal relating to an increase in number of shares available under the Plan for broad based grants is approved by the shareholders of the Company at the 1997 Annual Meeting of Shareholders; and/or (iii) 1,750,000 Shares if the proposal relating to an increase of the number of shares available for compensation replacement options is approved by the shareholders of the Company at the 1997 Annual Meeting of Shareholders of the Company. Any Shares described in (iii) above that are not used for compensation replacement options shall be available for other grants under the Plan. The maximum number of Shares on which options may be granted to any one individual during the term is 1,000,000, not including grants made pursuant to paragraphs (d), (e), (f), (g) and (h) of Section 4 and compensation replacement options. All of the numbers set forth above are subject to adjustment in accordance with the provisions of Section 6 hereof. 2. Consistent with the interpretation of the Plan by the Compensation Committee, the word "key" in the third line Section 4(a) is hereby amended to read "full-time". Except as here and amended, the Plan shall remain in full force and effect. BORDERS GROUP, INC. March 19, 1997 By: /s/ George R. Mrkonic ----------------------------- George R. Mrkonic EX-10.12 8 THIRD AMENDMENT TO MANAGMENT STOCK PURCHASE PLAN 1 EXHIBIT 10.12 THIRD AMENDMENT TO THE BORDERS GROUP, INC. MANAGEMENT STOCK PURCHASE PLAN The Borders Group Management Stock Purchase Plan (as amended, the "Plan") is hereby amended in the following particulars, effective as of the dates indicated: 1. Paragraph (u) of Article 2 of the Plan hereby amended to read as follows, effective as of September 16, 1998: "(u) "Stock Option Plan" shall mean the Borders Group, Inc. Stock Option Plan, the Borders Group International Stock Option Plan or the 1998 Borders Group, Inc. Stock Option Plan, as determined by the Committee or its delegate at the time that a Tandem Option is granted." 1. Paragraph (a) is of Article 16 of the Plan is hereby amended for clarification purposes to read as follows, effective as of June 1, 1995 (August 28, 1997 with respect to references to director level employee): (a) UP TO $1 MILLION PURCHASE. The Committee, or, to the extent permitted by Article 4 hereof, the Chairman of the Board and/or President, may grant a Participant who (i) is not a Section 16 Person, and (ii) did not receive Management Stock Purchase Options under the Stock Option Plan, an opportunity or opportunities to use up to $1 million ($250,000 in the case of director level employees) to purchase Restricted Shares under this Plan. The price of Restricted Shares acquired under this Article 16(a) shall be discounted 20% from its Fair Market Value on the date of purchase, provided, however, that, unless otherwise determined by the Committee or its delegate, (A) with respect to a Participant who was recently hired at the time that he or she was granted rights under this Article 16, the price shall be discounted 20% from its Fair Market Value on the date that the Participant commenced employment, and (B) with respect to a Participant who was recently promoted at the time that he or she was granted rights under this Article 16, the price shall be discounted 20% from its Fair Market Value on the date that the Participant's promotion was effective. The rights granted under this Section 16 shall be granted only on a one time basis except that, (i) in the event of the promotion of a director level employee to the officer level, the Participant may be given an additional opportunity to use up to the difference between $1,000,000 and the amount that he or she previously used to purchase Restricted Shares, to acquire additional Restricted Shares, and (ii) if a Participant elects to purchase Restricted Shares utilizing the proceeds of a Share Loan, and his or he application for the Share Loan is rejected on the terms initially requested, all elections 2 made by such Participant shall be null and void and such Participant shall not be precluded from receiving additional rights under the Plan. 2. The first sentence of Paragraph (a) of Article 16 of the Plan is hereby amended to read as follows, effective as of September 16, 1998: "The Committee, or, to the extent permitted by Article 4 hereof, the Chairman of the Board and/or President, may grant a Participant who did not receive Management Stock Purchase Options under the Stock Option Plan, an opportunity or opportunities to use up to $1 million ($250,000 in the case of director level employees) to purchase Restricted Shares under this Plan. 3. Clause (1) of paragraph (b) is of Article 16 of the Plan is hereby amended for clarification purposes to read as follows, effective as of June 1, 1995: " (1) up to 100 percent of his or her Annual Bonus (less applicable payroll deductions) for the year in which the purchase occurs (or, with respect to newly hired or promoted employees, the bonus or portions of bonuses attributable to the twelve months following his or her hire or promotion date, regardless of the year(s) in which such bonus or bonuses is or are earned);" 4. The following paragraph (f) is hereby added to Article 16 of the Plan, effective as of September 16, 1998: (f) LOANS BY THE COMPANY TO PARTICIPANTS. The Company, in its discretion, may make loans to Participants (a "Company Loan") in amounts that do not exceed the lesser of: (i) the amount of interest payable by the Participant with respect to any Share Loan of the Participant, or (ii) an amount such that, immediately after the proceeds of the Company Loan are used to pay interest on the Share Loan, the total amount outstanding under all Share Loans and Company Loans of the Participant (including accrued interest, if any) shall not exceed 100% of the then Fair Market Value of such Participant's Restricted Shares on the date that the Company Loan is made. A Company Loan shall become due and payable not later than the date upon which the restrictions on the Participant's Restricted Shares lapse, shall bear interest at the same rate as Share Loan to which it relates and shall have such other terms and conditions as the Company shall determine. The proceeds of any Company Loan may be used only to pay interest on a Share Loan, and the Company may pay the proceeds directly to the lender of the Share Loan for such purpose. Each Company Loan shall be secured by a lien on the Restricted Shares of the Participant, which lien shall become effective 3 immediately upon lapse of the restrictions and shall be subordinate to any lien relating to a Share Loan. In the event of a default under any Company Loan, the Company may, subject to the rights of any lender of the related Share Loan, offset against any payment (whether in cash or Shares) that the Participant would otherwise be entitled to receive, an amount equal to the amount then owing under the Company Loan (including accrued interest). In the event of a distribution of Shares, the number of Restricted Shares to be canceled to effectuate such offset shall be determined by dividing the amount outstanding under the Company Loan by the Fair Market Value per Restricted Share as of the date upon which the payment to the Participant is being made (or otherwise would be made if the amount to be offset exceeds the amount owing to the Participant). 5. For clarification purposes, the following phrase is added at the beginning of Section 5(c) of the Plan, effective as of June 1, 1995: "Except in connection with any Share Loan or a Company Loan provided for in Article 16 of the Plan, " 6. All references in the Plan to (i) the "Share Option Plan" are hereby amended retroactively to refer to the "Stock Option Plan" to correct a typographical error; (ii) "par value" of the Shares are eliminated from the Plan; and (iii) "one-time purchase right" or "one-time opportunity" are amended to read "purchase right under Article 16" or "opportunity under Article 16", as the case may be. Except as herein amended the Plan remains in full force and effect. BORDERS GROUP, INC. By: /s/ George R. Mrkonic ------------------------- EX-10.15 9 SECOND AMENDMENT TO EMPLOYEE STOCK PURCHASE PLAN 1 EXHIBIT 10.15 SECOND AMENDMENT TO THE BORDERS GROUP, INC. EMPLOYEE STOCK PURCHASE PLAN Section 2(j) of the Borders Group Employee Stock Purchase Plan (the "Plan") is hereby amended to read as follows, effective with respect to Offering Periods beginning on or after October 1, 1997: " (j) "Employee" shall mean any person, including an officer, who as of an Offering Date is regularly employed by the Company, a wholly owned Subsidiary of the Company or a Designated Subsidiary of the Company, except any person who is both "highly compensated" within the meaning of Section 414(g) of the Code and designated by the Committee as a participant in the Company's Management Stock Purchase Plan (other than director level employees who were given a one-time opportunity to purchase shares under the Management Stock Purchase Plan); provided, however, that such person's customary employment immediately prior to the relevant Offering Date must be more than 20 hours per week. Director level employees who are given a one-time opportunity to purchase shares under the Company's Management Stock Purchase Plan shall be eligible Employees" This Amendment shall not affect, or in any manner inure to the benefit of, any person who is subject to the reporting and short-swing liability provisions of Section 16 of the Exchange Act. Except as herein amended, the Plan shall remain in full force and effect. BORDERS GROUP, INC. By: /s/ George R. Mrkonic ------------------------- EX-10.16 10 THIRD AMENDMENT TO EMPLOYEE STOCK PURCHASE PLAN 1 EXHIBIT 10.16 THIRD AMENDMENT TO THE BORDERS GROUP, INC. EMPLOYEE STOCK PURCHASE PLAN The Borders Group Employee Stock Purchase Plan (the "Plan") is hereby amended in the following particulars: 1. Section 2(j) of the Plan is hereby amended as follows for clarification purposes: (j) "Employee" shall mean any person, including an officer, who as of an Offering Date is regularly employed by the Company, a wholly owned Subsidiary of the Company organized under the laws of any state of the United States or a Designated Subsidiary of the Company, except any person who is both "highly compensated" within the meaning of Section 414(q) of the Code and designated by the Committee as a Participant in the Company's Management Stock Purchase Plan (other than director level employee who are given an opportunity(ies) to purchase shares under the Management Stock Purchase Plan)." 2. The following sentence is hereby added at the end of Section 2(v) of the Plan for clarification purposes: " For purposes of this Plan, references to a "corporation" or "corporations" shall include corporations organized under the laws of any state of the United States and any similar entity organized under the laws of a country other than the United States that the Board designates as a Designated Subsidiary. 3. Effective with respect to Employees hired on or after October 1, 1998, paragraph (a) of Section 3 of the Plan is amended to read as follows: "(a) Subject to the requirements of Section 4(b) hereof, any person who is an Employee shall be eligible to participate in the Plan on the first day of the month following the earlier of satisfying the requirements of either (i), (ii) or (iii) below: (i) the Employee has: (A) attained the of age twenty-one (21), (B) completed six months of service, and (C) completed at least five hundred (500) hours of service within his/her initial 6 months of service; (ii) the Employee has: (A) attained the of age twenty-one (21), (B) completed one year of service, and (C) completed at least 1,000 hours of service WITHIN ANY TWELVE-MONTH PERIOD ENDING ON ANY ANNIVERSARY OF OF HIS/HER EMPLOYMENT COMMENCEMENT DATE, OR (iii) the Employee has been employed for at least two years and his or her customary employment is more than twenty (20) hours per week. 2 4. Effective as of October 1, 1998, the following sentences are hereby added to paragraph (a) of Section 3 of the Plan: "An Employee who has become eligible to participate in the Plan (whether hired on, before or after October 1, 1998) shall remain eligible to participate in the Plan until he or she ceases for any reason to be an Employee." 5. Effective as of December 1, 1998, the following sentences are hereby added to paragraph (a) of Section 3 of the Plan: "Any Employee who was hired prior to October 1, 1998 and who, on or after December 1, 1998, is or becomes eligible to participate in the Borders Group, Inc. Savings Plan, also shall be eligible to participate in this Plan. 6. The following sentence is hereby added to Section 11 of the Plan: "With respect to any Designated Subsidiary which employs Employees who reside outside of the United States, and notwithstanding anything herein to the contrary, the Committee may, in its sole discretion, amend the terms of the Plan, or an option granted under the Plan, in order to comply with the requirements of local law, and may, where appropriate, establish one or more sub-plans to reflect such amended provisions applicable to such Employees." Except as set forth herein an amended, the Plan shall remain in full force and effect. BORDERS GROUP, INC. By: /s/ George R. Mrkonic ------------------------- EX-10.18 11 FIRST AMENDMENT TO ANNUAL INCENTIVE PLAN 1 EXHIBIT 10.18 FIRST AMENDMENT TO THE BORDER GROUP, INC. ANNUAL INCENTIVE PLAN The Border Group, Inc. Annual Incentive Bonus Plan (the "Plan") is hereby amended as follows: 1. The following sentence is hereby added to the end of Section 6(a) of the Plan: "Notwithstanding any other provision of the Plan, the actual Bonus paid to any Participant for any Plan year shall not exceed $900,000." Except as herein amended, the Plan shall remain in full force and effort. BORDERS GROUP, INC. By: /s/ George R. Mrkonic --------------------------- George R. Mrkonic EX-10.30 12 1998 STOCK OPTION PLAN 1 EXHIBIT 10.30 1998 BORDERS GROUP, INC. STOCK OPTION PLAN 1. Purpose. The 1998 Borders Group, Inc. Stock Option Plan (the "Plan") is intended (i) to attract and retain employees of Borders Group, Inc. (the "Company") and its "Subsidiaries" (corporations of which a majority of the shares of voting stock are owned directly or indirectly by the Company and other business entities which have a majority of their shares of voting stock owned directly or indirectly by the Company); (ii) to increase the proprietary interest in the Company of such persons by providing further opportunity for ownership of shares of the Company's common stock, (the "Shares"); and (iii) to increase the incentives to such persons to contribute to the success of the Company's business. 2. Administration. The Plan shall be administered by the Compensation Committee (the "Committee" or "Administrator") of the Board of Directors of the Company (the "Board"). The Administrator shall keep minutes of its meetings. A majority of the members of the Administrator shall constitute a quorum thereof and the acts of a majority of the members present at any meeting of the Administrator at which a quorum is present, or acts unanimously approved in writing by all of the members of the Administrator, shall be the acts of the Administrator. The Administrator may make such rules and regulations and establish such procedures for the administration of the Plan as it deems appropriate in its sole discretion. The interpretation and application of the Plan or of any term or condition of an option granted under the Plan or of any rule, regulation or procedure, and any other matter relating to or necessary to the administration of the Plan, shall be determined by the Administrator, and any such determination shall be final and binding upon all persons. 3. Shares. The number of Shares which shall be reserved for issuance under the Plan shall not exceed 2,000,000, subject to adjustment in accordance with the provisions of Section 6 hereof. Shares to be optioned or issued under the Plan may be either authorized and unissued shares or issued shares which shall have been reacquired by the Company. In the event that any outstanding option or portion thereof expires or is canceled, surrendered or terminated for any reason, the Shares allocable to the unexercised portion of such option may again be subjected to an option or be issued under the Plan. 2 4. Grant of Options. (a) General Powers of Administrator. The Administrator may grant options to purchase Shares to such employees of the Company or any of its Subsidiaries as the Administrator or its delegate shall select; provided, however, that executive officers of the Company shall not be eligible to receive options under the Plan. Members of the Board who are not officers of the Company shall not be eligible to participate in the Plan. Subject to the foregoing, the Administrator shall have the discretion, in accordance with the provisions of the Plan, to determine to whom an option is granted, the number of Shares optioned, and the terms and conditions of the option, and, in the case of replacement options, to determine the terms and conditions of such options. In making such determinations, the Administrator shall consider the position and responsibilities of the employee, the nature and value to the Company of his or her services and accomplishments, his or her present and potential contribution to the success of the Company, and such other factors as the Administrator may deem relevant. The Administrator may delegate to the Chairman of the Board, the Vice Chairman and/or President of the Company the authority to grant options to any eligible employee of the Company or any of its Subsidiaries. If such authority is delegated, the Administrator's delegation of authority shall include the authority to determine (i) to whom the option is to be granted, (ii) the number of shares optioned, (iii) the terms and conditions of the option, and (iv) in the case of replacement options, the terms and conditions of such options. (b) Types of Options. Each option granted under the Plan shall be a non-qualified stock option (a "Non-Qualified" option). (c) General Provisions. Options granted under the Plan shall be subject to and governed by the provisions of the Plan and by such other terms and conditions, not inconsistent with the Plan, as shall be determined by the Administrator or its delegate in its sole discretion. Except as otherwise provided herein, the date on which an option shall be granted shall be the date on which the optionee, the number of Shares optioned and the terms and conditions of the option are determined by the Administrator or its delegate; provided, however, that if an option or any term or condition of an option is rejected or not accepted by an optionee or if an option is not granted in accordance with the provisions of the Plan, such option shall be deemed to have not been granted and shall be of no effect. Each option shall be evidenced by a written agreement (the "Share Option Agreement") in such form as the Administrator may from time to time approve. 2 3 (d) Tandem Options. Tandem options granted under Article 16(e) of the Borders Group, Inc. Management Stock Purchase Plan shall have the exercise price set forth therein; shall be forfeited to the extent that an equivalent number of shares are not purchased; shall become exercisable on the later of (i) the date on which timely payment for the Restricted Share has been made (and to the extent that the optionee shall fail to make such timely payment, a proportionate number of shares underlying the Tandem Option shall be forfeited) and (ii) the third anniversary of the date on which the exercise price is determined; shall expire on the fifth anniversary of the date on which the exercise price is determined; shall become exercisable only to the extent that Restricted Shares are purchased; and shall contain such other terms as the Administrator or its delegate shall determine. 5. Terms and Conditions of Options. (a) Option Price. Except as otherwise provided in the Management Stock Purchase Plan of the Company, in the case of each option granted under the Plan, the price of each share that may be acquired upon the exercise of an option (the "Option Price Per Share") shall not be less than the Fair Market Value per Share on the date of grant of such option. "Fair Market Value" per Share shall mean the closing price on the NYSE Composite Transactions Tape (or its equivalent if the Shares are not traded on the New York Stock Exchange) of such Share for the trading day immediately prior to the relevant valuation date. (b) Period of Option and When Exercisable. (i) An option granted under the Plan may not be exercised after the earlier of (A) the date specified by the Administrator, which shall be a maximum of ten years and two days from date of grant, or (B) the applicable time limit specified in paragraph (iii) of this Section 5 (b). Any option not exercised within the aforementioned time periods shall automatically terminate at the expiration of such period. (ii) Except as specified in this Section 5(b)(ii), an option granted with a maximum exercise period of more than three years may not be exercised prior to three years from the date of grant (or such other period as determined by the Administrator in its sole discretion), except that this limitation shall be removed (A) if termination of employment of the optionee results from death or Disability, or (B) if termination of employment of the optionee occurs at or after age 65 and the optionee has ten or more years of full-time service with Kmart, the Company and/or any of its Subsidiaries, or (C) in the event of a Change in Control of the Company, or (D) if and to the extent the Administrator may so determine in its 3 4 sole discretion. "Disability" shall mean an optionee's total and permanent inability to perform his or her duties with the Company or any of its affiliates by reason of any medically determinable physical or mental impairment, as determined by a physician acceptable to the Company. An option granted with a maximum exercise period of three years or less shall not be subject to the limitation contained in this paragraph (ii) unless otherwise specified by the Administrator. A Change in Control shall be deemed to have occurred if: (A) the "beneficial ownership" (as defined in Rule l3d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of securities representing more than 20% of the combined voting power of the Company is acquired by any "person" as defined in sections 13(d) and 14(d) of the Exchange Act (other; the Company; any Subsidiary; any trustee or other fiduciary holding securities under an employee benefit plan of the Company; or any corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of shares of the Company, or (B) the shareholders of the Company approve a definitive agreement to merge or consolidate the Company with or into another corporation, or to sell or otherwise dispose of all or substantially all of its assets, or adopt a plan of liquidation, or (C) during any period of three consecutive years, individuals who at the beginning of such period were members of the Board cease for any reason to constitute at least a majority thereof (unless the election, or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least a majority of the directors then still in office who were directors at the beginning of such period). (iii) An option may be exercised by an optionee only while such optionee is in the employ of the Company or a Subsidiary or within three months thereafter, and only if any limitation upon the right to exercise such option under paragraph (ii) of this Section 5 (b) has been removed or has expired prior to termination of employment and exercise is not otherwise precluded hereunder; provided, however, if at the date of termination of employment the optionee has ten or more years of full-time service with Kmart, the Company and/or any of its Subsidiaries or if termination of employment results from death or Disability, such three-month period shall be extended to three years. Employment with a Subsidiary shall be deemed terminated on the date a former Subsidiary ceases to be a Subsidiary of the Company. (iv) In the event of the Disability of an optionee, an option which is otherwise exercisable may be exercised by the optionee's legal representative or guardian. In the event of the death of an optionee, either before or after termination of employment with the Company or any of its subsidiaries, an option which is otherwise exercisable may be 4 5 exercised by the person or persons whom the optionee shall have designated in writing on forms prescribed by and filed with the Administrator("Beneficiary or Beneficiaries"), or, if no such designation has been made, by the person or persons to whom the optionee's rights shall have passed by will or by the laws of descent and distribution ("Successor(s)"). The Administrator may require an indemnity and/or such evidence or other assurances as it may deem necessary in connection with an exercise by a legal representative, guardian, Beneficiary or Successor. (v) Notwithstanding anything contained herein to the contrary, all rights with respect to all options of an optionee are subject to the conditions that the optionee not engage or have engaged (a) in activity constituting Cause, or (b) in activity directly or indirectly in competition with any business of the Company or a Subsidiary, or in other conduct inimical to the best interests of the Company or a Subsidiary, following the optionee's termination of employment. If it is determined by the Administrator or the Administrator's designee (which determination of such designee shall be subject to ratification by the Administrator), either before or after termination of employment of an optionee, that there has been a failure of any such condition, all options and all rights with respect to all options granted to such optionee shall immediately terminate and be null and void. "Cause shall mean an optionee's fraud, embezzlement, defalcation, gross negligence in the performance or nonperformance of the optionee's duties (other than as a result of Disability) or material failure or refusal to perform the optionee's duties at any time while in the employ of the Company or a Subsidiary. (c) Exercise and Payment. (i) Subject to the provisions of Section 5(b), an option may be exercised by notice (in the form prescribed by the Administrator) to the Company specifying the number of Shares to be purchased. Payment for the number of Shares purchased upon the exercise of an option shall be made in full at the price provided for in the applicable Share Option Agreement and such purchase price shall be paid by the delivery to the Company of cash (including check or similar draft) in United States dollars or previously owned whole Shares that have been owned by the optionee for more than six (6) months or a combination thereof. Shares used in payment of the purchase price shall be valued at their Fair Market Value as of the date notice of exercise is received by the Company. Any Shares delivered to the Company shall be in such form as is acceptable to the Company. (ii) The Company may defer making delivery of Shares under the Plan until satisfactory arrangements have been made for the payment of any tax attributable to exercise of an option. The Administrator may, in its sole discretion, permit an optionee to elect, in such form and at such time as the Administrator may prescribe, to pay all or a portion of all taxes arising in connection with the exercise of an option by electing to (A) have the Company withhold whole Shares, or (B) deliver other whole Shares previously owned by the optionee having a Fair Market Value not greater than the amount to be withheld; provid- 5 6 ed, however, that the amount to be withheld shall not exceed the optionee's estimated total tax obligations associated with the transaction. (d) Nontransferability. No option or any rights with respect thereto shall be subject to any debts or liabilities of an optionee, nor be assignable or transferable except by will or the laws of descent and distribution, nor be exercisable during the optionee's lifetime other than by him or her, nor shall Shares be issued to or in the name of anyone other than the optionee; provided, however, that (i) an option may after the death or Disability of an optionee be exercised pursuant to paragraph (iv) of Section 5(b); (ii)any Shares issued to an optionee hereunder may at the request of the optionee be issued in the name of the optionee and one other person, as joint tenants with right of survivorship and not as tenants in common, or in the name of a trust for the benefit of the optionee or for the benefit of the optionee and others; and (iii) if so provided in the Share Option Agreement executed by the optionee and approved by the Administrator, the option and rights covered by such Agreement may be transferred without consideration to an immediate family member(s) or to a trust for the benefit of such family member(s), in which event the transferee(s) must agree in writing to accept the terms and conditions of such option and such option shall not be covered under Rule 16(b)-3 of the Exchange Act. (e) Employment. No provision of the Plan, nor any term or condition of any option, nor any action taken by the Administrator, the Company or any Subsidiary pursuant to the Plan, shall give or be construed as giving an optionee any right to be retained in the employ of the Company or of any Subsidiary, or affect or limit in any way the right of the Company or any Subsidiary to terminate the employment of any optionee. (f) Termination of Option by Optionee. An optionee may at any time elect, in a written notice filed with the Administrator, to terminate a Non-Qualified option with respect to any number of shares as to which such option shall not have been exercised. 6. Adjustments. If there is any change in the number or class of Shares through the declaration of Share dividends, or recapitalization resulting in Share splits, or combinations or exchanges of such Shares or similar corporate transactions, or if the Administrator otherwise determines that, as a result of a corporate transaction involving a change in the Company's capitalization, it is appropriate to effect the adjustments described in this Section 6, the aggregate number or class of Shares on which options may be granted or which may be issued under the Plan, the number or class of Shares covered by each outstanding option, and the exercise price per Share of each option, shall all be proportionately adjusted by the Administrator; provided, however, that any fractional Shares resulting from such adjustment shall be eliminated. Subject to any required action by shareholders, if a new option is substituted for the option granted hereunder, or an assumption of the option granted hereunder is made, by reason of a corporate merger, consolidation, acquisition of 6 7 property or stock, separation, reorganization or liquidation, the option granted hereunder shall pertain to and apply to the securities to which a holder of the number of Shares subject to the option would have been entitled. 7. Term of Plan. No option shall be granted under the Plan after December 31, 2003. Options granted prior thereto, however, may extend beyond such date and the provisions of the Plan shall continue to apply thereto. 8. Application of Funds. The proceeds received by the Company from the sale of Shares pursuant to options granted under the Plan will be used for general corporate purposes. 9. No Obligation to Exercise Option. The granting or acceptance of an option shall impose no obligation upon the optionee to exercise such an option. 10. Rights as a Stockholder. An optionee shall have no rights as a stockholder with respect to Shares covered by his or her option until the date of issuance to him or her of a certificate evidencing such Shares after the exercise of such option and payment in full of the purchase price. No adjustment will be made for dividends or other rights for which the record date is prior to the date such certificate is issued. 11. Amendments. The Board may from time to time alter, amend, suspend or discontinue the Plan. Any such amendment may be effective in respect of all past and future options granted hereunder in the sole discretion of the Board. The Plan, each option under the Plan and the grant and exercise thereof, and the obligation of the Company to sell and issue shares under the Plan shall be subject to all applicable laws, rules, regulations and governmental and stockholder approvals, and the Administrator may make such amendment or modification thereto as it shall deem necessary to comply with any such laws, rules and regulations or to obtain any such approvals. 12. Severability. If any provision of the Plan, or any term or condition of any option granted or Share Option Agreement or form executed or to be executed thereunder, or any application thereof to any person or circumstance is invalid, such provision, term, condition or application shall to that extent be void (or, in the discretion of the Administrator, such provision, term or condition may be amended so as to avoid such invalidity or failure), and shall not affect other provisions, terms or conditions or applications thereof, and to this extent such provision, term or condition is severable. 7 EX-10.31 13 AGREEMENT DATED NOVEMBER 16, 1998 1 EXHIBIT 10.31 November 16, 1998 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") and your place of employment shall be in Ann Arbor, Michigan. 2. Your current compensation will remain in effect through January 24, 1999. Subject to Section 6 and Section 12: (i) for fiscal 1999, your salary will be $343,333 and you will have a bonus opportunity of $343,333 (the "Fiscal 1999 Bonus"); and (ii) you will receive the Fiscal 1999 Bonus if BGI meets "street" earnings estimates for fiscal 1999 and you are employed by BGI on the last day of fiscal 1999. "Street" earnings estimates shall be based upon consensus analysts' estimates determined as of April 15, 1999 and shall be the same as the earnings per share targets for other executives for fiscal 1999. Consistent with current practice, all or any portion of your salary and bonus may be paid in compensation replacement options subject to the mutual agreement of you and the Compensation Committee of the Board. 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 100% of full-time employment through January 23, 1999 and approximately 67% of full-time employment for the remainder of the term of this Agreement. 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 November 16, 1998 through January 23, 2000. 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: 2 -2- (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 (d) Any 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 1999 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; 3 -3- (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 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; (iv) The term "Restricted Period" means the period from the date hereof through December 31, 2001, 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 (iv) 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 his 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 4 -4- 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 1999 Bonus shall be paid to you, in whole or in part, in accordance with the terms of the Borders Group, Inc. Annual Bonus Incentive Plan; and (iii) the noncompete provisions set forth herein shall remain in effect until December 31, 2001. "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. The portions of your November, 1995 "Mega" option grant that would otherwise vest in November of 1999, 2000 and 2001 shall vest on November 16, 1998. Your remaining unvested MSPP shares shall vest on January 15, 1999. 15. 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 5 -5- 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. 16. 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). 17. This Agreement shall be effective as of November 16, 1997. You hereby acknowledge and agree that this Agreement replaces the Amended and Restated Employment Agreement dated February 1,1995 (the "Prior Agreement") between you and BGI, and that neither you nor BGI shall have no further rights or obligations of any nature whatsoever under the Prior Agreement or any other oral or written agreement relating to your employment or the termination thereof. Please confirm your agreement by signing below and retain one copy for your records. Sincerely, BORDERS GROUP, INC. Agreed: By: /s/ George R. Mrkonic -------------------------- ROBERT F. DiROMUALDO /s/ Robert F. DiRomualdo - ----------------------- EX-10.32 14 AGREEMENT DATED NOVEMBER 16, 1998 1 EXHIBIT 10.32 November 16, 1998 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. Your current compensation will remain in effect through January 24, 1999. Subject to Section 6 and Section 12: (i) for fiscal 1999, your salary will be $257,500 and you will have a bonus opportunity of $257,500 (the "Fiscal 1999 Bonus"); and (ii) you will receive the Fiscal 1999 Bonus if BGI meets "street" earnings estimates for fiscal 1999 and you are employed by BGI on the last day of fiscal 1999. "Street" earnings estimates shall be based upon consensus analysts' estimates determined as of April 15, 1999 and shall be the same as the earnings per share targets for other executives for fiscal 1999. Consistent with current practice, all or any portion of your salary and bonus may be paid in compensation replacement options subject to the mutual agreement of you and the Compensation Committee of the Board. 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 70% of full-time employment through January 23, 1999 and approximately 50% of full-time employment for the remainder of the term of this Agreement. 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 November 16, 1998 through January 23, 2000. 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: 2 -2- 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 d) Any 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 1999 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. 3 -3- (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 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; (iv) The term "Restricted Period" means the period from the date hereof through December 31, 2001, 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 (iv) 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 his 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. 4 -4- 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 1999 Bonus shall be paid to you, in whole or in part, in accordance with the terms of the Borders Group, Inc. Annual Bonus Incentive Plan; and (iii) the noncompete provisions set forth herein shall remain in effect until December 31, 2001. "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. The portions of your November, 1995 "Mega" option grant that would otherwise vest in November of 1999, 2000 and 2001 shall vest on November 16, 1998. Your remaining unvested MSPP shares shall vest on January 15, 1999. 15. 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 5 -5- 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. 16. 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). 17. This Agreement shall be effective as of November 16, 1998. You hereby acknowledge and agree that this Agreement replaces the Employment Agreement dated November 15,1994, as amended, (the "Prior Agreement") between you and BGI, and that neither you nor BGI shall have no further rights or obligations of any nature whatsoever under the Prior Agreement or any other oral or written agreement relating to your employment or the termination thereof. Please confirm your agreement by signing below and retain one copy for your records. Sincerely, BORDERS GROUP, INC. Agreed: By:/s/ Robert DiRomualdo --------------------- GEORGE R. MRKONIC /s/ George R. Mrkonic - ---------------------- EX-10.33 15 AGREEMENT DATED NOVEMBER 16, 1998 1 EXHIBIT 10.33 November 16, 1998 Dear Phil, This letter will confirm 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. Effective November 16, 1998, you will serve as Chief Executive Officer and a member of the Board of Directors of the Company. You will report to the Chairman of the Board of Directors of the Company. Subject to your annual election by the shareholders, you will continue to serve as a director during the period of your employment with the Company. 2. Your offices will be at the Company's Corporate Office in Ann Arbor, Michigan and at its facility in Nashville, Tennessee and you may maintain your residence in Nashville. The Company will reimburse you for travel expenses between Nashville and Ann Arbor until your son's graduation from high school. You will be responsible for your housing arrangements in Ann Arbor and the Company will reimburse you for reasonable relocation expenses on a "grossed-up" basis. 3. Your base salary will be $700,000 per year. All of your 1998 salary and at least $250,000 of your 1999 salary will be in the form of compensation replacement options. Commencing in 1999, your base salary and bonus potential will be reviewed annually by the Compensation Committee in the same manner as other senior executives of the Company, provided that in no event will your base salary or bonus potential be less than that of any other officer or employee of the Company. 4. You will receive an annual bonus of $500,000 per year if the Company meets "street" earnings estimates for the applicable year. "Street" earnings estimates shall be based upon consensus analysts' estimates for the applicable fiscal year determined as of April 15th of such year and shall be the same as the earnings per share targets for other executives for the applicable fiscal year. No bonus will be payable for 1998 but your 1999 bonus opportunity will be increased based upon the percentage of fiscal 1998 during which you were employed. 5. You will be granted the following stock options on November 16, 1998: a. an option for 250,000 shares with a term of ten years and 100% "cliff" vesting after four years from the grant date, except that if performance standards described below are met, 50% of the options will vest on the earliest date that the requirements of either (i) or (ii) below are satisfied. To achieve early vesting of 50% of such options, either: (i) the Company's per share earnings for the fiscal year ending in January of 2001 must equal or exceed 1.5625 times the per share earnings of the Company for the fiscal year ending in January of 1999, or (ii), the Company's percentage stock price movement for the period from November 16, 1998 through the last day of the Company's fiscal year ending in January 2001 must be higher than the average percentage stock price movement of the specialty retail companies listed on 2 Schedule A hereto for such period. For purposes of (ii), the calculation of the percentage stock price movement of the shares of the Company and the specialty retail companies listed on Schedule A shall be determined by comparing the percentage changes based upon the average closing prices for the 20 trading days beginning November 16, 1998 with the average closing prices for the last 20 trading days in the Company's fiscal year ending in January 2001. An example of the calculation is attached hereto as Schedule B. This option will be in lieu of any annual option grants for a three year period. b. an option for each share that you purchase on November 16, 1998 pursuant to paragraph 6 below. The options relating to shares purchased pursuant to paragraph 6a will have 100% "cliff" vesting after three years and a term of five years. The options relating to shares purchased pursuant 6b will have 100% "cliff" vesting on June 30, 2006, except that for each share purchased pursuant to 6b that you continue to hold on the fourth anniversary of the purchase date, the vesting period of the related option will be four years (i.e. November 16, 2002). All options will have an exercise price equal to the fair market value on the date of grant; i.e. the closing price on the proceeding trading day. 6. You will have the opportunity to purchase shares of the Company's common stock on November 16, 1998 in accordance with the following terms: a. 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 purchase date (i.e. the closing price on the preceding day) 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. b. You may purchase up to 500,000 shares from the Company at the closing price on November 13, 1998. The Company will provide a loan of $6, 300,000 with interest to be based upon the Company's borrowing rate. This will be full recourse debt which will be fully collateralized, which collateral may consist of the shares of the Company that you acquire under this paragraph 6b. The term of the debt will be ten years, with principal being amortized over ten years commencing on the third anniversary of your employment commencement date and the balance to be paid at the end of the tenth year. Interest will be payable annually beginning on the third anniversary of the date of the loan. In addition, the Company will loan to you the amount of interest payable during the first two years under other indebtedness that you incur to purchase such shares, subject to the limitations under the Company's credit agreements. Such additional indebtedness: (i) will be added to the principal amount of your loan from the Company; (ii) will accrue interest at the rate provided for in such loan, with such interest to be payable at the times specified for other interest payments, and (iii) the principal amount attributable to such additional indebtedness shall be paid as part of the balloon payment at the end of the tenth year. The shares purchased under this paragraph will not be registered under the Securities Act of 1933 and may be sold only in compliance with Rule 144, including the one year holding period; provided, however, that, subject to the terms set forth on Schedule C hereto, the Company will register, at its expense, the resale of shares as soon as reasonably practicable following 3 your request for such registration. You acknowledge and represent that: (i) these shares are being purchased for your own account and for investment and not with a view to any distribution thereof; (ii) the certificates representing such shares will bear a restrictive legend indicating that the shares may be sold only pursuant to a registration statement or an exemption from such registration, (iii) you have had access to a such information relating to the Company, including the opportunity to ask questions of senior officers and the receipt of satisfactory answers, as you have deemed necessary or appropriate in connection with your purchase of such shares; and (iv) you will notify the Secretary of the Company of any proposed sale or other transfer of the shares and provide satisfactory evidence of compliance with applicable securities laws. 7. Until 2001, you will not serve as a director of, or in a similar capacity with, any entity other than: (i) the Company, (ii) Ingram Micro, (iii) Pameco, Inc. and (iv) the volunteer organizations with which you are currently associated. Commencing in 2001, you may serve on the board of two additional for-profit entities so long such positions do not conflict with your responsibilities to the Company. Prior to your employment commencement date, you will discontinue all association with Ingram Industries and its affiliates (other than Ingram Micro), including service as an advisor to Ingram Industries or any of its shareholders, except that your existing securities holdings in Ingram Industries will be treated in the manner described in paragraph 13 below. 8. You may participate in the savings and welfare programs of the Company in accordance with their respective terms in the same manner as other senior executives of the Company. You will be reimbursed for expenses in accordance with the Company's policies and also will be reimbursed for business class travel on international flights. The Company also will reimburse your wife for reasonable out-of-pocket expenses incurred as director of RIF. 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 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 4 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 and 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 remedied within seven 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, or 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 5 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 Borders Group, Inc. Stock Option Plan; or (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. The shares of Ingram Industries that you or your wife or your minor children own or control, either directly or through partnerships or trusts, as well as any additional shares of Ingram Industries that you or your wife acquire in the future through the exercise of stock options or other rights, will be placed in one or more blind trusts pursuant to which all voting, disposition and other rights relating to such shares will be given to an independent trustee until the earlier of: (i) the date upon which you cease to be an employee of the Company; or (ii) the date upon which Ingram Industries ceases to own any shares or other interest in Ingram Book Group or any successor company. With respect to shares held for the benefit of your minor children, the blind trust requirement may be satisfied by the appointment of, and the grant of such rights to, an independent co-trustee of the existing trust(s) in which such shares are held and such trustee shall not be required to have any rights with respect to any assets of such trust(s) other than the Ingram Industries shares. The Company will establish an independent committee of the Board to monitor all transactions between the Company and Ingram Industries or its affiliates, including both transactions in the normal course of business and any unusual transactions, and all transactions outside the ordinary course of business will be subject to the approval of the Board after receiving the report of the independent committee. We may disclose your holdings in Ingram Industries and the role of the independent committee in our annual proxy statement. Such disclosure will be mutually acceptable to you and the Board except that the Company shall have the right to make any disclosure that it reasonably believes is required by law. 14. 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 6 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. Agreed: By:/s/ Robert DiRomualdo --------------------- /s/ Phillip M. Pfeffer - ---------------------- 7 Schedule A BORDERS GROUP, INC.* BGP Costco COST Bed, Bath & Beyond BBBY Staples SPLS Starbucks SBUX Home Depot HD Best Buy BBY Barnes & Noble BKS Wal-Mart WMT Circuit City CC OfficeMax OMX Office Depot ODP AutoZone AZO 8 Schedule C The Company will prepare and file with the Securities and Exchange Commission ("SEC") as soon as reasonably practicable after your written request, a Registration Statement on Form S-3, or other available form of Registration Statement with respect to the shares of common stock of the Company ("Company Shares") that you purchase under Section 6b (hereinafter referred to as the "Registration Statement") and use its reasonable efforts to cause such Registration Statement to become effective as soon as reasonably possible thereafter, and, subject to the provisions below, use its reasonable efforts to keep such Registration Statement effective for a period concluding on the earlier of (i) one year after it becomes effective or (ii) until you have sold all of such Company Shares. If at any time after a Registration Statement becomes effective, the Company advises you in writing that due to the existence of material information that has not been disclosed to the public and included in the Registration Statement it is necessary to amend the Registration Statement, you shall suspend any further sale of Company Shares pursuant to the Registration Statement until the Company advises you that the Registration Statement has been amended. In such event, the Company shall not be required to amend the Registration Statement during any time when the Company's officers and directors are prohibited from buying or selling Company Shares pursuant to Company's insider trade policy. Notwithstanding the foregoing sentence, the Company shall file any amendment necessary for you to recommence sales under the Registration Statement concurrently with the commencement of any period in which directors and officers of the Company are allowed to buy or sell Company Shares pursuant to Company's insider trade policy. In addition, the Company may suspend use of the Registration Statement to the extent the Company is advised by its legal counsel that such action is reasonably necessary to comply with federal securities law. In the event the sales of your Company Shares pursuant to the Registration Statement are suspended as provided above, the one year period during which a Registration Statement must be kept effective shall be extended for the total number of days during which sales are suspended. It shall be a condition precedent to the obligations of the Company to take any action pursuant to Section 6b and this Schedule C that you furnish to the Company such information regarding you, the Company Shares held by you, and the intended method of disposition of such Company Shares, as shall be required to effect their registration. EX-10.34 16 PARTICIPATION AGREEMENT DATED DECEMBER 1, 1998 1 EXHIBIT 10.34 PARTICIPATION AGREEMENT Among BORDERS GROUP, INC., BORDERS, INC., WILMINGTON TRUST COMPANY, not in its individual capacity except as expressly stated herein, but solely as Owner Trustee, JESS PROJECT FUNDING CORP., as Owner Beneficiary, FIRST SECURITY BANK, N.A., as Collateral Trustee, And THE PURCHASERS IDENTIFIED HEREIN Dated as of December 1, 1998 2 Participation Agreement ARTICLE I TERMS OF ISSUANCE OF THE NOTES....................................................1 Section 1.1 Issuance and Sale of Notes........................................................1 Section 1.2 Closing...........................................................................1 Section 1.3 Wire Transfer.....................................................................2 Section 1.4 Failure to Deliver................................................................2 ARTICLE II CONDITIONS TO THE CLOSING.........................................................2 Section 2.1 Representations and Warranties....................................................2 Section 2.2 Performance; No Default...........................................................3 Section 2.3 Indenture.........................................................................3 Section 2.4 Notes.............................................................................3 Section 2.5 Collateral Assignments of Project Loan Documents..................................3 Section 2.6 Assignments of Mortgage, et al....................................................3 Section 2.7 Certification of Cost.............................................................3 Section 2.8 Surveys, Environmental Reports and Zoning.........................................3 Section 2.9 Mortgagee's Title Insurance; Endorsements.........................................4 Section 2.10 Estoppels.........................................................................4 Section 2.11 Letter of Credit..................................................................4 Section 2.12 Compliance Certificate............................................................4 Section 2.13 Opinions of Counsel...............................................................5 Section 2.14 Purchase Permitted By Applicable Law, etc.........................................6 Section 2.15 Payment of Special Counsel and other Fees.........................................6 Section 2.16 Payment of Recording Fees, Charges and Taxes......................................6 Section 2.17 Private Placement Number..........................................................6 Section 2.18 Offeree Letter....................................................................6 Section 2.19 Proceedings and Documents.........................................................6 ARTICLE III REPRESENTATIONS AND WARRANTIES....................................................7 Section 3.1 Representations of the Issuer.....................................................7 Section 3.2 Representations of the Collateral Trustee.........................................7 Section 3.3 Representations of the Guarantor..................................................7 Section 3.4 Representations of the Tenant.....................................................7 Section 3.5 Representations of the Owner Beneficiary..........................................7 Section 3.6 Representations of the Purchasers.................................................7 ARTICLE IV GUARANTOR COVENANTS...............................................................9 Section 4.1 Reporting Requirements............................................................9 Section 4.2 Inspection Rights................................................................10 Section 4.3 Transaction Expenses.............................................................10 Section 4.4 Payment of Certain Fees and Expenses.............................................11 ARTICLE V DIRECT PAYMENT...................................................................11 Section 5.1 Direct Payment...................................................................11
-i- 3 Participation Agreement ARTICLE VI DEFINITIONS......................................................................12 Section 6.1 General Definitions..............................................................12 Section 6.2 Indenture Definitions............................................................17 ARTICLE VII OTHER COVENANTS AND AGREEMENTS...................................................17 Section 7.1 Covenants of the Trust Company, the Issuer, the Collateral Trustee and the Owner Beneficiary................................................17 Section 7.2 Guarantor's Operative Agreement Rights...........................................18 Section 7.3 Covenants of the Collateral Trustee..............................................18 Section 7.4 Collateral Trustee Project Loan Agreement Rights.................................19 ARTICLE VIII TRANSFER OF INTEREST.............................................................19 Section 8.1 Restrictions of Transfer.........................................................19 Section 8.2 Effect of Transfer...............................................................19 ARTICLE IX INDEMNIFICATION..................................................................19 Section 9.1 General Indemnity................................................................19 Section 9.2 General Tax Indemnity............................................................20 ARTICLE X MISCELLANEOUS....................................................................24 Section 10.1 Amendments, Etc..................................................................24 Section 10.2 Notices, Etc.....................................................................24 Section 10.3 No Waiver; Remedies..............................................................25 Section 10.4 Binding Effect; Term; Assignability..............................................26 Section 10.5 Governing Law....................................................................26 Section 10.6 Execution in Counterparts........................................................26 Section 10.7 Third Party Beneficiaries........................................................26 Section 10.8 Survival of Covenants and Representations........................................26 Section 10.9 Severability.....................................................................26 Section 10.10 Confidential Information.........................................................26 Section 10.11 Issuer Recourse..................................................................28 Section 10.12 Owner Beneficiary Exculpation....................................................28
-ii- 4 Participation Agreement ATTACHMENTS TO PARTICIPATION AGREEMENT SCHEDULE I -- Name and Address of Purchasers EXHIBIT A -- Description of Closing Opinion of Special Counsel for Purchasers EXHIBIT B -- Description of Closing Opinion of Counsel for Issuer EXHIBIT C -- Description of Closing Opinion of Counsel for Collateral Trustee EXHIBIT D -- Description of Closing Opinion of Counsel for Guarantor and Tenant EXHIBIT E -- Description of Closing Opinion of Counsel for Project Borrowers EXHIBIT F -- Representations and Warranties of Issuer EXHIBIT G -- Representations and Warranties of Collateral Trustee EXHIBIT H-1 -- Representations and Warranties of Guarantor EXHIBIT H-2 -- Representations and Warranties of Tenant EXHIBIT I -- Representations and Warranties of Owner Beneficiary
-iii- 5 Participation Agreement PARTICIPATION AGREEMENT INTRODUCTORY THIS PARTICIPATION AGREEMENT (the "Participation Agreement") is dated as of December 1, 1998, and is among Borders Group, Inc., a Michigan corporation (the "Guarantor"), Borders, Inc., a Colorado corporation (the "Tenant"), Jess Project Funding Corp., a Delaware corporation, as owner beneficiary under the Trust Agreement (as hereinafter defined) (the "Owner Beneficiary"), Wilmington Trust Company, not in its individual capacity except as expressly stated herein (in such individual capacity, referred to herein as the "Trust Company"), but solely as owner trustee under the Trust Agreement (in such capacity as owner trustee, the "Issuer"), First Security Bank, N.A., as Collateral Trustee under the Collateral Trust Indenture dated as of December 1, 1998 (the "Indenture") between the Issuer and the Collateral Trustee (the "Collateral Trustee") and the Purchasers listed on Schedule I hereto (the "Purchasers"). WHEREAS, Issuer wishes to issue its 6.91% Senior Secured Notes due 2019 (the "Notes") in accordance with the terms of the Indenture (as hereinafter defined), which Notes shall have the tenor, and shall be secured in the manner, set forth in the Indenture. WHEREAS, subject to the terms and conditions set forth herein and on the basis of the representations and warranties hereinafter set forth, the Purchasers are willing to purchase from the Issuer all of the Notes. WHEREAS, capitalized terms used in this Participation Agreement shall have the respective meanings as specified in Article VI hereof. NOW, THEREFORE, in consideration of and for the mutual benefit of the parties hereto, each of the undersigned does hereby agree as follows: ARTICLE I TERMS OF ISSUANCE OF THE NOTES Section 1.1 Issuance and Sale of Notes. The Issuer hereby agrees to sell to the Purchasers, and each of the Purchasers agrees, severally and not jointly, to purchase from the Issuer, the Notes on the Closing Date at a price of 100% of the principal amount thereof and in the aggregate principal amount set forth opposite its name on Schedule I hereto (the "Purchase Price"). The Issuer hereby directs the Collateral Trustee to execute the certificate of authentication appended to each Note. Section 1.2 Closing. The closing of the transaction contemplated by the Indenture and this Participation Agreement, including, without limitation, the issuance and sale of the Notes, shall be held at the offices of Dickinson Wright PLLC, 525 N. Woodward Avenue, Suite 2000, Bloomfield Hills, Michigan 48304, at 11:00 a.m., Bloomfield Hills, Michigan time, on 6 Participation Agreement December 17, 1998 or at such other date and time as may be mutually acceptable to the parties hereto (the "Closing Date"). Section 1.3 Wire Transfer. On the Closing Date, the Purchase Price for each Note shall be paid by the Purchaser thereof to the Issuer by wire transfer of immediately available funds for the account of the Issuer at Wilmington Trust Company, ABA no. 031100092, for credit to Account: Borders Trust 1998, Account No. 46983-0 Attn: Joe Feil, Ref: Borders Trust 1998. Section 1.4 Failure to Deliver. If on the Closing Date the Issuer fails to tender to any Purchaser the Notes to be purchased by such Purchaser or if the conditions to the obligation of such Purchaser specified in Article II have not been fulfilled, such Purchaser may thereupon elect to be relieved of all further obligations under this Participation Agreement. Nothing in this Section shall operate to relieve the Issuer, the Owner Beneficiary, the Guarantor or the Tenant from their respective obligations hereunder or to waive any of such Purchaser's rights against the Issuer, the Owner Beneficiary, the Guarantor or the Tenant. In addition to execution and delivery of the Notes, the Issuer shall, at the request of Purchaser, execute and deliver on the Closing Date such receipts, endorsements, and other documents acknowledging receipt of the Purchase Price as such Purchaser may reasonably request. ARTICLE II CONDITIONS TO THE CLOSING The obligation of each Purchaser to purchase and pay for the Notes to be sold to such Purchaser on the Closing Date is subject to the fulfillment to its satisfaction, prior to or on the Closing Date, of the following conditions: Section 2.1 Representations and Warranties. (a) The representations and warranties of the Issuer contained in Exhibit F to this Participation Agreement shall be true and correct on and with respect to the Closing Date. (b) The representations and warranties of the Collateral Trustee contained in Exhibit G to this Participation Agreement shall be true and correct on and with respect to the Closing Date. (c) The representations and warranties of the Guarantor contained in Exhibit H-1 to this Participation Agreement shall be true and correct on and with respect to the Closing Date. (d) The representations and warranties of the Tenant contained in Exhibit H-2 to this Participation Agreement shall be true and correct on and with respect to the Closing Date. (e) The representations and warranties of the Owner Beneficiary contained in Exhibit I to this Participation Agreement shall be true and correct on and with respect to the Closing Date. -2- 7 Participation Agreement Section 2.2 Performance; No Default. (a) The Issuer and the Collateral Trustee shall have performed all of their respective obligations and complied with all agreements and conditions required to be performed and complied with on or prior to the Closing Date as set forth in this Participation Agreement. (b) No default or event of default shall have occurred and be continuing with respect to any Project Loan Note, any Lease or any other Project Loan Document and no event shall have occurred and be continuing under the provisions of any such instrument or agreement which, with the lapse of time or the giving of notice, or both, would constitute a default or an event of default thereunder. Section 2.3 Indenture. The Indenture shall have been duly executed and delivered by the Issuer and the Collateral Trustee, and such parties shall have performed, complied with or satisfied all agreements and conditions contained in the Indenture required to be performed or complied with on or prior to the Closing Date to the satisfaction of such Purchaser. Section 2.4 Notes. The Issuer shall have issued, and the Collateral Trustee shall have authenticated, the respective Note to such Purchaser. Section 2.5 Collateral Assignments of Project Loan Documents. The Issuer shall have executed and delivered in favor of the Collateral Trustee a Collateral Assignment of Project Loan Document for each Project Loan, together with, (i) with respect to each Project Loan, the related executed original Project Loan Note, together with executed originals of the related Project Loan Agreement, Mortgage, Assignment of Lease and Rents, Environmental Indemnity and Property Owner Estoppel, if any, and a duly completed UCC financing statement listing the related Project Borrower, as debtor, and the Issuer, as secured party, and listing as collateral all fixtures located on the respective Mortgaged Property, to be filed in such filing offices as such Purchaser may reasonably determine, (ii) with respect to each Project Loan, a duly completed UCC financing statement listing the related Project Borrower, as debtor, the Issuer, as secured party, and the Collateral Trustee, as assignee, relating to the UCC financing statement referred to in clause (i) above to be filed in each filing office as such Purchaser may reasonably determine and (iii) duly completed UCC financing statement listing the Issuer, as debtor, and the Collateral Trustee, as secured party, and listing as collateral the security interests created by each Collateral Assignment of Project Loan Documentation to be filed in such filing office(s) as such Purchaser shall reasonably determine. Section 2.6 Assignments of Mortgage, et al.. The Issuer shall have executed and delivered in favor of the Collateral Trustee an Assignment of Mortgage for each Mortgage and a Reassignment of Leases and Rents for each Assignment of Lease and Rents, in recordable form for recording in the appropriate filing office in which the respective Mortgaged Property is located. Section 2.7 Certification of Cost. Certification of the actual cost for each of the Mortgaged Properties certified by the Guarantor shall have been delivered to such Purchaser or its special counsel and shall be satisfactory to such Purchaser in scope and form. Section 2.8 Surveys, Environmental Reports and Zoning. Surveys and environmental -3- 8 Participation Agreement reports for each of the Mortgaged Properties shall have been delivered to such Purchaser or its special counsel and shall be satisfactory to such Purchaser in scope and form. Such Purchaser shall have received sufficient evidence necessary to determine that all zoning laws, regulations and ordinances have been complied with for each Mortgaged Property. Section 2.9 Mortgagee's Title Insurance; Endorsements. Loan title insurance policies issued by a title insurance company naming the Collateral Trustee as the insured mortgagee reasonably satisfactory to such Purchaser (or, in the alternative, a commitment to issue a loan title insurance policy issued by a title insurance company reasonably satisfactory to such Purchaser and marked and initialed by an authorized agent of such title company to show all changes to be made in connection with the actual issuance of such title insurance policy) and dated the date of the recording of the Mortgages shall have been issued for each Mortgaged Property and shall be satisfactory in scope and form to such Purchaser. Section 2.10 Estoppels. The Tenant shall have executed and delivered the Tenant Estoppel and shall deliver estoppel certificates in respect of each reciprocal easement and/or operating agreement affecting any Mortgaged Property in form and scope, and executed by such parties, as may be reasonably satisfactory to each Purchaser. Section 2.11 Letter of Credit. The Guarantor or Tenant shall have delivered to the Issuer the Letter of Credit duly issued by a financial institution satisfactory to such Purchaser and the Issuer shall have delivered to the Collateral Trustee the original Letter of Credit listing the Collateral Trustee as a co-beneficiary. Section 2.12 Compliance Certificate. (a) Issuer Officer's Certificate. The Issuer shall have delivered to the Purchasers an Officer's Certificate, dated the Closing Date, certifying that the conditions specified in Sections 2.1(a), 2.2 and 2.3 (to the extent relating to the obligations of the Issuer) have been fulfilled. (b) Issuer Existence and Authority. On or prior to the Closing Date, such Purchaser shall have received, in form and substance reasonably satisfactory to such Purchaser and special counsel to the Purchasers, such documents and evidence with respect to the Issuer as special counsel to the Purchasers may reasonably request in order to establish the existence and good standing of the Issuer and the authorization of the transactions contemplated by this Participation Agreement and all other Operative Documents to which it is a party. (c) Collateral Trustee's Officer's Certificate. The Collateral Trustee shall have delivered to the Purchasers an Officer's Certificate, dated the Closing Date, certifying that the conditions specified in Sections 2.1(b), 2.2(a) and 2.3 (to the extent relating to the obligations of the Collateral Trustee) have been fulfilled. (d) Collateral Trustee's Existence and Authority. Such Purchaser shall have received, in form and substance reasonably satisfactory to such Purchaser and special counsel to the Purchasers, such documents and evidence with respect to the Collateral Trustee as special counsel to the Purchasers may reasonably request in order to establish the existence of the Collateral Trustee and the authorization of the transactions contemplated by this Participation Agreement and all other Operative Documents to which it is a party. -4- 9 Participation Agreement (e) Guarantor's Officer's Certificate. The Guarantor shall have delivered to the Purchasers an Officer's Certificate, dated the Closing Date, certifying that, to such officer's knowledge, the representations and warranties contained in Section 2.1(c) are true and correct on and with respect to the Closing Date. (f) Guarantor's Existence and Authority. Such Purchaser shall have received, in form and substance reasonably satisfactory to such Purchaser and special counsel to the Purchasers, such documents and evidence with respect to the Guarantor as special counsel to the Purchasers may reasonably request in order to establish the existence and good standing of the Guarantor and the authorization of the transactions contemplated by this Participation Agreement and all other Operative Documents to which it is a party. (g) Tenant's Officer's Certificate. The Tenant shall have delivered to the Purchasers an Officer's Certificate, dated the Closing Date, certifying that, to such officer's knowledge, the representations and warranties contained in Section 2.1(d) are true and correct on and with respect to the Closing Date. (h) Tenant's Existence and Authority. Such Purchaser shall have received, in form and substance reasonably satisfactory to such Purchaser and special counsel to the Purchasers, such documents and evidence with respect to the Tenant as special counsel to the Purchasers may reasonably request in order to establish the existence and good standing of the Tenant and the authorization of the transactions contemplated by this Participation Agreement and all other Operative Documents to which it is a party. Section 2.13 Opinions of Counsel. Each Purchaser shall have received opinions in form and substance satisfactory to such Purchaser from: (a) Morris, James, Hitchens & Williams, special counsel for the Issuer, dated the Closing Date and covering the matters set forth in Exhibit B and covering such other matters incident to the transactions contemplated hereby as such Purchaser may reasonably request (and the Issuer hereby instructs its counsel to deliver such opinions to the Purchasers), (b) Ray, Quinney & Nebeker, counsel for the Collateral Trustee, dated the Closing Date and covering the matters set forth in Exhibit C and covering such other matters incident to the transactions contemplated hereby as such Purchaser may reasonably request (and the Collateral Trustee hereby instructs its counsel to deliver such opinion to the Purchasers), (c) Dickinson Wright PLLC, special counsel for the Guarantor and the Tenant, dated the Closing Date and covering the matters set forth in Exhibit D and covering such other matters incident to the transactions contemplated hereby as such Purchaser may reasonably request, (d) various local counsel for the Project Borrowers dated on or prior to the Closing Date and covering the matters set forth in Exhibit E and covering such other matters incident to the transactions contemplated hereby as such Purchaser may reasonably request, and -5- 10 Participation Agreement (e) McDermott, Will & Emery, special counsel to the Purchasers in connection with such transactions, dated the Closing Date and substantially in the form set forth in Exhibit A and covering such other matters incident to such transactions as the Purchasers may reasonably request. Section 2.14 Purchase Permitted By Applicable Law, etc. On the Closing Date, the purchase of the Notes by such Purchaser shall (a) be permitted by the laws and regulations of each jurisdiction to which such Purchaser is subject, without recourse to provisions (such as Section 1405(a)(8) of the New York Insurance Law) permitting limited investments by insurance companies without restriction as to the character of the particular investment, (b) not violate any applicable law or regulation (including, without limitation, Regulation T, U or X of the Board of Governors of the Federal Reserve System) and (c) not subject such Purchaser to any tax, penalty or liability under or pursuant to any applicable law or regulation, which law or regulation was not in effect on the date hereof. If requested by any Purchaser, such Purchaser shall have received an Officer's Certificate of the Issuer certifying as to such matters of fact as it may reasonably specify to enable such Purchaser to determine whether such purchase is so permitted. Section 2.15 Payment of Special Counsel and other Fees. The Guarantor shall have paid, on or before the Closing Date, the fees, charges and disbursements of McDermott, Will & Emery, special counsel for the Purchasers. Section 2.16 Payment of Recording Fees, Charges and Taxes. All title insurance charges and premiums and all fees, charges and taxes in connection with the recordation or filing and re-recordation or re-filing of the Project Loan Documents and any other agreement or instrument, financing statement or any publication of notice required to be filed or recorded to protect the validity of the liens securing the obligations of the Project Loans shall have been paid in full by the Guarantor. Section 2.17 Private Placement Number. A Private Placement Number issued by Standard & Poor's CUSIP Service Bureau (in cooperation with the Securities Valuation Office of the National Association of Insurance Commissioners) shall have been obtained for the Notes. Section 2.18 Offeree Letter. An offeree letter shall have been issued by J.P. Morgan Securities, Inc. to the Purchasers satisfactory to each Purchaser in scope and form. Section 2.19 Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated by this Participation Agreement and all documents and instruments incident to such transactions shall be reasonably satisfactory to such Purchaser and its special counsel, and such Purchaser and its special counsel shall have received all such counterpart originals or certified or other copies of such documents as such Purchaser may reasonably request. For purposes of this Article II, the payment of the Purchase Price by such Purchaser for each Note to be purchased by it hereunder shall constitute conclusive evidence that such Purchaser is satisfied that each and every condition set forth in this Article II has been fulfilled or that such Purchaser has waived compliance of any such condition; provided, however, that nothing contained in this paragraph shall be construed as a waiver of the truth and accuracy of -6- 11 Participation Agreement any representation or warranty made by any party on or prior to the Closing Date in connection with the transactions contemplated by the Participation Agreement and the Indenture. ARTICLE III REPRESENTATIONS AND WARRANTIES Section 3.1 Representations of the Issuer. In order to induce each Purchaser to purchase the Notes from the Issuer, the Issuer represents and warrants that all representations and warranties set forth in Exhibit F to this Participation Agreement are true and correct as of the date hereof and are incorporated herein by reference with the same force and effect as though herein set forth in full. Section 3.2 Representations of the Collateral Trustee. In order to induce each Purchaser to purchase Notes from the Issuer, the Collateral Trustee represents and warrants that all representations and warranties set forth in Exhibit G to this Participation Agreement are true and correct as of the date hereof and are incorporated herein by reference with the same force and effect as though herein set forth in full. Section 3.3 Representations of the Guarantor. In order to induce each Purchaser to purchase the Notes from the Issuer, the Guarantor represents and warrants that all representations and warranties set forth in Exhibit H-1 to this Participation Agreement are true and correct as of the date hereof and are incorporated herein by reference with the same force and effect as though herein set forth in full. Section 3.4 Representations of the Tenant. In order to induce each Purchaser to purchase the Notes from the Issuer, the Tenant represents and warrants that all representations and warranties set forth in Exhibit H-2 to this Participation Agreement are true and correct as of the date hereof and are incorporated herein by reference with the same force and effect as though herein set forth in full. Section 3.5 Representations of the Owner Beneficiary. In order to induce each Purchaser to purchase the Notes from the Issuer, the Owner Beneficiary represents and warrants that all representations and warranties set forth in Exhibit I to this Participation Agreement are true and correct as of the date hereof and are incorporated herein by reference with the same force and effect as though herein set forth in full. Section 3.6 Representations of the Purchasers. (a) Each Purchaser represents and warrants that at least one of the following statements concerning each source of funds to be used by it to pay the Purchase Price is accurate as of the Closing Date: (i) the source of funds to be used by it to pay the purchase price of the Notes is an "insurance company general account" within the meaning of Department of Labor Prohibited Transaction Exemption ("PTE") 95-60 (issued July 12, 1995) and there is no employee benefit plan, treating as a single plan, all plans maintained by the same employer or employee organization, with respect to which the amount of the general -7- 12 Participation Agreement account reserves and liabilities for all contracts held by or on behalf of such plan, exceed ten percent (10%) of the total reserves and liabilities of such general account (exclusive of separate account liabilities) plus surplus, as set forth in the NAIC Annual Statement filed with its state of domicile; (ii) all or a part of such funds constitute assets of one or more separate accounts, trusts or a commingled pension trust maintained by it, and it has disclosed to each of the Collateral Trustee, the Issuer, the Owner Beneficiary and each Project Borrower, the names of such employee benefit plans whose assets in such separate account or accounts or pension trusts exceed 10% of the total assets or are expected to exceed 10% of the total assets of such account or accounts or trusts as of the date of such purchase (for the purpose of this clause (ii), all employee benefit plans maintained by the same employer or employee organization are deemed to be a single plan); (iii) all or part of such funds constitute assets of a bank collective investment fund maintained by it, and it has disclosed to each of the Collateral Trustee, the Issuer, the Owner Beneficiary and each Project Borrower, the names of such employee benefit plans whose assets in such collective investment fund exceed 10% of the total assets or are expected to exceed 10% of the total assets of such fund as of the date of such purchase (for the purpose of this clause (iii), all employee benefit plans maintained by the same employer or employee organization are deemed to be a single plan); (iv) all or part of such funds constitute assets of one or more employee benefit plans, each of which has been identified to each of the Collateral Trustee, the Issuer, the Owner Beneficiary and each Project Borrower, in writing; (v) it is acquiring the Notes for the account of one or more pension funds, trust funds or agency accounts, each of which is a "governmental plan" as defined in Section 3(32) of ERISA; (vi) the source of funds is an "investment fund" managed by a "qualified professional asset manager" or "QPAM" (as defined in Part V of PTE 84-14, issued March 13, 1984), provided that no other party to the transactions described in this Agreement and no "affiliate" of such other party (as defined in Section V(c) of PTE 84-14) has at this time, or during the immediately preceding one year exercised the authority to appoint or terminate said QPAM as manager of the assets of any plan identified in writing pursuant to this clause (vi) or to negotiate the terms of said QPAM's management agreement on behalf of any such identified plans; or (vii) if it is other than an insurance company, all or a portion of such funds consists of funds which do not constitute "plan assets". (b) Each Purchaser represents that it is an "accredited investor" (as defined in Rule 501 (a)(1), (2), (3) or (7) of Regulation D under the Securities Act of 1933, as amended) acting for its own account (and not for the account of others) or as a fiduciary or agent for others (which others are also "accredited investors"). Each Purchaser further represents that such Purchaser is acquiring the Notes for the purpose of investment and not with a view to the distribution thereof, -8- 13 Participation Agreement and that such Purchaser has no present intention of selling, negotiating or otherwise disposing of the Notes; it being understood, however, that the disposition of such Purchaser's property shall at all times be and remain within its control. Each Purchaser understands that the Notes have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), or under any state securities laws, and may not be resold in the absence of registration unless such sale is exempt from registration under the Securities Act and any applicable state securities laws. ARTICLE IV GUARANTOR COVENANTS Section 4.1 Reporting Requirements. The Guarantor hereby covenants and agrees that until payment in full of all principal, premium, if any, and interest outstanding from time to time under the Notes, the Guarantor will furnish or cause to be furnished to the Collateral Trustee and each Purchaser: (a) As soon as available and in any event within forty-five (45) calendar days after the end of each of its first three fiscal quarters in each fiscal year, consolidating and consolidated financial statements of the Guarantor and its Subsidiaries, consisting of a consolidating and consolidated balance sheet as of the end of such fiscal quarter and related consolidating and consolidated statements of income, stockholders' equity and cash flows for the fiscal quarter then ended and the fiscal year through that date, all in reasonable detail and certified (subject to normal year-end audit adjustments) by an authorized officer of the Guarantor as having been prepared in accordance with GAAP, consistently applied, and setting forth in comparative form the respective financial statements for the corresponding date and period in the previous fiscal year. (b) As soon as available and in any event within ninety (90) days after the end of each fiscal year of the Guarantor, consolidating and consolidated financial statements of the Guarantor and its Subsidiaries consisting of a consolidating and consolidated balance sheet as of the end of such fiscal year, and related consolidating and consolidated statements of income, stockholders' equity and cash flows for the fiscal year then ended, all in reasonable detail and setting forth in comparative form the financial statements as of the end of and for the preceding fiscal year, and certified by independent certified public accountants of nationally recognized standing satisfactory to the Collateral Trustee. The certificate or report of accountants shall be free of qualifications (other than any consistency qualification that may result from a change in the method used to prepare the financial statements as to which such accountants concur) and shall not indicate the occurrence or existence of any event, condition or contingency which would materially impair the prospect of payment or performance of any covenant, agreement or duty of the Guarantor under any of the Credit Documents, the Project Loan Documents or the Operative Documents to which it is a party. (c) Concurrently with the delivery of the financial statements described in the foregoing paragraphs (a) and (b), a certificate executed by the President or any Vice President of -9- 14 Participation Agreement the Guarantor certifying that no Event of Default has occurred and is then continuing as of the date of such financial statements and as of the date of such certificate. (d) Concurrently with the delivery of the financial statements described in the foregoing paragraph (b), a report setting forth for the corresponding fiscal year (i) with respect to each Mortgaged Property (A) the return on net assets for such Mortgaged Property, (B) the net sales for such Mortgaged Property and the corresponding percentage changes for the year earlier period, and (C) the net sales per square foot for such Mortgaged Property and (ii) with respect to each Mortgaged Property on an average basis for all other "super stores" operated by the Tenant and open in the same fiscal year of the Tenant as such Mortgaged Property has opened (A) the average return on net assets for all such "super stores," (B) the average net sales for all such "super stores," (C) the average net sales per square foot for all such "super stores" and (D) the corresponding figures and corresponding percentage change for the year earlier period. (e) promptly, copies of all financial statements and reports and all press releases that the Guarantor sends to its creditors or shareholders, and copies of all financial statements and regular, periodical or special reports (including Forms 10K, 10Q and 8K) that the Guarantor or the Tenant may make to, or file with, the Securities and Exchange Commission, or any successor thereto. (f) Such other information respecting the condition or operations, financial or otherwise, of the Guarantor and the Tenant as the Collateral Trustee or any Purchaser may from time to time reasonably request. Section 4.2 Inspection Rights. The Guarantor shall permit the representatives of the Purchaser: (a) If no Default or Event of Default then exists, at the expense of such Purchasers and upon reasonable prior notice to the Guarantor, to visit the principal executive office of the Guarantor, to discuss the affairs, finances and accounts of the Guarantor and its Subsidiaries with the Guarantor's officers, and (with the consent of the Guarantor, which consent will not be unreasonably withheld) its independent public accountants, and (with the consent of the Guarantor, which consent will not be unreasonably withheld) to visit the Mortgaged Properties, all at such reasonable times and as often as may be reasonably requested in writing; and (b) If a Default or Event of Default then exists, at the expense of the Guarantor, to visit and inspect any of the offices or properties of the Guarantor or any Subsidiary, to examine all their respective books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers and independent public accountants (and by this provision the Guarantor authorizes said accountants to discuss the affairs, finances and accounts of the Guarantor and its Subsidiaries), all at such times and as often as may be requested. Section 4.3 Transaction Expenses. Whether or not the transactions contemplated hereby are consummated, the Guarantor will pay all costs and expenses (including reasonable attorneys' fees of a special counsel and, if reasonably required, local or other counsel) incurred by each Purchaser in connection with such transactions and in connection with any amendments, -10- 15 Participation Agreement waivers or consents under or in respect of this Agreement or the other Operative Documents (whether or not such amendment, waiver or consent becomes effective), including, without limitation: (a) the costs and expenses incurred in enforcing or defending (or determining whether or how to enforce or defend) any rights under this Agreement or the other Operative Documents or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement or the other Operative Agreements, or by reason of being a holder of the Notes, and (b) the costs and expenses, including financial advisors' fees, incurred in connection with the insolvency or bankruptcy of the Guarantor or the Tenant or in connection with any work-out or restructuring of the transactions contemplated hereby and by the Notes. The Guarantor will pay, and will save each Purchaser harmless from, all claims in respect of any fees, costs or expenses if any, of brokers and finders. The obligations of the Guarantor under this Section 4.3 will survive the payment or transfer of any Note, the enforcement, amendment or waiver of any provision of this Agreement or the other Operative Documents, and the termination of the Leases. Section 4.4 Payment of Certain Fees and Expenses. The Guarantor shall pay or cause to be paid (a) the initial and annual fee of the Trust Company and any necessary co-trustees (including reasonable counsel fees and expenses) or any successor, for acting as owner trustee pursuant to the Trust Agreement, (b) the initial and annual fee of the Owner Beneficiary and any successor beneficial owner, for acting as beneficial owner pursuant to this Trust Agreement, (c) the initial and annual fee of the Collateral Trustee and any necessary co-trustees (including reasonable counsel fees and expenses) or any successor collateral trustee, for acting as Collateral Trustee, (d) the initial and annual fee of Lord Securities Corporation, a Delaware corporation, as manager of the Owner Beneficiary pursuant to a management agreement between the Owner Beneficiary and Lord Securities Corporation which has been delivered to Guarantor, and (e) all costs and expenses incurred by the Trust Company, the Collateral Trustee and the Owner Beneficiary in entering into any future amendments or supplements with respect to any of the Operating Documents, whether or not such amendments or supplements are ultimately entered into, or in giving or withholding of waivers or consents hereto or thereto or, in the case of the Trust Company, in complying with any further assurances with respect to the Collateral. ARTICLE V DIRECT PAYMENT Section 5.1 Direct Payment. Notwithstanding anything to the contrary contained in the Indenture or the Notes, in the case of any Note owned by any Purchaser or any other Noteholder which has given written notice to the Collateral Trustee requesting that the provisions of this Section 5.1 shall apply, the Collateral Trustee will punctually pay when due all distributions thereof with respect to said Notes pursuant to the terms of the Indenture, without any presentment thereof, directly to such Noteholder at its address set forth in Schedule I hereto or such other address as such Noteholder may from time to time designate in writing to the Collateral Trustee or, if a bank account with a United States bank is so designated for such Noteholder, the Collateral Trustee will make such payments in immediately available funds to such bank account, no later than 11:00 a.m., New York City time, on the date due, marked for attention as indicated, or in such other manner or to such other account in any United States bank -11- 16 Participation Agreement as such Noteholder may from time to time direct in writing. ARTICLE VI DEFINITIONS Section 6.1 General Definitions. As used herein, the following terms have the respective meanings set forth below: "After Tax Basis" shall mean with respect to any payment to be received by an Impositions Indemnitee, the amount of such payment supplemented by a further payment or payments so that, after deducting from such aggregate payments the amount of all taxes (net of any actual current credits, deductions or other tax benefits arising from the payment by the Impositions Indemnitee of any amount, including taxes, for which the payment to be received is made) actually imposed currently on the Impositions Indemnitee by any Governmental Authority or taxing authority with respect to such payments, the balance of such payment shall be equal to the original payment to be received; provided, however, that for the purposes of this definition it shall be assumed that for any Purchaser as an Indemnified Person (or any Affiliate thereof) Federal, state and local income taxes are payable at the highest marginal Federal, state and local statutory income tax rates applicable to corporations from time to time. "Annual Statements" is defined on Exhibit H paragraph (6). "Claims" shall mean any and all obligations, liabilities, losses, actions, suits, penalties, claims, demands, costs and expenses (including, without limitation, reasonable attorney's fees and expenses) of any nature whatsoever. "Collateral Trustee" is defined in the Introductory paragraphs of this Participation Agreement. "Closing Date" is defined in Section 1.2. "Environmental Laws" shall have the meaning assigned thereto in the Lease Appendix. "Environmental Violation" shall have the meaning assigned thereto in the Lease Appendix. "GAAP" shall mean generally accepted accounting principles as are in effect from time to time and applied on a basis consistent with the Historical Statements both as to classification of items and amounts. "Governmental Authority" shall have the meaning assigned thereto in the Lease Appendix. "Guarantor" is defined in the Introductory paragraphs of this Participation Agreement. -12- 17 Participation Agreement "Hazardous Substance" shall have the meaning assigned thereto in the Lease Appendix. "Historical Statements" is defined on Exhibit H paragraph (6). "Impositions" shall mean, except to the extent described in the following sentence, any and all liabilities, losses, expenses and costs of any kind whatsoever for fees, taxes, levies, imposts, duties, charges, assessments or withholdings ("Taxes") (including (i) real and personal property taxes, including personal property taxes on any property covered by a Lease that is classified by any governmental authority as personal property, and real estate or ad valorem taxes in the nature of property taxes; (ii) sales taxes, use taxes and other similar taxes (including rent taxes and intangibles taxes); (iii) any excise taxes; (iv) real estate transfer taxes, conveyance taxes, stamp taxes and documentary recording taxes and fees; (v) taxes that are or are in the nature of franchise, income, value added, privilege and doing business taxes, license and registration fees; and (vi) assessments on any Mortgaged Property, including all assessments for public improvements or benefits, whether or not such improvements are commenced or completed within the term of such Lease), and in each case all interest, additions to tax and penalties thereon, which at any time prior to, during or with respect to the term of such Lease or in respect of any period for which the Tenant shall be obligated to pay Supplemental Rent (as defined in the respective Leases), may be levied, assessed or imposed by any Federal, state, city, county or local authority upon or with respect to (a) any Mortgaged Property or any part thereof or interest therein; (b) the financing, refinancing, demolition, construction, substitution, subleasing, assignment, control, condition, occupancy, servicing, maintenance, repair, ownership, possession, activity conducted on, delivery, insuring, use, operation, improvement, transfer of title, return or other disposition of such Mortgaged Property or any part thereof or interest therein; (c) the Notes or the Project Loan Notes or other indebtedness with respect to any Mortgaged Property or any part thereof or interest therein; (d) the rentals, receipts or earnings arising from any Mortgaged Property or any part thereof or interest therein; (e) the Operative Documents or any payment made or accrued pursuant thereto; (f) the income or other proceeds received with respect to any Mortgaged Property, or any part thereof or interest therein upon the sale or disposition thereof; (g) the issuance of the Notes or the Project Loan Notes; or (h) otherwise in connection with the transactions contemplated by the Operative Documents. The term "Imposition" shall not mean or include: (i) Taxes and impositions (other than Taxes that are, or are in the nature of, sales, use, rental, value added, transfer or property taxes) that are imposed on a Tax Indemnitee by the United States federal government that are based on or measured by the net income (including taxes based on capital gains and minimum taxes) of such Person; provided that this clause (i) shall not be interpreted to prevent a payment from being made on an After Tax Basis if such payment is otherwise required to be so made; (ii) Taxes and impositions (other than Taxes that are, or are in the nature of, sales, use, rental, value added, transfer or property taxes) that are imposed by any state or local jurisdiction and that are based upon or measured by the gross or net income or gross or net receipts (including any minimum taxes, withholding taxes or taxes on or measured by capital stock, franchise or doing business taxes) except that this clause (ii) shall not -13- 18 Participation Agreement apply to (and thus shall not exclude) any such Taxes imposed on a Tax Indemnitee by the state (or any local taxing authority thereof or therein) where any Mortgaged Property is located, possessed or used under each Lease; provided that this clause (ii) shall not be interpreted to prevent a payment from being made on an After Tax Basis if such payment is otherwise required to be so made; (iii) any Tax or imposition to the extent, but only to such extent, it relates to any act, event or omission that occurs after the termination of a Lease with respect to a Mortgaged Property (but not any Tax or imposition that relates to any period prior to the termination of each Lease); (iv) any Tax or imposition for so long as, but only for so long as, it is being contested in accordance with the provisions of Section 9.2(g); (v) any interest or penalties imposed on a Tax Indemnitee as a result of the failure of such Tax Indemnitee to file any return to report timely and in the form prescribed by law or to pay any Tax or imposition, except to the extent such failure is a result of a breach by such Tax Indemnitee of its obligations under Section 9.2; provided, that this clause (v) shall not apply (x) if such interest or penalties arise as a result of a position taken (or requested to be taken) by the Lessee in a contest controlled by the Lessee under Section 9.2(g) or (y) to any such interest or penalties that result from such Tax Indemnitee's complying with the reporting procedures set forth in Section 9.2; (vi) any Taxes or impositions imposed on the Tenant that are a result of the Tenant not being considered a "United States person" as defined in Section 7701(a)(30) of the Code; (vii) any Taxes or impositions that are enacted or adopted by their express terms as a substitute for any Tax that would not have been indemnified against pursuant to the terms of Section 9.2; (viii) any Taxes which are imposed on a Tax Indemnitee as a result of a breach of a covenant or representation by such Tax Indemnitee in any Operative Document (unless caused by the Lessee's breach of its representations, warranties and covenants) or as a result of the gross negligence or willful misconduct of such Tax Indemnitee itself (as opposed to gross negligence or willful misconduct imputed to such Tax Indemnitee), but not Taxes imposed as a result of ordinary negligence of such Tax Indemnitee. (ix) any Taxes or impositions imposed on the Tenant to the extent that such Taxes are actually reimbursed to the Tenant by another Person other than an Affiliate of the Tenant; (x) any Taxes or impositions imposed upon the Tenant with respect to any voluntary transfer, sale, financing or other voluntary disposition by a Project Borrower (other than a transfer contemplated and permitted by the Operative Documents, including -14- 19 Participation Agreement any transfer in connection with (1) the exercise by the Tenant of any purchase option under any Lease, (2) the occurrence of an Event of Default, or (3) a Casualty Event or Condemnation Event affecting any Mortgaged Property) of any interest in any Mortgaged Property or any interest in, or created pursuant to, the Operative Documents or any voluntary transfer of any interest in the Tenant (other than in connection with the existence of a Lease Event of Default) or any involuntary transfer of any of the foregoing interests resulting from the bankruptcy or insolvency of the Tenant (other than in connection with the existence of an Event of Default); (xi) any gift or inheritance Taxes; (xii) any Taxes or impositions imposed on a Tax Indemnitee, to the extent such Tax Indemnitee actually receives a credit (or otherwise has a reduction in a liability for Taxes) in respect thereof against Taxes that are not indemnified hereunder (but only to the extent such credit is not taken into account in calculating the indemnity payment on an After Tax Basis); (xiii) any Tax or imposition to the extent that such Tax or imposition is imposed on a Tax Indemnitee in respect of a transaction or business in the jurisdiction imposing such Tax other than the transactions arising out of the Operative Documents; or (xiv) any Tax or imposition imposed on a direct or indirect transferee, successor or assign of the Tenant to the extent of the excess of such Taxes over the amount of such Taxes that would have been imposed had there not been a transfer by the Tenant of an interest arising under the Operative Documents; provided that there shall not be excluded under this clause (xiv) any such Tax or imposition if such direct or indirect transferee, successor or assign of the Tenant acquired its interest as a result of a transfer in connection with an Event of Default; provided, further, that there shall not be excluded under this clause (xiv) any amount necessary to make any payment on an After Tax Basis. Any tax or imposition excluded from the defined term "Imposition" in any one of the foregoing clauses (i) through (xiv) shall not be construed as constituting an Imposition by any provision of any other of the aforementioned clauses. "Indemnified Person" shall mean the Trust Company, the Issuer, the Collateral Trustee, in its individual capacity and its trust capacity, each Purchaser, and the Owner Beneficiary and their respective successors, assigns, directors, shareholders, partners, officers, employees, agents and Affiliates. "Indenture" is defined in the Introductory paragraphs of this Participation Agreement. "Interim Statements" is defined on Exhibit H paragraph (6). "Issuer" is defined in the Introductory paragraphs of this Participation Agreement. -15- 20 Participation Agreement "Lease Appendix" shall mean the appendix of defined terms attached to each Lease. "Material Adverse Effect" shall have the meaning assigned thereto in the Lease Appendix. "Noteholder" shall mean the Person in whose name a Note is registered in accordance with the provisions of the Indenture. "Notes" is defined in the Introductory paragraphs of this Participation Agreement. "Officer's Certificate" shall mean a certificate of the chief financial officer, treasurer, or other officer of such Person whose responsibilities extend to the subject matter of such certificate. "Owner Beneficiary" is defined in the Introductory paragraph of this Participation Agreement. "Person" shall mean any individual, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Purchase Price" is defined in Section 1.1. "Purchasers" is defined in the Introductory paragraphs of this Participation Agreement. "Subsidiary" of any Person shall mean any corporation, partnership, joint venture, trust or estate of which (or in which) more than 50% of: (i) the outstanding capital stock having voting power to elect a majority of the board of directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might having voting power upon the occurrence of any contingency), (ii) the interest in the capital or profits of such partnership or joint venture, or (iii) the beneficial interest of such trust or estate, is at the time directly or indirectly owned by such Person, by such Person and one or more of its Subsidiaries or by one or more of such Person's Subsidiaries. "Tax Indemnitee" shall mean a Project Borrower, the Purchasers, the Issuer, the Trust Company, the Collateral Trustee, in its individual capacity and its trust capacity, the Owner Beneficiary and their respective successors, assigns, participants, directors, shareholders, partners, officers, employees, agents and Affiliates. -16- 21 Participation Agreement "Taxes" is defined in the definition of "Imposition." "Tenant" is defined in the Introductory paragraph of this Participation Agreement. "Trust Company" is defined in the Introductory paragraphs of this Participation Agreement. "Trust Estate" shall have the meaning assigned thereto in the Trust Agreement. Section 6.2 Indenture Definitions. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned thereto in the Indenture. ARTICLE VII OTHER COVENANTS AND AGREEMENTS Section 7.1 Covenants of the Trust Company, the Issuer, the Collateral Trustee and the Owner Beneficiary. The Trust Company, the Issuer, the Collateral Trustee and the Owner Beneficiary hereby covenant and agree (as to itself only) with the other parties hereto that, so long as this Agreement is in effect. (a) Discharge of Lien. Each of the Owner Beneficiary, the Issuer and the Trust Company will not create or permit to exist at any time, and will, at its own cost and expense, promptly take such action as may be necessary duly to discharge, or to cause to be discharged, all Liens on the Mortgaged Property or the other Collateral (other than the Liens permitted or contemplated by the Operative Documents) attributable to it or any of its Affiliates. (b) Trust Agreement. Without prejudice to any right under the Trust Agreement of the Trust Company to resign, or the Owner Beneficiary's right under the Trust Agreement to remove the institution acting as owner trustee under the Trust Agreement, the Owner Beneficiary hereby agrees with the Collateral Trustee and the Tenant (i) not to terminate or revoke the trust created by the Trust Agreement, (ii) not to amend, supplement, terminate or revoke or otherwise modify any provision of the Trust Agreement in such a manner as to adversely affect the rights of any such party without the prior written consent of such party, (iii) to comply with all of the terms of the Trust Agreement, the nonperformance of which would adversely affect such party and (iv) not to remove the Trust Company as owner trustee under the Trust Agreement. (c) Successor Trust Company. Subject to Section 8.1 of the Trust Agreement, a successor owner trustee under the Trust Agreement may be appointed, and a corporation may become the owner trustee under the Trust Agreement, only with the consent of the Tenant and the Collateral Trustee, which consent shall not be unreasonably withheld or delayed. (d) Indebtedness; Other Business. Neither the Issuer nor the Owner Beneficiary shall contract for, create, incur or assume any indebtedness, or enter into any business or other activity, other than pursuant to or under the Operative Documents. (e) No Violation. Neither the Collateral Trustee nor the Owner Beneficiary will -17- 22 Participation Agreement instruct the Issuer to take any action in violation of the terms of any Operative Document. (f) No Voluntary Bankruptcy. The Owner Beneficiary shall not (i) commence any case, proceedings or other action under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization, arrangement, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (ii) seek appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial benefit of its creditors; and neither the Owner Beneficiary nor the Issuer shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in this paragraph. (g) Change of Principal Place of Business. The Issuer and the Owner Beneficiary shall give prompt notice to the Tenant and the Collateral Trustee if the Trust Company's principal place of business or chief executive office, or the office where the records concerning the accounts or contract rights relating to the Mortgaged Properties are kept, shall cease to be located at the location described in Exhibit F, paragraph 8 or if it shall change its name, identity or corporate structure. (h) Operative Agreements. Neither the Issuer nor the Owner Beneficiary shall consent to or permit, and the Owner Beneficiary shall not take any action for the purpose of permitting the Issuer to consent to or permit, any amendment, supplement or other modification of the terms and provisions of the Operative Documents, in each case without the prior written consent of the Tenant and the Collateral Trustee. Section 7.2 Guarantor's Operative Agreement Rights. Each of the parties hereto agrees that, unless and until any Lease Event of Default shall have occurred and be continuing, it will not enter into any amendments or modifications of any Operative Document without the prior written consent of the Guarantor. Section 7.3 Covenants of the Collateral Trustee The Collateral Trustee (in its individual capacity and in its trust capacity) hereby covenants and agrees with the other parties hereto that, so long as this Agreement is in effect: (a) Discharge of Lien. The Collateral Trustee (in its individual capacity and in its trust capacity) will not create or permit to exist at any time, and will, at its own cost and expense, promptly take such action as may be necessary duly to discharge, or to cause to be discharged, all Liens on any Mortgaged Property or the Collateral attributable to it or any of its Affiliates (other than Liens arising under or pursuant to any Operative Document); provided, however, that the Collateral Trustee shall not be required to so discharge any such Lien while the same is being contested in good faith by appropriate proceedings diligently prosecuted so long as such proceedings shall not involve any material danger or impairment of the Liens of the Operative Documents or of the sale, forfeiture or loss of, and shall not interfere with the use or disposition of, any Mortgaged Property or title thereto or any interest therein or the payment of rent under any Lease or the Trust Estate (as defined in the Trust Agreement). (b) Successor Collateral Trustee. A successor Collateral Trustee may be appointed, and a corporation may become the Collateral Trustee under the Indenture, only with the consent -18- 23 Participation Agreement of the Tenant and the Purchasers, which consent in the case of the Tenant shall be limited to approval of such successor Collateral Trustee's fees. Section 7.4 Collateral Trustee Project Loan Agreement Rights. Notwithstanding anything to the contrary contained in any Project Loan Document, the Collateral Trustee, the Guarantor, the Tenant, the Purchasers, the Issuer, the Trust Company and the Owner Beneficiary hereby agree that the Collateral Trustee, as agent on behalf of the Issuer in accordance with the Collateral Trust Indenture, shall have the right to make all decisions, receive all payments and take all actions on behalf of the Issuer under each Project Loan Document. ARTICLE VIII TRANSFER OF INTEREST Section 8.1 Restrictions of Transfer. The Owner Beneficiary may not, directly or indirectly, assign, convey or otherwise transfer any of its right, title or interest in or to the Trust Estate or the Trust Agreement. Any transfer by the Owner Beneficiary as above provided, shall only be effected pursuant to an agreement in form and substance reasonably satisfactory to the Collateral Trustee, the Trust Company, the Tenant, and their respective counsel. Section 8.2 Effect of Transfer. From and after any transfer effected in accordance with this Section 8, the transferor shall be released, to the extent of such transfer, from its liability hereunder and under the other documents to which it is a party in respect of obligations to be performed on or after the date of such transfer. Notwithstanding any transfer of all or a portion of the Owner Beneficiary's interest as provided in this Section 8, the transferor shall be entitled to all benefits accrued and all rights vested prior to such transfer, including, without limitation, rights to indemnification under any such document. ARTICLE IX INDEMNIFICATION Section 9.1 General Indemnity. The Guarantor and the Tenant, jointly and severally, hereby assume liability for and agree to defend, indemnify and hold harmless each Indemnified Person on an After Tax Basis from and against any and all Claims, which may be imposed on, incurred by or asserted against an Indemnified Person (other than to the extent such Claims arise from the gross negligence, willful misconduct or willful breach of such Indemnified Person) in any way relating to or arising out of the execution, delivery, performance or enforcement of this Agreement, or any other Operative Document or on or with respect to any Mortgaged Property, including, without limitation, Claims in any way relating to or arising out of (a) the financing or refinancing, purchase, acceptance, rejection, ownership, design, leasing, subleasing, possession, use, operation, repair, modification, condition, sale, return, repossession (whether by summary proceedings or otherwise), or any other disposition of a Mortgaged Property or any part thereof; (b) any latent or other defects in any Property whether or not discoverable by any Indemnified Person or the Tenant; (c) the Operative Documents, or any transaction contemplated thereby; (d) any breach by the Guarantor or the Tenant of any of their representations or warranties under the Operative Documents or failure by the Guarantor or the Tenant to perform or observe any -19- 24 Participation Agreement covenant or agreement to be performed by them under any of the Operative Documents; and (e) personal injury, death or property damage, including Claims based on strict liability in tort; but excluding (i) Claims (except Claims against the Trust Company (including claims arising from Taxes or other impositions set forth in clause (iii) of the exclusions to the definition of "Impositions" set forth in Article VI)) to the extent such Claims arise solely out of events occurring after the expiration of the terms of all Leases and after the Tenant's discharge of all its obligations under the Operative Documents or (ii) any Taxes (disregarding with respect to the Trust Company the exclusions set forth in clauses (v), to the extent attributable to action taken or not taken by the Issuer at the direction of the Owner Beneficiary or the Collateral Trustee, and (ix) of the exclusions to the definition of Impositions set forth in Article VI) including any Claim (or any portion of a Claim) made upon an Indemnified Person by a third party that at its origin is based upon a Tax (other than amounts necessary to make any payments hereunder on an After Tax Basis, where the Tenant is otherwise specifically required to make such payments on an After Tax Basis). The Guarantor and the Tenant shall be entitled to control, and shall assume full responsibility for the defense of any Claim; provided, however, that any Indemnified Person named in such Claim, may each retain separate counsel at the expense of the Tenant and the Guarantor; provided, further, that such parties shall use reasonable efforts to share counsel to the extent practicable and minimize the fees of counsel being reimbursed hereunder. The Tenant, the Guarantor and each Indemnified Person agree to give each other prompt written notice of any Claim hereby indemnified against but the giving of any such notice by an Indemnified Person shall not be a condition to the Tenant's and Guarantor's obligation under this Section 9.1, except to the extent failure to give such notice prejudices the Tenant's or Guarantor's rights hereunder. After an Indemnified Person has been fully indemnified for a Claim pursuant to this Section 9.1, and so long as no default shall have occurred and be continuing under any Lease, the Tenant and the Guarantor shall be subrogated to any right of such Indemnified Person (except against another Indemnified Person) with respect to such Claim. Section 9.2 General Tax Indemnity. (a) Indemnification. The Tenant shall pay and assume liability for, and hereby agrees to indemnify, protect and defend each Mortgaged Property and all Tax Indemnitees, and hold them harmless against, all Impositions on an After Tax Basis. Each Tax Indemnitee agrees to use good-faith efforts (but not including increasing liability for Taxes not indemnifiable hereunder) to minimize the amount of Taxes indemnifiable by the Tenant during any taxable year; provided that this sentence shall not be construed to limit or impair any right of the Issuer set forth in the Operative Documents. Each Tax Indemnitee further agrees to comply with recommendations made by the Tenant regarding techniques to minimize Taxes indemnifiable hereunder; provided that (i) the Tenant agrees to make payments to (or otherwise indemnify) such Tax Indemnitee against any cost or expense arising from instituting the Tenant's recommendations and (ii) such Tax Indemnitee determines in its sole discretion that such recommendations will not have an adverse impact on such Tax Indemnitee. (b) Refunds. Provided that no Default or Event of Default has occurred and is continuing, if any Tax Indemnitee obtains a refund or a reduction in a liability (but only if such reduction relates to a Tax not otherwise indemnifiable hereunder and has not been taken into account in determining the amount of a payment on an After Tax Basis) as a result of any Imposition paid or reimbursed by the Tenant (in whole or in part), such Tax Indemnitee shall promptly pay to the Tenant the lesser of (x) the amount of such refund or reduction in liability and (y) the amount previously so paid or advances by the Tenant, in each case net of reasonable -20- 25 Participation Agreement expenses not already paid or reimbursed by the Tenant. (c) Payments. (i) Subject to the terms of Section 9.2(g), the Tenant shall pay or cause to be paid all Impositions directly to the taxing authorities where feasible and otherwise to the Tax Indemnitee, as appropriate, and the Tenant shall at its own expense, upon such Tax Indemnitee's reasonable request, furnish to such Tax Indemnitee copies of official receipts or other satisfactory proof evidencing such payment. (ii) In the case of Impositions for which no contest is conducted pursuant to Section 9.2(g) and which the Tenant pays directly to the taxing authorities, the Tenant shall pay such Impositions prior to the latest time permitted by the relevant taxing authority for timely payment. In the case of Impositions for which the Tenant reimburses a Tax Indemnitee, the Tenant shall do so within twenty (20) days after receipt by the Tenant of demand by such Tax Indemnitee describing in reasonable detail the nature of the Imposition and the basis for the demand (including the computation of the amount payable), but in no event shall the Tenant be required to pay such reimbursement prior to thirty (30) days before the latest time permitted by the relevant taxing authority for timely payment. In the case of Impositions for which a contest is conducted pursuant to Section 9.2(g), the Tenant shall pay such Impositions or reimburse such Tax Indemnitee for such Impositions, to the extent not previously paid or reimbursed pursuant to Section 9.2(a), prior to the latest time permitted by the relevant taxing authority for timely payment after conclusion of all contests under Section 9.2(g). (iii) Impositions imposed with respect to a Mortgaged Property for a billing period during which a Lease expires or terminates with respect to such Mortgaged Property (unless the Tenant has exercised the purchase option set forth in the respective Lease with respect to such Mortgaged Property) shall be adjusted and prorated on a daily basis between the Tenant and the applicable Project Borrower, whether or not such Imposition is imposed before or after such expiration or termination and each party shall pay or reimburse the other for each party's pro rata share thereof. (iv) At the Tenant's request, the amount of any indemnification payment by the Tenant pursuant to Section 9.2(a) shall be verified and certified by an independent public accounting firm mutually acceptable to the Tenant and the Tax Indemnitee. The fees and expenses of such independent public accounting firm shall be paid by the Tenant unless such verification shall result in an adjustment in the Tenant's favor of 5 % or more of the payment as computed by the Tax Indemnitee, in which case such fee shall be paid by the Tax Indemnitee. (d) Reports and Returns. (i) The Tenant shall be responsible for preparing and filing any real and personal property or ad valorem tax returns in respect of each Mortgaged Property. In case any other report or tax return shall be required to be made with respect to any obligations of the Tenant under or arising out of Section 9.2(a) and of which the Tenant has knowledge or should have knowledge, the Tenant, at its sole cost and expense, shall notify the relevant Tax Indemnitee of such requirement and (except if such Tax Indemnitee notifies the Tenant that such Person intends to file such report or return) (A) to the extent required or permitted by and consistent with applicable laws, make and file in its own name such return, statement or report; and (B) in the case of any other such return, statement or report required to be made in the name of such Tax Indemnitee, advise such Tax Indemnitee of such fact and prepare such return, -21- 26 Participation Agreement statement or report for filing by such Tax Indemnitee or, where such return, statement or report shall be required to reflect items in addition to any obligations of the Tenant under or arising out of Section 9.2(a), provide such Tax Indemnitee at the Tenant's expense with information sufficient to permit such return, statement or report to be properly made with respect to any obligations of the Tenant under or arising out of Section 9.2(a). Such Tax Indemnitee shall, upon the Tenant's request and at the Tenant's expense, provide any data maintained by such Tax Indemnitee (and not otherwise within the control of the Tenant) with respect to each Mortgaged Property which the Tenant may reasonably require to prepare any required tax returns or reports. (e) Income Inclusions. If as a result of the payment or reimbursement by the Tenant of any costs and expenses of the Issuer, the Owner Beneficiary or any of their respective Affiliates incurred in connection with the transactions contemplated by the Operative Documents, the Issuer, the Owner Beneficiary or any of their respective Affiliates shall suffer a net increase in any federal, state or local income tax liability, the Tenant shall indemnify the Issuer, the Owner Beneficiary or any of their respective Affiliates (without duplication of any indemnification required by Section 9.2(a)) on an After Tax Basis for the amount of such increase. The calculation of any such net increase shall take into account any current or future tax savings realized or reasonably expected to be realized by the Issuer, the Owner Beneficiary or any of their respective Affiliates, in respect thereof, as well as any interest, penalties and additions to tax payable by the Issuer, the Owner Beneficiary or any of their respective Affiliates. (f) Withholding Taxes. As between the Tenant and the Issuer, the Tenant shall be responsible for, and the Tenant shall indemnify and hold harmless the Issuer (without duplication of any indemnification required by Section 9.2(a)) on an After Tax Basis against, any obligation for United States withholding taxes imposed in respect of the interest payable on the Project Loan Notes to the extent, but only to the extent, the Issuer has actually paid funds to a taxing authority with respect to such withholding taxes (and, if the Issuer receives a demand for such payment from any taxing authority, the Tenant shall discharge such demand on behalf of the Issuer). (g) Contests of Tax. (i) If a written claim is made against any Tax Indemnitee or if any proceeding shall be commenced against such Tax Indemnitee (including a written notice of such proceeding), for any Imposition, such Tax Indemnitee shall promptly notify the Tenant in writing and shall not take action with respect to such claim or proceeding without the consent of the Tenant for thirty (30) days after the receipt of such notice by the Tenant; provided, however, that, in the case of any such claim or proceeding, if action shall be required by law or regulation to be taken prior to the end of such 30-day period, such Tax Indemnitee shall, in such notice to the Tenant, inform the Tenant, and no action shall be taken with respect to such claim or proceeding without the consent of the Tenant before the termination of such shorter period; provided, further, that the failure of such Tax Indemnitee to give the notices referred to this sentence shall not diminish the Tenant's obligation hereunder except to the extent such failure precludes the Tenant from contesting all or part of such claim. (ii) If, within thirty (30) days of receipt of such notice from the Tax Indemnitee (or such shorter period as the Tax Indemnitee is required by law or regulation for the Tax Indemnitee to commence such contest), the Tenant shall request in writing that such Tax -22- 27 Participation Agreement Indemnitee contest such Imposition, the Tax Indemnitee shall, at the expense of the Tenant, in good faith conduct and control such contest (including, without limitation, by pursuit of appeals) relating to the validity, applicability or amount of such Tax (provided, however, that (A) if such contest can be pursued independently from any other proceeding involving a tax liability of such Tax Indemnitee, the Tax Indemnitee, at the Tenant's request, shall allow the Tenant to conduct and control such contest and (B) in the case of any contest, the Tax Indemnitee may request the Tenant to conduct and control such contest) by, in the sole discretion of the Person conducting and controlling such contest, (1) resisting payment thereof, (2) not paying the same except under protest, if protest is necessary and proper, (3) if the payment be made, using reasonable efforts to obtain a refund thereof in appropriate administrative and judicial proceedings, or (4) taking such other action as is reasonably requested by the Tenant from time to time. (iii) The party controlling any contest shall consult in good faith with the noncontrolling party and shall keep the non-controlling party reasonably informed as to the conduct of such contest; provided that all decisions ultimately shall be made in the sole discretion of the controlling party. The parties agree that an Tax Indemnitee may at any time decline to take further action with respect to the contest of any Imposition and may settle such contest if such Tax Indemnitee shall waive its rights to any indemnity from the Tenant that otherwise would be payable in respect of such claim (and any future claim by any taxing authority with respect to other taxable periods that are based, in whole or in part, upon the resolution of such claim) and shall pay to the Tenant any amount previously paid or advanced by the Tenant pursuant to this Section 9.2 by way of indemnification or advance for the payment of an Imposition. (iv) Notwithstanding the foregoing provisions of this Section 9.2, an Tax Indemnitee shall not be required to take any action and the Tenant shall not be permitted to contest any Tax in its own name or that of the Tax Indemnitee unless (A) the Tenant shall have agreed to pay and shall pay to such Tax Indemnitee on demand and on an After Tax Basis all reasonable costs, losses and expenses that such Tax Indemnitee actually incurs in connection with contesting such Tax, including, without limitation, all reasonable legal, accounting and investigatory fees and disbursements, (B) in the case of a claim that must be pursued in the name of an Tax Indemnitee (or an Affiliate thereof), the amount of the potential indemnity (taking into account all similar or logically related claims that have been or could be raised in an audit involving such Tax Indemnitee) for which the Tenant may be liable to pay an indemnity under this Section 9.2 exceeds $1,000,000, (C) the Tax Indemnitee shall have reasonably determined that the action to be taken will not result in any material danger of sale, forfeiture or loss of any Mortgaged Property, or any part thereof or interest therein, will not interfere with the payment of rent under any Lease, and will not result in risk of criminal liability, (D) if such contest shall involve the payment of the Imposition prior to the contest, the Tenant shall provide to the Tax Indemnitee an interest-free advance in an amount equal to the Imposition that the Tax Indemnitee is required to pay (with no additional net after-tax cost to such Tax Indemnitee), (E) in the case of a claim that must be pursued in the name of an Tax Indemnitee (or an Affiliate thereof), the Tenant shall have provided to such Tax Indemnitee an opinion of independent tax counsel selected by the Tax Indemnitee and reasonably satisfactory to the Tenant stating that a reasonable basis exists to contest such claim (or, in the case of an appeal of an adverse determination, an opinion of such counsel to the effect that there is substantial authority for the -23- 28 Participation Agreement position asserted in such appeal) and (F) no Event of Default shall have occurred and be continuing. In no event shall an Tax Indemnitee be required to appeal an adverse judicial determination to the United State Supreme Court. In addition, an Tax Indemnitee shall not be required to contest any claim in its name (or that of an Affiliate) if the subject matter thereof shall be of a continuing nature and shall have previously been decided adversely by a court of competent jurisdiction pursuant to the contest provisions of this Section 9.2, unless there shall have been a change in law (or interpretation thereof) and the Tax Indemnitee shall have received, at the Tenant's expense, an opinion of independent tax counsel selected by the Tax Indemnitee and reasonably acceptable to the Tenant stating that as a result of such change in law (or interpretation thereof), it is more likely than not that the Tax Indemnitee will prevail in such contest. ARTICLE X MISCELLANEOUS Section 10.1 Amendments, Etc. No amendment or waiver of any provision of this Participation Agreement, and no consent to any departure by any party herefrom, shall in any event be effective unless the same shall be in writing and signed by the parties hereto, and then such amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. Section 10.2 Notices, Etc. All notices and other communications provided for hereunder shall be in writing (including telecopier) and telecopied, if the sender on the same day sends a confirming copy of such notice by a recognized overnight delivery service (charges prepaid), or sent by courier, charges prepaid, for delivery at the following address (or at such other address as shall be designated by such party in a written notice to the other Persons listed below): (a) if to the Issuer, to Wilmington Trust Company Rodney Square North 1100 North Market Street Wilmington, Delaware 19890-0001 Attention: Corporate Trust Administration Facsimile: (302) 651-8882 (b) if to Guarantor or Tenant, to: Borders Group, Inc. 100 Phoenix Drive Ann Arbor, MI 48108 Attention: Vice President and General Counsel Facsimile: (734) 477-1285 With a copy to: -24- 29 Participation Agreement Dickinson Wright PLLC 525 North Woodward Avenue Suite 2000 Bloomfield Hills, MI 48304 Attention: Judith E. Gowing (c) if to Owner Beneficiary, to: Jess Project Funding Corp. c/o Lord Securities Corporation Two Wall Street New York City, NY 10005 Attention: Rick L. Taiano, Vice President Facsimile: (212) 346-9012 (d) if to the Collateral Trustee, to: First Security Bank, N.A. 79 South Main Street, 3rd Floor Salt Lake City, UT 84111 Attention: Corporate Trust Services Facsimile: (801) 246-5053 (e) if to a Purchaser, to its address specified in Schedule I hereto Unless otherwise stated herein, all such notices and communications shall be effective (i) if sent by courier, when delivered by hand on the day of delivery or (ii) if telecopied, when received (provided such receipt is (x) verified by a telephone call to the recipient or (y) confirmed by a transmission report evidencing successful transmission). Copies of all notices and other communications sent pursuant to the Indenture and the Trust Agreement shall be sent to the Guarantor and Tenant. Section 10.3 No Waiver; Remedies. No remedy conferred herein is intended to be exclusive of any other remedy, but every such remedy shall be cumulative and shall be in addition to every other remedy herein conferred or now or hereafter existing in law or in equity. No failure to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. Section 10.4 Binding Effect; Term; Assignability. This Participation Agreement shall be binding upon the parties hereto and shall inure to the benefit of the parties hereto and their respective successors and assigns. Section 10.5 Governing Law. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New -25- 30 Participation Agreement York excluding choice-of-law principles of the law of such State that would require the application of the laws of a jurisdiction other than such State. Section 10.6 Execution in Counterparts. This Participation Agreement may be executed in two or more counterparts and by each party hereto in a separate counterpart, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. Section 10.7 Third Party Beneficiaries. Nothing expressed or implied herein is intended or shall be construed to confer upon or to give to any Person, other than the parties hereto, any right, remedy or claim under or by reason of this Participation Agreement, and any terms, covenants, conditions, promises and agreements contained herein shall be for the sole and exclusive benefit of the parties hereto and their respective successors and assigns. Section 10.8 Survival of Covenants and Representations. All covenants, representations and warranties made by any party to any other party herein or in any Note delivered pursuant hereto, whether or not in connection with the Closing Date, shall be considered to have been relied upon by such other party and shall survive the issuance of the Notes and the delivery of this Participation Agreement and shall survive until all of the Project Loans have been paid in full. Section 10.9 Severability. Should any part of this Participation Agreement for any reason by declared invalid, such decision shall not affect the validity of any remaining portion, which remaining portion shall remain in full force and effect as if this Participation Agreement had been executed with the invalid portion thereof eliminated and it is hereby declared the intention of the parties hereto that they would have executed the remaining portion of this Participation Agreement without including therein any such part, parts or portion which may, for any reason, be hereafter declared invalid. Section 10.10 Confidential Information. For the purposes of this Section 10.10, "Confidential Information" means information delivered to the Collateral Trustee or any Purchaser by or on behalf of the Guarantor or the Tenant in connection with the transactions contemplated by or otherwise pursuant to this Participation Agreement that is confidential or proprietary in nature and that was clearly marked or labeled or otherwise adequately identified when received by the Collateral Trustee or any Purchaser as being confidential information of the Guarantor or the Tenant, provided that such term does not include information that (a) was publicly known or otherwise known to the Collateral Trustee or any Purchaser prior to the time of such disclosure, (b) subsequently becomes publicly known through no act or omission by the Collateral Trustee or any Purchaser or any Person acting on behalf of the Collateral Trustee or any Purchaser, (c) otherwise becomes known to the Collateral Trustee or any Purchaser other than through disclosure by the Guarantor or the Tenant or (d) constitutes financial statements delivered to the Collateral Trustee or any Purchaser under Section 4.1 that are otherwise publicly available. The Collateral Trustee and each Purchaser will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by the Collateral Trustee and each Purchaser in good faith to protect confidential information of third parties delivered to the -26- 31 Participation Agreement Collateral Trustee or such Purchaser, provided that the Collateral Trustee and each Purchaser may deliver or disclose Confidential Information to: (i) directors, trustees, officers, employees, attorneys and affiliates of the Collateral Trustee or any Purchaser (to the extent such disclosure reasonably relates to the administration of the investment represented by the Notes); (ii) financial advisors and other professional advisors of the Collateral Trustee or any Purchaser who agree to hold confidential the Confidential Information in accordance with the terms of this Section 10.10; (iii) any other Holder; (iv) with prior written notice to the Guarantor, any Institutional Holder to which any Purchaser sells or offers to sell a Note or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 10.10); (v) with prior written notice to the Guarantor, any Person from which any Purchaser offers to purchase any security of the Guarantor (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 10.10); (vi) any federal or state regulatory authority having jurisdiction over the Collateral Trustee or any Purchaser but only to the extent such information is expressly required to be disclosed by such regulatory authority (with written notice of such disclosure given to the Guarantor promptly following such disclosure); (vii) the National Association of Insurance Commissioners or any similar organization, or any nationally recognized rating agency that requires access to information about the investment portfolio of any Purchaser (with written notice of such disclosure given to the Guarantor promptly following such disclosure); or (viii) with prior written notice to the Guarantor, any other Person to which such delivery or disclosure may be necessary, but only (w) to effect compliance with any law, rule, regulation or order applicable to the Collateral Trustee or any Purchaser, (x) in response to any subpoena or other legal process, (y) in connection with any litigation to which the Collateral Trustee or any Purchaser is a party or (z) if an Event of Default has occurred and is continuing, to the extent the Collateral Trustee or any Purchaser may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under the Notes and this Participation Agreement. Each Holder, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 10.10 as though it were a party to this Agreement. On reasonable request by the Guarantor or the Tenant in connection with the delivery to any Holder of information required to be delivered to such Holder under this Agreement or requested by such Holder (other than a Holder that is a party to this Agreement or its nominee), such Holder will enter into an agreement with the Guarantor and the Tenant embodying the provisions of this Section 10.10. Section 10.11 Issuer Recourse. The parties hereto agree that all of the statements, representations, warranties, covenants and agreements made by the Issuer contained in this Participation Agreement are made and intended only for the purpose of binding the Trust Estate (as defined in the Trust Agreement) and establishing the existence of rights and remedies which can be exercised and enforced against the Trust Estate. Therefore, anything contained in this Agreement to the contrary notwithstanding, no recourse shall be had with respect to this Participation Agreement against the Trust Company or against any institution or person which becomes a successor trustee or co-trustee under the Trust Agreement or any officer, director, trustee, servant or direct or indirect parent or controlling person or persons of any of them; provided, however, that this Section 10.11 shall not be construed to prohibit any action or -27- 32 Participation Agreement proceeding against any party hereto for its own willful misconduct or grossly negligent conduct; and provided, further, that nothing contained in this Section 10.11 shall be construed to limit the exercise and enforcement in accordance with the terms of this Participation Agreement of rights and remedies against the Trust Estate. The foregoing provisions of this Section 10.11 shall survive the termination of this Participation Agreement. Section 10.12 Owner Beneficiary Exculpation. Notwithstanding any other provision herein, no recourse under any obligation, covenant, agreement or instrument of the Owner Beneficiary contained in any Operative Document or with respect hereto shall be had against any incorporator, member, manager, employee, agent or partner of the Owner Beneficiary or its stockholders or their affiliates (each a "Related Person") whether arising by breach of contract, otherwise at law or in equity (including any claim or tort, whether express or implied); it being expressly understood that the agreements and other obligations of the Owner Beneficiary herein and with respect hereto are solely its corporate obligations. Any and all personal liability of any Related Person for breaches of any such obligation, covenant, agreement or instrument as aforesaid are hereby expressly waived as a condition of and in consideration of the Owner Beneficiary's execution of this Participation Agreement. Notwithstanding any other provision herein, the provisions of this Section 10.12 shall survive the termination of this Participation Agreement. -28- 33 Participation Agreement IN WITNESS WHEREOF, the parties hereto have caused this Participation Agreement to be executed by their respective officers thereunto duly authorized as of the day and year first above written. WILMINGTON TRUST COMPANY, not in its individual capacity except as expressly stated herein, but solely as Issuer By /s/ Norma P. Closs ----------------------------------- Name: Norma P. Closs Title: Vice President 34 Participation Agreement JESS PROJECT FUNDING CORP., as Owner Beneficiary By: /s/ Richard L. Taiano ---------------------------------- Name: Richard L. Taiano Title: Vice President 35 Participation Agreement FIRST SECURITY BANK, N.A. as Collateral Trustee By /s/ Val T. Orton ----------------------------------- Name: Val T. Orton Title: Vice President 36 Participation Agreement BORDERS GROUP, INC. By /s/ Kenneth E. Scheve ------------------------------------ Name: Kenneth E. Scheve Title: Senior Vice President 37 Participation Agreement BORDERS, INC. By /s/ Edward W. Wilhelm ------------------------------------ Name: Edward W. Wilhelm Title: Vice President 38 Participation Agreement By 39 Participation Agreement
FRACTIONAL UNDIVIDED NAME AND ADDRESS OF PURCHASER INTEREST
40 Participation Agreement DESCRIPTION OF CLOSING OPINION OF COUNSEL FOR PURCHASERS The closing opinion of McDermott, Will & Emery, special counsel to the Purchasers, called for by SECTION 2.10(e) of the Participation Agreement, shall be dated the Closing Date and addressed to each Purchaser, shall be satisfactory in form and substance to each Purchaser and shall cover such matters relating to the sale of the Notes as each Purchaser may reasonably request. With respect to matters of fact on which such opinion is based, such counsel shall be entitled to rely on appropriate certificates of public officials and other officers of the parties involved in the transaction. EXHIBIT A (to Participation Agreement) 41 Participation Agreement DESCRIPTION OF CLOSING OPINIONS OF COUNSEL FOR ISSUER The closing opinions of Morris, James, Hitchens & Williams, special counsel to the Issuer, called for by SECTION 2.13(a) of the Participation Agreement, shall be dated the Closing Date and addressed to each Purchaser, shall be satisfactory in form and substance to each Purchaser and shall be to the effect that: 1. The Trust Company is a Delaware banking corporation, duly organized and validly existing in good standing under the laws of the State of Delaware and has all necessary power and authority to enter into and perform its obligations under the Indenture and act as the Owner Trustee and to enter into and perform its obligations, as Trust Company or Owner Trustee, as the case may be, under each of the other Operative Agreements to which the Trust Company or the Owner Trustee, as the case may be, is a party. 2. The execution, delivery and performance of each Operative Agreement to which it is a party, either in its individual capacity or as the Owner Trustee, as the case may be, has been duly authorized by all necessary action on its part and neither the execution and delivery thereof, nor the consummation of the transactions contemplated thereby, nor compliance by it with any of the terms and provisions thereof (i) does or will require, to our knowledge, any approval or consent of any trustee or holder of any of its indebtedness or obligations, (ii) does or will contravene any current State of Delaware or United States federal law, governmental rule or regulations relating to its banking or trust powers, (iii) does or will contravene or result in any breach of or constitute any default under, or result in the creation of any Lien upon any of its property under, its charter or by-laws, or, to our knowledge, any indenture, mortgage, chattel mortgage, deed of trust, conditional sales contract, bank loan or credit agreement or other agreement or instrument to which it is a party or by which it or its properties may be bound or affected or (iv) does or will require any approval, consent, filing (other than the filing of the financing statements in the Office of the Secretary of State of the State of Delaware as described in paragraph 7 below), registration or qualification with any governmental body of the State of Delaware or any of the federal governmental body of the United States of America governing the banking or trust powers of the Trust Company. 3. The Indenture and each other Operative Agreement to which Trust Company is a party have been duly executed and delivered by Trust Company, and the Indenture and each such other Operative Agreement to the extent entered into by the Trust Company constitutes a legal, valid and binding obligation enforceable against the Trust Company in accordance with the terms thereof. 4. Each Operative Agreement to which the Owner Trustee is a party have been duly executed and delivered by the Owner Trustee and constitutes a legal, valid and EXHIBIT B (to Participation Agreement) 42 Participation Agreement binding obligation of the Owner Trustee, enforceable against the Owner Trustee in accordance with the terms thereof. 5. To our knowledge, no limitation, investigation or proceeding of or before any arbitrator or any governmental body, federal, state or local, is pending or threatened by or against the Trust Company or the Owner Trustee (a) with respect to any of the Operative Agreements or any of the transactions contemplated thereby, or (b) which could reasonably be expected to have a material adverse effect on the assets, liabilities, operations, business or financial condition of the Trust Company or the Owner Trustee. 6. To our knowledge, neither the Owner Trustee nor any person authorized by the Owner Trustee to act on its behalf has offered or sold any interest in the Trust Estate or the Notes, or created any similar security or interest relating to any Property, or solicited any offer to acquire any of the same from, any Person except as permitted by the Operative Agreements. 7. Insofar as Article 9 of the Uniform Commercial Code as in effect in the State of Delaware (the "UCC") is applicable (without regard to conflicts of laws principles), and assuming that the security interests of the Collateral Trustee in the Collateral have been duly created and have attached (and are of the type that may be perfected by the filing of a UCC financing statement), no action is required to perfect such security interests in the State of Delaware, except for the filing of a UCC financing statement in the Office of the Secretary of State of the State of Delaware. The opinion of Morris, James, Hitchens & Williams shall cover such other matters of Delaware law relating to the collateral assignment of the Project Loans and the issuance of the Notes and the transactions contemplated thereby as each Purchaser may reasonably request. With respect to matters of fact on which such opinions are based, such counsel shall be entitled to rely on appropriate Certificates of public officials and other officers of the parties involved in the transaction and the representations contained in the Participation Agreement. B-2 43 Participation Agreement DESCRIPTION OF CLOSING OPINIONS OF COUNSEL FOR COLLATERAL TRUSTEE The closing opinion of Ray, Quinney & Nebeker, counsel to the Collateral Trustee called for by SECTION 2.13(b) of the Participation Agreement, shall be dated the Closing Date and addressed to each Purchaser and shall be satisfactory in form and substance to each Purchaser and shall be to the effect that: 1. The Collateral Trustee is a national banking association validly existing under the laws of the United States and is duly qualified to act as Collateral Trustee. 2. The Collateral Trustee has the requisite power and authority to execute, deliver and perform its respective obligations under the Participation Agreement and the Indenture and the other Operative Documents to which it is a party ( the "Collateral Trustee Documents") and has taken all necessary action to authorize the execution, delivery and performance by it of each of the Collateral Trustee Documents. 3. Each of the Collateral Trustee Documents has been duly authorized, executed and delivered by the Collateral Trustee and constitutes the legal, valid and binding obligation or contract of the Collateral Trustee enforceable against the Collateral Trustee in accordance with its respective terms, subject to bankruptcy, insolvency, fraudulent conveyance and similar laws affecting creditors' rights generally, and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law). 4. The Notes delivered on the date hereof have been duly authenticated by the Collateral Trustee in accordance with the terms of the Indenture. 5. No authorization, consent, approval, license, exemption of or filing or registration with any court or governmental department, commission, board, bureau, agency or instrumentality by the Collateral Trustee or any affiliate thereof is necessary to the valid execution, delivery or performance of the Collateral Trustee Documents. The opinion of Ray, Quinney & Nebeker shall cover such other matters relating to the transactions contemplated by the Operative Documents as each Purchaser may reasonably request. With respect to matters of fact on which such opinion is based, such counsel shall be entitled to rely on appropriate certificates of public officials and other officers of the parties involved in the transaction. EXHIBIT C (to Participation Agreement) 44 Participation Agreement DESCRIPTION OF CLOSING OPINION OF COUNSEL FOR GUARANTOR AND TENANT The closing opinion of Dickinson Wright PLLC, special counsel to the Guarantor and the Tenants, called for by SECTION 2.13(c) of the Participation Agreement, shall be dated on the Closing Date and shall be satisfactory in form and substance to each Purchaser and shall be to the effect that: 1. The Guarantor is a corporation duly organized, validly existing and in good standing under the laws of Michigan and has the corporate power and authority to enter into and perform its obligations under the Participation Agreement and each other Operative Document to which the Guarantor is a party (the "Guarantor Documents"). 2. Each of the Guarantor Documents has been duly authorized, executed and delivered by the Guarantor and constitutes the legal, valid and binding obligations of the Guarantor, enforceable against the Guarantor in accordance with its terms, subject to bankruptcy, insolvency, fraudulent conveyance and similar laws affecting creditors' rights generally, and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law). 3. The execution, delivery and compliance by the Guarantor with all of the provisions of the Guarantor Documents will not conflict with or result in any breach of any of the provisions or constitute a default under or result in the creation or imposition of any lien or encumbrance upon any of the property of the Guarantor pursuant to the provisions of the charter or the by-laws of the Guarantor or any material agreement or other instrument to which the Guarantor is a party or by which the Guarantor may be bound or any existing law or governmental regulation relating to or having jurisdiction over the Guarantor or its activities. 4. No approval, consent or withholding of objection on the part of, or filing, registration or qualification with, any governmental body, federal or state, is necessary in connection with the execution, delivery and performance by the Guarantor of the Guarantor Documents. 5. The Tenant is a corporation duly organized, validly existing and in good standing under the laws of Colorado and has the corporate power and authority to enter into and perform the Participation Agreement and each other Operative Document to which the Tenant is a party (the "Tenant Documents"). 6. The Tenant is duly licensed or qualified and is in good standing as a foreign corporation in each jurisdiction in which any Mortgaged Property is located. EXHIBIT D (to Participation Agreement) 45 Participation Agreement 7. Each of the Tenant Documents has been duly authorized, executed and delivered by the Tenant and constitutes the legal, valid and binding obligations of the Tenant, enforceable against the Tenant in accordance with its terms, subject to bankruptcy, insolvency, fraudulent conveyance and similar laws affecting creditors' rights generally, and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law). 8. The execution, delivery and compliance by the Tenant with all of the provisions of the Tenant Documents will not conflict with or result in any breach of any of the provisions of or constitute a default under or result in the creation or imposition of any lien or encumbrance upon any of the property of the Tenant pursuant to the provisions of the charter or the by-laws of the Tenant or any material agreement or other instrument to which the Tenant is a party or by which the Tenant may be bound or any existing law or governmental regulation relating to or having jurisdiction over the Tenant or its activities. 9. No approval, consent or withholding of objection on the part of, or filing, registration or qualification with, any governmental body, federal or state, is necessary in connection with the execution, delivery and performance by the Tenant of the Tenant Documents. 10. The issuance and sale of the Project Loan Notes under the circumstances contemplated by the Project Loan Agreements do not, under existing law, require the registration of the Project Loan Notes under the Securities Act of 1933, as amended, or the qualification of an indenture under the Trust Indenture Act of 1939, as amended. 11. To the best of our knowledge after due inquiry, there is no action, proceeding or governmental investigation pending or threatened that (i) questions the validity of or challenges any of the Tenant Documents or any of the transactions contemplated thereby, (ii) would have an adverse effect on the benefits intended to be realized by the Issuer, the Collateral Trustee or the Purchasers under any of the Tenant Documents, or (iii) could reasonably be expected to have, either in any case or in the aggregate, a materially adverse effect on the business, properties, assets, operations or financial condition of Guarantor or the Tenant. 12. The issuance and delivery of the Notes under the circumstances contemplated by the Participation Agreement and the Indenture do not, under existing law, require the registration of the Notes under the Securities Act of 1933, as amended, or the qualification of an indenture under the Trust Indenture Act of 1939, as amended. 13. [NON-CONSOLIDATION OPINION CONCERNING PROJECT BORROWERS]. The opinion of Dickinson Wright PLLC shall cover such other matters relating to the transactions contemplated by the Operative Documents as each Purchaser may reasonably D-2 46 Participation Agreement request. With respect to matters of fact on which such opinion is based, such counsel shall be entitled to rely on appropriate Certificates of public officials and other officers of the parties involved in the transaction. D-3 47 Participation Agreement DESCRIPTION OF CLOSING OPINION OF EACH LOCAL COUNSEL FOR THE PROJECT BORROWERS The closing opinion of various local counsel to the Project Borrowers, called for by SECTION 2.13(d) of the Participation Agreement, shall be dated the Closing Date and shall be satisfactory in form and substance to each Purchaser and shall be to the effect that: 1. Each Lease Document to which the Tenant is a party constitutes the legal, valid and binding contract of the Tenant, enforceable against the Tenant in accordance with its respective terms, subject to bankruptcy, insolvency, fraudulent conveyance and similar laws affecting creditors' rights generally, and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law). 2. No authorization, consent, approval, license, exemption of or filing or registration with any court or governmental department, commission, board, bureau, agency or instrumentality in the State of _________ is necessary for the valid execution, delivery or performance of any Lease Document or any other Project Loan Document by the Tenant. 3. Each Lease Document to which each Project Borrower is a party has been duly authorized, executed and delivered by such Project Borrower and constitutes the legal, valid and binding contract of such Project Borrower, enforceable against such Project Borrower in accordance with its respective terms, subject to bankruptcy, insolvency, fraudulent conveyance and similar laws affecting creditors' rights generally, and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law). 4. Each Project Loan Document to which each Project Borrower is a party has been duly authorized, executed and delivered by such Project Borrower and constitutes the legal, valid and binding contract of such Project Borrower, enforceable against such Project Borrower in accordance with its respective terms, subject to bankruptcy, insolvency, fraudulent conveyance and similar laws affecting creditors' rights generally, and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law). 5. The execution, delivery and compliance by each Project Borrower with all of the provisions of each Lease Document to which it is a party and each Project Loan Document to which it is a party will not conflict with or result in any breach of any of the provisions of or constitute a default under or result in the creation or imposition of any lien or encumbrance upon any of the property of the Project Borrower pursuant to the provisions of the certificate of trust or trust agreement, charter instrument or any agreement or other instrument known to such counsel to which any Project Borrower is a party or by which any Project Borrower may be bound. EXHIBIT E (to Participation Agreement) 48 Participation Agreement 6. No authorization, consent, approval, license, exemption of or filing or registration with any court or governmental department, commission, board, bureau, agency or instrumentality in the State of is necessary for the valid execution, delivery or performance of any Lease Document or any other Project Loan Document by the Project Borrower. 7. The transactions contemplated by, and the payments to be made and received pursuant to any Mortgage Note or any Project Loan Document do not violate, or are exempt from, any applicable federal or state usury laws. 8. There are no actions, suits or proceedings pending or, to the knowledge of such counsel after due inquiry, threatened against or affecting any Project Borrower in any court or before any governmental authority or arbitration board or tribunal which could reasonably be expected to materially and adversely affect the execution, delivery or performance by any such Project Borrower of its obligations under any Lease Document to which it is a party or any Project Loan Document to which it is a party or the enforceability of any such Project Borrower's obligations thereunder. 9. The execution, delivery and performance by each Project Borrower of each Lease Document to which it is a party and each Project Loan Document to which it is a party do not (i) violate (A) the certificate of trust or trust agreement pursuant to which such Project Borrower is organized, (B) any provision of any law, rule or regulation in the State of __________, or (C) to the knowledge of such counsel, any order, writ, judgment, injunction, decree, determination or award applicable to such Project Borrower, (ii) result in a breach or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument (including, without limitation, the Lease) to which it is a party or by which it or its properties are bound, where such breach or default would have a material adverse effect on the financial condition, properties or operations of such Project Borrower, or (iii) result in, or require, the creation or imposition of any mortgage, deed of trust, pledge, lien, security interest or other charge or encumbrance (other than as contemplated by the Project Loan Documents). To the knowledge of such counsel, no Project Borrower is in violation of or in default under any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award or any indenture, agreement, lease or instrument described in this opinion where such violation or default would have a material adverse effect on the financial condition, properties or operations of any such Project Borrower. 10. The Memorandum of Lease, Mortgage, Assignment of Lease and Rents and the Assignment of Mortgage are each in form satisfactory for recording in the appropriate public office for the recording of instruments affecting title to real property in each county in which any portion of the Mortgaged Property is located, and upon such recordation shall constitute a valid first lien upon the real property interest described therein, in each case in favor of the Indenture Trustee. No other recordation or filing is required to create or preserve the validity of such lien. E-2 49 Participation Agreement 11. The Mortgage creates a security interest in the portions of the Mortgaged Property constituting fixtures, if any, and no financing or other statements are required to be filed to perfect such security interest under the Uniform Commercial Code of the state in which the Mortgaged Property is located. Upon the recordation or filing of the financing statement in the office of the Secretary of State of the State of ________ and the offices of the county in which the Mortgaged Property is located, the Collateral Trustee shall have a perfected security interest upon the Collateral (as defined in the Mortgage) pursuant to the uniform commercial code of such state. To continue the effectiveness of such financing statement as to such Collateral, continuation statements must be filed in the office in which such financing statement has been filed within six months prior to the expiration of each fifth anniversary of the date of filing of such financing statement. Any such continuation statement must be signed by the secured party, who should identify the original statement by file number and state that the original statement is still effective. No other recordation or filing is required to preserve such interest in or lien upon the Collateral. Other than the filing fee required to be paid at the time of recording the financing statement, no other fees, taxes or other charges due in the state in which Mortgaged Property is located in connection with the execution, delivery, filing and recording of the financing statement. 12. No fees, taxes or other charges, or intangible documentary stamp, mortgage, transfer or recording taxes or similar charges, are payable to the government of the state in which the Mortgaged Property is located or to any jurisdiction therein on account of the execution, delivery or ownership of any Lease Document or any other Project Loan Document, the creation of the indebtedness evidenced or secured thereby, the creation of the liens and security interests thereunder, or the filing, recording or registration of the Mortgage or any financing statement except for nominal filing or recording fees. 13. Neither the Collateral Trustee nor the Purchasers are required to pay any tax or to be qualified to do business, or to file any designation for service of process or to file any reports in the state in which the Mortgaged Property is located or to comply with any statutory or regulatory rule or requirement applicable only to financial institutions chartered or qualified to do business in the state in which the Mortgaged Property is located solely by reason of its execution and delivery or acceptance of the Mortgage or the other Project Loan Documents or by reason of its participation in any of the transactions under or contemplated by the Project Loan Documents, including, without limitation, the Project Loan Note and the purchase or holding of the Project Loan Note as contemplated thereby, and the making and receipt of any payments pursuant thereto; and the validity and enforceability of, and the exercise of any right or remedy under of with respect to, the Mortgage and the other Project Loan Documents will not be precluded by any failure to so qualify or file. 14. The Project Borrower has qualified to do business in the State of ___________. E-3 50 Participation Agreement 15. The Mortgage and financing statement conform to all requirements of the laws of the state in which the Property is located and the Mortgage contains remedial, waiver and other provisions which will allow the Collateral Trustee to realize the practical benefits intended to be conferred thereby. The Project Loan Documents grant to the Collateral Trustee the rights to (a) foreclose Project Borrower's interests in the Mortgaged Property, (b) execute upon Project Borrower's interests in the Collateral, (c) apply to a state court of the state in which the Mortgaged Property is located for the appointment of a receiver, (d) cite Project Borrower's failure to pay taxes as evidence of waste and (e) collect the rents from the Mortgaged Property, each of which is a remedy commonly sought by creditors whose loans are secured by real and personal property in the state in which the Mortgaged Property is located. Enforcement of the remedies provided in the Mortgage with respect to the Project Borrower or its property will not, except as expressly limited by the terms of the Mortgage, deprive any secured party of its right to seek a deficiency judgment nor will it limit the right of the Collateral Trustee to foreclose on other security or collateral securing the Project Loan Note. 16. In connection with the remedies provided in the Mortgage: (a) The exercise at any time and in any order of any remedies available against the property covered by the uniform commercial code as adopted by the state in which the Mortgaged Property is located or any other Mortgaged Property will not be affected by, nor will the exercise at any time of such remedies affect the remedies relating to the Land and Improvements (as such terms are defined in the Mortgage), unless the Project Loan Note and Mortgage have been paid and performed in full. (b) The exercise of any remedies with respect to any security or collateral located outside of the state in which the Mortgaged Property is located securing the obligations under any Project Loan Documents will not affect or limit the Collateral Trustee's ability to foreclose against, or exercise any other remedies with respect to, the Mortgaged Property, except to the extent that the fair value of such security or collateral so sold or disposed of has been appropriately applied to the payment of the Project Loan Note or unless such Project Loan Note has been paid and performed in full. (c) There is no "one form of action" or similar law in the state in which the Mortgaged Property is located which would limit the Collateral Trustee or any other secured party to choosing only one remedy to enforce its or their rights under any Project Loan Documents or any other Project Loan Documents. E-4 51 Participation Agreement REPRESENTATIONS AND WARRANTIES OF ISSUER Capitalized terms used herein shall have the respective meanings as set forth in the Participation Agreement. Each of the Trust Company and the Issuer represents and warrants (as to itself only) as follows (provided that the representations in the following paragraphs 6 through 17 are made solely by the Issuer): 1. It is a corporation duly organized and validly existing and in good standing under the laws of the State of Delaware and has the power and authority to enter into and perform its obligations under the Operative Agreements to which the Trust Company is a party (the "Issuer Documents"). 2. The execution, delivery and performance by the Issuer of each of the Issuer Documents have been duly authorized by all necessary action on its part and neither the execution and delivery thereof, nor the consummation of the transactions contemplated thereby, nor compliance by it with any of the terms and provisions thereof does or will (i) require any approval or consent of any trustee or holders of any of its indebtedness or obligations, (ii) contravene any current law, governmental rule or regulation of the State of Delaware or any United States federal law, rule or regulation, in each case relating to it, (iii) contravene or result in any breach of or constitute any default under, or result in the creation of any Lien upon any of its property under, its organizational documents, or any indenture, mortgage, chattel mortgage, deed of trust, conditional sales contract, bank loan or credit agreement or other agreement or instrument to which it is a party or by which it or its properties may be bound or affected or (iv) require any authority, approval or other action by any Governmental Authority or agency of the State of Delaware or any federal authority governing the banking or trust powers of the Issuer. 3. Each of the Issuer Documents has been, or will be, duly executed and delivered by the Trust Company or the Issuer, as the case may be, and constitutes, or upon execution and delivery will constitute, a legal, valid and binding obligation enforceable against the Trust Company (to the extent expressly provided therein) or the Issuer, as the case may be, in accordance with its respective terms. 4. No litigation, investigation or proceeding of or before any arbitrator or Governmental Authority of the State of Delaware or of the United States government governing the banking or trust powers of the Issuer is pending or, to the knowledge of the Issuer, threatened by or against the Issuer (a) with respect to any of the Issuer Documents or any of the transactions contemplated thereby, or (b) which could have a material adverse effect on the business or financial condition of the Issuer or the validity or enforceability of any of the Issuer Documents. EXHIBIT F (to Participation Agreement) 52 Participation Agreement 5. It has not assigned or transferred, or granted any lien in respect of, any of its rights, title or interest in or under any Project Loan, except in accordance with the Issuer Documents. 6. The Issuer is not in default under or with respect to any of its contractual obligations in any respect which could have a material adverse effect on the business or financial condition of the Issuer or the validity or enforceability of any of the Issuer Documents. No Default or Event of Default has occurred and is continuing. 7. The proceeds of the Loans shall be applied by the Issuer solely to make Project Loans to the Project Borrowers. 8. The Issuer's principal place of business, chief executive office and office where the documents, accounts and records relating to the transaction contemplated by this Agreement and each other Operative Agreement are located is in Wilmington, Delaware and the Issuer's mailing address is: c/o Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890. 9. No part of the proceeds of any Loans will be used for "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulation U of the Board of Governors of the Federal Reserve System as now and from time to time hereafter in effect. If requested by any Purchaser, the Issuer will furnish to such Purchaser a statement to the foregoing effect in conformity with the requirements of FR Form U-1 referred to in said Regulation U. 10. The Issuer is not an "investment company" or a company controlled by an "investment company" within the meaning of the Investment Company Act. 11. The originally executed copy of each Project Loan Note and an originally executed copy of each other Project Loan Document has been delivered to the Collateral Trustee on or prior to the Closing Date. 12. As of the Closing Date, no Project Loan Note or any related Project Loan Document has been assigned or pledge to a third party other than the Collateral Trustee. The Issuer has good and marketable title to each Project Loan Note and related Project Loan Documents purported to be collaterally assigned by the Issuer, and the Issuer is the sole owner thereof and has full right and power to hold and to create a Lien on such Project Loan Note and related Project Loan Documents in favor of the Trustee. 13. The Issuer has collaterally assigned to the Collateral Trustee the Project Loan Documents and the Collateral Trustee has a first perfected Lien on all such Project Loan Documents. F-2 53 Participation Agreement 14. The Issuer represents and warrants that the Issuer has not, directly or indirectly, nor has any agent on its behalf, offered or will offer any Note or any similar security to or has solicited or will solicit an offer to acquire any Note or any similar security from any person in such manner as to bring the issuance and sale of the Notes within the provisions of Section 5 of the Securities Act of 1933, as amended. 15. The consummation of the transactions provided for in the Issuer Documents and compliance by the Issuer with the provisions thereof and the collateral assignment of the Project Loans thereunder will not involve any prohibited transaction within the meaning of the Employee Retirement Income Security Act of 1974, as amended, or Section 4975 of the Internal Revenue Code of 1986, as amended. 16. The Issuer has not waived or agreed to any waiver under, or agreed to any amendment or other modification of, any Project Loan Note, or any Project Loan Document. 17. The Issuer has not nor has anyone acting on its behalf offered, transferred, pledged, sold or otherwise disposed of any Note, any interest in any Note or any other similar security to, or solicited any offer to buy or accept a transfer, pledge or other disposition of any Note, any interest in the Notes or any other similar security, or otherwise approached or negotiated with respect to the Notes, any interest in the Notes or any other similar security with, any person in any manner which would, or made any general solicitation by means of general advertising or in any other manner or taken any other action which would, constitute a distribution of the Notes under the Securities Act of 1933, as amended, or which would render the disposition of the Notes a violation of Section 5 of the Securities Act of 1933, as amended, or require registration pursuant thereto. F-3 54 Participation Agreement REPRESENTATIONS AND WARRANTIES OF COLLATERAL TRUSTEE Capitalized terms used herein shall have the respective meanings as set forth in the Participation Agreement. The Collateral Trustee hereby represents and warrants that: 1. The Collateral Trustee is a national banking association duly organized, validly existing, and in good standing under the laws of the United States of America. 2. The Collateral Trustee has full power, authority and legal right under the laws of the United States pertaining to its banking and trust powers to execute, deliver, and perform each of the Operative Documents to which it is a party (the "Trustee Documents") and to authenticate and deliver the Notes and has taken all necessary action to authorize the execution, delivery, and performance by it of each of the Trustee Documents and to authenticate and deliver the Notes. 3. The execution, delivery and performance by the Collateral Trustee of each of the Trustee Documents will not contravene any law, rule or regulation of the States of New York or Utah or any United States governmental authority or agency regulating the Collateral Trustee's banking or trust powers or any judgment or order applicable to or binding on the Collateral Trustee and will not contravene or result in any breach of, or constitute a default under, the Collateral Trustee's articles of association or by-laws or the provision of any indenture, mortgage, contract or other agreement to which it is a party or by which it or any of its properties is bound. 4. The execution, delivery and performance by the Collateral Trustee of each of the Trustee Documents and the authentication of the Notes will not require the authorization, consent, or approval of, the giving of notice to, the filing or registration with, or the taking of any other action in respect of, any United States or State of Utah governmental authority or agency regulating the banking and trust activities of the Collateral Trustee. 5. Each of the Trustee Documents have been duly executed and delivered by the Collateral Trustee and constitutes the legal, valid, and binding agreements of the Collateral Trustee, enforceable in accordance with their respective terms, subject to bankruptcy, insolvency, fraudulent conveyance and similar laws affecting creditors' rights generally, and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law). 6. The Collateral Trustee is not or will not, as a result of the performance of its duties under the Indenture, be required to be registered as an "investment company" within the meaning of the Investment Company Act of 1940, as amended. EXHIBIT G (to Participation Agreement) 55 Participation Agreement REPRESENTATIONS AND WARRANTIES OF GUARANTOR 1. The Guarantor is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdictions of incorporation. The Guarantor has the lawful power to own or lease its properties and to engage in the business it presently conducts or proposes to conduct. 2. The Guarantor has full power to enter into, execute, deliver and carry out the Operating Documents to which it is a party (the "Guarantor Documents") and to perform obligations under each of the Guarantor Documents and all such actions have been duly authorized by all necessary proceedings on its part. 3. The Guarantor has duly and validly executed and delivered each of the Guarantor Documents. Each such Guarantor Document constitutes the legal, valid and binding obligation of the Guarantor enforceable against the Guarantor in accordance with its terms, except to the extent that enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforceability of creditors' rights generally or limiting the right of specific performance. 4. Neither the execution and delivery of the Guarantor Documents nor the consummation of the transactions therein contemplated nor the compliance with the terms and provisions thereof will (i) violate any provision of any existing law, statute, rule or regulation applicable to the Guarantor or (ii) conflict with, constitute a default under or result in any breach of (a) the terms and conditions of the certificate of incorporation, by-laws or other organizational documents of the Guarantor or (b) any agreement or instrument or order, writ, judgment, injunction or decree to which the Guarantor is a party or by which the Guarantor or any of its properties may be subject or bound, or (iii) result in the creation or enforcement of any Lien, charge or encumbrance whatsoever upon any property (now or hereafter acquired) of the Guarantor. 5. There are no actions, suits, proceedings or investigations pending or, to the knowledge of the Guarantor threatened against the Guarantor or any of its Subsidiaries before any Governmental Authority which individually or in the aggregate could reasonably be expected to have a Material Adverse Effect. Neither the Guarantor nor any of its Subsidiaries is in violation of any order, writ, injunction or any decree of any Governmental Authority which individually or in the aggregate could reasonably be expected to have a Material Adverse Effect. 6. The Guarantor has delivered to each of the Purchasers copies of its audited consolidated financial statements dated January 25, 1998 (the "Annual Statements"). In addition, the Guarantor has delivered to each of the Purchasers copies of its unaudited consolidated interim financial statements dated October 25, 1998 (the "Interim Statements") (the Annual Statements and the Interim Statements being collectively referred to as the "Historical Statements"). The Historical Statements were compiled from the books and records maintained EXHIBIT H-1 (to Participation Agreement) 56 Participation Agreement by the Guarantor's management, are correct and complete and fairly represent the consolidated financial condition of the Guarantor and its Subsidiaries as of their dates and the results of operations for the fiscal periods then ended and have been prepared in accordance with GAAP consistently applied (except as disclosed in such financial statements), subject (in the case of the Interim Statements) to normal year end audit adjustments. 7. Neither the Guarantor nor any of its Subsidiaries (including the Tenant) has any material liabilities, contingent or otherwise, or forward or long-term commitments that are not disclosed in the Historical Statements referenced in the foregoing paragraph (6) or in the notes thereto, other than as incurred in the ordinary course of business after the date of such statements. Except as disclosed therein or on the schedules thereto, there are no unrealized or anticipated losses from any commitments of the Guarantor or any Subsidiary of the Guarantor which individually or in the aggregate could reasonably be expected to have a Material Adverse Effect. Since the date of the Interim Statements, no circumstances or events have occurred which could reasonably be expected to have a Material Adverse Effect. 8. On the Closing Date, no Guarantor Documents or any certificate, statement, financial or otherwise, agreement or other documents furnished to the Purchasers in connection therewith, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not misleading. On the Closing Date, there is no fact known to the Guarantor which could reasonably be expected to have a Material Adverse Effect and which has not been set forth in this Certificate or in the certificates, Historical Statements, agreements or other documents furnished in writing to the Purchasers prior to or on the Closing Date in connection with the transactions contemplated by the Guarantor Documents. 9. No consent, approval, exemption, order or authorization of, or registration or filing with any Governmental Authority or any other Person is required by law or any agreement in connection with the execution and delivery by the Guarantor of the Guarantor Documents, the consummation of the transactions therein contemplated and the compliance with the terms and provisions thereof. 10. No Event of Default or Default has occurred and is continuing. Neither the Guarantor nor any of its Subsidiaries (including the Tenant) is in violation of (i) any term of its certificate of incorporation, by-laws, or other organizational documents or (ii) any agreement or instrument or order, writ, judgment, injunction or decree to which it is a party or by which it or any of its properties may be subject or bound where such violation individually or in the aggregate could reasonably be expected to have a Material Adverse Effect. 11. The Guarantor and its Subsidiaries (including the Tenant) are in compliance in respects with all applicable laws in all jurisdictions in which the Guarantor or any of its Subsidiaries is presently or will be doing business except where the failure to do so individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. H-1-2 57 Participation Agreement 12. All contracts which are material to the business operations of the Guarantor and its Subsidiaries (including the Tenant) are valid, binding and enforceable upon the Guarantor and each such Subsidiary, as applicable, and each of the other parties thereto in accordance with their respective terms, and there is no default thereunder, to the Guarantor's knowledge, with respect to parties other than the Guarantor or its Subsidiaries which could be expected to have a Material Adverse Effect. 13. (a) Except as otherwise disclosed in the December, 1998 Property Solutions, Inc. Phase I Environmental Assessments prepared for each Mortgaged Property (the "Reports"), there are no circumstances at, on or under any Mortgaged Property that constitute a material breach of or material noncompliance with any of the Environmental Laws, and there are no past or present Environmental Violations at, on or under any Mortgaged Property or, to the knowledge of the Guarantor at, on or under adjacent property, that prevent compliance with the Environmental Laws at any Mortgaged Property or that otherwise would require that any removal, remediation or other corrective action or cleanup be taken with respect to any Mortgaged Property. (b) No Mortgaged Property and no structures, improvements, equipment, fixtures, activities or facilities thereon or thereunder contain or use Hazardous Substances except in compliance with Environmental Laws. Except as may otherwise be disclosed in the Reports, there are no processes, facilities, operations, equipment or any other activities at, on or under such property, or, to the knowledge of the Guarantor at, on or under adjacent property, that have resulted or are currently resulting in the release or threatened release of Hazardous Substances onto any Mortgaged Property, except to the extent that such releases or threatened releases are not a breach of or otherwise not a violation of the Environmental Laws. (c) There are no above ground storage tanks, underground storage tanks or underground piping associated with such tanks, used for the management of Hazardous Substances at, on or under any Mortgaged Property that (a) do not have a full operational secondary containment system in place, and (b) are not otherwise in compliance with all Environmental Laws. Except as may otherwise be disclosed in the Reports, there are no abandoned underground storage tanks or underground piping associated with such tanks, previously used for the management of Hazardous Substances at, on or under any Mortgaged Property that have not either been closed in place in accordance with Environmental Laws or removed in compliance with all applicable Environmental Laws and no contamination associated with the use of such tanks exists on such property. (d) All material permits, licenses, authorizations, plans and approvals necessary under the Environmental Laws for the conduct of business by the Tenant on the Mortgaged Properties as presently conducted have been obtained. All material notices, reports and other filings required by the Environmental H-1-3 58 Participation Agreement Laws to be submitted to a Governmental Authority which pertain to past and current operations on the Mortgaged Properties have been submitted. (e) All present, and, based upon the Reports, to the best of Guarantor's knowledge, all past on-site generation, storage, processing, treatment, recycling, reclamation, disposal or other use or management of Hazardous Substances at, on, or under any Mortgaged Property and all off-site transportation, storage, processing, treatment, recycling, reclamation, disposal or other use or management of Hazardous Substances has been done in material compliance with the Environmental Laws. 14. The representations and warranties of the Guarantor set forth in each Guarantor Document are true and correct in all material respects. The Guarantor is in compliance with its obligations under the Guarantor Documents and there exists no Default or Event of Default by the Guarantor under any of the Guarantor Documents. 15. The aggregate amount of Project Loan Debt Service (as defined in the Project Loan Agreements) and payable as Basic Rent due under all Leases for each calendar month occurring while the Notes are scheduled to be outstanding equals the Monthly Amortization for such calendar month. H-1-4 59 Participation Agreement REPRESENTATIONS AND WARRANTIES OF TENANT 1. Tenant is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdictions of incorporation. Tenant has the lawful power to own or lease its properties and to engage in the business it presently conducts or proposes to conduct. The Tenant is duly licensed or qualified and in good standing in each jurisdiction in which any Property is located. 2. Tenant has full power to enter into, execute, deliver and carry out the Operating Documents to which it is a party (the "Tenant Documents") and to perform obligations under each of the Tenant Documents and all such actions have been duly authorized by all necessary proceedings on its part. 3. Tenant has duly and validly executed and delivered each of the Tenant Documents. Each such Tenant Document constitutes the legal, valid and binding obligation of Tenant enforceable against Tenant in accordance with its terms, except to the extent that enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforceability of creditors' rights generally or limiting the right of specific performance. 4. Neither the execution and delivery of the Tenant Documents nor the consummation of the transactions therein contemplated nor the compliance with the terms and provisions thereof will (i) violate any provision of any existing law, statute, rule or regulation applicable to Tenant or (ii) conflict with, constitute a default under or result in any breach of (a) the terms and conditions of the certificate of incorporation, by-laws or other organizational documents of Tenant or (b) any agreement or instrument or order, writ, judgment, injunction or decree to which Tenant is a party or by which Tenant or any of its properties may be subject or bound, or (iii) result in the creation or enforcement of any Lien, charge or encumbrance whatsoever upon any property (now or hereafter acquired) of Tenant. 5. There are no actions, suits, proceedings or investigations pending or, to the knowledge of Tenant threatened against Tenant or any of its Subsidiaries before any Governmental Authority which individually or in the aggregate could reasonably be expected to have a Material Adverse Effect. Neither Tenant nor any of its Subsidiaries is in violation of any order, writ, injunction or any decree of any Governmental Authority which individually or in the aggregate could reasonably be expected to have a Material Adverse Effect. 6. On the Closing Date, no Tenant Documents or any certificate, statement, financial or otherwise, agreement or other documents furnished to the Purchasers in connection therewith, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not misleading. On the Closing Date, there is no fact known to Tenant which could reasonably be expected to have a Material Adverse Effect and which has not been set forth in this Certificate or in the certificates, Historical Statements, agreements or other documents EXHIBIT H-2 (to Participation Agreement) 60 Participation Agreement furnished in writing to the Purchasers prior to or on the Closing Date in connection with the transactions contemplated by the Tenant Documents. 7. No consent, approval, exemption, order or authorization of, or registration or filing with any Governmental Authority or any other Person is required by law or any agreement in connection with the execution and delivery by Tenant of the Tenant Documents, the consummation of the transactions therein contemplated and the compliance with the terms and provisions thereof. 8. (a) Except as otherwise disclosed in the December, 1998 Property Solutions, Inc. Phase I Environmental Assessments prepared for each Mortgaged Property (the "Reports"), there are no circumstances at, on or under any Mortgaged Property that constitute a material breach of or material noncompliance with any of the Environmental Laws, and there are no past or present Environmental Violations at, on or under any Mortgaged Property or, to the knowledge of Tenant at, on or under adjacent property, that prevent compliance with the Environmental Laws at any Mortgaged Property or that otherwise would require that any removal, remediation or other corrective action or cleanup be taken with respect to any Mortgaged Property. (b) No Mortgaged Property and no structures, improvements, equipment, fixtures, activities or facilities thereon or thereunder contain or use Hazardous Substances except in compliance with Environmental Laws. Except as may otherwise be disclosed in the Reports, there are no processes, facilities, operations, equipment or any other activities at, on or under such property, or, to the knowledge of Tenant at, on or under adjacent property, that have resulted or are currently resulting in the release or threatened release of Hazardous Substances onto any Mortgaged Property, except to the extent that such releases or threatened releases are not a breach of or otherwise not a violation of the Environmental Laws. (c) There are no above ground storage tanks, underground storage tanks or underground piping associated with such tanks, used for the management of Hazardous Substances at, on or under any Mortgaged Property that (a) do not have a full operational secondary containment system in place, and (b) are not otherwise in compliance with all Environmental Laws. Except as may otherwise be disclosed in the Reports, there are no abandoned underground storage tanks or underground piping associated with such tanks, previously used for the management of Hazardous Substances at, on or under any Mortgaged Property that have not either been closed in place in accordance with Environmental Laws or removed in compliance with all applicable Environmental Laws and no contamination associated with the use of such tanks exists on such property. (d) All material permits, licenses, authorizations, plans and approvals necessary under the Environmental Laws for the conduct of business by Tenant on the Mortgaged Properties as presently conducted have been obtained. All H-2-2 61 Participation Agreement material notices, reports and other filings required by the Environmental Laws to be submitted to a Governmental Authority which pertain to past and current operations on the Mortgaged Properties have been submitted. (e) All present, and, based upon the Reports, to the best of Tenant's knowledge, all past on-site generation, storage, processing, treatment, recycling, reclamation, disposal or other use or management of Hazardous Substances at, on, or under the Mortgaged Property and all off-site transportation, storage, processing, treatment, recycling, reclamation, disposal or other use or management of Hazardous Substances has been done in material compliance with the Environmental Laws. 9. The representations and warranties of Tenant set forth in each Tenant Document are true and correct in all material respects. Tenant is in compliance with its obligations under the Tenant Documents and there exists no Default or Event of Default by Tenant under any of the Tenant Documents. 10. Upon the execution and delivery of each Lease, (i) Tenant will have unconditionally accepted the Mortgaged Property subject to such Lease, (ii) no offset will exist with respect to any Basic Rent or other sums payable under such Lease and (iii) no Basic Rent or Supplemental Rent under any Lease will have been prepaid except as otherwise required by the Operative Agreements. 11. No portion of any Mortgaged Property is located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable agency, or if any such Mortgaged Property is located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable agency, then flood insurance has been obtained for such Mortgaged Property in accordance with Article XV of each Lease and in accordance with the National Flood Insurance Act of 1968, as amended. 12. Tenant has obtained insurance coverage for each Mortgaged Property which meets the requirements of Article XV of each Lease and all of such coverage is in full force and effect. 13. To the actual knowledge of Tenant, each Mortgaged Property (i) complies in all material respects with all applicable laws, rules and regulations of all governmental authorities (including, without limitation, all zoning and land use laws and Environmental Laws); or (ii) does not comply with certain state and local land use, zoning and related legal requirements (other than Environmental Laws) which have been identified in writing to the Purchasers and which the Purchasers have deemed immaterial. 14. To the actual knowledge of Tenant, all consents, licenses and building permits required by all applicable laws, rules and regulations of all governmental authorities, occupancy and operation of each Mortgaged Property (i) have been obtained and are in full force and effect; or (ii) have not been obtained (such consents, licenses and building permits having been identified in writing to the Purchasers and which the Purchasers have deemed immaterial). H-2-3 62 Participation Agreement REPRESENTATIONS AND WARRANTIES OF OWNER BENEFICIARY Capitalized terms used herein shall have the respective meanings as set forth in the Participation Agreement. The Owner Beneficiary hereby represents and warrants that: 1. The Owner Beneficiary is a corporation duly organized, validly existing and in good standing under the laws of Delaware. 2. The Owner Beneficiary has full power, authority and legal right to execute, deliver, and perform each of the Operative Documents to which it is a party (the "Owner Beneficiary Documents") and has taken all necessary corporate action to authorize the execution, delivery, and performance by it of each of the Owner Beneficiary Documents. 3. The execution, delivery and performance by the Owner Beneficiary of each of the Owner Beneficiary Documents will not contravene any law, rule or regulation or any judgment or order applicable to or binding on the Owner Beneficiary and will not contravene or result in any breach of, or constitute a default under, the Owner Beneficiary's certificate of incorporation or by-laws or the provision of any indenture, mortgage, contract or other agreement to which it is a party or by which it or any of its properties is bound. 4. The execution, delivery and performance by the Owner Beneficiary of each of the Owner Beneficiary Documents will not require the authorization, consent, or approval of, the giving of notice to, the filing or registration with, or the taking of any other action in respect of, any governmental authority. 5. Each of the Owner Beneficiary Documents have been duly executed and delivered by the Owner Beneficiary and constitutes the legal, valid, and binding agreements of the Owner Beneficiary, enforceable in accordance with their respective terms, subject to bankruptcy, insolvency, fraudulent conveyance and similar laws affecting creditors' rights generally, and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law). 6. The Owner Beneficiary is not or will not, as a result of the performance of its duties under the Indenture, be required to be registered as an "investment company" within the meaning of the Investment Company Act of 1940, as amended. EXHIBIT I (to Participation Agreement) EX-10.35 17 AGREEMENT DATED APRIL 10, 1999 1 EXHIBIT 10.35 RESIGNATION AND RELEASE AGREEMENT AGREEMENT (the "Agreement"), dated as of April 20, 1999 (the "Resignation Date"), by and between Borders Group, Inc. (the "Company"), and Philip M. Pfeffer (the "Executive"). WHEREAS, the Executive has been employed as Chief Executive Officer of the Company; and WHEREAS, by mutual agreement between the parties hereto, the Executive shall hereby resign, effective as of the Resignation Date, his positions as Chief Executive Officer of the Company, as a member of the Board of Directors of the Company and as an officer and director of any subsidiary or affiliate of the Company for which he is serving in such positions. NOW, THEREFORE, BE IT RESOLVED, that the Company and the Executive, in consideration of the covenants herein set forth, hereby agree as follows: 1. TERMINATION OF EMPLOYMENT By mutual agreement with the Company, the Executive hereby resigns, effective as of the Resignation Date, from his positions as Chief Executive Officer of the Company and a member of the Board of Directors of the Company, and from all other positions the Executive may currently hold as an officer or member of the Board of Directors of any of the Company's subsidiaries or affiliates. The Executive shall sign and deliver to the Company such other documents as may be requested to reflect such resignations. 2 2. SEVERANCE PAYMENTS, BENEFITS AND OBLIGATIONS (a) The Company will pay to the Executive his base salary through the Resignation Date, and the Executive will not be entitled to any additional compensation or benefits from the Company, or its subsidiaries or affiliates, except as provided in this Agreement. (b) In consideration of the Executive's agreement to comply with Sections 3, 4, 6 and 8 of this Agreement, and in lieu of and in satisfaction of any severance or other payments due under any severance or other benefit plans maintained by the Company or any of its subsidiaries or affiliates (collectively, the "Company Entities"), or any individual agreement previously entered into with the Executive by any of the Company Entities, including without limitation the Employment Agreement, dated as of November 16, 1998, by and between the Company and the Executive (the "Employment Agreement"), the Company shall pay the Executive (i) with respect to severance under the Employment Agreement, an aggregate payment of $2,400,000, half of which shall be payable in equal monthly installments during the twelve-month period commencing in May, 1999, and the other half of which shall be payable on April 20, 2000, and (ii) with respect to the Executive's compliance with Sections 3, 4, 6 and 8 of this Agreement, a payment of $1,500,000, payable upon the end of the Revocation Period (as defined in Section 8(c) hereof). The Company shall waive any mitigation (or obligation to seek employment) provisions otherwise applicable to the Executive under the Employment Agreement. (c) The $6,300,000 promissory note from the Executive to the Company, dated November 23, 1998 (the "Note") shall be extended to remain outstanding until April 20, 2000, at which time the entire unpaid principal balance of the Note, plus all unpaid accrued interest, shall be immediately due and payable. The Pledge Agreement between the Executive 2 3 and the Company, dated November 23, 1998, shall continue pursuant to its terms and shall not be affected by any release set forth in Section 8 of this Agreement. When any of the payments under Section 2(b) and Section 5(c) become due, if the Executive has not repaid in full all outstanding principal and accrued interest on the Note, the Company may, in its sole discretion, apply the payment otherwise due to the Executive (net of applicable income, employment and Medicare taxes required to be withheld on such payment by the Company) to reduce the outstanding principal and accrued interest on the Note, instead of making such payment directly to the Executive. Except as provided in this Section 2(c), the terms and conditions of the Note (including without limitation as to security therefor) shall remain in effect without amendment. (d) The Executive shall be deemed, by virtue of the execution of this Agreement, to have made a written request pursuant to Schedule C of the Employment Agreement that the Company prepare and file with the Securities and Exchange Commission, as soon as reasonably practicable following the date hereof, a Registration Statement on Form S-3 (or other available Form) with respect to the 400,000 shares of common stock of the Company purchased by the Executive under the Employment Agreement, and the Company shall comply with the requirements of said Schedule C (and Schedule C shall remain in effect until the Company's obligations thereunder are satisfied in full). (e) The Company shall continue to provide, and shall cause its subsidiaries to continue to provide, the Executive with indemnification, expense advancement, exculpation of liabilities and directors and officers liability insurance, with respect to actions of the Executive as an officer or director of the Company (or any of its subsidiaries) prior to the Resignation Date, in each case on terms and conditions no less favorable than the terms and conditions applicable 3 4 from time to time to their respective senior executives and directors or, if more favorable, to their respective former senior executives and directors. (f) The Company will reimburse the Executive for any unreimbursed reasonable business expenses incurred by the Executive prior to the Resignation Date, pursuant to the Company's reimbursement policies, following the Executive's presentation of an expense report to the Company. In addition, the Company shall reimburse the Executive for reasonable fees and expenses of the Executive's legal and tax accounting advisors incurred in connection with the negotiation and execution of this Agreement and for the expenses he incurs in relocating his residence to Nashville, Tennessee, upon presentation by the Executive of invoices therefor; provided, that the amounts reimbursed pursuant to this sentence shall not exceed $30,000. Finally, the Company shall assume, as of the date of this Agreement, all rights and responsibilities of the Executive under the lease of the premises at 453 Waymarket Drive, Ann Arbor, MI and the lease of the furniture contained therein, true and correct copies of which leases have been provided to the Company. (g) The Executive agrees that the payment of the amounts set forth in this Section 2 is conditioned upon his satisfaction of the terms of this Agreement and, that, without limiting any other remedies available to the Company, the Company shall not be obligated to pay to the Executive any unpaid portion of such payments or perform its obligations under this Section 2 if the Executive fails to comply in any material respect with any of the material terms of this Agreement. (h) This Agreement shall supersede the Employment Agreement, and the Employment Agreement shall be deemed terminated from and after the date of this Agreement, 4 5 without any remaining obligation of any party under such agreement, except to the extent otherwise specifically provided in this Agreement. 3. DISPARAGING COMMENTS From and after the Resignation Date, the Executive will refrain from taking actions or making statements, written or oral, which denigrate, disparage or defame the goodwill or reputation of the Company Entities and their trustees, officers, security holders, partners, agents and former and current employees and directors or which are intended to, or may be reasonably expected to, adversely affect the morale of the employees of any of the Company Entities. The Executive further agrees not to make any negative statements to employees of the Company Entities or to third parties relating to his employment or any aspect of the business of the Company Entities and not to make any statements to employees of the Company Entities or to third parties about the circumstances of the Executive's resignation, or about the Company Entities and their former and current trustees, officers, security holders, partners, agents, employees and directors. From and after the Resignation Date, the Company will refrain, and will cause its executive officers and directors to refrain, from taking actions or making statements, written or oral, which denigrate, disparage or defame the reputation of the Executive. The Company further agrees not to make, and cause its executive officers and directors not to make, any negative statements to employees of the Company Entities or to third parties relating to the Executive's employment or any statements to employees of the Company Entities or to third parties about the circumstances of the Executive's resignation. It is expressly acknowledged and agreed that none of the following shall be considered a violation of the foregoing: (i) a disposition by the Executive of stock of the Company that he owns; (ii) 5 6 statements described in Section 9 of this Agreement; and (iii) statements that a court or governmental body requires be made. 4. RESTRICTIVE COVENANTS (a) The Executive has returned or will immediately return to the Company all embodiments of Company Information (as defined below), including client lists, files, software, records, computer access codes and instruction manuals, which he has in his possession, and agrees not to keep any copies thereof. The Executive affirms his obligation to keep all Company Information confidential and not to use it or disclose it to any third party in the future. The term "Company Information" means: (i) confidential information, including information received from third parties under confidential conditions, and (ii) other systems, technical, marketing, business or financial information, or information relating to personnel or former personnel of the Company, the use or disclosure of which might reasonably be construed to be contrary to the interest of the Company; provided, however, that the term "Company Information" shall not include any information that is or became known or available to the public other than as a direct result of a breach of this paragraph by the Executive or any action by the Executive prior to the Resignation Date which would have been a breach of the Executive's obligations to the Company in effect at such time. The Executive shall have the right to remove from the offices of the Company any of his personal belongings which do not constitute Company Information. (b) The Executive agrees that he will not without the prior written consent of the Company engage in Competition during the thirty-six month period following the Resignation Date. "Competition" for the purposes of this Agreement shall mean: (i) becoming directly or indirectly involved, as an owner, principal, employee, officer, director, independent contractor, representative, stockholder, agent, advisor, lender or in 6 7 any other capacity, in any business or entity engaged (either directly or indirectly, through any subsidiary or other affiliated entity) in the sale of books, music or videos directly to the public (whether through traditional retail sales or over the Internet or otherwise, but excluding sales that are merely incidental to the sale of other goods or services) (such sales activity, the "Covered Businesses"), anywhere in North America, the United Kingdom, Singapore, Australia and New Zealand; provided, however, that in no event shall ownership of less than 5% of the outstanding capital stock of any corporation, in and of itself, be deemed Competition if such capital stock is listed on a national securities exchange or regularly traded in an over-the-counter market; and provided, further, that following the first anniversary of the Resignation Date, in no event shall the ownership of less than 10% of the outstanding capital stock of any corporation, in and of itself, be deemed Competition if such capital stock is not listed on a national securities exchange or regularly traded in an over-the-counter market; and provided, further, that in no event shall the Executive's ownership of securities of Ingram Industries, Inc. or Ingram Micro Inc. be deemed Competition; and provided, further, that in no event shall Ingram Industries, Inc. or Ingram Micro Inc., as the case may be, be deemed to be engaged in Competition if such entity and its consolidated affiliates do not have consolidated net revenues from the Covered Businesses in excess of the following percentages of their total consolidated net revenues: 5% during the first twelve months following the Resignation Date; 10% during the next twelve months following the Resignation Date; and 20% during the final twelve months following the Resignation Date; or (ii) directly soliciting, or causing another person to solicit, any person who is a customer of the businesses conducted by the Company, on behalf of a business engaged in 7 8 Competition, or inducing or attempting to persuade any individual known by the Executive to be an employee of the Company or any of its subsidiaries to terminate his or her employment relationship with the Company or any of its subsidiaries. (c) The Executive acknowledges and agrees that the Company's remedy at law for any breach of the Executive's obligations under this Section 4 would be inadequate and agrees and consents that temporary and permanent injunctive relief may be granted in any proceeding which may be brought to enforce any provision of this Section without the necessity of proof of actual damage. With respect to any provision of this Section 4 finally determined by a court of competent jurisdiction to be unenforceable, the Executive and the Company hereby agree that such court shall have jurisdiction to reform this Agreement or any provision hereof so that it is enforceable to the maximum extent permitted by law, and the parties agree to abide by such court's determination. 5. WAIVER OF OTHER PAYMENTS AND BENEFITS; STOCK OPTIONS; RESTRICTED STOCK (a) The compensation and benefits arrangements set forth in this Agreement are in lieu of any rights or claims that the Executive may have with respect to severance or other benefits, or any other form of remuneration from the Company Entities, other than benefits under any tax-qualified employee pension benefit plans subject to the Employee Retirement Income Security Act of 1974, as amended (including the Company's 401(k) plan), and without limiting the generality of the foregoing, the Executive hereby expressly waives any right or claim that he may have or could assert to payment for salary, bonuses, medical, dental or hospitalization benefits, payments under supplemental retirement plans and incentive plans, life insurance 8 9 benefits, expenses and attorneys' fees, except as otherwise provided in this Agreement or as mandated under applicable law. (b) The Executive acknowledges that, except as provided in the immediately following sentence, upon the Resignation Date all of his stock options granted under the Borders Group, Inc. Stock Option Plan (the "Option Plan") shall be immediately cancelled and forfeited pursuant to the terms of such Plan. Notwithstanding the foregoing, the Company and the Executive acknowledge that, pursuant to the terms of the Option Plan, the Executive's stock options set forth on Exhibit A to this Agreement shall become vested and exercisable upon the Resignation Date and shall remain exercisable until July 20, 1999, at which time they will be immediately cancelled and forfeited. (c) Pursuant to the terms of the Company's Management Stock Purchase Plan (the "Purchase Plan"), in settlement of the Executive's 53,763 shares of restricted stock purchased under the Purchase Plan, the Company shall deliver to the Executive on the next business day immediately following the Resignation Date a cash payment equal to $917,331.19, less all applicable withholding, employment and Medicare taxes. If, at the time of payment under this Section 5(c), the Executive has not repaid in full all outstanding principal and accrued interest on the Note, the Company may in its sole discretion, apply the above payment to reduce the outstanding principal and accrued interest on the Note, and not make such payment directly to the Executive. 6. INFORMATION REQUESTS/COOPERATION The Executive agrees to make himself reasonably available to the Company to respond to requests by the Company for information concerning matters involving facts or events relating to the Company or any other Company Entity that arose during the period of the 9 10 Executive's employment with the Company and that may be within the Executive's knowledge, and to assist the Company and the Company Entities as reasonably requested with respect to pending and future litigations, arbitrations or other dispute resolutions concerning matters involving facts or events relating to the Company or any other Company Entity that arose during the period of the Executive's employment with the Company. The Company will reimburse the Executive for his reasonable travel expenses and costs incurred as a result of his assistance under this Section 6. In addition, the Company shall pay the Executive a fee of $500 per day for each day in excess of an aggregate of 10 days for which the Executive renders services pursuant to this Section 6. 7. NO ADMISSION OF WRONGDOING Nothing contained in this Agreement shall be construed in any way as an admission by any of the parties of any act, wrongdoing, practice or policy of discrimination or breach of contract either in violation of applicable law or otherwise. 8. WAIVER AND RELEASE. (a) In consideration of the payments and benefits set forth in this Agreement, the Executive, for himself, his heirs, administrators, representatives, executors, successors and assigns (collectively "Releasors") does hereby irrevocably and unconditionally release, acquit and forever discharge the Company Entities and their former and current trustees, officers, security holders, partners, agents, employees and directors, including without limitation all persons acting by, through, under or in concert with any of them (collectively, "Releasees"), from any and all charges, complaints, claims, liabilities, obligations, promises, agreements, controversies, damages, remedies, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses (including attorneys' fees and costs) of any nature whatsoever, known or 10 11 unknown, whether in law or equity and whether arising under federal, state or local law and in particular including any claim for discrimination based upon race, color, ethnicity, sex, age (including the Age Discrimination in Employment Act of 1967) (the "ADEA Release"), national origin, religion, disability, or any other unlawful criterion or circumstance, which the Releasors had, now have, or may in the future have, against each or any of the Releasees from the beginning of the world until the date of the execution of this Agreement; provided, that the foregoing shall not include claims for the payments and benefits expressly provided for in this Agreement. The Executive acknowledges and agrees that if he or any other Releasor should hereafter make any claim or demand or commence or threaten to commence any action, claim or proceeding against the Releasees with respect to any cause, matter or thing which is the subject of this Section 8(a), this Agreement may be raised as a complete bar to any such action, claim or proceeding, and the applicable Releasee may recover from the Executive all costs incurred in connection with such action, claim or proceeding, including attorneys' fees. (b) In consideration of the Executive's agreements and covenants set forth in this Agreement, the Company and the Company Entities (the "Company Releasors") hereby irrevocably and unconditionally release, acquit and forever discharge the Executive, his heirs, administrators, representatives, executors, successors and assigns (in each case in their capacity as such), including without limitation all persons acting by, through, under or in concert with any of them (collectively, the "Company Releasees"), from any and all charges, complaints, claims, liabilities, obligations, promises, agreements, controversies, damages, remedies, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses (including attorneys' fees and costs) of any nature whatsoever, known or unknown, whether in law or equity and whether arising under federal, state or local law, which the Company Releasors now have, or may in the 11 12 future have, against the Executive or any of the Company Releasees with respect to the Executive from the beginning of the world until the date of the execution of this Agreement, other than any claim based upon fraudulent or illegal activity that was not discovered by the Company Releasors until subsequent to the date of execution of this Agreement, or any claim that may be brought derivatively. The Company acknowledges and agrees that if it or any other Company Releasor should hereafter make any claim or demand or commence or threaten to commence any action, claim or proceeding against the Executive or the Company Releasees with respect to any cause, matter or thing which is the subject of this Section 8(b), this Agreement may be raised as a complete bar to any such action, claim or proceeding, and the Executive or the applicable Company Releasee may recover from the Company Releasors all costs incurred in connection with such action, claim or proceeding, including attorneys' fees. (c) The Executive affirms that prior to the execution of this Agreement and the waiver and release in Section 8(a), the Executive was advised by the Company to consult with an attorney of the Executive's choice concerning the terms and conditions set forth herein, and that the Executive was given up to 21 days to consider executing this Agreement, including the ADEA Release in Section 8(a). The Executive has 7 days following his execution of this Agreement (the "Revocation Period") to revoke the ADEA Release. In the event the Executive revokes the ADEA Release, the Company may cease making the payments set forth in Section 2. 9. PUBLIC STATEMENTS The parties agree that the Executive's termination of employment will be announced by the statement attached hereto as Exhibit B, and no subsequent comments shall be made to the media or through other public statements by any party hereto or any Company Entity regarding the Executive's termination of employment that are inconsistent with such statement, 12 13 except as may be required by applicable law or regulation. The Company shall retain the public relations firm of Abernathy MacGregor Frank to handle public relations and press inquiries in connection with this Agreement and the Executive's termination of employment. 10. NO RELIANCE The Executive represents and acknowledges that, in executing this Agreement, he has not relied upon any representation or statement made by the Company or not set forth herein. The Company represents and acknowledges that, in executing this Agreement, it has not relied upon any representation or statement made by the Executive or not set forth herein. 11. GOVERNING LAW This Agreement shall be governed by and construed in accordance with the laws of the State of Michigan, without regard to the principles of conflicts of law thereof, to the extent not superseded by applicable federal law. 12. WARRANTY The parties hereto represent and warrant that there exists no impediment or restraint, contractual or otherwise on their power, right or ability to enter into this Agreement and to perform their duties and obligations hereunder or as contemplated hereby. 13. TAXES All payments made to the Executive under this Agreement will be reduced by, or the Executive will otherwise pay, all income, employment and Medicare taxes required to be withheld on such payments. 14. NO COERCION The parties hereto represent and acknowledge that they have decided to enter into this Agreement voluntarily, knowingly and without coercion of any kind. 13 14 15. ENFORCEABILITY/SEVERABILITY The parties hereto affirmatively acknowledge that this Agreement, and each of its provisions, is enforceable, and expressly agree not to challenge nor raise any defense against the enforceability of this Agreement or any of its provisions in the future. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions or portions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 16. NOTICES All notices, requests, demands and other communication which are required or may be given under this Agreement shall be in writing and shall be deemed to have been duly given when received if personally delivered; when transmitted by telecopy, electronic or digital transmission method upon receipt of telephonic or electronic confirmation; the day after it is sent, if sent for next day delivery to a domestic address by recognized overnight delivery service (e.g., Federal Express) and upon receipt, if sent by certified or registered mail, return receipt requested. In each case notice shall be sent to: If to the Executive, addressed to: Philip M. Pfeffer 836 Tremont Court Nashville, TN 37220 14 15 If to the Company, addressed to: Borders Group, Inc. 100 Phoenix Drive Ann Arbor, MI 48108-2202 Attention: General Counsel or to such other place and with such other copies as any party may designate as to itself or himself by written notice to the others. 17. AMENDMENTS; WAIVERS This Agreement may not be amended, modified or terminated, except by a written instrument signed by the parties hereto. Any provision of this Agreement may be waived by a written instrument signed by the party to be charged with such waiver. 18. SUCCESSORS This Agreement shall be binding on the Executive, the Company, and their respective heirs, successors and assigns, including without limitation any corporation or other entity into which the Company may be merged, reorganized or liquidated, or by which the Company may be acquired. As the obligations to be performed by the Executive hereunder are unique based upon his skills and qualifications, the Executive's obligations under this Agreement may not be assigned. The obligations of the Company under this Agreement may not be assigned except to a successor to all or substantially all of the business or assets of the Company or by operation of law. 19. ENTIRE AGREEMENT Except as specified herein, this Agreement contains the entire agreement between the parties concerning the subject matter hereof and supersedes all prior agreements, 15 16 understandings, discussions, negotiations and undertakings, whether written or oral, between the parties with respect thereto. 20. COUNTERPARTS This Agreement may be executed in several counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same Agreement. 16 17 IN WITNESS WHEREOF, the parties have executed this Agreement, as of the date and year first written above. BORDERS GROUP, INC. Robert D. Roumaldo -------------------------- By: /s/ Philip M. Pfeffer --------------------------- Philip M. Pfeffer 18 EXHIBIT A Re: Outstanding Stock Options 1. Grant Date No. of Option Shares Option Price Per Share 11/16/98 15,610 $23.25 2. Grant Date No. of Option Shares Option Price Per Share 2/1/99 45,787 $17.125 The above-referenced options shall terminate on July 20, 1999. 18 EX-21.1 18 SUBSIDIARIES OF REGISTRANT 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 Niche Marketing LLC 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 19 CONSENT OF PRICE WATERHOUSE LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-92716) of Borders Group, Inc. of our report dated March 8, 1999 appearing on page 31 of this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Bloomfield Hills, Michigan April 26, 1999 EX-27 20 FINANCIAL DATA SCHEDULE
5 1,000,000 12-MOS JAN-24-1999 JAN-25-1998 JAN-24-1999 43 0 63 0 1,020 1,133 825 331 1,767 989 0 0 0 0 715 1,767 2,595 2,595 1,859 1,859 0 0 16 151 59 92 0 0 0 92 1.20 1.12
EX-99.1 21 CAUTIONARY STATEMENT 1 EXHIBIT 99.1 BORDERS GROUP, INC. 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," "anticipates," "plans," "will," "estimates," "forecasts," "guidance" "projects" and other words of similar meaning. One can also identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address the Company's growth strategy, sales and, earnings and other financial projections, Y2K compliance and similar matters. One must carefully consider any such statement and should understand that many factors could cause actual results to differ from the Company's forward-looking statements. These factors include inaccurate assumptions and a broad variety of risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially. Although it is not possible to predict or identify all such factors, they may include the following: - - consumer demand for the Company's products, which is believed to be related to a number of factors, including overall consumer spending patterns, weather conditions and with respect to the mall business, overall mall traffic - - an unexpected increase in competition, including internet competition and competition resulting from electronic or other alternative methods of delivery of books, music, and other products to consumers, or unanticipated margin or other disadvantages relative to our competitors - - higher than anticipated interest, occupancy, labor, distribution and inventory shrinkage costs - - unanticipated adverse litigation expenses or results - - unanticipated work stoppages - - higher than anticipated costs associated with the closing of underperforming stores; unanticipated increases in the cost of the merchandise sold by the Company - - the performance of the Company's new strategic initiatives, including the Internet and international expansion - - the stability and capacity of the Company's information systems - - unanticipated adverse litigation expenses or results 2 - - unanticipated work stoppages - - higher than anticipated costs associated with the closing of underperforming stores - - unanticipated increases in the cost of the merchandise sold by the Company - - the performance of the Company's new strategic initiatives - - including the Internet and international expansion the stability and capacity of the Company's information systems - - unanticipated costs or problems relating to the Company's Year 2000 compliance or systems enhancements required for the operations of the Company - - changes in foreign currency exchange rates - - and the continued ability of the Company to locate and develop suitable sites for its superstore expansion program and kiosk programs. The Company does not undertake any obligation to update forward looking statements. -----END PRIVACY-ENHANCED MESSAGE-----